-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eh7oVqRvEncYXVNUEKPq/h70zeOMa2HAyhgXMdTu4sG/YUPTbGj1jf0IdVm5d97b j8VSu1WGxKIlV5KrR8aaew== 0000950114-97-000076.txt : 19970222 0000950114-97-000076.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950114-97-000076 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970220 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANCORPORATION INC CENTRAL INDEX KEY: 0000064907 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 430951744 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11792 FILM NUMBER: 97540508 BUSINESS ADDRESS: STREET 1: P O BOX 524 STREET 2: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 BUSINESS PHONE: 3144252525 MAIL ADDRESS: STREET 1: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 FORMER COMPANY: FORMER CONFORMED NAME: MERCANTILE TRUST CO DATE OF NAME CHANGE: 19720229 10-K405 1 MERCANTILE BANCORPORATION INC. FORM 10-K405 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, 1996 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 ST. LOUIS, MISSOURI 63166-0524 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 314-425-2525 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EXCHANGE ON WHICH 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 JANUARY 31, 1997: COMMON STOCK, $5.00 PAR VALUE, $2,566,265,226 INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF JANUARY 31, 1997: COMMON STOCK $5.00 PAR VALUE, 60,757,050 SHARES OUTSTANDING DOCUMENT INCORPORATED BY REFERENCE AS PROVIDED HEREIN, PORTIONS OF THE DOCUMENT BELOW ARE INCORPORATED BY REFERENCE: DOCUMENT PART-FORM 10-K -------- -------------- REGISTRANT'S PROXY STATEMENT FOR THE 1997 III ANNUAL MEETING OF SHAREHOLDERS ================================================================================ 2 FORM 10-K TABLE OF CONTENTS PART I PAGE ---- Item 1--Business................................................................................................. 1 Item 2--Properties............................................................................................... 6 Item 3--Legal Proceedings........................................................................................ 6 Item 4--Submission of Matters to a Vote of Security Holders...................................................... 6 PART II Item 5--Market for the Registrant's Common Equity and Related Shareholder Matters................................ 6 Item 6--Selected Financial Data.................................................................................. 6 Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7 Item 8--Financial Statements and Supplementary Data.............................................................. 31 Item 9--Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 58 PART III Item 10--Directors and Executive Officers of the Registrant....................................................... 58 Item 11--Executive Compensation................................................................................... 58 Item 12--Security Ownership of Certain Beneficial Owners and Management........................................... 58 Item 13--Certain Relationships and Related Transactions........................................................... 59 PART IV Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 59 Signatures........................................................................................................ 62 Management's discussion and analysis includes forward-looking statements. Many factors effect Mercantile Bancorporation Inc.'s ("Corporation") financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services. Because these factors are unpredictable and beyond the Corporation's control, earnings may fluctuate from period to period. The purpose of this discussion and analysis is to provide Form 10-K readers with information relevant to understanding and assessing the financial condition and results of operations of the Corporation.
3 PART I ITEM 1. BUSINESS THE COMPANY Mercantile Bancorporation Inc. ("Mercantile" or "Corporation") is a bank holding company which, as of January 31, 1997, owned all of the stock (except for directors' qualifying shares) of Mercantile Bank National Association ("Mercantile Bank") formerly known as Mercantile Bank of St. Louis National Association, 28 commercial banks located throughout Missouri, Illinois, eastern Kansas, Iowa and Arkansas, one federal savings bank located in Davenport, Iowa, and other non-banking subsidiaries. At December 31, 1996, Mercantile's consolidated assets were $18,986,959,000, consolidated loans were $12,772,920,000, consolidated deposits were $14,819,887,000 and consolidated shareholders' equity was $1,634,027,000. At December 31, 1996, Mercantile Bank and its consolidated subsidiaries had assets of $7,441,073,000, loans of $4,236,557,000, deposits of $4,808,933,000 and shareholder's equity of $503,263,000. Mercantile has its principal offices at One Mercantile Center, St. Louis, Missouri 63101 (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 company in March 1971. Since then Mercantile has acquired and organized additional banks, bank holding companies and a federal savings bank, located throughout Missouri, Illinois, eastern Kansas, Iowa and Arkansas. FINANCIAL SUMMARY OF MERCANTILE A financial summary of Mercantile and its consolidated subsidiaries is detailed below:
DECEMBER 31 ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (THOUSANDS) Total assets $18,986,959 $17,928,041 $16,723,887 $16,293,187 $16,032,843 Loans and leases 12,772,920 11,730,887 10,904,106 9,808,786 9,570,372 Investments in debt and equity securities 4,038,575 4,210,756 4,280,259 4,670,382 4,631,862 Deposits 14,819,887 13,714,260 12,864,890 13,243,141 13,260,362 Shareholders' equity 1,634,027 1,639,587 1,408,690 1,295,221 1,142,891
SUBSIDIARIES The table setting forth the names and locations of Mercantile's subsidiary financial institutions is included on Pages 65-67. SERVICES AND TRANSACTIONS WITH SUBSIDIARIES Mercantile provides it 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 subsidiary remains with its Board of Directors and with the officers elected by each Board. Intercompany transactions between Mercantile and its subsidiaries are subject to restrictions of existing banking and savings and loan laws and accepted principles of fair dealing. Mercantile had 186 full-time equivalent employees at December 31, 1996. Mercantile uses the premises of Mercantile Bank for its offices and pays Mercantile Bank a fee for services and facilities furnished to it. 1 4 EMPLOYEES At December 31, 1996, Mercantile and its subsidiaries had 7,890 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 subsidiaries, Mercantile offers complete banking and trust services to the consumer, institutional and agricultural segments of the market 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 brokerage services, 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 correspondent bank for 405 commercial banks located throughout the United States. Correspondent banking services to banks in Kansas and western Missouri are provided through Mercantile Bank (Kansas/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 management, advisory and custodian services. 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, 1996, Mercantile subsidiaries managed investments with a market value of approximately $17.9 billion and administered $8.4 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. Investment 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 38 foreign banks, and 32 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 (Kansas/Kansas City) offer a wide range of services to their customers involved in international business including currency exchange and letters of credit. Mercantile Bank maintains a Hong Kong subsidiary, Mercantile Trade Services Ltd., which enables the bank to issue, amend and negotiate letters of credit in Hong Kong on behalf of the bank's importing customers. Customers of other subsidiary banks with a need for international services are referred to these banks. Mercantile Bank also 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, 1996, total deposits of the foreign branch amounted to $448,906,000. 2 5 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 competition 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. 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. 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 Office of the Comptroller of the Currency (the "Comptroller") and the Office of Thrift Supervision (the "OTS"), and various state financial institution regulatory agencies. 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 institution'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 financial institutions and other subsidiaries. The principal source of Mercantile's revenues is dividends from its financial institution subsidiaries. Various federal and state statutory provisions limit the amount of dividends an affiliate financial institution can pay to Mercantile without regulatory approval. The approval of federal and state bank regulatory agencies, as appropriate, is required for any dividend if the total of all dividends declared in any calendar year would exceed the total of the institution's 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 financial institution subsidiary may also be affected by other factors, such as the maintenance of adequate capital. 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 financial institutions and financial institution 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 3 6 off-balance-sheet activities such as loan commitments. Mercantile and each of its subsidiary financial institutions exceed all applicable capital adequacy standards. 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. This support may be required at times when Mercantile may not find itself able to provide it. 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. 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 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 I capital to risk-adjusted assets of 6% or greater; (iii) had a ratio of Tier I 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 I capital to risk-adjusted assets of 4% or greater; and (iii) had a ratio of Tier I 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). All Mercantile subsidiary financial institutions as of December 31, 1996 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. 4 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. 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 so assigned to the institution by the FDIC. See "--FIRREA and FDICIA." FIRREA, adopted in August 1989 to provide for the resolution of insolvent savings associations, 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. FIRREA also required the FDIC to set deposit insurance assessments at such levels as would 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 reached its designated reserve ratio in May 1995. As a result, effective January 1, 1996, the FDIC eliminated deposit insurance assessments (except for the minimum $2,000 payment required by law) for banks that are well capitalized and well managed and reduced the deposit insurance assessments for all other banks. As of January 1, 1996, the SAIF had not reached the designated reserve ratio. Mercantile, which has acquired substantial amounts of SAIF-insured deposits during the years from 1989 to the present, is required to pay SAIF deposit insurance premiums on these SAIF-insured deposits. The Deposit Insurance Funds Act of 1996 (the "Funds Act"), enacted as part of the Omnibus Appropriations Bill on September 30, 1996, required the FDIC to take immediate steps to recapitalize the SAIF and to change the basis on which funds are raised to make the scheduled payments on the FICO bonds issued in 1987 to replenish the Federal Savings and Loan Insurance Corporation. The new legislation, combined with regulations issued by the FDIC immediately after enactment of the Funds Act, provided for a special assessment in the amount of 65.7 basis points per $100 of insured deposits on SAIF-insured deposits held by depository institutions on March 31, 1995 (the special assessment was required by the Funds Act to recapitalize the SAIF to the designated reserve ratio of 1.25 percent of the deposits insured by SAIF). Payments of this assessment were made in November 1996, but were accrued by financial institutions in the third calendar quarter of 1996. Institutions such as Mercantile that have deposits insured by both the BIF and the SAIF ("Oakar Banks") were required to pay the special assessment on 80% of their "adjusted attributable deposit amounts" ("AADA"). In addition, for purposes of future regular deposit insurance assessments, the AADA on which Oakar Banks pay assessments to SAIF was also reduced by 20%. Commencing January 1, 1997, BIF insured institutions will be responsible for a portion of the annual carrying costs of the FICO bonds. Such institutions will be assessed at 80% of the rate applicable to SAIF-insured institutions until December 31, 1999. Effective January 1, 1997, the Funds Act also reduced ongoing SAIF deposit insurance assessment rates to a range from 6.4 cents to 23 cents (from previous rates of 23 cents to 31 cents) per $100 of insured deposits and increased ongoing BIF deposit insurance assessment rates to a range from zero to 1.3 cents per $100 of insured deposits. Additionally, pursuant to the Funds Act, if the reserves in BIF at the end of any semiannual assessment period exceed 1.25% of insured deposits, the FDIC is required to refund the excess to the BIF-insured institutions. The Funds Act contemplates the merger of the SAIF and BIF by 1999, provided the consolidation/merger of federal bank and thrift charters under applicable law and regulation has been achieved by that time. Until such time, however, depository institutions will continue to be prohibited from shifting deposits from SAIF insurance coverage to BIF insurance coverage in an attempt to avoid the higher SAIF assessments. The FDIC is required to issue regulations to guard against the shifting of deposits from SAIF to BIF. A report to Congress regarding the merger of the SAIF and the BIF is required from the Treasury Department by March 31, 1997. As of December 31, 1996, approximately 7.78% of Mercantile's banking subsidiaries' deposits were insured by the SAIF. Interstate Banking and Other Recent Legislation. 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 ("Riegle-Neal") facilitates the interstate expansion and consolidation of banking organizations by permitting (i) bank holding companies that are adequately capitalized and managed 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) 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) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state, (iv) foreign banks to establish, 5 8 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) banks 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 effect of Riegle-Neal is 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, Riegle-Neal is likely to have the effects of increasing competition and promoting geographic diversification in the banking industry. In addition, the Funds Act contains a variety of regulatory relief measures affecting banks and thrifts, including provisions modifying some of the more onerous requirements imposed under federal banking laws passed in the late 1980s and early 1990s. Among the measures are provisions reducing certain regulatory burdens imposed upon bank holding companies. For example, the Funds Act eliminates the requirement that a bank holding company seeking to acquire control of a thrift must file an application with the OTS and for approval to become a unitary savings and loan holding company as a result of such acquisition. The Funds Act also provides that a bank holding company owning or controlling a thrift will no longer be subject to the supervision and regulation of the OTS. The OTS will continue to regulate and supervise all thrifts acquired in such transactions. There also have been a number of recent legislative and regulatory proposals designed to strengthen the federal deposit insurance system and to improve the overall financial stability of the United States banking system, and to provide for other changes in the bank regulatory structure, including proposals to reduce regulatory burdens on banking organizations and to expand the nature of products and services banks and bank holding companies may offer. It is not possible to predict whether or in what form these proposals may be adopted in the future, and, if adopted, what their effect will be on Mercantile. 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, 90,008 square-foot office building located at 12443 Olive Boulevard, Creve Coeur, Missouri, which houses Mercantile's credit card and a part of mortgage loan operations; a four-story, 222,400 square foot data processing center located at 1005 Convention Plaza in St. Louis, Missouri; and a four-story, 101,827 square-foot banking facility located at 721 Locust Street, St. Louis, Missouri. Mercantile's subsidiaries own and lease other facilities in Missouri, Illinois, Kansas, Iowa and Arkansas. See Note G to the Consolidated Financial Statements included on Page 42. ITEM 3. LEGAL PROCEEDINGS Mercantile and its subsidiaries are subject to various legal actions and proceedings in the normal course of business, some of which involve substantial claims for compensatory or punitive damages. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management does not believe that the final outcome will have a material adverse effect on the financial condition of Mercantile. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT See Part III, Item 10. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See Exhibit 12 on Page 18 contained herein. ITEM 6. SELECTED FINANCIAL DATA See Exhibits 2 and 3 on Pages 9 and 10 contained herein. 6 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PERFORMANCE SUMMARY To allow comparison of the fundamental financial performance of Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") for 1996 with 1995, it is helpful to exclude certain one-time charges from the 1996 results of operations. Exhibit 1 presents 1996 results adjusted for such exclusions. After excluding nonrecurring expense, adjusted net income for 1996 was $248,486,000, a 6.8% increase over the $232,676,000 earned a year ago. On a per common share basis, adjusted net income was $4.01, an improvement of 7.2% from the $3.74 earned last year. Return on assets increased to 1.37% in 1996 from 1.33% in 1995, while return on average equity for the year increased to 15.41% from 15.14% last year. Reported net income, or earnings including certain one-time charges, for 1996 was $191,947,000 as compared with the $232,676,000 earned a year ago. On a per common share basis, net income was $3.10 compared with the $3.74 earned last year. In the first and fourth quarters of 1996, the Corporation recorded nonrecurring merger-related costs which reduced net income and net income per common share by $48,489,000 and $.78, respectively. Also, on September 30, 1996, legislation was enacted to recapitalize the Savings Association Insurance Fund ("SAIF"), which called for a one-time assessment of 65.7 basis points per $100 in thrift deposits held as of March 31, 1995. The assessment, recorded as a nonrecurring expense in the third quarter, totaled $12,385,000, which on an after-tax basis reduced earnings per common share by an additional $.13. - ------------------------------------------------------------------------------------------------------------------ Exhibit 1 1996 RESULTS
EARNINGS NET INCOME PER COMMON RETURN ON (THOUSANDS) SHARE ASSETS ----------- ---------- --------- Reported $191,947 $3.10 1.06% Nonrecurring merger-related expenses 48,489 .78 .27 SAIF assessment 8,050 .13 .04 -------- ----- ---- Total Adjustments 56,539 .91 .31 -------- ----- ---- Adjusted $248,486 $4.01 1.37% ======== ===== ==== - ------------------------------------------------------------------------------------------------------------------
All prior year figures have been restated to include the pre-acquisition accounts and results of operations of Hawkeye Bancorporation ("Hawkeye"), which was merged with Mercantile on January 2, 1996 in a transaction accounted for as a pooling-of-interests. Also effective January 2, 1996, Mercantile completed a merger with First Sterling Bancorp, Inc. ("Sterling"), based in Sterling, Illinois. The Sterling transaction met the requirements for treatment as a pooling-of-interests; however, due to the immateriality of Sterling's financial condition and results of operations to that of Mercantile's, the Consolidated Financial Statements of the Corporation were not restated. Five acquisitions accounted for as purchases were consummated in 1996: 1) Today's Bancorp, Inc. ("Today's"), a two-bank holding company headquartered in Freeport, Illinois, on November 7, 1996; 2) First Financial Corporation of America ("First Financial"), parent company of First National Bank of Salem, located in central Missouri, on November, 1, 1996; 3) Peoples State Bank ("Peoples"), in Topeka, Kansas, on August 22, 1996; 4) Metro Savings Bank, F.S.B. ("Metro"), headquartered in Wood River, Illinois, on March 7, 1996; and 5) Security Bank of Conway, F.S.B. ("Conway"), located in Conway, Arkansas, on February 9, 1996. Since the Today's, First Financial, Peoples, Metro and Conway acquisitions were accounted for as purchases, the results of operations were included in the Consolidated Financial Statements from their respective acquisition dates. Total assets of these five companies at their respective dates of acquisition were $868,083,000 or 4.57% of year-end consolidated total assets; so while there was some impact on average balances and changes in net interest income, other income and other expense, it was not significant. It is not anticipated that any of these recently completed acquisitions will have a significant impact on liquidity, capital ratios or the results of operations of the Corporation. Note B to the Consolidated Financial Statements details acquisitions completed during 1994, 1995 and 1996, as well as three announced and pending acquisitions, the largest being the announcement on December 23, 1996 of a merger with Roosevelt Financial Group, Inc. ("Roosevelt"), headquartered in St. Louis, Missouri. Roosevelt is a $7.8 billion-asset savings and loan holding company with 81 locations in Missouri, Illinois and Kansas. The merger with Roosevelt is expected to be completed in mid-1997 with branch consolidation of the combined entities to occur the following year. Another significant St. Louis-based merger was announced on October 28, 1996, following the execution of a definitive merger agreement with Mark Twain Bancshares, Inc. ("Mark Twain"), a $3.1 billion-asset commercial banking organization with 41 offices in Missouri, Illinois and Kansas. The Mark Twain transaction is expected to close in the second quarter of 1997. Both transactions will add significantly to the Corporation's market share in its three largest Missouri markets. After all announced acquisitions are closed and integrated, Mercantile will operate approximately 486 banking offices in its five-state trade area. When 1996 adjusted results are compared with 1995 and 1994, the notable trends include moderate growth in net interest income, a higher provision for loan losses, favorable growth in non-interest income and good control of operating expenses. Two significant items impacted 1996 adjusted results. In the first quarter of 1996, $10,000,000 was added to the provision for loan losses in connection with a specialty retailer that declared bankruptcy in late 1995, thereby reducing first quarter 1996 earnings per common share by $.10. The Corporation substantially eliminated its exposure to this borrower through a write-down and a secondary market sale. 7 10 In addition, the co-branded credit card launched in May 1995 by SBC Communications Inc. ("SBC") and Mercantile reduced earnings throughout the year. On December 5, 1996, the Corporation announced that the co-branded credit card program with SBC was jointly terminated. The Southwestern Bell VISA(R) card was replaced with the MercRewards VISA(R) card in January 1997, and allows Mercantile to provide a competitive product while improving shareholder returns. Building shareholder value through strategic deployment of capital is increasingly critical in today's competitive environment. Two decisions in 1996 reflected such strategic deployment of capital. First, the Corporation sold its credit card merchant processing business to First U.S.A. Paymentech, Inc. and realized a gain of $10,000,000 or $.10 per common share in the second quarter of 1996. Second, in December 1996, Mercantile consummated the sale of its indenture trustee and agency business to State Street Bank and Trust Company. The sale resulted in a gain of $6,750,000, or $.07 per common share on an after-tax basis. Additionally, banking locations continued to be evaluated for growth and profit potential. During 1996, the Mercantile Bank of Batesville, Arkansas, as well as several branch offices, were sold as part of this office rationalization program. On April 3, 1996, the Corporation announced plans to reduce its bank charters during the following 12 months by approximately 80% through consolidations in order to achieve greater operational efficiencies. Through December 31, 1996, nine consolidations were completed which reduced 53 bank charters to nine. In total, the Corporation's number of chartered banks dropped from 74 early in 1996 to 30 at December 31, 1996. The charter consolidation program will continue throughout 1997. Net interest income increased 4.3% to $702,389,000 during 1996. The year-to-date net interest rate margin was 4.30% in 1996 compared with 4.28% in 1995. Average earning assets for 1996 of $16.7 billion were 3.4% higher than last year as average loan volume was up 4.6%. Loan growth was funded through an increase in average core deposits. For the year ended December 31, 1996, other income was $295,968,000, an improvement of $22,315,000 or 8.2% from last year. Excluding $3,114,000 in nonrecurring securities losses which resulted from portfolio restructurings of recently acquired banks, other income increased by 9.3% over 1995. Growth in core fee businesses, especially in the trust and investment areas, as well as gains on the sales of the merchant credit card processing and indenture trustee and agency businesses, largely accounted for the increase. Non-interest expenses were up 15.1% from a year ago and totaled $637,307,000 compared with $553,748,000 last year. Other expense in the first and fourth quarters of 1996 included $51,071,000 in nonrecurring merger-related costs, and expenses for the third quarter of 1996 reflected the one-time SAIF assessment of $12,385,000 discussed earlier. Excluding these nonrecurring costs, operating expenses grew by 3.6%. On an adjusted basis, the year-to-date efficiency ratio was 56.45% compared with 57.46% last year, and the other expense to average assets ratio of 3.17% was the same in both years. The provision for possible loan losses in 1996 was $71,014,000 compared with $36,530,000 the prior year; 1996 included the $13,666,000 in nonrecurring merger-related provision, and the previously mentioned special provision for a specialty retailer credit. Net charge-offs for the year were $83,549,000 in 1996 and $52,429,000 in 1995, and represented .69% of average loans compared with .46% last year. Net charge-offs attributable to credit card loans in 1996 represented $60,159,000 of the total while the write-off to the specialty retailer credit was $11,000,000. At December 31, 1996, the reserve for possible loan losses was $196,627,000 and provided coverage of 313.02% of non-performing loans (i.e., non-accrual and renegotiated loans) compared with 245.18% last year. Aggressive workout management reduced non-performing assets as of December 31, 1996 to $76,161,000, or .60% of total loans and foreclosed assets, compared with the 1995 figures of $94,890,000 or .81%. Consolidated assets of $19.0 billion at December 31, 1996 were up 5.9% from last December 31. Core deposits increased by 8.4% to $13.6 billion, loans were $12.8 billion, up 8.9% from last year, and shareholders' equity of $1.6 billion was .3% lower than at December 31, 1995, reflecting the impact of share repurchases. All measures of capital adequacy remained strong. Tier I capital to risk-adjusted assets was 10.91% while Total capital to risk-adjusted assets at December 31, 1996 was 13.87%. On a pro forma basis after all announced acquisitions are closed, consolidated assets of Mercantile will approximate $30 billion. At the Board of Directors meeting on February 19, 1997, the quarterly dividend was increased by 4.9% to $.43 from $.41 per common share. The Corporation intends to take a one-time charge to pre-tax earnings approximating $40,000,000 to $50,000,000 in the second quarter of 1997 related to the merger with Mark Twain. A pre-tax charge of $38,000,000 to $45,000,000 is estimated in the second half of 1997 when it is anticipated that the Roosevelt transaction will close. The charges to pre-tax earnings include accruals to substantially conform the accounting and credit policies of Mark Twain and Roosevelt to those of Mercantile as well as to account for one-time expenses associated with these in-market transactions. The ultimate amount of one-time expenses incurred may vary significantly from those included in these estimates above due to substantial market overlaps and the associated final decisions affecting branch closings and severance. The following financial commentary presents a more thorough discussion and analysis of the results of operations and financial condition of the Corporation for the year ended December 31, 1996. It should be read in conjunction with the accompanying audited Consolidated Financial Statements and related notes. Financial highlights for the past six years are presented in Exhibits 2 and 3. 8 11 - ------------------------------------------------------------------------------------------------------------------------------------ Exhibit 2 SELECTED FINANCIAL DATA
GROWTH RATES --------------------- 1996 1995 1994 1993 1992 1991 ONE YEAR FIVE YEARS ---- ---- ---- ---- ---- ---- -------- ---------- PER COMMON SHARE DATA Net income $ 3.10 $ 3.74 $ 3.19 $ 2.79 $ 2.41 $ 2.34 (17.1)% 5.8% Dividends declared 1.64 1.32 1.12 .99 .93 .93 24.2 12.0 Book value at year-end 26.52 26.04 23.32 21.59 19.44 18.12 1.8 7.9 Market price at year-end 51 3/8 46 31 1/4 30 1/8 32 1/8 25 1/8 11.7 15.4 Average shares outstanding (Thousands) 61,875 61,884 59,757 58,751 55,050 47,159 -- 5.6 OPERATING RESULTS (Thousands) Taxable-equivalent net interest income $717,531 $689,980 $683,735 $667,185 $606,369 $502,277 4.0% 7.4% Tax-equivalent adjustment 15,142 16,570 16,616 17,147 16,204 14,034 (8.6) 1.5 -------- -------- -------- -------- -------- -------- Net interest income 702,389 673,410 667,119 650,038 590,165 488,243 4.3 7.5 Provision for possible loan losses 71,014 36,530 43,265 64,302 79,551 64,028 94.4 2.1 Other income 295,968 273,653 236,561 245,589 224,456 195,237 8.2 8.7 Other expense 637,307 553,748 555,176 570,182 529,645 486,490 15.1 5.5 Income taxes 98,089 124,109 113,165 96,074 69,681 28,418 (21.0) 28.1 -------- -------- -------- -------- -------- -------- Net income $191,947 $232,676 $192,074 $165,069 $135,744 $104,544 (17.5) 12.9 ======== ======== ======== ======== ======== ======== ENDING BALANCE SHEET (Millions) Total assets $18,987 $17,928 $16,724 $16,293 $16,033 $14,045 5.9% 6.2% Earning assets 17,137 16,264 15,427 14,980 14,678 12,854 5.4 5.9 Loans and leases 12,773 11,731 10,904 9,809 9,570 8,809 8.9 7.7 Investments in debt and equity securities 4,039 4,211 4,280 4,670 4,632 3,412 (4.1) 3.4 Deposits 14,820 13,714 12,865 13,243 13,260 11,685 8.1 4.9 Long-term debt 303 326 330 316 336 238 (7.0) 4.9 Shareholders' equity 1,634 1,640 1,409 1,295 1,143 939 (.3) 11.7 Reserve for possible loan losses 197 202 216 206 199 176 (2.6) 2.2 AVERAGE BALANCE SHEET (Millions) Total assets $18,119 $17,462 $16,394 $16,098 $15,301 $13,373 3.8% 6.3% Earning assets 16,668 16,127 15,090 14,752 13,997 12,192 3.4 6.5 Loans and leases 12,051 11,519 10,196 9,636 9,398 8,639 4.6 6.9 Investments in debt and equity securities 4,335 4,271 4,533 4,639 4,081 2,955 1.5 8.0 Deposits 14,411 13,617 13,265 13,427 12,847 11,210 5.8 5.2 Long-term debt 315 332 334 313 274 267 (5.2) 3.4 Shareholders' equity 1,612 1,537 1,366 1,226 1,064 885 4.9 12.7 - ------------------------------------------------------------------------------------------------------------------------------------
9 12 - ----------------------------------------------------------------------------------------------------------- Exhibit 3 SELECTED RATIOS
1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- Return on assets 1.06% 1.33% 1.17% 1.03% .89% .78% Return on equity 11.90 15.14 14.06 13.46 12.76 11.81 Efficiency ratio 62.88 57.46 60.33 62.47 63.75 69.75 Other expense to average assets 3.52 3.17 3.39 3.54 3.46 3.64 Dividend yield 3.19 2.87 3.58 3.29 2.89 3.70 Dividend payout 52.90 35.29 35.11 35.48 38.59 39.74 Equity to assets 8.61 9.15 8.42 7.95 7.13 6.68 Tier I capital to risk-adjusted assets 10.91 12.22 11.78 11.40 10.45 9.06 Total capital to risk-adjusted assets 13.87 15.30 15.04 14.83 13.56 10.64 Leverage 7.82 8.54 8.06 7.40 6.63 6.21 Loans to deposits (Average) 83.62 84.59 76.86 71.77 73.15 77.07 Reserve for possible loan losses to outstanding loans 1.54 1.72 1.98 2.10 2.08 2.00 Reserve for possible loan losses to non-performing loans 313.02 245.18 583.17 290.02 154.17 109.79 Non-performing loans to outstanding loans .49 .70 .34 .72 1.35 1.82 Non-performing assets to outstanding loans and foreclosed assets .60 .81 .48 1.15 2.03 2.84 Net interest rate margin 4.30 4.28 4.53 4.52 4.33 4.12 - -----------------------------------------------------------------------------------------------------------
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, the mix and the rates earned and paid on funds. The net interest rate margin is net interest income on a fully taxable-equivalent basis as a percentage of average earning assets. In 1996, net interest income was $702,389,000, an increase of 4.3% from the $673,410,000 earned in 1995, which was up .9% over 1994 results. The volume of average earning assets grew by 3.4% in 1996, and the net interest rate margin was 4.30% compared with 4.28% in 1995 and 4.53% in 1994. Factors adversely affecting the net interest rate margins during the past three years included the May 1995 credit card securitization, introductory rates on the SBC co-branded credit card during 1995, continued competitive pricing for both loans and deposits and the continued movement of retail deposits from savings and transaction accounts to either retail certificates of deposit or into mutual funds. Positive factors included higher levels of non-interest bearing funds in 1996 and margin improvement in newly acquired entities. A three-year detailed rate-volume analysis, included as Exhibit 4, provides more insight into these factors that impact net interest income. In addition, 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 1996, 1995 and 1994. While average earning assets in 1996 grew by $540,896,000 or 3.4% when compared with 1995, average loans grew by 4.6%. This growth was funded by an increase of $755,783,000 or 6.1% in average core deposits. As loan demand increased, the ratio of average loans to earning assets grew to 72.30% in 1996 compared with 71.43% in 1995 and 67.57% in 1994. Since loans are the highest yielding earning asset, this shift in mix somewhat aided the net interest rate margin. The average balance of funds in the investment portfolio has been relatively stable for the past three years. There were also changes in the mix of funding sources during 1996. Average non-interest bearing deposits increased by $252,908,000 or 11.5%, reflecting higher levels of balances to pay for services, while average short-term borrowings declined by $274,729,000 or 17.7%. Core deposits represented 91.93% of total average deposits compared with 91.74% a year ago and 93.50% in 1994. Average retail certificates of deposit, the largest and a more costly source of core funds, grew by 3.0% and represented 39.87% of total core deposits versus 41.06% in 1995 and 38.28% in 1994. Average shareholders' equity increased by 4.9%, due largely to the contraction of equity resulting from share repurchases. LIQUIDITY Mercantile's Asset/Liability Management Committee meets regularly to formulate guidelines for and to monitor the composition of assets and liabilities. Its objective is to meet earnings goals by producing the optimal yield and maturity mix consistent with interest rate expectations and projected liquidity needs within the constraints of capital levels. Key to 10 13 - ------------------------------------------------------------------------------------------------------------------------------------ Exhibit 4 TAXABLE-EQUIVALENT RATE-VOLUME ANALYSIS ($ in Millions)
AVERAGE VOLUME AVERAGE RATE ---------------------------- ------------------------ 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- INTEREST INCOME Loans and leases $ 3,104 $ 2,944 $ 2,723 8.33% 8.73% 7.48% Commercial 2,081 1,984 1,767 8.64 8.96 8.03 Real estate--commercial 331 327 292 9.20 8.90 7.26 Real estate--construction 3,976 3,835 3,204 8.16 8.02 7.73 Real estate--residential 1,712 1,653 1,448 8.84 8.66 8.18 Consumer 847 776 762 12.86 14.29 15.99 Credit card ------- ------- ------- 12,051 11,519 10,196 8.74 8.90 8.38 Total Loans and Leases Investments in debt and equity securities 3 8 11 5.16 5.55 5.12 Trading 3,918 3,815 4,057 6.06 5.95 5.55 Taxable 414 448 465 7.96 8.21 8.18 Tax-exempt ------- ------- ------- 4,335 4,271 4,533 6.24 6.19 5.82 Total Short-term investments Due from banks--interest 69 41 66 5.90 5.96 4.31 bearing Federal funds sold and 213 296 295 5.75 6.16 4.51 repurchase agreements ------- ------- ------- Total Short-term 282 337 361 5.79 6.14 4.48 Investments ------- ------- ------- $16,668 $16,127 $15,090 8.04 8.13 7.52 Total Interest Income ======= ======= ======= INTEREST EXPENSE Interest Bearing Deposits $ 2,230 $ 2,140 $ 2,270 2.15% 2.19% 1.87% Interest bearing demand 2,043 1,800 1,906 3.87 3.94 3.01 Money market accounts 1,058 1,103 1,197 2.27 2.37 2.32 Savings Consumer time certificates 5,283 5,130 4,748 5.51 5.42 4.39 under $100,000 184 122 40 4.18 6.33 3.26 Other time ------- ------- ------- Total Interest Bearing 10,798 10,295 10,161 4.16 4.17 3.32 Core Deposits Time certificates $100,000 979 914 754 5.57 5.80 4.16 and over 184 211 109 5.70 6.21 4.95 Foreign ------- ------- ------- 1,163 1,125 863 5.59 5.88 4.26 Total Purchased Deposits ------- ------- ------- 11,961 11,420 11,024 4.30 4.34 3.39 Total Interest Bearing Deposits 1,273 1,548 1,204 5.44 5.56 4.26 Short-term borrowings 261 215 13 5.88 6.37 6.19 Bank notes 315 332 334 7.50 7.52 7.43 Long-term debt ------- ------- ------- $13,810 $13,515 $12,575 4.51 4.59 3.59 Total Interest Expense ======= ======= ======= 3.53 3.54 3.93 NET INTEREST RATE SPREAD NET INTEREST RATE MARGIN 4.30 4.28 4.53 AND NET INTEREST INCOME INCREASE (DECREASE) ----------------------------------------------------------- INTEREST 1995 TO 1996 1994 TO 1995 -------------------------- --------------------------- --------------------------- 1996 1995 1994 RATE VOL. TOTAL RATE VOL. TOTAL ---- ---- ---- -------- ---- ----- -------- ---- ----- INTEREST INCOME Loans and leases Commercial $ 259 $ 257 $ 205 $(12) $ 14 $ 2 $ 36 $ 16 $ 52 Real estate--commercial 180 178 142 (7) 9 2 19 17 36 Real estate--construction 31 29 21 1 1 2 5 3 8 Real estate--residential 325 308 247 6 11 17 12 49 61 Consumer 151 143 118 3 5 8 8 17 25 Credit card 109 111 122 (12) 10 (2) (13) 2 (11) ------ ------ ------ ---- ---- ---- ---- ---- ---- Total Loans and Leases 1,055 1,026 855 (21) 50 29 67 104 171 Investments in debt and equity securities Trading -- 1 1 -- (1) (1) -- -- -- Taxable 237 227 225 4 6 10 16 (14) 2 Tax-exempt 33 36 38 (1) (2) (3) -- (2) (2) ------ ------ ------ ---- ---- ---- ---- ---- ---- Total 270 264 264 3 3 6 16 (16) -- Short-term investments Due from banks--interest bearing 4 3 3 -- 1 1 1 (1) -- Federal funds sold and repurchase agreements 12 18 13 (1) (5) (6) 5 -- 5 ------ ------ ------ ---- ---- ---- ---- ---- ---- Total Short-term Investments 16 21 16 (1) (4) (5) 6 (1) 5 ------ ------ ------ ---- ---- ---- ---- ---- ---- Total Interest Income $1,341 $1,311 $1,135 $(19) $ 49 $ 30 $ 89 $ 87 $176 ====== ====== ====== ==== ==== ==== ==== ==== ==== INTEREST EXPENSE Interest Bearing Deposits Interest bearing demand $ 48 $ 47 $ 42 $ (1) $ 2 $ 1 $ 7 $ (2) $ 5 Money market accounts 79 71 57 (1) 9 8 17 (3) 14 Savings 24 26 28 (1) (1) (2) -- (2) (2) Consumer time certificates under $100,000 291 278 209 5 8 13 53 16 69 Other time 8 8 1 (4) 4 -- 4 3 7 ------ ------ ------ ---- ---- ---- ---- ---- ---- Total Interest Bearing Core Deposits 450 430 337 (2) 22 20 81 12 93 Time certificates $100,000 and over 55 53 31 (2) 4 2 15 7 22 Foreign 10 13 6 (1) (2) (3) 2 5 7 ------ ------ ------ ---- ---- ---- ---- ---- ---- Total Purchased Deposits 65 66 37 (3) 2 (1) 17 12 29 ------ ------ ------ ---- ---- ---- ---- ---- ---- Total Interest Bearing Deposits 515 496 374 (5) 24 19 98 24 122 Short-term borrowings 69 86 51 (2) (15) (17) 20 15 35 Bank notes 15 14 1 (1) 2 1 -- 13 13 Long-term debt 24 25 25 -- (1) (1) -- -- -- ------ ------ ------ ---- ---- ---- ---- ---- ---- Total Interest Expense $ 623 $ 621 $ 451 $ (8) $ 10 $ 2 $118 $ 52 $170 ====== ====== ====== ==== ==== ==== ==== ==== ==== NET INTEREST RATE SPREAD NET INTEREST RATE MARGIN AND NET INTEREST INCOME $ 718 $ 690 $ 684 ====== ====== ====== Taxable-equivalent basis. Includes tax-equivalent adjustments of $15,142,000, $16,570,000 and $16,616,000 for 1996, 1995 and 1994, respectively based on a Federal income tax rate of 35%. The rate-volume variance is allocated entirely to rate. Income from loans on non-accrual status is included on a cash basis, while non-accrual loan balances are included in average volume. - ------------------------------------------------------------------------------------------------------------------------------------
11 14 these goals is liquidity management, which ensures 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. 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 form 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 the maintenance of confidence in Mercantile by suppliers of funds. The Corporation has a current liability 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. Examples of liability liquidity include: 1) Federal Home Loan Bank borrowing availability of $1.8 billion, of which only $91,061,000 is utilized; and 2) $100,000,000 in lines of credit available to the Parent Company. These programs provide the Corporation with significant access to funds at a wide range of maturities. Asset liquidity is typically provided through the maturities of various assets, the net cash flow of fee-based businesses, the ability to convert loans and maturing investments into cash (such as through securitizations), the availability of proceeds from the sale of investment securities classified as available-for-sale, and the utilization of securities as collateral in repurchase agreements. A prime example of asset liquidity was a transaction structured in the second quarter of 1995, in which $400,000,000 of Mercantile's MasterCard(R) and VISA(R) credit card loans were securitized, thereby removing them, and the need to fund them, from the balance sheet. Future asset securitizations are likely in 1997, and if initiated will be accounted for as prescribed by Financial Accounting Standard ("FAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Based on presently available estimates with regard to planned transactions, the new rules are not expected to materially change net income. A second example of asset liquidity was the sale of $225,000,000 of adjustable-rate mortgages in December 1995. The reputation of Mercantile Bank 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. There were seven acquisitions completed by Mercantile in 1996. All were well capitalized and substantially funded by core deposits, which strengthened the liquidity position of Mercantile. Regarding 1997 pending acquisitions, Mark Twain's liquidity and funding philosophies are consistent with those of Mercantile. Roosevelt's loan portfolio is substantially funded by core deposits while its investment securities portfolio is largely funded with repurchase agreements and Federal Home Loan Bank borrowings. Roosevelt is currently downsizing its investment portfolio and the leverage to support it. When combined with Mercantile, the remaining borrowings are not expected to have a significant impact on the liquidity resources of the merged Corporation. At December 31, 1996, the Parent Company held $158,680,000 in cash, liquid money market investments and available-for-sale securities. The Parent Company's routine cash requirements consist primarily of operating expenses, dividends to shareholders, principal and interest payments on debt, share repurchases and funds used in acquisitions. Operating expenses are funded by subsidiary bank management fees, while shareholder dividends, share repurchases and debt service are satisfied by quarterly subsidiary bank dividends. The Parent Company also borrows funds in the commercial paper market, which are in turn lent to subsidiaries, and it also has access to long-term capital markets. Maintaining favorable debt ratings is critical to liquidity as these ratings affect the availability and cost of funds to the Corporation. These public ratings are indicated on Exhibit 13 on Page 18. Net cash provided by operating activities for the Corporation in 1996 was $397,666,000. Net income of $191,947,000, adjusted for non-cash charges, largely accounted for the net cash provided by operating activities. Net cash used by investing activities was $152,582,000 in 1996. The largest component of cash used by investing activities was the purchase of investment securities, which totaled $1.5 billion. Net cash used for financing activities in 1996 was $129,587,000. INTEREST RATE SENSITIVITY Interest sensitivity is related to liquidity, as each is affected by maturing assets and sources of funds. Interest sensitivity, however, also takes into consideration those assets and liabilities with interest rates which are subject to change prior to maturity. The objective and primary focus of interest sensitivity management is to optimize earnings results, while managing, within internal policy constraints, interest rate risk. Mercantile's policy on rate sensitivity is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by unexpected changes in interest rates. The total absence of risk, as well as excessive risk, will result in less than acceptable returns; therefore, 12 15 - -------------------------------------------------------------------------------------------------------- Exhibit 5 INTEREST RATE SENSITIVITY ($ in Millions)
DECEMBER 31, 1996 ---------------------------------------------------------------------- TOTAL ONE OVER VARIABLE 1-3 4-6 7-12 YEAR ONE RATE MONTHS MONTHS MONTHS OR LESS YEAR TOTAL -------- ------ ------ ------ ------- ---- ----- EARNING ASSETS Loans and leases $ 2,107 $ 3,319 $ 1,137 $1,854 $ 8,417 $4,356 $12,773 Investments in debt and equity securities 1 576 322 623 1,522 2,517 4,039 Short-term investments 243 80 2 -- 325 -- 325 ------- ------- ------- ------ ------- ------ ------- Total Earning Assets $ 2,351 $ 3,975 $ 1,461 $2,477 $10,264 $6,873 $17,137 ======= ======= ======= ====== ======= ====== ======= ACQUIRED FUNDS Interest bearing core deposits $ 3,099 $ 1,128 $ 1,052 $1,509 $ 6,788 $4,224 $11,012 Purchased deposits 70 540 257 184 1,051 173 1,224 Short-term borrowings 1,377 364 41 6 1,788 -- 1,788 Bank notes -- 175 -- -- 175 -- 175 Long-term debt -- 3 2 3 8 295 303 Net effect of credit card securitization -- 176 -- -- 176 (176) -- Interest rate swaps -- 85 -- -- 85 (85) -- ------- ------- ------- ------ ------- ------ ------- Total Interest Bearing Acquired Funds 4,546 2,471 1,352 1,702 10,071 4,431 14,502 Non-interest bearing deposits 535 -- -- -- 535 2,049 2,584 ------- ------- ------- ------ ------- ------ ------- Total Acquired Funds $ 5,081 $ 2,471 $ 1,352 $1,702 $10,606 $6,480 $17,086 ======= ======= ======= ====== ======= ====== ======= GAP ANALYSIS Interest sensitivity gap $(2,730) $ 1,504 $ 109 $ 775 $ (342) ======= ======= ======= ====== ======= Cumulative interest sensitivity gap $(2,730) $(1,226) $(1,117) $ (342) ======= ======= ======= ====== Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities .46 .84 .87 .97 Non-accrual loans are reported in the "Over One 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 or repricing, 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 One Year" category. If these deposits were all included in the "Total One Year or Less" category, the cumulative ratio of interest-sensitive assets to interest-sensitive liabilities would be .68. - --------------------------------------------------------------------------------------------------------
Mercantile manages its interest sensitivity risk between those two extremes. Interest rate risk as a given point in time can be represented by an interest rate sensitivity position ("gap"). Exhibit 5 presents a summary balance sheet at December 31, 1996 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, 1996. Because that portrayal does not capture many of the factors which determine interest rate risk, Mercantile places more emphasis on the use of sophisticated models 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 all subsidiary banks. Current model projections indicate that annual net interest income would change by less than one percent should rates rise or fall within 100 basis points from their current level. The year-end 1996 gap report shows a negative interest sensitivity gap position. A negative interest sensitivity gap position would indicate that net interest income would generally be enhanced in a declining rate environment and if rates rose net interest income would be somewhat negatively impacted. However, the results of the Corporation's simulation models show that net interest income would be unchanged in a rising interest rate environment and slightly diminished by a further decline in rates. In either case, the impact would be immaterial and management believes the Corporation is appropriately positioned for subsequent rate movements in the current economic 13 16 environment. For the last eight months of 1996, the Corporation's net interest rate margin varied by less than eight basis points. 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. During 1996, the Corporation carefully developed policies that allow it to build its capability to use basic derivative products to better manage its interest rate risk. The instruments used are disclosed in Note P to the Consolidated Financial Statements and they are insignificant to the capital base and size of Mercantile. Mark Twain and Roosevelt have modeled the interest sensitivity of their net interest income. Mark Twain's latest model projections indicate that annual net interest income would decrease by slightly over one percent should rates either rise or fall by 100 basis points. Roosevelt's results indicate a four percent gain from a rate decline and a six percent decrease if rates rise. The combined results from the three institutions indicate a less than one percent increase in net interest income if rates fall by 100 basis points and a decrease of slightly more than one percent should rates rise. Due to differences in models and assumptions, these results may not be directly comparable. Mercantile will model each institution on a uniform basis shortly after the mergers are completed, and plans to continue its conservative approach to interest rate risk management. DEPOSITS Deposits are the primary funding source for the Corporation's banks and are acquired from a broad base of local markets, including both individual and corporate customers. Total deposits at December 31, 1996 were $14.8 billion, an 8.1% or $1.1 billion increase from the $13.7 billion of a year ago, as deposits of $895,172,000 were added in the six acquisitions accounted for as purchases or poolings without restatement. On average, total deposits grew by 5.8% and most of that growth was likewise due to the deposits assumed in the six acquisitions. Exhibit 6 details the components of the Corporation's deposit mix for the past five years. 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 under $100,000 and other time deposits. Average core deposits grew by 6.1% in 1996 and improved to 79.48% of earning assets compared with 77.46% last year. Average non-interest bearing deposits increased by $252,908,000 or 11.5% from 1995. The United States Government is a significant cash management customer of Mercantile Bank N.A. and pays for services rendered via compensating balances. Increases in these compensating balances, non-interest bearing deposits assumed in acquisitions, as well as successful efforts in managing float and minimizing reserve requirements resulted in an increase in average net non-interest bearing funds (non-interest bearing deposits less cash and due from banks) of $205,770,000 for 1996. Average interest bearing demand, money market accounts and retail certificates of deposit increased by 4.2%, 13.5% and 3.0%, respectively, while savings deposits declined by 4.1% from 1995. Deposit growth derived from acquisitions was partially offset by movement of these funds to other investment products, including those offered by Mercantile investment representatives. Certificates of deposit greater than $100,000 and foreign branch deposits increased on average by 3.4% to $1.2 billion. Most of the large domestic deposits were gathered from the local retail, commercial and institutional customer base, which provides a natural access to purchased - ------------------------------------------------------------------------------------------------------------- Exhibit 6 DEPOSITS (Thousands)
DECEMBER 31 ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Non-interest bearing $ 2,584,340 $ 2,075,579 $ 1,980,168 $ 2,125,052 $ 1,892,287 Interest bearing demand 2,329,973 2,185,587 2,227,039 2,249,179 2,068,515 Money market accounts 2,134,996 1,900,057 1,742,622 1,975,831 2,007,625 Savings 1,020,841 1,051,880 1,129,316 1,226,794 1,096,621 Consumer time certificates under $100,000 5,298,120 5,289,146 4,774,568 4,879,136 5,322,112 Other time 227,496 38,742 38,717 35,438 123,669 ----------- ----------- ----------- ----------- ----------- Total Core Deposits 13,595,766 12,540,991 11,892,430 12,491,430 12,510,829 Time certificates $100,000 and over 972,234 964,099 753,325 725,626 729,883 Foreign 251,887 209,170 219,135 26,085 19,650 ----------- ----------- ----------- ----------- ----------- Total Purchased Deposits 1,224,121 1,173,269 972,460 751,711 749,533 ----------- ----------- ----------- ----------- ----------- Total Deposits $14,819,887 $13,714,260 $12,864,890 $13,243,141 $13,260,362 =========== =========== =========== =========== =========== - -------------------------------------------------------------------------------------------------------------
14 17 funds and, accordingly, tends to be less volatile than other categories of purchased funds. Exhibit 7 portrays the maturities of domestic time deposits $100,000 and over. - ------------------------------------------------------------------------------- Exhibit 7 MATURITY OF DOMESTIC TIME DEPOSITS $100,000 AND OVER (Thousands)
DECEMBER 31, 1996 ---------------------------------------- CERTIFICATES OTHER TIME OF DEPOSIT DEPOSITS TOTAL ------------ ---------- ----- Three months or less $398,777 $ 13,028 $ 411,805 Over three through six months 221,949 5,455 227,404 Over six through twelve months 184,240 207,867 392,107 Over twelve months 167,268 203 167,471 -------- -------- ---------- Total $972,234 $226,553 $1,198,787 ======== ======== ========== - -------------------------------------------------------------------------------
SHORT-TERM BORROWINGS AND SHORT-TERM INVESTMENTS 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, short-term Federal Home Loan Bank advances and commercial paper. These sources of funding are utilized primarily by Mercantile Bank 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 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 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. Average short-term borrowings decreased by $274,729,000, due primarily to the securitization of $400,000,000 in credit card loans during May 1995, the growth in core deposits, an increase in average bank note funding and the $56,071,000 decline in average short-term investments, which include due from banks--interest bearing, federal funds sold, and securities purchased under agreements to resell. These funding changes were in line with the liquidity goals and balance sheet management strategies employed by Mercantile in prior years. - ------------------------------------------------------------------------------------------------------------------------- Exhibit 8 SHORT-TERM BORROWINGS ($ in Thousands)
1996 1995 1994 ------------------------- ------------------------- -------------------------- AVERAGE AVERAGE AVERAGE AMOUNT RATE MATURITY AMOUNT RATE MATURITY AMOUNT RATE MATURITY ------ ---- -------- ------ ---- -------- ------ ---- -------- AT YEAR END Federal funds purchased and repurchase agreements $1,589,261 5.98% 9 DAYS $1,552,945 5.07% 16 days $1,519,156 5.42% 5 days Treasury tax and loan notes 110,259 5.16 2 DAYS 116,416 5.23 2 days 170,045 5.23 3 days Commercial paper 19,405 5.45 17 DAYS 16,950 5.81 17 days 26,800 5.97 20 days Other short-term borrowings 68,748 5.70 133 DAYS 77,425 5.97 86 days 122,080 5.94 177 days ---------- ---------- ---------- Total Short-term Borrowings $1,787,673 5.91 14 DAYS $1,763,736 5.13 18 days $1,838,081 5.44 16 days ========== ========== ========== AVERAGE FOR THE YEAR Federal funds purchased and repurchase agreements $1,117,209 5.43% $1,291,351 5.49% $ 902,125 4.32% Treasury tax and loan notes 72,186 5.22 169,062 5.68 211,962 3.75 Commercial paper 18,222 5.42 20,930 5.97 26,487 4.53 Other short-term borrowings 65,864 5.85 66,867 6.41 63,504 5.04 ---------- ---------- ---------- Total Short-term Borrowings $1,273,481 5.44 $1,548,210 5.56 $1,204,078 4.26 ========== ========== ========== MAXIMUM MONTH-END BALANCE Federal funds purchased and repurchase agreements $1,589,261 $1,638,089 $1,554,219 Treasury tax and loan notes 433,885 522,672 615,267 Commercial paper 21,660 31,157 37,406 Other short-term borrowings 75,673 84,456 122,080 - -------------------------------------------------------------------------------------------------------------------------
15 18 - ---------------------------------------------------------------------------------------------------------------------------- Exhibit 9 REGULATORY CAPITAL (Thousands)
DECEMBER 31 ------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Tier I capital $ 1,437,815 $ 1,509,061 $ 1,331,782 $ 1,187,956 $ 1,045,145 Tier II capital 390,101 381,301 368,469 357,513 311,811 ----------- ----------- ----------- ----------- ----------- Total Risk-based Capital $ 1,827,916 $ 1,890,362 $ 1,700,251 $ 1,545,469 $ 1,356,956 =========== =========== =========== =========== =========== Risk-adjusted assets $13,176,540 $12,352,966 $11,307,760 $10,423,938 $10,005,983 =========== =========== =========== =========== =========== Quarterly average tangible assets $18,378,811 $17,663,663 $16,515,293 $16,063,813 $15,773,179 =========== =========== =========== =========== =========== - ----------------------------------------------------------------------------------------------------------------------------
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 is focused on ensuring that adequate capital is available for both current needs and anticipated growth. This strategy has enabled the Corporation to profitably expand its balance sheet, while maintaining capital ratios which exceed minimum capital requirements. At December 31, 1996, shareholders' equity was $1.6 billion, a managed decline of .3% from a year ago. During 1996, Mercantile repurchased 3,926,951 shares of its common stock via designated broker-dealers at an average cost of $47.57 per share. A portion of this stock was reissued in the Today's, First Financial, Conway, Metro and Peoples acquisitions while some was held for reissuance in conjunction with stock incentive plans. An estimated 600,000 in treasury shares will be reissued in the Regional Bancshares, Inc. transaction during the first quarter of 1997. The remaining treasury shares will likely be reissued in the Mark Twain transaction. Partially offsetting the share buyback was net earnings retained as well as stock issued for acquisitions. While total shareholders' equity declined, equity represented a strong 8.61% of assets at December 31, 1996 compared with 9.15% at year-end 1995 and 8.42% at December 31, 1994. Exhibits 9 and 10 detail significant capital information for the past five years. Due to the strength of the capital base at the individual bank subsidiaries, approximately $198,891,000 was available at December 31, 1996 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 $150,622,000 would be available in the form of loans to the Parent Company under current regulations. This strong capital base allowed the Corporation to purchase the 3,926,951 shares of common stock in the open market during 1996. 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, improved to 104.81% at December 31, 1996 compared with 107.93% last year. Intangible assets, which consisted largely of goodwill, totaled $175,226,000 at December 31, 1996 compared with $110,529,000 a year ago, and $97,357,000 at December 31, 1994. Exhibit 11 details the composition of intangible assets for the past five years. Long-term debt as a percentage of total capitalization - -------------------------------------------------------------------------------------------------------- Exhibit 10 CAPITAL RATIOS
DECEMBER 31 ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Tier I capital to risk-adjusted assets 10.91% 12.22% 11.78% 11.40% 10.45% Total capital to risk-adjusted assets 13.87 15.30 15.04 14.83 13.56 Leverage 7.82 8.54 8.06 7.40 6.63 Equity to assets Consolidated 8.61 9.15 8.42 7.95 7.13 Combined bank subsidiaries 7.74 8.76 8.30 8.18 7.38 Tangible equity to assets 7.75 8.58 7.89 7.36 6.56 Double leverage 104.81 107.93 108.04 110.72 112.40 Long-term debt to total capitalization 15.63 16.57 18.99 19.59 22.72 - --------------------------------------------------------------------------------------------------------
16 19 declined to 15.63% versus 16.57% at December 31, 1995. No significant amount of debt is scheduled to mature before 1999. As interest rates declined during 1995, the Corporation recorded a favorable adjustment to equity of $47,494,000 on available-for-sale investment securities. In 1996, the net fair value adjustment lowered equity by $14,386,000, due largely to an increase in longer-term interest rates, thus reducing the equity to assets ratio at December 31, 1996 in comparison with the prior year. In conjunction with the acquisition of TCBankshares, Inc. on May 1, 1995, the Corporation assumed, through an exchange, 14,806 shares of preferred stock with a book value of $12,153,000. These preferred shares were redeemed in March 1996. Book value per common share at December 31, 1996 was $26.52 compared with $26.04 at the prior year-end, an increase of 1.8%. The equity formation rate (defined as net income less dividends divided by average equity) decreased to 5.58% in 1996 from 9.64% in 1995. Cash dividends totaling $1.64 per common share were declared and paid during 1996, a 24.2% increase from last year's total of $1.32. In addition, on February 19, 1997, the quarterly dividend payable April 1, 1997 was increased by 4.9% to $.43 per common share. Additional data relating to Mercantile's common stock is included in Exhibit 12 of this report. On July 11, 1996, the Board of Directors authorized the repurchase of up to 6,000,000 of the Corporation's common stock. This authorization was inclusive of shares to be repurchased in connection with the previously announced pending acquisitions. On October 28, 1996, the Corporation rescinded all previously announced share repurchase programs and stated it may repurchase up to 700,000 shares in the open market that would be reissued in the Mark Twain transaction. Two significant 1997 acquisitions were announced in the fourth quarter of 1996. On October 27, 1996, a definitive agreement was signed with Mark Twain for which Mercantile will exchange up to 16,950,000 shares of its common stock for the Mark Twain common stock. The transaction will be accounted for as a pooling-of-interests. Since Mark Twain's capital ratios are greater than or equal to those of Mercantile, the capital ratios of the combined company are expected to be strengthened. On December 23, 1996, the Corporation announced that it signed a definitive agreement with Roosevelt. Up to 13,000,000 Mercantile shares plus cash are expected to be issued in this transaction, which will be accounted for as a purchase. Mercantile also announced that it may repurchase up to 7,000,000 of its shares in the open market that would be reissued in the Roosevelt transaction. Although Roosevelt has a program to dispose of low-yielding assets, its balance sheet will still be more highly leveraged than Mercantile's; therefore, combined capital ratios will decline, yet remain well above regulatory minimums and at a level necessary to maintain external credit ratings. Goodwill of approximately $550,000,000 will be recorded, and the Corporation will access the public debt markets to meet its cash financing needs of between $500 million and $600 million. The first evidence of accessing the capital markets occurred on January 29, 1997, when the Mercantile Capital Trust I was formed. Through this trust, Mercantile obtained $150,000,000 of floating-rate debt which for regulatory purposes is part of Tier I capital. Additional funds will likely be raised in the first half of 1997 in the form of senior and/or subordinated debt. - ----------------------------------------------------------------------------------------------------------- Exhibit 11 INTANGIBLE ASSETS (Thousands)
DECEMBER 31 -------------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- ------- -------- ------- Goodwill $147,527 $ 90,037 $77,092 $ 81,002 $75,653 Core deposit premium 9,450 12,660 13,818 17,818 17,923 Other 18,249 7,832 6,447 4,809 4,170 -------- -------- ------- -------- ------- Total $175,226 $110,529 $97,357 $103,629 $97,746 ======== ======== ======= ======== ======= - -----------------------------------------------------------------------------------------------------------
17 20 - -------------------------------------------------------------------------------------------------------------------------- Exhibit 12 SELECTED INVESTOR INFORMATION NEW YORK STOCK EXCHANGE: MTL In newspaper stock tables generally MercBc or MercBcpMO COMMON STOCK INFORMATION
1996 1995 1994 ------------------------------- ------------------------------- ------------------------------- MARKET PRICE MARKET PRICE MARKET PRICE ----------------- DIVIDEND ----------------- DIVIDEND ----------------- DIVIDEND HIGH LOW DECLARED HIGH LOW DECLARED HIGH LOW DECLARED ------- ------- ------------ ------- ------- ------------ ------- ------- ------------ 1ST QUARTER $46 1/2 $41 1/2 $ .41 $37 1/4 $31 1/4 $ .33 $34 1/8 $29 7/8 $ .28 2ND QUARTER 47 7/8 43 1/2 .41 44 7/8 36 .33 38 1/8 31 1/8 .28 3RD QUARTER 52 7/8 43 3/8 .41 47 41 5/8 .33 39 1/4 34 7/8 .28 4TH QUARTER 54 49 .41 46 1/2 41 1/2 .33 36 7/8 29 1/2 .28 ----- ----- ----- $1.64 $1.32 $1.12 ===== ===== ===== SELECTED DATA DECEMBER 31 ---------------------------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Market Price $51 3/8 $46 $31 1/4 Dividend Yield 3.19% 2.87% 3.58% Price Earnings Ratio 16.57X 12.30x 9.80x Book Value per Common Share $26.52 $26.04 $23.32 Market Price to Book Value 193.72% 176.65% 134.01% Average Common Shares Outstanding 61,874,882 61,883,723 59,757,392 Year-end Common Shares Outstanding 61,604,723 62,506,536 59,883,249 Shareholders of Record 17,283 19,178 20,069 Average Daily Volume 116,204 89,172 52,926 Calculated based upon net income per common share which includes acquisition charges and the special SAIF assessment. - --------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------- Exhibit 13 DEBT RATINGS
THOMSON STANDARD MOODY'S FITCH BANKWATCH & POOR'S ------- ----- --------- -------- MERCANTILE BANCORPORATION INC. Issuer Rating B Commercial Paper F1 TBW-1 7.625% Subordinated Notes, due 2002 Baa1 BBB+ BBB Floating Rate Capital Trust Pass-through Securities(SM) a3 BBB- MERCANTILE BANK N.A. Bank Notes 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 Issued on January 29, 1997. - --------------------------------------------------------------------------------------------------------
18 21 Management has established financial objectives designed to monitor future capital needs. Mercantile's dividend policy is influenced by the belief that most shareholders are interested in long-term performance as well as current yield. The current dividend payout level is considered reasonable 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. INVESTMENTS IN DEBT AND EQUITY SECURITIES The Corporation'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 securities provide 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. Securities are the largest category of earning assets after loans. During 1996, average securities represented 26.01% of earning assets compared with 26.48% in 1995 and 30.04% for 1994. Investment securities totaled $4.0 billion at December 31, 1996 compared with $4.2 billion at December 31, 1995, a decrease of 4.1%. As loan demand increased and collateral requirements decreased, the overall size of the portfolio was reduced in the fourth quarter of 1996. FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," is the accounting pronouncement that prescribes the accounting for the investment portfolio and it requires that investment securities be classified into three categories: trading, available-for-sale and held-to-maturity. Throughout 1994 and 1995, Mercantile classified the vast majority of its investment securities as held-to-maturity. In November 1995, the Financial Accounting Standards Board issued a pronouncement that allowed for a one-time redesignation of securities between categories. In December 1995, the Corporation, with approval from its Asset/Liability Management Committee, redesignated the entire held-to-maturity portfolio as available-for- sale and transferred approximately $3.1 billion of securities to that category. During the third quarter of 1996, in conjunction with the establishment of a real estate investment trust ("REIT") and investment subsidiaries, the Corporation redesignated selected investment securities as held-to-maturity. Note E to the Consolidated Financial Statements details the components of the investment portfolio for the past three years. The year-end 1996 held-to-maturity and available-for-sale investment portfolio was composed of 83.57% of U.S. Treasury and other government agency securities, including 27.14% in mortgage-related issues, 12.74% in state and municipal securities, and 3.69% of other miscellaneous securities, primarily private-label collateralized mortgage obligations. The comparable distribution at year-end 1995 was 83.52%, 13.31% and 3.17%, respectively. The average maturity of the overall portfolio declined to two years and two months at the end of 1996 versus two years and nine months at year-end 1995. Purchased 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 increased during 1996 to 6.24% from 6.19% in 1995, even though rates in general slightly declined during 1996. Mercantile's commitment to its expanding region continued to be reflected by the holdings of securities of Missouri, Arkansas, Illinois, Kansas and Iowa and their local governmental units, although securities of many other states were also held in the portfolio. At December 31, 1996, investments in securities of those five states and their political subdivisions amounted to approximately 57.02% of total tax-exempt securities. However, securities of any one single political subdivision in any of these states did not exceed .32% of shareholders' equity at December 31, 1996. Outside of those five states, securities of no single issuer exceeded .82% of shareholders' equity. Approximately 65.68% of the state and municipal securities held at December 31, 1996 were rated A or higher by Moody's Investors Service. Of the remaining securities, most were non-rated bonds due to the smaller size of the issues 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. 19 22 - ------------------------------------------------------------------------------------------------------------------------------ Exhibit 14 INVESTMENTS IN DEBT AND EQUITY SECURITIES ($ in Thousands)
DECEMBER 31, 1996 ------------------------------------------------------------------------------------------ AVAILABLE-FOR-SALE HELD-TO-MATURITY ----------------------------------------- ------------------------------------------ ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE YIELD COST VALUE YIELD --------- --------- --------- --------- --------- ------------ U.S. TREASURY Within one year $ 578,445 $ 578,894 5.59% $ -- $ -- --% One to five years 786,081 786,736 5.89 27,177 27,296 6.38 Five to 10 years 5,048 5,402 7.54 -- -- -- After 10 years -- -- -- -- -- -- ---------- ---------- -------- -------- Total 1,369,574 1,371,032 5.77 27,177 27,296 6.38 Average Maturity 1 yr. 3 mo. 2 yr. 0 mo. U.S. GOVERNMENT AGENCIES Within one year 418,597 418,897 6.22 59,590 59,946 5.68 One to five years 1,120,488 1,123,534 6.35 227,263 231,444 6.73 Five to 10 years 99,265 100,478 7.00 22,586 20,506 9.56 After 10 years 17,634 17,986 7.31 6,252 6,835 9.42 ---------- ---------- -------- -------- Total 1,655,984 1,660,895 6.37 315,691 318,731 6.79 Average Maturity 2 yr. 2 mo. 2 yr. 5 mo. OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS Within one year 113,323 113,914 6.91 -- -- -- One to five years 252,587 256,534 7.35 -- -- -- Five to 10 years 79,430 81,373 8.35 -- -- -- After 10 years 61,572 62,442 9.01 -- -- -- ---------- ---------- -------- -------- Total 506,912 514,263 7.61 -- -- -- Average Maturity 4 yr. 1 mo. -- OTHER Within one year 9,118 9,174 6.68 -- -- -- One to five years 33,604 33,494 6.22 -- -- -- Five to 10 years 1,037 1,176 6.65 -- -- -- After 10 years 1,539 1,553 5.84 3,698 3,711 9.50 ---------- ---------- -------- -------- Total 45,298 45,397 6.31 3,698 3,711 9.50 Average Maturity 2 yr. 8 mo. 22 yr. 3 mo. TOTAL INTEREST EARNING INVESTMENTS Within one year 1,119,483 1,120,879 5.97 59,590 59,946 5.68 One to five years 2,192,760 2,200,298 6.30 254,440 258,740 6.69 Five to 10 years 184,780 188,429 7.59 22,586 20,506 9.56 After 10 years 80,745 81,981 8.58 9,950 10,546 9.45 ---------- ---------- -------- -------- Total 3,577,768 3,591,587 6.31 346,566 349,738 6.78 Average Maturity 2 yr. 1 mo. 2 yr. 7 mo. FEDERAL RESERVE BANK STOCK, FEDERAL HOME LOAN BANK STOCK AND OTHER EQUITY INVESTMENTS 100,728 99,922 5.47 -- -- ---------- ---------- -------- -------- TOTAL PORTFOLIO $3,678,496 $3,691,509 6.29 $346,566 $349,738 6.78 ========== ========== ======== ======== This exhibit excludes trading securities, which are reported at estimated fair value on the Consolidated Balance Sheet. Trading securities totaled $500,000, $3,677,000 and $14,299,000 at December 31, 1996, 1995, and 1994, respectively. Taxable-equivalent basis. Maturities of asset-backed obligations are based on the remaining weighted average maturities. - -------------------------------------------------------------------------------------------------------------------------------
20 23 LOANS Loans are the primary earning asset of the Corporation and were $12.8 billion at December 31, 1996, up $1.0 billion or 8.9% from year-end 1995. This growth follows a 7.6% increase in 1995 over 1994. Affecting loan growth figures from year-to-year is the amount of loans acquired in the six acquisitions accounted for as purchases or poolings-of-interests without restatement. The internal loan growth rate for 1996 was in the 3% to 5% range. The vast majority of the Corporation's loans are extended in its natural trade areas, which now includes five states. Mercantile's diversified loan portfolio spreads the risk and reduces exposure to economic downturns that may occur in different segments of the economy or in different industries. At December 31, 1996, the portfolio was 45.17% commercial and 54.83% consumer-related, compared with 45.87% and 54.13% at December 31, 1995. Note O 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 the dominant asset, comprising one-third of the loan portfolio. The acquisition of Mark Twain will supplement the focus on middle-market commercial loans, and the acquisition of Roosevelt will add significantly to Mercantile's residential real estate mortgage loan totals. These shifts have been complemented by consumer and middle-market portfolios added in the other 1996 mergers. The 1996 average loan to deposit ratio for the Corporation was 83.62% compared with 84.59% and 76.86% in 1995 and 1994, respectively. Exhibit 15 portrays the composition of the loan portfolio for the past five years. During 1996, commercial loans averaged $3.1 billion, which represented a growth rate of 5.5% following growth of 8.2% in 1995. The growth was across the system with more notable increases recorded in the second half of 1996. Average commercial real estate mortgage and construction loans of $2.4 billion in 1996 increased by 4.4% following 12.2% growth in 1995. Commercial mortgage and construction loans held by Mercantile Bank N.A. represented 18.07% of the portfolio, with the rest relating largely to smaller owner-occupied projects in Missouri, Illinois, Arkansas, Kansas and Iowa originated by the Corporation's other banks. Commercial real estate loans are generally secured by the underlying property at a 75% to 80% loan-to-appraisal value, and are typically supported by guarantees from the project developers. Additional collateral may be taken as deemed necessary. For 1996, average residential real estate mortgage loan volume grew by 3.7% following 19.7% growth in 1995, and during 1996 represented one-third of the total loan portfolio. When the effect of the sale of $225,000,000 in mortgages in the fourth quarter of 1995 is considered, the rate of 1996 growth was 9.5%. Volume was impacted by a general decline in interest rates during 1996 which allowed customers the opportunity to switch from adjustable-rate loans, which are held in the portfolio, to fixed-rate loans, which are sold. Mercantile currently services a residential real estate loan portfolio of $5.9 billion. Roosevelt will add approximately $8.6 billion to servicing volume in the second half of 1997. Average credit card loans grew by 9.0% in 1996. Excluding the impact of the $400,000,000 in credit card loans securitized in May 1995, total managed credit card loans increased on average by 21.5%. The former SBC co-branded credit card accounted for this 1996 growth while the core MasterCard(R) and VISA(R) portfolio declined modestly as expected. Mercantile announced on December 5, 1996 that it had terminated its co-branded credit card program with SBC and offered to replace those cards with a MercRewards VISA(R) card beginning in 1997. Mercantile expects to lose via attrition approximately 200,000 accounts representing $100,000,000 in balances of customers who used the former co-branded card largely for transactions rather than for credit. Other consumer loans of $1.7 billion increased on average by 3.6%, due largely to growth in indirect auto loans. - ------------------------------------------------------------------------------------------------------------ Exhibit 15 LOAN AND LEASE PORTFOLIO MATURITIES (Millions)
ONE TO FIVE OVER FIVE YEARS YEARS UNDER --------------- -------------- ONE FIXED FLOATING FIXED FLOATING YEAR RATE RATE RATE RATE 1996 1995 1994 1993 1992 ------ ------ -------- ------ -------- ---- ---- ---- ---- ---- Commercial $1,214 $ 930 $ 570 $ 399 $ 225 $ 3,338 $ 2,980 $ 2,788 $2,535 $2,581 Real estate--commercial 536 653 401 153 299 2,042 2,120 1,779 1,670 1,695 Real estate--construction 194 85 61 31 20 391 282 324 302 278 Real estate--residential 229 383 153 583 2,959 4,307 3,823 3,531 3,252 3,193 Consumer 294 1,235 100 136 20 1,785 1,667 1,617 1,273 1,206 Credit card -- 148 762 -- -- 910 859 865 777 617 ------ ------ ------ ------ ------ ------- ------- ------- ------ ------ Total Loans and Leases $2,467 $3,434 $2,047 $1,302 $3,523 $12,773 $11,731 $10,904 $9,809 $9,570 ====== ====== ====== ====== ====== ======= ======= ======= ====== ====== Non-accrual loans are reported at contractual maturities and rates. - ------------------------------------------------------------------------------------------------------------
21 24 The overall tax-equivalent yield of the loan portfolio decreased by 16 basis points to 8.74% in 1996 compared with 8.90% in 1995, when interest rates were moderately higher. As shown in Exhibit 15, which portrays the maturity and interest sensitivity of the portfolio, 62.92% of loans were priced at floating rates or maturing within one year. 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 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 at least on a quarterly basis. The reserve for possible loan losses represents the aggregate reserves of the Corporation's banking subsidiaries, and at December 31, 1996 was $196,627,000 compared with $201,780,000 at the end of 1995. Loans outstanding increased by 8.9%, which resulted in a year-end 1996 ratio of the reserve for possible loan losses to outstanding loans of 1.54% compared with 1.72% at December 31, 1995. The reserve as a percentage of non-performing loans was 313.02% compared with 245.18% last year. The 1996 levels were reasonable considering that the risk profile had been lessened due to growth in low-risk residential real estate mortgage loans, for which the loss experience has averaged .06% for the past five years. If residential mortgages are excluded from total loans, the reserve represents 2.32% of outstanding loans at December 31, 1996. The provision for loan losses 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, delinquen- cies, management's assessments of loan quality, general economic factors and collateral values. The 1996 provision was $71,014,000 compared with $36,530,000 last year. The first and fourth quarters of 1996 included a nonrecurring merger-related provision of $13,666,000 which was recorded largely to conform the credit policies of recently acquired entities to those of Mercantile; an additional $10,000,000 in provision was recorded during the first quarter of 1996 in connection with an $11,000,000 charge-off of a credit to a St. Louis-based specialty retailer that declared bankruptcy in late 1995. The ratio of net charge-offs to average loans for 1996 was .69% compared with .46% in 1995. The corresponding net charge-off figures were $83,549,000 and $52,429,000, respectively. The $11,000,000 charge-off mentioned above impacted the 1996 ratio of charge-offs to average loans by nine basis points. Exhibit 16 provides charge-offs and recoveries by loan type for the past five years. Excluding securitized credit cards, net credit card charge-offs were $60,159,000 in 1996 versus $37,260,000 last year, and represented 7.11% of average credit card loans compared with 4.80% in 1995. On the managed portfolio, the ratio of net charge-offs to average loans was 7.78% in 1996. By credit policy, losses are taken when the loan is past due for a period of time when collection is not probable, or upon receipt of notice of personal bankruptcy, if earlier. Approximately 36% of the 1996 credit card losses were a result of bankruptcy claims. The Corporation believes that total credit card losses in 1997 will approximate the amount experienced in 1996; however, the ratio of credit card net charge-offs to average loans is expected to improve steadily throughout the year, after peaking in the first quarter. Excluding credit card net charge-offs and the $11,000,000 nonrecurring loss, net charge-offs were only $12,390,000 or .10% of average loans in 1996. The Corporation evaluates the reserves of all banks on a quarterly basis to ensure the timely charge-off of loans and the adequacy of each bank's reserve for possible loan losses. This review is performed by each bank preliminarily, and is validated by both corporate Credit Review and the Chief Credit Officer. Factors considered in determining reserve adequacy include: volumes and trends in delinquencies and non-performing loans; specific loan ratings and outstandings; historical and projected loss experience based on volumes and types of loans; the results of independent internal loan ratings or external credit reviews; industrial or geographical concentrations; national, regional and/or specific industry economic conditions; off-balance-sheet risk; and other subjective factors. 22 25 - ---------------------------------------------------------------------------------------------------------------------- Exhibit 16 RESERVE FOR POSSIBLE LOAN LOSSES ($ in Thousands)
YEAR ENDED DECEMBER 31 ----------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- BEGINNING BALANCE $201,780 $215,849 $205,946 $198,742 $176,248 PROVISION 71,014 36,530 43,265 64,302 79,551 CHARGE-OFFS Commercial 18,634 7,254 5,816 18,640 25,694 Real estate--commercial 2,771 6,546 7,690 30,987 36,033 Real estate--construction 377 258 2,191 371 1,519 Real estate--residential 1,906 1,950 4,842 2,260 2,550 Consumer 12,294 10,441 6,181 5,815 7,673 Credit card 66,111 42,650 41,363 31,021 20,753 -------- -------- -------- -------- -------- Total Charge-offs 102,093 69,099 68,083 89,094 94,222 RECOVERIES Commercial 3,496 3,831 9,812 14,375 7,047 Real estate--commercial 4,408 3,639 16,180 4,588 3,411 Real estate--construction 326 151 248 709 174 Real estate--residential 598 736 654 546 1,385 Consumer 3,764 2,923 2,882 2,840 3,049 Credit card 5,952 5,390 4,498 3,467 2,522 -------- -------- -------- -------- -------- Total Recoveries 18,544 16,670 34,274 26,525 17,588 -------- -------- -------- -------- -------- NET CHARGE-OFFS 83,549 52,429 33,809 62,569 76,634 Acquired Reserves 7,382 13,830 447 5,471 19,577 Transfer to Mercantile Credit Card Master Trust -- (12,000) -- -- -- -------- -------- -------- -------- -------- ENDING BALANCE $196,627 $201,780 $215,849 $205,946 $198,742 ======== ======== ======== ======== ======== LOANS AND LEASES December 31 balance $12,772,920 $11,730,887 $10,904,106 $9,808,786 $9,570,372 =========== =========== =========== ========== ========== Average balance $12,051,043 $11,519,057 $10,196,059 $9,636,276 $9,397,901 =========== =========== =========== ========== ========== RATIOS Reserve balance to outstanding loans 1.54% 1.72% 1.98% 2.10% 2.08% Reserve balance to non-performing loans 313.02 245.18 583.17 290.02 154.17 Net charge-offs to average loans .69 .46 .33 .65 .82 Earnings coverage of net charge-offs 4.32X 7.50x 10.31x 5.20x 3.72x - ----------------------------------------------------------------------------------------------------------------------
Every significant problem credit is reviewed initially by the respective bank, and a secondary review is performed quarterly to confirm the risk rating, proper accounting and adequacy of both strategy and the 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 based on judgments regarding risk of error, local economic conditions and any other relevant factors. In Exhibit 17, 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 December 31, 1996 consolidated reserve of 1.54% of total loans outstanding and 313.02% of non-performing loans was adequate based on the risks identified at such date in the loan portfolio, and is not aware of any significant risks in the loan portfolio due to concentrations within any particular industry. 23 26 - ----------------------------------------------------------------------------------------------------- Exhibit 17 ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES ($ in Thousands)
1996 1995 1994 ----------------------- ----------------------- ----------------------- PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS ALLOCATED TO TOTAL ALLOCATED TO TOTAL ALLOCATED TO TOTAL RESERVES LOANS RESERVES LOANS RESERVES LOANS --------- -------- --------- -------- --------- -------- Commercial $ 20,355 26.13% $ 48,293 25.40% $ 37,805 25.58% Real estate-- commercial 41,250 15.99 47,785 18.07 38,004 16.31 Real estate-- construction 2,386 3.06 3,982 2.41 3,325 2.97 Real estate-- residential 15,106 33.72 12,153 32.59 9,459 32.38 Consumer 11,606 13.98 11,340 14.21 13,263 14.83 Credit card 57,666 7.12 27,333 7.32 36,827 7.93 Unallocated 48,258 N/A 50,894 N/A 77,166 N/A -------- ------ -------- ------ -------- ------ Total $196,627 100.00% $201,780 100.00% $215,849 100.00% ======== ====== ======== ====== ======== ====== 1993 1992 --------------------- ----------------------- PERCENT PERCENT OF LOANS OF LOANS ALLOCATED TO TOTAL ALLOCATED TO TOTAL RESERVES LOANS RESERVES LOANS -------- -------- --------- -------- Commercial $ 34,023 25.86% $ 42,628 26.97% Real estate-- commercial 43,039 17.02 48,781 17.71 Real estate-- construction 2,305 3.08 4,985 2.91 Real estate-- residential 6,240 33.15 4,962 33.36 Consumer 10,180 12.97 11,768 12.60 Credit card 31,285 7.92 25,169 6.45 Unallocated 78,874 N/A 60,449 N/A -------- ------ -------- ------ Total $205,946 100.00% $198,742 100.00% ======== ====== ======== ====== - -----------------------------------------------------------------------------------------------------
Mark Twain's reserve and coverage levels are comparable to those of Mercantile. Roosevelt maintains a lower relative reserve level as its loan portfolio consists largely of residential real estate mortgage loans for which losses are typically very low. After each of these mergers is completed, the acquired organization will comply with the reserve and credit policies as described above. 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 18. FAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS 118, was adopted by the Corporation in the first quarter of 1995. This standard requires an impaired loan to be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate. By the Corporation's definition, all non-accrual and renegotiated commercial-related loans are considered impaired. As of December 31, 1996, impaired loans totaled $33,933,000, for which the related reserve for possible loan losses was $6,287,000. For 1996, the average recorded investment in impaired loans was $43,596,000. The Corporation recognized $452,000 of interest income on these impaired loans in 1996. At year-end 1996, non-performing loans (i.e., non-accrual and renegotiated) were $62,816,000 and represented .49% of total loans. Foreclosed assets at December 31, 1996 were $13,345,000; the ratio of non-performing assets to outstanding loans plus foreclosed assets was .60% at December 31, 1996. As noted in Exhibit 18, non-accrual loans decreased by $19,406,000 or 24.5% while renegotiated loans and foreclosed property stayed at a relatively constant level. 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. Non-accrual loans declined by $19,406,000 from the December 31, 1995 level due to the $11,000,000 charge-off previously mentioned, the sale of the unsecured balance of that same loan and the payment in full of a $4,500,000 loan during the second quarter of 1996. At December 31, 1996, the Corporation had only four non-accrual loans with balances exceeding $1,000,000, the largest totaling $3,600,000. 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 were $3,017,000 compared with $3,094,000 at year-end 1995. All loans classified as renegotiated were paying in accordance with the modified terms at December 31, 1996. Loans past due 90 days or more and still accruing interest were $33,638,000 compared with $27,242,000 last year. This classification consisted largely of credit card loans, residential real estate mortgage loans and other consumer loans. Credit card loans are fully charged off when the loan is past due for a period of time in which collection is not probable based upon historical trends, or upon receipt of notice of personal bankruptcy, if earlier. Losses on residential mortgage loans generally are minimal. The Corporation had $1,440,000 par value of investment securities at December 31, 1996, 1995 and 1994 on non-accrual status. The carrying value of these securities was reduced to $1,240,000 as of December 31, 1996. 24 27 - ----------------------------------------------------------------------------------------------------------------------------------- Exhibit 18 NON-PERFORMING ASSETS ($ in Thousands)
DECEMBER 31 ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- NON-ACCRUAL LOANS Commercial $17,303 $39,222 $ 6,428 $ 15,158 $ 41,230 Real estate--commercial 14,845 17,953 13,630 27,721 40,358 Real estate--construction 977 342 146 975 6,119 Real estate--residential 22,237 17,327 8,111 10,617 14,370 Consumer 4,437 4,361 2,335 2,376 3,387 ------- ------- ------- -------- -------- TOTAL NON-ACCRUAL LOANS 59,799 79,205 30,650 56,847 105,464 RENEGOTIATED LOANS 3,017 3,094 6,363 14,163 23,450 ------- ------- ------- -------- -------- TOTAL NON-PERFORMING LOANS $62,816 $82,299 $37,013 $ 71,010 $128,914 ======= ======= ======= ======== ======== FORECLOSED ASSETS Foreclosed real estate $10,519 $ 9,951 $12,785 $ 41,053 $ 63,809 Other foreclosed assets 2,826 2,640 2,313 1,199 3,237 ------- ------- ------- -------- -------- TOTAL FORECLOSED ASSETS $13,345 $12,591 $15,098 $ 42,252 $ 67,046 ======= ======= ======= ======== ======== TOTAL NON-PERFORMING ASSETS $76,161 $94,890 $52,111 $113,262 $195,960 ======= ======= ======= ======== ======== PAST-DUE LOANS (90 DAYS OR MORE) $33,638 $27,242 $22,753 $ 18,095 $ 14,116 ======= ======= ======= ======== ======== RATIOS Non-performing loans to outstanding loans .49% .70% .34% .72% 1.35% Non-performing assets to outstanding loans and foreclosed assets .60 .81 .48 1.15 2.03 Non-performing assets to total assets .40 .53 .31 .70 1.22 Past-due loans 90 days or more are not included in non-performing asset totals or ratios. - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------- Exhibit 19 INTEREST NOT RECORDED ON NON-PERFORMING LOANS (Thousands except per common share data)
DECEMBER 31 ---------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Interest not accrued $3,586 $3,742 $3,181 $5,035 $9,795 Less cash-basis income (605) (260) (408) (359) (782) ------ ------ ------ ------ ------ Effect on income before income taxes $2,981 $3,482 $2,773 $4,676 $9,013 ====== ====== ====== ====== ====== Effect on net income $1,938 $2,263 $1,802 $3,039 $5,949 ====== ====== ====== ====== ====== Effect on net income per common share $ .03 $ .04 $ .03 $ .05 $ .11 ====== ====== ====== ====== ====== Interest collected applied to principal $ 930 $1,242 $ 851 $2,984 $4,424 ====== ====== ====== ====== ====== - -----------------------------------------------------------------------------------------------------------------------
25 28 Foreclosed assets were $13,345,000 at December 31, 1996 compared with the prior year-end level of $12,591,000. 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 1996, the carrying value of all properties were less than appraised value and the Corporation had only one foreclosed property with a book value exceeding $1,000,000, which is under contract for sale in the first quarter of 1997. "Potential problem loans" at December 31, 1996 amounted to $33,368,000. These are defined as loans and commitments not included in any of the two basic non-performing loan categories discussed above or 90 days past due and still accruing interest, but which management, through normal internal credit review procedures, has developed information regarding possible credit problems that could cause the borrowers future difficulties in complying with present loan repayment terms. There were no loans classified for regulatory purposes as loss, doubtful or substandard 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 continue to be minimal. Mercantile offers these products as a financial intermediary, and at present it makes very limited use of financial derivatives to manage its own interest rate exposure. There are $62,823,000 in forward delivery contracts outstanding as hedges to the fixed-rate production in the residential loan pipeline. Mark Twain, like Mercantile, makes limited use of derivative products although it does offer foreign denominated certificates of deposit that are appropriately hedged for foreign currency risk. Roosevelt makes significant use of derivative products in its balance sheet management although it has been and continues to reduce derivative contracts in conjunction with the contraction of its balance sheet. 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, 1996, the Corporation's commitments under standbys aggregated approximately $356,287,000, with $258,667,000 expiring within one year, $73,463,000 expiring within one to five years and $24,157,000 expiring after five years. At year-end 1996, Mercantile subsidiary banks had outstanding unused loan commitments of $8.6 billion, including $5.5 billion in credit card lines and $361,668,000 in home equity credit lines. The remaining commitments were largely to commercial customers in Mercantile's primary service area. Management does not anticipate any losses that would materially affect the financial position or results of operations of the Corporation as a result of such commitments and contingent liabilities. Note P to the Consolidated Financial Statements provides further discussion pertaining to these off-balance-sheet activities and provides information as to the estimated fair values of all financial instruments, including off-balance-sheet instruments. OTHER INCOME Non-interest income increased 8.2% during 1996 to $295,968,000. Excluding $3,114,000 in nonrecurring securities losses, 1996 other income was $25,429,000 or 9.3% higher than in 1995. Trust fees, service charges, investment banking and brokerage fees, credit card and letters of credit fees were at higher levels than last year, while securitization revenue and mortgage banking income declined. Service charge income of $80,660,000 was the largest source of non-interest income in 1996 and was up 7.0% over 1995 levels. The increase in deposit service charges was due largely to selective fee increases and enhanced pricing of low-balance, high-transaction accounts. In 1996, trust fees were $79,413,000 compared with $70,751,000 during 1995, an increase of 12.2% following growth of 7.4% in 1995. Personal trust fees earned by Mercantile Trust Company N.A. were the largest source of trust revenue and increased 21.0% from last year. Income from Mississippi Valley Advisors Inc., the investment management subsidiary of Mercantile, rose by 26.7%. Mississippi Valley Advisors Inc. manages 12 proprietary mutual funds--the ARCH funds, which had assets of $2.5 billion at December 31, 1996. Increases in the value of assets managed as well as repricing and successful new business development efforts largely accounted for the growth in trust fees. The net proceeds from the sale of the indenture trust and agency business in the fourth quarter of 1996 at a gain of $6,750,000 are reflected in miscellaneous income. Trust fee income in the future will be slightly impacted by the Corporation's sale of its indenture trust and agency business. At December 31, 1996, the Corporation held $17.9 billion in assets under investment management and $8.4 billion additional assets under custodial relationships, increases of 20.3% and 48.0%, respectively, from year-end 1995. Investment banking and brokerage fees were $13,021,000 compared with $11,366,000 last year, an increase of 14.6%. This income is derived 26 29 from transaction fees for services performed for both individual and corporate customers, including sales of annuities and mutual funds, profits earned on trading positions and foreign exchange revenue. Mercantile Investment Services, Inc., Mercantile's brokerage services subsidiary, has experienced strong growth in fees from sales of investment products throughout 1996, reflecting favorable market conditions and an increase in sales activity. Mortgage banking income decreased by $501,000 or 4.6%. Excluding the one-time gain of $1,427,000 earned in 1995 on the sale of $225,000,000 of mortgages, this source of income grew by 9.9% in 1996. Mortgages serviced totaled $5.9 billion at December 31, 1996 compared with $5.3 billion at December 31, 1995. The Roosevelt transaction will add approximately $8.6 billion to servicing volume. Originated mortgage servicing rights on the balance sheet at year-end 1996 totaled $4,409,000. The associated risk for significant impairment was not considered to be material. For the year ended December 31, 1996, credit card income was $27,007,000 or 37.2% higher than the comparable 1995 period. The 1996 results included a $12,000,000 start-up cost reimbursement from the Corporation's former co-branded card partner. Excluding that reimbursement, credit card income declined by $4,683,000 or 23.8%. Credit card income primarily represents interchange fees received on transactions of Mercantile cardholders, miscellaneous fees and fees charged merchants for processing credit card transactions. Transaction-based rebates paid to SBC co-branded cardholders are netted against credit card fee income; these rebates totaled $22,388,000 in 1996 versus $11,281,000 in 1995. Also, certain fees relating to the securitized loans were reclassified to securitization revenue starting in the second quarter of 1995. Credit card income related to the merchant processing business, which was sold late in the second quarter of 1996, was only $3,755,000 compared with $5,280,000 in 1995. Securitization revenue in 1996 was $16,008,000 compared with $23,005,000 last year, and represents amounts accruing to Mercantile on the $400,000,000 in credit card loans securitized in the 1995 Mercantile Credit Card Master Trust. For securitized loans, amounts that would otherwise have been reported as interest income, interest expense, credit card fees and provision for loan losses are instead netted in non-interest income as securitization revenue. Because credit losses are absorbed against credit card servicing income over the life of these transactions, such income may vary depending upon the credit performance of the securitized loans. Higher levels of net charge-offs in 1996 adversely impacted securitization revenue. Mercantile acts as servicing agent and receives loan servicing fees equal to two percent per annum of the securitized receivables. As servicing agent, Mercantile continues to provide customer service to collect past due accounts and to provide other services typically performed for its customers. Accordingly, Mercantile's relationship with its credit card customers is not affected by the securitization. Net securities losses of $317,000 were realized in 1996 compared with gains of $4,042,000 in 1995. Losses of $3,114,000 were realized as the result of merger-related investment portfolio restructurings by recently acquired banks in the first and fourth quarters of 1996. Offsetting those losses, Mercantile Bank N.A. recorded $2,442,000 in gains on securities sold during the fourth quarter of 1996, as it contracted its investment portfolio due largely to the need for less collateral for U.S. government deposits. Net securities transactions in 1995 included gains of $1,730,000 on the sale of equity securities. The 17.7% increase in letters of credit fees was due largely to a growth in the average volume of standby letters of credit during 1996. Note P to the Consolidated Financial Statements and the discussion of Off-Balance-Sheet Risk on Page 26 summarize the Corporation's commitments under letters of credit. For 1996, all other miscellaneous income was up $10,145,000 or 19.5% over 1995. Significant items in miscellaneous income for 1996 included the gains on sales of merchant credit card, indenture trust and agency and portfolio leases, which amounted to $10,000,000, $6,750,000 and - ----------------------------------------------------------------------------------------- Exhibit 20 OTHER INCOME ($ in Thousands)
1996 1995 CHANGE 1994 ---- ---- ------ ---- Trust $ 79,413 $ 70,751 12.2% $ 65,888 Service charges 80,660 75,408 7.0 72,659 Credit card fees 27,007 19,690 37.2 26,588 Securitization revenue 16,008 23,005 (30.4) -- Mortgage banking 10,321 10,822 (4.6) 10,917 Investment banking and brokerage 13,021 11,366 14.6 14,400 Letters of credit fees 7,582 6,441 17.7 6,681 Securities gains (losses) (317) 4,042 -- 2,579 Other 62,273 52,128 19.5 36,849 -------- -------- -------- Total Other Income $295,968 $273,653 8.2 $236,561 ======== ======== ======== - -----------------------------------------------------------------------------------------
27 30 $3,542,000, respectively. Gains in 1995 included the $5,155,000 reported on the sale of Mercantile's interest in an ATM joint venture and $5,917,000 in portfolio lease gains. Excluding those one-time items from both years, miscellaneous income was up $925,000 or 2.3% over 1995. OTHER EXPENSE Expenses other than interest expense and the provision for possible loan losses for 1996 were $637,307,000, an increase of 15.1% from 1995. Included in other expense in the first and fourth quarters of 1996 was $51,071,000 in expenses associated with mergers, largely for transition and duplicative costs related to systems standardization and signage, contract penalties to systems providers, investment banking and other professional service fees, change in control and severance payments, and obsolete equipment write-offs. The Corporation also recorded FDIC insurance expense in the third quarter of 1996 of $12,385,000 for the nonrecurring SAIF assessment. Excluding nonrecurring merger and SAIF insurance costs, year-to-date operating expenses increased by 3.6% over 1995. The efficiency ratio, defined as operating expenses as a percentage of taxable-equivalent net interest income and other income, was 56.45% in 1996 compared with 57.46%, or 101 basis points better than last year, excluding the nonrecurring items noted above. Salary expense increased by 5.0% during 1996, largely reflecting the costs of merit increases and the compensation for employees added in acquisitions. Year-to-date benefit costs were up by 8.5% due to an increase in the number of staff and higher costs of most employee benefit programs. In 1996, the Corporation lowered the discount rate used in pension and postretirement actuarial assumptions by one percent, which increased pension expense by 10.5% this year in comparison with 1995. FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which was adopted in 1993, required the recording of the unrecognized transition obligation for postretirement benefits other than pensions. That liability approximated $25,308,000 at December 31, 1996 and will be amortized over the next 16 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 implications of this statement remain immaterial to the financial condition and results of operations of Mercantile. FAS 123, "Accounting for Stock Based Compensation," was issued in October 1995; it encourages companies to adopt an optional accounting method in 1996 based on the estimated fair value of employee stock options. Mercantile has continued to use the current accounting methodology for stock based compensation plans. Therefore, additional pro forma footnote disclosure has been made in Note M of the Consolidated Financial Statements. Occupancy and equipment costs grew by 10.2% during 1996, reflecting the costs of maintaining additional offices and a consistent program of upgrading systems and equipment to further enhance productivity. Total capital expenditures were $67,837,000, $59,849,000 and $47,956,000 in 1996, 1995 and 1994, respectively. In March 1995, FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was published. Under FAS 121, long-lived assets and certain identifiable intangible assets are reviewed whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. This statement was effective in 1996 and did not have a material impact on Mercantile. - ----------------------------------------------------------------------------------------- Exhibit 21 OTHER EXPENSE ($ in Thousands)
1996 1995 CHANGE 1994 ---- ---- ------ ---- Salaries $253,529 $241,422 5.0% $233,430 Employee benefits 62,091 57,203 8.5 55,345 -------- -------- -------- Total Personnel Expense 315,620 298,625 5.7 288,775 Net occupancy 40,431 38,044 6.3 36,475 Equipment 50,648 44,630 13.5 41,410 Marketing/business development 11,176 14,759 (24.3) 15,974 Postage and freight 22,195 20,124 10.3 17,741 Office supplies 12,807 13,024 (1.7) 11,971 Communications 11,077 10,770 2.9 8,737 Legal and professional 10,658 13,055 (18.4) 15,900 Credit card 15,890 12,081 31.5 12,042 FDIC insurance 15,863 17,705 (10.4) 29,119 Foreclosed property expense (727) 1,565 -- (5,077) Intangible asset amortization 11,318 9,492 19.2 10,802 Other 120,351 59,874 -- 71,307 -------- -------- -------- Total Other Expense $637,307 $553,748 15.1 $555,176 ======== ======== ======== - -----------------------------------------------------------------------------------------
28 31 The major components of all other operating expenses for the past three years are shown in Exhibit 21. Credit card, communications and postage expenses increased mainly as the result of costs of servicing the SBC co-branded credit card customers. Intangible asset amortization increased by $1,826,000 or 19.2%, due primarily to the amortization of the goodwill recorded on the Today's, First Financial, Plains Spirit Financial Corporation, Metro, Conway and Peoples acquisitions. Excluding the special assessment, FDIC insurance expense was insignificant in 1996 compared with $17,705,000 in 1995. In late 1996, Mercantile began to organize a formal program to address the systems implications of the year 2000. It is the goal of the program to have all systems "2000 compliant" by January 1, 1999. Preliminary cost estimates for the 1997 through 1999 time frame are not yet quantified. These costs will be expensed as incurred. INCOME TAXES For the year ended December 31, 1996, the Corporation recorded income tax expense of $98,089,000 compared with $124,109,000 in 1995 and $113,165,000 in 1994. The effective tax rate for 1996 was 33.82% compared with 34.79% last year and 37.07% in 1994. The higher 1994 effective tax rate was due largely to a $3,615,000 tax provision for the statutory recapture of acquired thrift loan loss reserves for which no deferred taxes had previously been provided. The lower 1996 rate is due to a reduction in state and local tax effective rates reflecting the benefits associated with the creation of special purpose subsidiaries that were established in the third quarter of 1996, as well as the resolution of certain tax uncertainties. A three-year summary of significant income tax data is presented in Note K 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 tax asset of $49,116,000 at December 31, 1996. Due to the significant amount of taxes paid for the past three years and the forecasted taxes payable for 1997, no valuation reserve for the deferred tax asset is deemed necessary. The Corporation currently has no operating loss carryforwards and the federal returns have been examined through 1992 by the Internal Revenue Service. FOURTH QUARTER RESULTS Mercantile earned $66,630,000 in the fourth quarter of 1996, a 17.7% increase from the $56,592,000 earned in the same period last year. On a per common share basis, earnings increased to $1.09 from $.89 the prior year. The fourth quarter of 1996 included nonrecurring merger-related costs which reduced net income and net income per common share by $8,477,000 and $.14, respectively. One-time favorable items in the fourth quarter of 1996 included the final $4,000,000 co-branded credit card start-up cost reimbursement, $2,442,000 in securities gains and the $6,750,000 indenture trust and agency sale gain. Additionally, the Corporation's earnings were positively impacted by a lower effective tax rate due to the consolidation of bank charters and the creation of special purpose subsidiaries, as well as the resolution of certain tax uncertainties. Exhibit 22 presents condensed quarterly financial data for the last two years. Net interest income improved by 5.9% to $180,509,000 as the volume of average earning assets increased by 3.4% and the net interest rate margin grew from 4.25% to 4.34%. Average loan volume was up $656,956,000 or 5.5% as loan demand improved and loans were added from the 1996 acquisitions previously discussed. The commentary on Net Interest Income on Page 10 provides more details on the dynamics of net interest income and the net interest rate margin. The provision for possible loan losses for the fourth quarter was $15,099,000 compared with $7,353,000 the prior year, as higher levels of provision were needed to absorb credit card losses. Additionally, there was nonrecurring merger-related provision of $2,815,000 in the fourth quarter of 1996. Net charge-offs were $25,405,000 or .81% of average loans for the quarter compared with the year-earlier $15,001,000 or .51%. Losses on credit card loans continued to be responsible for most of the charge-offs. Other income grew by $10,002,000 or 13.5% from the fourth quarter of 1995. Strong results in the trust and investment business as well as the one-time items previously mentioned accounted for the increase. A detailed explanation of the year over year increase in other income is included on Page 26. Other operating expenses were up $8,509,000 or 5.8% from a year ago; this year's expense included $9,393,000 of nonrecurring charges related to mergers. Excluding nonrecurring expenses, the efficiency ratio was 54.31% in the current quarter compared with 59.05% last year. 29 32 - ------------------------------------------------------------------------------------------ Exhibit 22 QUARTERLY FINANCIAL SUMMARY
1995 ----------------------------------------------- 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. -------- -------- -------- -------- PER COMMON SHARE DATA Net income $ .91 $ .95 $ .99 $ .89 Dividends declared .33 .33 .33 .33 Book value at period-end 23.82 24.49 25.31 26.04 Market price at period-end 36 1/2 44 7/8 44 3/4 46 Average common shares outstanding (Thousands) 60,774 60,670 63,025 63,028 OPERATING RESULTS (Thousands) Taxable-equivalent net interest income $176,318 $169,627 $169,744 $174,291 Tax-equivalent adjustment 4,405 4,230 4,125 3,810 -------- -------- -------- -------- Net interest income 171,913 165,397 165,619 170,481 Provision for possible loan losses 13,990 6,683 8,504 7,353 Other income 62,701 64,910 72,005 74,037 Other expense 135,926 135,288 135,906 146,628 Income taxes 29,265 30,449 30,450 33,945 -------- -------- -------- -------- Net income $ 55,433 $ 57,887 $ 62,764 $ 56,592 ======== ======== ======== ======== AVERAGE BALANCE SHEET (Millions) Total assets $17,009 $17,215 $17,839 $17,774 Earning assets 15,740 15,863 16,495 16,400 Loans and leases 11,106 11,268 11,828 11,862 Investments in debt and equity securities 4,325 4,277 4,287 4,194 Deposits 13,239 13,505 13,912 13,804 Long-term debt 328 322 342 338 Shareholders' equity 1,445 1,480 1,594 1,627 SELECTED RATIOS Return on assets 1.30% 1.35% 1.41% 1.27% Return on equity 15.35 15.64 15.75 13.91 Efficiency ratio 56.87 57.68 56.22 59.05 Other expense to average assets 3.20 3.14 3.05 3.30 Equity to assets 8.52 8.68 8.95 9.15 Tier I capital to risk-adjusted assets 11.79 12.13 12.37 12.22 Total capital to risk-adjusted assets 15.00 15.33 15.49 15.30 Leverage 8.08 8.26 8.48 8.54 Loans to deposits (Average) 83.89 83.44 85.02 85.93 Reserve for possible loan losses to outstanding loans 1.92 1.77 1.75 1.72 Reserve for possible loan losses to non-performing loans 548.87 431.32 366.62 245.18 Non-performing loans to outstanding loans .35 .41 .48 .70 Non-performing assets to outstanding loans and foreclosed assets .48 .54 .61 .81 Net interest rate margin 4.48 4.28 4.12 4.25 1996 ---------------------------------------------- 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. -------- -------- -------- -------- PER COMMON SHARE DATA Net income $ .07 $ 1.04 $ .92 $ 1.09 Dividends declared .41 .41 .41 .41 Book value at period-end 25.47 25.64 25.51 26.52 Market price at period-end 45 3/4 44 1/2 52 51 3/8 Average common shares outstanding (Thousands) 63,052 62,780 60,665 61,024 OPERATING RESULTS (Thousands) Taxable-equivalent net interest income $173,657 $180,490 $179,123 $184,261 Tax-equivalent adjustment 3,921 3,768 3,701 3,752 -------- -------- -------- -------- Net interest income 169,736 176,722 175,422 180,509 Provision for possible loan losses 33,168 10,638 12,109 15,099 Other income 59,284 78,157 74,488 84,039 Other expense 182,770 143,324 156,076 155,137 Income taxes 8,517 35,841 26,049 27,682 -------- -------- -------- -------- Net income $ 4,565 $ 65,076 $ 55,676 $ 66,630 ======== ======== ======== ======== AVERAGE BALANCE SHEET (Millions) Total assets $17,865 $18,202 $18,039 $18,366 Earning assets 16,411 16,640 16,656 16,964 Loans and leases 11,798 11,855 12,027 12,518 Investments in debt and equity securities 4,296 4,475 4,380 4,192 Deposits 13,921 14,746 14,483 14,492 Long-term debt 325 322 310 303 Shareholders' equity 1,675 1,612 1,559 1,604 SELECTED RATIOS Return on assets .10% 1.43% 1.23% 1.45% Return on equity 1.09 16.15 14.28 16.62 Efficiency ratio 78.46 55.41 61.54 57.82 Other expense to average assets 4.09 3.15 3.46 3.38 Equity to assets 8.98 8.91 8.43 8.61 Tier I capital to risk-adjusted assets 11.90 11.88 11.15 10.91 Total capital to risk-adjusted assets 14.99 14.95 14.19 13.87 Leverage 8.28 8.18 7.73 7.82 Loans to deposits (Average) 84.75 80.39 83.05 86.38 Reserve for possible loan losses to outstanding loans 1.79 1.72 1.66 1.54 Reserve for possible loan losses to non-performing loans 259.41 322.71 348.56 313.02 Non-performing loans to outstanding loans .69 .53 .48 .49 Non-performing assets to outstanding loans and foreclosed assets .77 .60 .58 .60 Net interest rate margin 4.23 4.34 4.30 4.34 - ------------------------------------------------------------------------------------------
30 33 MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS The management of Mercantile Bancorporation Inc. is responsible for the preparation, and the integrity and objectivity of the accompanying financial statements. 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 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 financial statements were audited by KPMG Peat Marwick LLP, independent auditors, in accordance with generally accepted auditing standards. Their independent professional opinion on the Corporation's financial statements is presented herein. /s/ Thomas H. Jacobsen - ----------------------------- Thomas H. Jacobsen Chairman and Chief Executive Officer /s/ John Q. Arnold - ----------------------------- John Q. Arnold Senior Executive Vice President and Chief Financial Officer ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT 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, 1996, 1995 and 1994, 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, 1996. 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, 1996, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - ---------------------------------- KPMG Peat Marwick LLP St. Louis, Missouri January 15, 1997 31 34 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Thousands except per common share data)
YEAR ENDED DECEMBER 31 1996 1995 1994 ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $1,049,439 $1,021,052 $ 850,525 Investments in debt and equity securities Trading 173 431 527 Taxable 237,130 226,905 225,051 Tax-exempt 22,331 24,829 25,824 ---------- ---------- ---------- Total 259,634 252,165 251,402 Due from banks--interest bearing 4,052 2,487 2,859 Federal funds sold and repurchase agreements 12,256 18,240 13,283 ---------- ---------- ---------- Total Interest Income 1,325,381 1,293,944 1,118,069 INTEREST EXPENSE Interest bearing deposits 504,263 482,775 368,633 Foreign deposits 10,501 13,088 5,398 Short-term borrowings 69,272 86,043 51,293 Bank notes 15,333 13,674 780 Long-term debt 23,623 24,954 24,846 ---------- ---------- ---------- Total Interest Expense 622,992 620,534 450,950 ---------- ---------- ---------- NET INTEREST INCOME 702,389 673,410 667,119 PROVISION FOR POSSIBLE LOAN LOSSES 71,014 36,530 43,265 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 631,375 636,880 623,854 OTHER INCOME Trust 79,413 70,751 65,888 Service charges 80,660 75,408 72,659 Credit card fees 27,007 19,690 26,588 Securitization revenue 16,008 23,005 -- Mortgage banking 10,321 10,822 10,917 Investment banking and brokerage 13,021 11,366 14,400 Securities gains (losses) (317) 4,042 2,579 Other 69,855 58,569 43,530 ---------- ---------- ---------- Total Other Income 295,968 273,653 236,561 OTHER EXPENSE Salaries 253,529 241,422 233,430 Employee benefits 62,091 57,203 55,345 Net occupancy 40,431 38,044 36,475 Equipment 50,648 44,630 41,410 Intangible asset amortization 11,318 9,492 10,802 Other 219,290 162,957 177,714 ---------- ---------- ---------- Total Other Expense 637,307 553,748 555,176 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 290,036 356,785 305,239 INCOME TAXES 98,089 124,109 113,165 ---------- ---------- ---------- NET INCOME $ 191,947 $ 232,676 $ 192,074 ========== ========== ========== PER COMMON SHARE DATA Average shares outstanding 61,874,882 61,883,723 59,757,392 Net income $3.10 $3.74 $3.19 Dividends declared 1.64 1.32 1.12 Includes the following acquisition charges and special SAIF assessment: Provision for possible loan losses $13,666 $-- $ 7,775 Other income (securities losses) (3,114) -- -- Other expense 63,456 -- 12,664 Income tax benefit (23,697) -- (3,739) -------- --- -------- Impact on Net Income $(56,539) $-- $(16,700) ======== === ======== Earnings per common share is calculated by dividing net income, less dividends on preferred stock, by weighted average common shares outstanding.
32 35 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Thousands)
DECEMBER 31 1996 1995 1994 ---- ---- ---- ASSETS Cash and due from banks $ 1,223,911 $ 1,112,088 $ 863,986 Due from banks--interest bearing 91,616 51,056 29,366 Federal funds sold and repurchase agreements 234,212 271,098 213,581 Investments in debt and equity securities Trading 500 3,677 14,299 Available-for-sale (Amortized cost of $3,678,496, $4,167,560 and $720,843, respectively) 3,691,509 4,207,079 700,741 Held-to-maturity (Estimated fair value of $349,738 in 1996 and $3,451,258 in 1994) 346,566 -- 3,565,219 ----------- ----------- ----------- Total Investments in Debt and Equity Securities 4,038,575 4,210,756 4,280,259 Loans held-for-sale 66,373 94,877 21,383 Loans and leases, net of unearned income 12,706,547 11,636,010 10,882,723 ----------- ----------- ----------- Total Loans and Leases 12,772,920 11,730,887 10,904,106 Reserve for possible loan losses (196,627) (201,780) (215,849) ----------- ----------- ----------- Net Loans and Leases 12,576,293 11,529,107 10,688,257 Bank premises and equipment 341,060 309,070 284,565 Due from customers on acceptances 4,946 2,622 6,609 Intangible assets 175,226 110,529 97,357 Other assets 301,120 331,715 259,907 ----------- ----------- ----------- Total Assets $18,986,959 $17,928,041 $16,723,887 =========== =========== =========== LIABILITIES Deposits Non-interest bearing $ 2,584,340 $ 2,075,579 $ 1,980,168 Interest bearing 11,983,660 11,429,511 10,665,587 Foreign 251,887 209,170 219,135 ----------- ----------- ----------- Total Deposits 14,819,887 13,714,260 12,864,890 Federal funds purchased and repurchase agreements 1,589,261 1,552,945 1,519,156 Other short-term borrowings 198,412 210,791 318,925 Bank notes 175,000 250,000 100,000 Long-term debt 302,795 325,607 330,200 Bank acceptances outstanding 4,946 2,622 6,609 Other liabilities 262,631 232,229 175,417 ----------- ----------- ----------- Total Liabilities 17,352,932 16,288,454 15,315,197 Commitments and contingent liabilities -- -- -- SHAREHOLDERS' EQUITY 1996 1995 1994 ---- ---- ---- Preferred stock-- no par value Shares authorized 5,000 5,000 5,000 Shares issued and outstanding -- 15 15 -- 12,153 12,153 Common stock-- $5.00 par value Shares authorized 100,000 100,000 100,000 Shares issued 63,332 63,887 59,977 316,663 319,434 299,885 Capital surplus 228,151 283,288 230,940 Retained earnings 1,163,069 1,060,960 889,115 Valuation on available- for-sale securities 10,345 24,309 (20,449) Treasury stock, at cost 1,728 1,380 94 (84,201) (60,557) (2,954) ----------- ----------- ----------- Total Shareholders' Equity 1,634,027 1,639,587 1,408,690 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $18,986,959 $17,928,041 $16,723,887 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements.
33 36 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ($ in Thousands)
COMMON STOCK --------------------- TOTAL OUTSTANDING PREFERRED CAPITAL RETAINED TREASURY SHAREHOLDERS' SHARES DOLLARS STOCK SURPLUS EARNINGS STOCK EQUITY ----------- ------- --------- -------- ------------ -------- ------------- BALANCE AT DECEMBER 31, 1993 59,432,238 $297,162 $ 12,153 $224,634 $ 761,272 $ -- $1,295,221 Net income 192,074 192,074 Common dividends declared: Mercantile Bancorporation Inc.--$1.12 per share (48,329) (48,329) Pooled companies prior to acquisition (10,947) (10,947) Preferred dividends declared (1,219) (1,219) Issuance of common stock for: Employee incentive plans 308,112 1,541 1,683 3,224 Convertible notes 181,092 905 3,793 4,698 Net fair value adjustment on available-for-sale securities (24,291) (24,291) Purchase of treasury stock (93,500) (2,954) (2,954) Pre-merger transactions of pooled companies and other 55,307 277 830 106 1,213 ----------- -------- -------- -------- ---------- -------- ---------- BALANCE AT DECEMBER 31, 1994 59,883,249 299,885 12,153 230,940 868,666 (2,954) 1,408,690 Net income 232,676 232,676 Common dividends declared: Mercantile Bancorporation Inc.--$1.32 per share (68,542) (68,542) Pooled companies prior to acquisition (14,897) (14,897) Preferred dividends declared (1,020) (1,020) Issuance of common stock in acquisitions of: Southwest Bancshares, Inc. 674,975 3,375 625 9,797 13,797 AmeriFirst Bancorporation, Inc. 661,356 3,307 5,367 3,781 12,455 Plains Spirit Financial Corporation 1,301,180 2,639 22,930 27,701 53,270 Wedge Bank 969,954 4,850 1,649 7,314 13,813 Issuance of common stock for: Employee incentive plans 664,748 3,300 10,932 170 14,402 Convertible notes 331,075 1,655 6,935 8,590 Net fair value adjustment on available-for-sale securities 47,494 47,494 Purchase of treasury stock (2,064,600) (85,474) (85,474) Pre-merger transactions of pooled companies and other 84,599 423 3,910 4,333 ----------- -------- -------- -------- ---------- -------- ---------- BALANCE AT DECEMBER 31, 1995 62,506,536 319,434 12,153 283,288 1,085,269 (60,557) 1,639,587 NET INCOME 191,947 191,947 COMMON DIVIDENDS DECLARED--$1.64 PER SHARE (101,499) (101,499) PREFERRED DIVIDENDS DECLARED (408) (408) REDEMPTION OF PREFERRED STOCK (12,153) (531) (12,684) ISSUANCE OF COMMON STOCK IN ACQUISITIONS OF: TODAY'S BANCORP, INC. 1,127,058 (2,195) 52,321 50,126 FIRST FINANCIAL CORPORATION OF AMERICA 258,742 (1,226) 12,954 11,728 PEOPLES STATE BANK 325,837 849 14,791 15,640 METRO SAVINGS BANK, F.S.B. 197,902 57 14 8,983 9,054 SECURITY BANK OF CONWAY, F.S.B. 321,964 75 14,614 14,689 FIRST STERLING BANCORP, INC. 521,417 2,607 1,876 13,772 18,255 ISSUANCE OF COMMON STOCK FOR EMPLOYEE INCENTIVE PLANS 274,517 1,091 (3,771) 2,397 (283) NET FAIR VALUE ADJUSTMENT ON AVAILABLE-FOR-SALE SECURITIES (14,386) (14,386) PURCHASE OF TREASURY STOCK (3,926,951) (186,811) (186,811) REISSUANCE AND RETIREMENT OF TREASURY STOCK (6,458) (50,708) 57,166 -- OTHER (2,299) (11) (94) (764) (59) (928) ----------- -------- -------- -------- ---------- -------- ---------- BALANCE AT DECEMBER 31, 1996 61,604,723 $316,663 $ -- $228,151 $1,173,414 $(84,201) $1,634,027 =========== ======== ======== ======== ========== ======== ========== Includes valuation on available-for-sale securities.
34 37 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands)
YEAR ENDED DECEMBER 31 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES Net income $ 191,947 $ 232,676 $ 192,074 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 71,014 36,530 43,265 Depreciation and amortization 42,539 39,255 35,388 Provision for deferred income tax credits (23,049) (13,159) (8,026) Net change in loans held-for-sale 28,504 (73,494) 120,085 Net change in accrued interest receivable 10,427 (9,429) (15,380) Net change in accrued interest payable (12,521) 28,502 6,343 Other, net 88,805 11,887 (3,163) ---------- ---------- ---------- Net Cash Provided by Operating Activities 397,666 252,768 370,586 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (1,545,342) (1,123,682) (1,486,183) Proceeds from maturities 1,672,969 1,302,913 1,398,857 Proceeds from sales of: Held-to-maturity securities -- -- 1,985 Available-for-sale securities 269,463 207,901 427,204 Net change in loans and leases (668,686) (895,993) (1,511,428) Purchases of loans and leases (141,600) (128,361) (78,730) Proceeds from sales of loans and leases 255,043 759,626 302,580 Purchases of premises and equipment (67,837) (59,849) (47,956) Proceeds from sales of premises and equipment 9,163 5,146 5,908 Proceeds from sales of foreclosed property 26,450 20,792 45,978 Cash and cash equivalents from acquisitions, net of cash paid 32,014 47,126 48,196 Other, net 5,781 4,648 32,026 ---------- ---------- ---------- Net Cash Provided (Used) by Investing Activities (152,582) 140,267 (861,563) FINANCING ACTIVITIES Net change in time certificates of deposit under $100,000 (419,087) 147,550 (112,901) Net change in time certificates of deposit $100,000 and over (37,898) 156,683 27,699 Net change in other time deposits 188,754 446 (10,745) Net change in foreign deposits 42,717 (9,965) 193,050 Net change in other deposits 509,672 (157,160) (529,742) Net change in short-term borrowings (25,744) (171,697) 613,409 Issuance of bank notes 25,000 150,000 100,000 Principal payments on bank notes (100,000) -- -- Issuance of long-term debt 2,607 14,676 82,151 Principal payments on long-term debt (25,758) (31,288) (61,910) Cash dividends paid (101,907) (84,459) (59,952) Net proceeds from issuance of common stock from employee incentive plans (59) 2,778 2,729 Purchase of treasury stock (175,036) (85,474) (2,954) Redemption of preferred stock (12,684) -- -- Other, net (164) 2,184 (4,572) ---------- ---------- ---------- Net Cash Provided (Used) by Financing Activities (129,587) (65,726) 236,262 ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 115,497 327,309 (254,715) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,434,242 1,106,933 1,361,648 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $1,549,739 $1,434,242 $1,106,933 ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements.
35 38 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 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. Material intercompany transactions are eliminated. Restatement: Effective January 2, 1996, the Corporation acquired Hawkeye Bancorporation ("Hawkeye"), in a transaction accounted for as a pooling-of-interests. Accordingly, prior period financial statements have been restated as if the combining entities had been consolidated for all periods presented. Reclassification: Certain reclassifications have been made to the 1995 and 1994 historical financial statements to conform with the 1996 presentation. New Accounting Standards: Financial Accounting Standard ("FAS") 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective for fiscal years ending after December 15, 1995, provides separate guidelines for establishing carrying values of long-lived assets and certain identifiable intangible assets based on intent to either hold and use an asset or dispose of an asset. The adoption of FAS 121 had no material effect on Mercantile's financial condition or results of operations. FAS 123, "Accounting for Stock Based Compensation," encourages an optional accounting method for stock based compensation based on the estimated fair value of employee stock options. The Corporation continues to use the current accounting methodology for stock based compensation plans. The Corporation has complied with the expanded footnote disclosures as set forth in FAS 123 which is included in Note M to the Consolidated Financial Statements. The FASB issued Statement 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which requires an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The Corporation will apply the new rules prospectively to transactions beginning in the first quarter of 1997. Based on current circumstances, the Corporation believes the application of the new rules will not have a material impact on the financial statements. Use of Estimates: Management of the Corporation has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the Consolidated Financial Statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Earnings per Common Share: Earnings per common share data is calculated by dividing net income, after deducting dividends on preferred stock, by the weighted average number of common shares outstanding during the period. 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 and brokerage 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, 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 (losses). 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. Realized gains and losses, based on the amortized cost of the specific security, are included in other income as securities gains (losses). 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 is generally accrued on a simple interest basis. 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. 36 39 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 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. All non-accrual and renegotiated commercial-related loans are considered impaired. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Mortgage servicing rights associated with loans originated and sold, where servicing is retained, are capitalized and amortized using the level-yield method over the estimated lives of the loans. The carrying value of such rights is subject to periodic adjustment based upon changing market conditions. 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. Mercantile charges off credit card loans when the loan is past due for a period of time in which collection is not probable based upon historical trends. In addition, a credit card loan is charged off immediately following notice of bankruptcy of the borrower. Foreclosed Assets: Foreclosed assets include real estate and other assets acquired through foreclosure or other proceedings, and 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 values 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 consist primarily of goodwill and core deposit premium. 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 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 reissuance, the treasury stock account is reduced by the average cost basis of such stock. Cash Equivalents: Cash and due from banks, due from banks--interest bearing, and 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. 37 40 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) NOTE B SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------------------------------- Listed below are the acquisitions completed during the years ended December 31, 1996, 1995 and 1994: ($ in Thousands)
ORIGINAL CONSIDERATION INTANGIBLE --------------------- ACCOUNTING DATE ASSETS ASSET CASH SHARES METHOD ---- ------ ---------- ---- ------ ---------- ACQUISITIONS COMPLETED Today's Bancorp, Inc. Nov. 7, 1996 $ 501,418 $46,854 $34,912 1,127,058 Purchase First Financial Corporation of America Nov. 1, 1996 87,649 5,137 3,253 258,742 Purchase Peoples State Bank ("Peoples") Aug. 22, 1996 95,657 7,552 -- 325,837 Purchase Metro Savings Bank, F.S.B. ("Metro") Mar. 7, 1996 80,857 3,016 5 197,902 Purchase Security Bank of Conway, F.S.B. ("Conway") Feb. 9, 1996 102,502 6,000 1 321,964 Purchase Hawkeye Bancorporation Jan. 2, 1996 1,978,540 N/A 80 7,892,196 Pooling First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 N/A 1 521,417 Pooling Southwest Bancshares, Inc. Aug. 1, 1995 187,701 N/A 1 674,975 Pooling AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 N/A 1 661,356 Pooling Plains Spirit Financial Corporation July 7, 1995 400,754 17,820 6,697 1,301,180 Purchase TCBankshares, Inc. ("TCB") May 1, 1995 1,422,798 N/A -- 4,749,999 Pooling Central Mortgage Bancshares, Inc. ("Central") May 1, 1995 654,584 N/A 8 2,537,723 Pooling UNSL Financial Corp ("UNSL") Jan. 3, 1995 508,346 N/A 11 1,578,107 Pooling Wedge Bank Jan. 3, 1995 195,716 N/A 1 969,954 Pooling United Postal Bancorp, Inc. Feb. 1, 1994 1,260,765 N/A 39 5,631,953 Pooling Metro Bancorporation Jan. 3, 1994 370,175 N/A 6 1,638,278 Pooling The historical financial statements of the Corporation were not restated for the acquisition due to the immateriality of the acquiree's financial condition and results of operations to that of Mercantile's. In addition to Mercantile common stock issued, the Corporation assumed, through an exchange, the outstanding, non-convertible preferred stock of TCB. The preferred stock was redeemed in the first quarter of 1996. - ----------------------------------------------------------------------------------------------------------------------------------
During the first and fourth quarters of 1996, certain adjustments were recorded by the Corporation to conform accounting and credit policies regarding loan, other real estate and other asset valuations of recently acquired companies to those of the Corporation. These adjustments consisted of a $13,666,000 increase in provision for loan losses, $3,114,000 in losses on securities sold in portfolio restructurings, a $51,071,000 charge to other expense and a related tax benefit of $19,362,000, resulting in an after-tax reduction to net income of $48,489,000. During the fourth quarter of 1994, certain adjustments were recorded by UNSL, Central and TCB to conform their accounting and credit policies regarding loan, other real estate and other asset valuations to those of the Corporation. These adjustments consisted of an increase in the provision of $7,775,000, an increase in other expense of $12,664,000 and a related tax benefit of $3,739,000, for a total of $16,700,000 on an after-tax basis. For all acquisitions accounted for as purchases, the unamortized excess of cost over the fair value of assets acquired was $147,527,000, $90,037,000 and $77,092,000 at December 31, 1996, 1995 and 1994, respectively. The Hawkeye, Central, TCB, and UNSL acquisitions were accounted for as poolings-of-interests. Net income and net income per common share for the Corporation, Central, TCB, UNSL and Hawkeye prior to restatement was as follows: - ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 (Thousands except per common share data) Corporation prior to restatement Net income $216,835 $161,029 Net income per common share 4.00 3.74 Central Net income 2,851 Net income per common share .69 TCB Net income 8,729 Net income per common share 3,616.30 UNSL Net loss (4,280) Net loss per common share (2.71) Hawkeye Net income 15,841 23,745 Net income per common share 1.18 1.78 - ---------------------------------------------------------------------------------------------------------------
38 41 Pending Acquisitions: The Corporation entered into an agreement dated October 27, 1996 to acquire the $3.1 billion-asset Mark Twain Bancshares, Inc. ("Mark Twain"). The acquisition, to be accounted for as a pooling-of-interests, is expected to be consummated during the second quarter of 1997. On December 22, 1996, Mercantile and Roosevelt Financial Group, Inc. ("Roosevelt") signed a definitive merger agreement. Roosevelt is a $7.8 billion-asset thrift holding company headquartered in St. Louis, Missouri. The Roosevelt acquisition is expected to be consummated in the second half of 1997, and will be accounted for as a purchase. The Corporation expects to record a one-time pre-tax expense approximating $40,000,000 to $50,000,000 in the second quarter of 1997 related to the merger with Mark Twain. A pre-tax charge of $38,000,000 to $45,000,000 is estimated relative to the Roosevelt transaction. These charges include accruals to substantially conform the accounting and credit policies of Mark Twain and Roosevelt as well as to account for one-time expenses associated with the transactions. The ultimate amount of one-time expenses may vary significantly from those included in the estimates above due to the substantial market overlaps and the associated final decisions affecting branch closings and severance. Unaudited pro forma combined consolidated financial data including the Corporation, Mark Twain and Roosevelt for 1996 and 1995 is listed below. The unaudited pro forma combined consolidated financial data provided includes the impact of goodwill amortization and the reduction in net interest income due to: 1) interest lost on cash paid for share repurchases or paid directly to Roosevelt shareholders as purchase consideration; and 2) interest on debt which may be issued to finance the Roosevelt acquisition. There is no estimate of potential cost savings included in the following table. - ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 (Thousands except per common share data) Total assets $30,210,572 $30,438,906 Net interest income 955,137 930,453 Other income 299,808 255,299 Net income 182,933 235,543 Net income per common share 2.21 2.84 - ---------------------------------------------------------------------------------
Mercantile entered into an agreement dated August 23, 1996 to acquire the capital stock of Regional Bancshares, Inc., a $181 million-asset bank holding company based in Alton, Illinois. The acquisition, to be accounted for as a purchase transaction, is expected to be consummated in the first quarter of 1997. NOTE C CASH FLOWS The Corporation paid interest on deposits, short-term borrowings, bank notes and long-term debt of $635,513,000, $588,398,000 and $444,607,000 in 1996, 1995 and 1994, respectively. The Corporation paid Federal income taxes of $111,180,000, $104,977,000 and $113,203,000 in 1996, 1995 and 1994, respectively. The following details cash and cash equivalents from acquisitions accounted for as purchases, net of cash paid: - -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 (Thousands) Fair value of assets purchased $(1,098,630) $(952,585) $(52,979) Fair value of liabilities assumed 946,057 851,875 58,561 Issuance of common stock 119,492 95,490 835 ----------- --------- -------- Net Cash Received (Paid) for Acquisitions (33,081) (5,220) 6,417 Cash and cash equivalents acquired 65,095 52,346 41,779 ----------- --------- -------- Cash and Cash Equivalents from Acquisitions, Net of Cash Paid $ 32,014 $ 47,126 $ 48,196 =========== ========= ======== - -----------------------------------------------------------------------------------------------------------------
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, 1996 was $176,399,000. 39 42 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) NOTE E INVESTMENTS IN DEBT AND EQUITY SECURITIES 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, 1996 U.S. government $3,025,558 $18,419 $12,050 $3,031,927 State and political subdivisions Tax-exempt 394,754 8,226 896 402,084 Taxable 112,158 490 469 112,179 ---------- ------- ------- ---------- Total State and Political Subdivisions 506,912 8,716 1,365 514,263 Other 146,026 410 1,117 145,319 ---------- ------- ------- ---------- Total $3,678,496 $27,545 $14,532 $3,691,509 ========== ======= ======= ========== DECEMBER 31, 1995 U.S. government $3,483,593 $44,864 $14,839 $3,513,618 State and political subdivisions Tax-exempt 415,021 11,472 1,032 425,461 Taxable 134,400 1,034 714 134,720 ---------- ------- ------- ---------- Total State and Political Subdivisions 549,421 12,506 1,746 560,181 Other 134,546 211 1,477 133,280 ---------- ------- ------- ---------- Total $4,167,560 $57,581 $18,062 $4,207,079 ========== ======= ======= ========== DECEMBER 31, 1994 U.S. government $641,587 $ 345 $19,867 $622,065 State and political subdivisions--tax-exempt 12,582 156 24 12,714 Other 66,674 1,468 2,180 65,962 -------- ------ ------- -------- Total $720,843 $1,969 $22,071 $700,741 ======== ====== ======= ======== - -------------------------------------------------------------------------------------------------------------------------
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, 1996 U.S. government $342,868 $8,785 $5,626 $346,027 Other 3,698 188 175 3,711 -------- ------ ------ -------- Total $346,566 $8,973 $5,801 $349,738 ======== ====== ====== ======== DECEMBER 31, 1994 U.S. government $2,896,654 $ 8,027 $105,496 $2,799,185 State and political subdivisions Tax-exempt 436,413 4,391 10,617 430,187 Taxable 165,551 164 9,102 156,613 ---------- ------- -------- ---------- Total State and Political Subdivisions 601,964 4,555 19,719 586,800 Other 66,601 13 1,341 65,273 ---------- ------- -------- ---------- Total $3,565,219 $12,595 $126,556 $3,451,258 ========== ======= ======== ========== - --------------------------------------------------------------------------------------------------------------------------
40 43 In December 1995, the Corporation reclassified approximately $3.1 billion in held-to-maturity securities to the available-for-sale category. The unrealized gain on the securities transferred was approximately $31 million. The Financial Accounting Standards Board issued a Special Report titled, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers," which stated that reclassifications made no later than December 31, 1995 from the held-to-maturity category will not call into question the intent to hold other securities to maturity in the future. During the third quarter of 1996, the Corporation transferred securities from the available-for-sale classification to the held-to-maturity classification. The securities transferred had an amortized cost basis of $370,014,000 and an estimated fair value of $373,557,000 on the transfer date. The unrealized gain on the date of the transfer remained in shareholders' equity and is being amortized over the remaining life of the transferred securities. The unamortized balance as of December 31, 1996 was $3,475,000. Securities with a carrying value of $2,644,989,000 at December 31, 1996, $2,233,972,000 at December 31, 1995 and $2,405,905,000 at December 31, 1994 were pledged to secure public and trust deposits, securities sold under agreements to repurchase, and for other purposes required by law. 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; the only transfer of securities from the held-to-maturity category to available-for-sale during 1995 and 1996 was the December 1995 reclassification discussed above. Held-to-maturity securities gains and losses resulted from portfolio restructurings in connection with subsidiary bank acquisitions or calls by the security issuer prior to maturity. - --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 (Thousands) Proceeds from sales of: Held-to-maturity securities $ -- $ -- $ 1,985 Available-for-sale securities 269,463 207,901 427,204 Securities gains on: Held-to-maturity securities $ 14 $ 111 $ 471 Available-for-sale securities 2,813 4,217 5,558 -------- -------- -------- Total Securities Gains 2,827 4,328 6,029 Securities losses on: Held-to-maturity securities -- 1 262 Available-for-sale securities 3,144 285 3,188 -------- -------- -------- Total Securities Losses 3,144 286 3,450 -------- -------- -------- Net Securities Gains (Losses) Before Income Taxes (Benefit) (317) 4,042 2,579 Applicable income taxes (benefit) 111 (1,415) (903) -------- -------- -------- Net Securities Gains (Losses) $ (206) $ 2,627 $ 1,676 ======== ======== ======== - --------------------------------------------------------------------------------------------------
NOTE F LOANS AND LEASES Loans and leases consisted of the following: - ------------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Commercial $ 3,336,846 $ 2,979,437 $ 2,789,062 Real estate--commercial 2,042,072 2,119,714 1,778,884 Real estate--construction 391,167 282,215 323,603 Real estate--residential 4,307,451 3,823,327 3,530,596 Consumer 1,785,467 1,667,348 1,616,786 Credit card 909,917 858,846 865,175 ------------ ------------ ------------ Total Loans and Leases $ 12,772,920 $ 11,730,887 $ 10,904,106 ============ ============ ============ - ------------------------------------------------------------------------------------------------------------
41 44 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Changes in the reserve for possible loan losses were as follows: - --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 (Thousands) Beginning Balance $201,780 $215,849 $205,946 Provision 71,014 36,530 43,265 Charge-offs (102,093) (69,099) (68,083) Recoveries 18,544 16,670 34,274 -------- -------- -------- Net Charge-offs (83,549) (52,429) (33,809) Acquired Reserves 7,382 13,830 447 Transfer to Mercantile Credit Card Master Trust -- (12,000) -- -------- -------- -------- Ending Balance $196,627 $201,780 $215,849 ======== ======== ======== - --------------------------------------------------------------------------------------------------
Non-performing loans consisted of the following: - ------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Non-accrual $ 59,799 $ 79,205 $ 30,650 Renegotiated 3,017 3,094 6,363 -------- -------- -------- Non-performing Loans $ 62,816 $ 82,299 $ 37,013 ======== ======== ======== - ------------------------------------------------------------------------------------------------
Certain directors and executive officers of the Corporation were loan customers of the Corporation's banks during 1996, 1995 and 1994. 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 $4,064,000, $20,693,000 and $19,425,000, at December 31, 1994, 1995 and 1996, respectively. During 1996, $24,755,000 of new loans were made to these persons, repayments totaled $26,023,000. NOTE G BANK PREMISES AND EQUIPMENT Bank premises and equipment were as follows: - --------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Land $ 54,956 $ 54,297 $ 49,968 Bank premises 311,019 285,402 272,560 Leasehold improvements 30,669 29,062 25,421 Furniture and equipment 290,001 258,497 224,475 -------- -------- -------- Total Cost 686,645 627,258 572,424 Accumulated depreciation (345,585) (318,188) (287,859) -------- -------- -------- Net Carrying Value $341,060 $309,070 $284,565 ======== ======== ======== - --------------------------------------------------------------------------------------------------
At December 31, 1996, 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) 1997 $ 7,583 1998 6,240 1999 4,947 2000 4,001 2001 3,262 2002 and later 12,151 ------- Total $38,184 ======= - --------------------------------------------------------------------------
Net rental expense for all operating leases was $8,979,000 in 1996, $8,752,000 in 1995 and $8,435,000 in 1994. NOTE H DEPOSITS Deposits consisted of the following: - -------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Non-interest bearing $ 2,584,340 $ 2,075,579 $ 1,980,168 Interest bearing demand 2,329,973 2,185,587 2,227,039 Money market accounts 2,134,996 1,900,057 1,742,622 Savings 1,020,841 1,051,880 1,129,316 Consumer time certificates under $100,000 5,298,120 5,289,146 4,774,568 Other time 227,496 38,742 38,717 ----------- ----------- ----------- Total Core Deposits 13,595,766 12,540,991 11,892,430 Time certificates $100,000 and over 972,234 964,099 753,325 Foreign 251,887 209,170 219,135 ----------- ----------- ----------- Total Purchased Deposits 1,224,121 1,173,269 972,460 ----------- ----------- ----------- Total Deposits $14,819,887 $13,714,260 $12,864,890 =========== =========== =========== - -------------------------------------------------------------------------------------------------
42 45 The scheduled maturities of Mercantile's consumer time certificates under $100,000, time certificates $100,000 and over and other time deposits were as follows: - --------------------------------------------------------------------------
PERIOD SCHEDULED MATURITY AMOUNT (Thousands) 1997 $4,493,549 1998 1,222,432 1999 451,231 2000 189,575 2001 112,553 2002 and later 28,510 ---------- Total $6,497,850 ========== - ------------------------------------------------------------------------
NOTE I SHORT-TERM BORROWINGS Short-term borrowings were as follows: - -----------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Federal funds purchased and repurchase agreements $ 1,589,261 $ 1,552,945 $ 1,519,156 Treasury tax and loan notes 110,259 116,416 170,045 Commercial paper 19,405 16,950 26,800 Other short-term borrowings 68,748 77,425 122,080 ----------- ----------- ----------- Total Short-term Borrowings $ 1,787,673 $ 1,763,736 $ 1,838,081 =========== =========== =========== - -----------------------------------------------------------------------------------------------
The average balance of total short-term borrowings was $1,273,481,000, $1,548,210,000 and $1,204,078,000 during 1996, 1995 and 1994, respectively. The average rate on total short-term borrowings was 5.44% in 1996, 5.56% in 1995 and 4.26% in 1994. The maximum balances at month-end are listed below: - -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 (Thousands) Federal funds purchased and repurchase agreements $ 1,589,261 $ 1,638,089 $1,554,219 Treasury tax and loan notes 433,885 522,672 615,267 Commercial paper 21,660 31,157 37,406 Other short-term borrowings 75,673 84,456 122,080 - -----------------------------------------------------------------------------------------------
The Corporation had unused lines of credit arrangements with unaffiliated banks in support of commercial paper outstanding of $100,000,000 at December 31, 1996. NOTE J LONG-TERM DEBT AND BANK NOTES Long-term Debt: Long-term debt consisted of the following: - ---------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) MERCANTILE BANCORPORATION INC. (PARENT COMPANY ONLY) 7.625% subordinated notes, due 2002 $ 150,000 $ 150,000 $ 150,000 8.000% convertible subordinated capital notes, due 1995 -- -- 8,822 --------- --------- --------- Total 150,000 150,000 158,822 SECOND-TIER HOLDING COMPANIES -- -- 27,354 BANKS AND OTHER SUBSIDIARIES 6.375% subordinated debt, due 2004 75,000 75,000 75,000 9.000% mortgage-backed notes, due 1999 53,450 53,450 53,450 Federal Home Loan Bank advances 24,267 47,021 15,501 Other 78 136 73 --------- --------- --------- Total 152,795 175,607 144,024 --------- --------- --------- Total Long-term Debt $ 302,795 $ 325,607 $ 330,200 ========= ========= ========= - ---------------------------------------------------------------------------------------------------
On October 15, 1992, the Corporation issued $150,000,000 of non-callable 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. As of December 31, 1994, $16,035,000 of the debt issued by second-tier holding companies was a term loan of Hawkeye, which was paid in full on December 26, 1995. On January 25, 1994, Mercantile Bank 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 9.000% mortgage-backed notes were collateralized by U.S. government securities at December 31, 1996, and mature in July 1999. Federal Home Loan Bank advances at December 31, 1996 consisted of various debt instruments with rates varying from 5.000% to 7.070%. This debt was collateralized by certain loans and securities, with maturities through June 2010. 43 46 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) A summary of annual principal reductions of long-term debt is presented below: - -------------------------------------------------------------------------
ANNUAL PRINCIPAL REDUCTIONS PERIOD (Thousands) 1997 $ 8,002 1998 5,876 1999 55,190 2000 1,359 2001 1,239 2002 and later 231,129 -------- Total $302,795 ======== - -------------------------------------------------------------------------
Bank Notes: Beginning in 1994, certain subsidiary banks could offer unsecured bank notes. Note maturities can range from 30 days to 15 years from the date of issue and may 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. It is anticipated that the bank note program will be restructured in 1997. Bank notes are presented below with December 31, 1996 coupon rates: - ---------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) MERCANTILE BANK N.A. 5.693% floating-rate bank notes, due 1998 $ 150,000 $ 150,000 $ -- 6.000% floating-rate bank notes, due 1996 -- 100,000 100,000 5.650% floating-rate bank notes, due 1999 25,000 -- -- --------- --------- --------- Total Bank Notes $ 175,000 $ 250,000 $ 100,000 ========= ========= ========= - ---------------------------------------------------------------------------------------------------
NOTE K INCOME TAXES The Corporation's results include income tax expense as follows: - ------------------------------------------------------------------------------------------------
CURRENT DEFERRED TOTAL (Thousands) YEAR ENDED DECEMBER 31, 1996 U.S. FEDERAL $108,475 $(22,102) $ 86,373 STATE AND LOCAL 12,663 (947) 11,716 -------- -------- -------- TOTAL $121,138 $(23,049) $ 98,089 ======== ======== ======== Year ended December 31, 1995 U.S. Federal $122,262 $(12,420) $109,842 State and local 15,006 (739) 14,267 -------- -------- -------- Total $137,268 $(13,159) $124,109 ======== ======== ======== Year ended December 31, 1994 U.S. Federal $108,112 $ (7,701) $100,411 State and local 13,079 (325) 12,754 -------- -------- -------- Total $121,191 $ (8,026) $113,165 ======== ======== ======== - ------------------------------------------------------------------------------------------------
44 47 The tax effects of temporary differences that gave rise to the deferred tax assets and deferred tax liabilities are presented below. - --------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Deferred tax assets Reserve for possible loan losses $ 60,165 $ 66,342 $ 70,210 Foreclosed property 1,448 720 2,560 Deferred compensation 5,869 5,451 3,240 Net operating losses from pooled subsidiary -- -- 1,494 Expenses not currently allowable for tax purposes 22,327 12,732 11,079 State tax liabilities 1,595 2,554 2,239 Investments in debt and equity securities--FAS 115 -- -- 11,417 Retirement expenses in excess of tax deduction 8,794 6,737 5,274 Other 6,484 2,512 5,978 -------- -------- -------- Total Gross Deferred Tax Assets 106,682 97,048 113,491 Deferred tax liabilities Leasing (28,315) (37,616) (56,776) Pension settlement gain (6,005) (6,079) (6,005) Intangible assets (5,637) (6,466) (9,865) Depreciation (3,119) (4,167) (3,935) Investments in debt and equity securities--FAS 115 (4,323) (13,946) -- Other (10,167) (12,330) (8,262) -------- -------- -------- Total Gross Deferred Tax Liabilities (57,566) (80,604) (84,843) -------- -------- -------- Net Deferred Tax Assets $ 49,116 $ 16,444 $ 28,648 ======== ======== ======== - --------------------------------------------------------------------------------------------------
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 1996 1995 1994 (Thousands) Computed "expected" tax expense $101,513 $124,874 $106,834 Increase (reduction) in income taxes resulting from Tax-exempt income (9,025) (9,958) (10,006) State and local income taxes, net of federal income tax benefit 7,615 9,274 8,290 Thrift bad debt recapture -- -- 3,615 Other, net (2,014) (81) 4,432 -------- -------- -------- Total Tax Expense $ 98,089 $124,109 $113,165 ======== ======== ======== - --------------------------------------------------------------------------------------------------
NOTE L RETIREMENT PLANS Pension Plans: The Corporation maintains both qualified and nonqualified noncontributory pension plans that cover all employees meeting certain age and service requirements. The qualified plan provides pension benefits based on the employee's length of service and the five highest consecutive years of compensation. 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 1996, 1995 or 1994. 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 1996 1995 1994 (Thousands) Service cost--benefits earned during the period $ 8,787 $ 6,025 $ 6,665 Interest cost on projected benefit obligation 10,352 9,220 8,382 Actual (return) loss on plan assets (15,021) (26,535) 1,863 Net amortization and deferral 851 13,585 (14,254) -------- -------- -------- Net Periodic Pension Expense $ 4,969 $ 2,295 $ 2,656 ======== ======== ======== - --------------------------------------------------------------------------------------------------
The table below sets forth the funded status and amounts recognized in the Consolidated Balance Sheet for the qualified plan: - --------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Actuarial present value of Vested benefit obligation $111,048 $ 98,597 $ 78,380 ======== ======== ======== Accumulated benefit obligation $123,606 $109,819 $ 87,122 ======== ======== ======== Projected benefit obligation $149,426 $134,987 $104,949 Plan assets at fair value 159,469 144,825 121,799 -------- -------- -------- Plan assets in excess of projected benefit obligation (10,043) (9,838) (16,850) Unrecognized net loss (8,650) (13,226) (8,964) Unrecognized prior service cost 2,318 2,603 2,922 Unrecognized net asset at December 31 3,295 4,357 5,664 -------- -------- -------- Prepaid Pension $(13,080) $(16,104) $(17,228) ======== ======== ======== - --------------------------------------------------------------------------------------------------
45 48 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Assumptions used were as follows: - -----------------------------------------------------------------------------------------
1996 1995 1994 Discount rate in determining benefit obligations 7.50% 7.50% 8.50% Rate of increase in compensation levels 5.00 5.00 5.00 Expected long-term rate on assets 9.50 9.50 9.00 - -----------------------------------------------------------------------------------------
At December 31, 1996, approximately 59% of the plan's assets was invested in listed common stocks, 38% was invested in government and corporate bonds rated A or better, and the remaining 3% was 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 years ended December 31, 1996, 1995 and 1994. The expense related to these plans was $1,914,000 in 1996, $1,685,000 in 1995 and $1,612,000 in 1994. 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. FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires 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 1996 1995 1994 (Thousands) Service cost--benefits earned during the period $ 820 $ 610 $ 734 Interest cost on accumulated postretirement benefit obligation 2,748 2,716 2,539 Net amortization and deferral 1,713 1,475 1,633 ------- ------- ------- Net Periodic Postretirement Benefit Cost $ 5,281 $ 4,801 $ 4,906 ======= ======= ======= - ---------------------------------------------------------------------------------------------
The table below sets forth the funded status and the amount recognized in the Consolidated Balance Sheet regarding other postretirement benefits: - --------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Accumulated postretirement benefit obligation ("APBO") Retirees $ 26,736 $ 27,041 $ 24,493 Active employees fully eligible for benefits 1,446 1,301 1,085 Other active employees 10,028 7,862 6,609 -------- -------- -------- Total 38,210 36,204 32,187 Assets at fair value -- -- -- -------- -------- -------- APBO in excess of assets 38,210 36,204 32,187 Unrecognized net gain (loss) (1,988) (1,241) 2,436 Unrecognized prior service cost (140) (147) (155) Unrecognized transition obligation at December 31 (25,308) (26,889) (28,470) -------- -------- -------- Accrued Postretirement Benefit Obligation $ 10,774 $ 7,927 $ 5,998 ======== ======== ======== - --------------------------------------------------------------------------------------------------
Assumptions used were as follows: - --------------------------------------------------------------------------------------------------
1996 1995 1994 Discount rate in determining benefit obligations 7.50% 7.50% 8.50% Health care cost trend First year 9.50 10.50 11.00 Ultimate (2001 and after) 5.50 5.50 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 $112,000 in 1996, and $120,000 in 1995 and 1994. The APBO would increase by $1,542,000 as of December 31, 1996, $1,448,000 as of December 31, 1995 and $1,443,000 as of December 31, 1994. NOTE M SHAREHOLDERS' EQUITY Common Stock: The authorized common stock of the Corporation consists of 100,000,000 shares, $5.00 par value, of which 61,604,723, 62,506,536 and 59,883,249 shares were outstanding at December 31, 1996, 1995 and 1994, respectively. The Corporation's Dividend Reinvestment Plan ("Plan") allows shareholders of record to reinvest dividends and/or make voluntary cash contributions to purchase additional shares of the Corporation's common 46 49 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 14,806 shares were issued and outstanding at December 31, 1995 and 1994. As of December 31, 1995 and 1994, there were two series of non-voting preferred stock issued. Series B-1 consisted of 5,306 shares which had non-cumulative dividends as declared by Mercantile's Board of Directors. Series B-2 represented 9,500 shares with a cumulative annual dividend at the rate of $85 per share. The Series B-1 and B-2 preferred shares were redeemed by the Corporation in March 1996. At December 31, 1996, 1,000,000 shares were reserved for issuance pursuant to the Preferred Share Purchase Rights Plan. 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. Stock Options: The Corporation had stock options outstanding under various plans at December 31, 1996, 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. As of December 31, 1996, there were 960,349 options available for grant. The per share price range for options exercisable was $5.41 to $45.25 as of December 31, 1996. The following table summarizes stock options outstanding as of December 31, 1996: - -----------------------------------------------------------------------
OPTIONS OUTSTANDING ----------------------------------------------------- WEIGHTED AVERAGE RANGE OF REMAINING WEIGHTED AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE - -------------- ----------- ---------------- ---------------- $ 5.41-14.61 218,661 4.30 $ 8.14 14.62-32.42 803,560 3.78 20.63 32.43-32.50 1,046,161 6.62 32.50 32.51-45.63 377,161 7.76 36.86 45.64-53.38 322,674 9.11 46.14 --------- 5.41-53.38 2,768,217 6.06 29.31 ========= - -----------------------------------------------------------------------
Changes in options outstanding were as follows: - -----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE EXERCISE SHARES PRICE --------- -------- BALANCE AT DECEMBER 31, 1993 2,560,118 $18.39 Granted 746,045 32.46 Exercised (319,080) 11.32 Canceled (55,227) 28.65 --------- BALANCE AT DECEMBER 31, 1994 2,931,856 22.55 Granted 415,555 36.51 Exercised (518,155) 14.05 Canceled (71,995) 31.32 Assumed 98,358 15.80 --------- BALANCE AT DECEMBER 31, 1995 2,855,619 25.55 GRANTED 353,274 46.11 EXERCISED (405,440) 14.85 CANCELED (86,228) 37.83 ASSUMED 50,992 22.91 --------- BALANCE AT DECEMBER 31, 1996 2,768,217 29.31 ========= - -----------------------------------------------------------------------------------------------------
Stock options exercisable as of December 31, 1996, 1995 and 1994 were 1,641,560, 1,575,729 and 1,493,243, respectively, with a weighted average exercise price of $23.72, $19.19 and $16.00, respectively. The fair value of the option grants is estimated on the date of grant using an option-pricing model based upon the following assumptions: dividend yield of 3.30%; expected volatility of 31.7%; average risk-free 47 50 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) interest rate of 5.15% and 7.28% for the 1996 and 1995 grants, respectively; and expected option life of 1.26 years from the vesting date. The weighted average fair value of stock options granted in 1995 and 1996 was $9.48 and $10.72, respectively. The Corporation applies Accounting Principles Board Opinion 25 in accounting for its stock option plans. The compensation cost that has been charged against income for stock based compensation plans was $1,438,000, $3,628,000 and $4,081,000 for 1994, 1995 and 1996, respectively. Had the Corporation adopted FAS 123's optional accounting method, the Corporation's net income and earnings per common share would have been reduced to the pro forma amounts noted below: - --------------------------------------------------------------------------------------------------------
EARNINGS NET PER COMMON INCOME SHARE For the Year Ended December 31, 1996: As Reported $191,947 $ 3.10 Pro Forma 189,578 3.06 For the Year Ended December 31, 1995: As Reported $232,676 $ 3.74 Pro Forma 230,974 3.72 - --------------------------------------------------------------------------------------------------------
Debt and Dividend Restrictions: Consolidated retained earnings at December 31, 1996 were not restricted under any 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, 1996, approximately $198,891,000 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 $150,622,000 would be available for loans to the Parent Company under Federal Reserve regulations. The remaining equity of bank subsidiaries approximating $1,158,969,000 was restricted as to transfers to the Parent Company. NOTE N REGULATORY MATTERS The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Mercantile and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of the Corporation and its subsidiary banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Mercantile and subsidiary banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Corporation and its subsidiary banks to maintain minimum amounts and ratios, as set forth in the table below, of Tier I and Total capital to risk-weighted assets, and of Tier I capital to average assets, the leverage ratio. Management believes, as of December 31, 1996, the Corporation and its subsidiary banks meet all capital adequacy requirements to which it is subject. As of December 11, 1996, the date of the most recent notification from regulatory agencies, the subsidiary banks were categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the subsidiary banks' category. The actual and required capital amounts and ratios as of December 31, 1996 for the Corporation and Mercantile Bank N.A. are listed in the following table: - --------------------------------------------------------------------------------------------------------------------------------
MINIMUM CAPITAL ACTUAL REQUIREMENTS AMOUNT RATIO AMOUNT RATIO ($ in Thousands) Tier I capital (to risk-weighted assets): Corporation $1,437,815 10.91% $527,062 4.00% Mercantile Bank N.A. 499,602 9.51 210,225 4.00 Total capital (to risk-weighted assets): Corporation 1,827,916 13.87 1,054,123 8.00 Mercantile Bank N.A. 620,308 11.80 420,450 8.00 Leverage (to average assets): Corporation 1,437,815 7.82 735,152 4.00 Mercantile Bank N.A. 499,602 6.97 286,873 4.00 - --------------------------------------------------------------------------------------------------------------------------------
NOTE O CONCENTRATIONS OF CREDIT The Corporation's primary market area is the state of Missouri and the lower Midwest. At December 31, 1996, approximately 93% of the total loan portfolio, and 90% 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. 48 51 Real estate and credit card lending constituted the two other areas of significant concentration of credit risk. Real estate-related financial instruments (loans, commitments and standby letters of credit) comprised 35% of all such instruments of the Corporation. However, of this total, approximately 63% was consumer-related in the form of residential real estate mortgages and home equity lines of credit. Credit card-related financial instruments comprised approximately 29% of all such instruments of the Corporation. The Corporation is, in general, a secured lender. At December 31, 1996, approximately 87% 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 P 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, "Disclosures about Fair Value of Financial Instruments." 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 securities were based upon quoted market prices where available. Fair values for trading and available-for-sale 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. 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 all 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. 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 $208,000,000 to $436,000,000 at December 31, 1996, 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. 49 52 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The estimated fair values of the Corporation's financial instruments were as follows: - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 ------------------------- ------------------------- ------------------------- (Thousands) CARRYING FAIR CARRYING FAIR CARRYING FAIR FINANCIAL ASSETS VALUE VALUE VALUE VALUE VALUE VALUE Cash and due from banks and short-term investments $ 1,549,739 $ 1,549,739 $ 1,434,242 $ 1,434,242 $ 1,106,933 $ 1,106,933 Trading securities 500 500 3,677 3,677 14,299 14,299 Held-to-maturity securities 346,566 349,738 -- -- 3,565,219 3,451,258 Available-for-sale securities 3,691,509 3,691,509 4,207,079 4,207,079 700,741 700,741 Net loans and leases 12,576,293 12,973,557 11,529,107 11,995,484 10,688,257 10,738,843 FINANCIAL LIABILITIES Deposits 14,819,887 15,010,880 13,714,260 13,932,902 12,864,890 12,847,481 Short-term borrowings 1,787,673 1,787,673 1,763,736 1,763,736 1,838,081 1,838,081 Bank notes and long-term debt 477,795 482,259 575,607 594,405 430,200 409,096 OFF-BALANCE-SHEET Foreign exchange contracts purchased $ 823 $ 3,071 $ 6,641 Foreign exchange contracts sold (439) (2,597) (6,199) Interest rate contracts 866 75 (184) Commitments to extend credit (16,012) (12,035) (10,833) Standby letters of credit (2,425) (2,551) (2,179) Commercial letters of credit (5,098) (4,265) (4,104) - ----------------------------------------------------------------------------------------------------------------------------------
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 1996 1995 1994 (Thousands) Commitments to extend credit Commercial $ 2,541,753 $ 1,998,786 $ 1,835,082 Consumer 6,015,905 5,504,932 4,431,671 ----------- ----------- ----------- Total $ 8,557,658 $ 7,503,718 $ 6,266,753 =========== =========== =========== Standby letters of credit $ 356,287 $ 327,027 $ 230,250 =========== =========== =========== Interest rate contracts $ 141,000 $ 27,000 $ 21,000 =========== =========== =========== - -----------------------------------------------------------------------------------------------------------------------------
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 long-term, fixed-rate liabilities into short-term, variable-rate liabilities, to secure interest margins and to hedge against interest rate movements. 50 53 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 $2,958,000, $2,839,000 and $2,558,000 in 1996, 1995 and 1994, respectively. The notional amounts of interest options written, foreign exchange contracts purchased and foreign exchange contracts sold were as follows: - -------------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) Interest options written $ 16,456 $ 25,225 $ 62,725 Foreign exchange contracts purchased 199,456 125,725 184,079 Foreign exchange contracts sold 201,999 130,394 173,378 - -------------------------------------------------------------------------------------------------------------
These transactions are generally entered into on behalf of customers and are subsequently matched off by the Corporation. As a consequence, these matched transactions do not represent exposure to market risk. The Corporation manages the potential credit exposure through established credit approvals, risk control limits and other monitoring procedures. Credit risk to the Corporation could result from non-performance by a counterparty to a contract; however, currently that credit risk is minimal. Held or Issued for Purposes Other Than Trading: Of the commitments to extend credit discussed in the preceding paragraphs, $250,019,000, $108,267,000 and $74,966,000 were entered into with fixed rates for commercial loan customers at December 31, 1996, 1995 and 1994, respectively. Fixed-rate commitments for consumer (residential mortgage) loan customers totaled $64,692,000 at December 31, 1996, $57,883,000 at December 31, 1995 and $35,289,000 at December 31, 1994. 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. Forward delivery contracts outstanding totaled $62,823,000 as of December 31, 1996 and $68,000,000 as of December 31, 1995. NOTE Q 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. 51 54 NOTE R 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 $12,420,000, $12,828,000 and $14,856,000 for the years ended December 31, 1996, 1995 and 1994, respectively. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) STATEMENT OF INCOME - -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 (Thousands) INCOME Dividends from subsidiaries $ 444,136 $ 215,580 $ 104,950 Other interest and dividends 4,359 4,355 4,644 Management fees 16,987 13,637 13,879 Other 5,159 11,702 3,546 --------- --------- --------- Total Income 470,641 245,274 127,019 EXPENSE Interest on commercial paper 987 1,249 1,199 Interest on long-term debt 11,681 11,697 12,607 Personnel expense 18,503 16,869 14,463 Other operating expenses 46,372 12,410 16,019 --------- --------- --------- Total Expense 77,543 42,225 44,288 INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 393,098 203,049 82,731 Income tax benefit 16,514 2,926 6,482 --------- --------- --------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 409,612 205,975 89,213 Equity in undistributed income of subsidiaries (217,665) 26,701 102,861 --------- --------- --------- NET INCOME $ 191,947 $ 232,676 $ 192,074 ========= ========= ========= - -----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET - -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994 (Thousands) ASSETS Cash $ 33 $ 21 $ -- Short-term investments 128,480 40,358 82,405 Available-for-sale securities 30,167 22,669 12,539 Investment in subsidiaries 1,565,058 1,679,526 1,444,810 Goodwill 123,913 64,812 48,557 Loans and advances to subsidiaries 19,405 16,950 26,849 Other assets 11,642 14,871 3,849 ----------- ----------- ----------- Total Assets $ 1,878,698 $ 1,839,207 $ 1,619,009 =========== =========== =========== LIABILITIES Commercial paper $ 19,405 $ 16,950 $ 26,800 Long-term debt 150,000 150,000 158,822 Other liabilities 75,266 32,670 24,697 ----------- ----------- ----------- Total Liabilities 244,671 199,620 210,319 SHAREHOLDERS' EQUITY 1,634,027 1,639,587 1,408,690 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $ 1,878,698 $ 1,839,207 $ 1,619,009 =========== =========== =========== - -----------------------------------------------------------------------------------------------------------------------------
52 55 STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 (Thousands) OPERATING ACTIVITIES Net income $ 191,947 $ 232,676 $ 192,074 Adjustments to reconcile net income to net cash provided by operating activities Net income of subsidiaries (226,471) (242,281) (207,811) Dividends from subsidiaries 421,299 211,485 98,666 Other, net 33,386 363 14,263 --------- --------- --------- Net Cash Provided by Operating Activities 420,161 202,243 97,192 INVESTING ACTIVITIES Investments in debt and equity securities Purchases (8,339) (9,914) (948) Proceeds from maturities -- 4,501 5,417 Contributions of capital to subsidiaries -- (70,352) (21,505) Acquisitions (33,082) (6,700) -- Other, net (2,943) (3,601) 25,143 --------- --------- --------- Net Cash Provided (Used) by Investing Activities (44,364) (86,066) 8,107 FINANCING ACTIVITIES Cash dividends paid (101,907) (69,562) (48,329) Net issuance of common stock for employee incentive plans (327) 6,839 2,923 Purchase of treasury stock (175,036) (85,474) (2,954) Redemption of preferred stock (12,684) -- -- Principal payments on long-term debt -- (156) (30,552) Net change in commercial paper 2,455 (9,850) 8,410 Other, net (164) -- (777) --------- --------- --------- Net Cash Used by Financing Activities (287,663) (158,203) (71,279) --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 88,134 (42,026) 34,020 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 40,379 82,405 48,385 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 128,513 $ 40,379 $ 82,405 ========= ========= ========= - ----------------------------------------------------------------------------------------------------------------------
NOTE S SUBSEQUENT EVENT On January 29, 1997, the Corporation formed Mercantile Capital Trust I. Through this trust, the Corporation obtained $150,000,000 of floating-rate debt which for regulatory purposes is part of Tier I capital. Proceeds are expected to be utilized for share repurchases relating to the Roosevelt transaction as well as for general corporate purposes. 53 56 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SIX YEAR CONSOLIDATED STATEMENT OF INCOME ($ in Thousands except per common share data)
1996 1995 ---- ---- INTEREST INCOME Interest and fees on loans and leases $1,049,439 $1,021,052 Investments in debt and equity securities Trading 173 431 Taxable 237,130 226,905 Tax-exempt 22,331 24,829 ---------- ---------- Total Investments in Debt and Equity Securities 259,634 252,165 Due from banks--interest bearing 4,052 2,487 Federal funds sold and repurchase agreements 12,256 18,240 ---------- ---------- Total Interest Income 1,325,381 1,293,944 Tax-equivalent adjustment 15,142 16,570 ---------- ---------- Taxable-equivalent Interest Income 1,340,523 1,310,514 INTEREST EXPENSE Deposits 514,764 495,863 Borrowed funds 108,228 124,671 ---------- ---------- Total Interest Expense 622,992 620,534 ---------- ---------- TAXABLE-EQUIVALENT NET INTEREST INCOME 717,531 689,980 PROVISION FOR POSSIBLE LOAN LOSSES 71,014 36,530 OTHER INCOME Trust 79,413 70,751 Service charges 80,660 75,408 Credit card fees 27,007 19,690 Securitization revenue 16,008 23,005 Investment banking and brokerage 13,021 11,366 Securities gains (losses) (317) 4,042 Other 80,176 69,391 ---------- ---------- Total Other Income 295,968 273,653 OTHER EXPENSE Salaries 253,529 241,422 Employee benefits 62,091 57,203 Net occupancy 40,431 38,044 Equipment 50,648 44,630 Other 230,608 172,449 ---------- ---------- Total Other Expense 637,307 553,748 ---------- ---------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 305,178 373,355 INCOME TAXES Income taxes 98,089 124,109 Tax-equivalent adjustment 15,142 16,570 ---------- ---------- Adjusted Income Taxes 113,231 140,679 ---------- ---------- NET INCOME $191,947 $ 232,676 ========== ========== PER COMMON SHARE DATA Net income $ 3.10 $ 3.74 Dividends declared 1.64 1.32 Book value 26.52 26.04 TAX-EQUIVALENT ADJUSTMENT Loans $ 4,298 $ 4,440 Investments in debt and equity securities 10,844 12,130 ------- ------- Total Tax-equivalent Adjustment $15,142 $16,570 ======= ======= Taxable-equivalent basis.
54 57
1994 1993 1992 1991 ---- ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $ 850,525 $ 803,793 $ 830,602 $ 871,713 Investments in debt and equity securities Trading 527 678 593 1,288 Taxable 225,051 248,601 262,276 228,486 Tax-exempt 25,824 25,235 24,298 18,155 ---------- ----------- ----------- ----------- Total Investments in Debt and Equity Securities 251,402 274,514 287,167 247,929 Due from banks--interest bearing 2,859 3,491 8,674 15,624 Federal funds sold and repurchase agreements 13,283 12,813 13,364 21,555 ---------- ----------- ----------- ----------- Total Interest Income 1,118,069 1,094,611 1,139,807 1,156,821 Tax-equivalent adjustment 16,616 17,147 16,204 14,034 ---------- ----------- ----------- ----------- Taxable-equivalent Interest Income 1,134,685 1,111,758 1,156,011 1,170,855 INTEREST EXPENSE Deposits 374,031 393,842 495,307 600,348 Borrowed funds 76,919 50,731 54,335 68,230 ---------- ----------- ----------- ----------- Total Interest Expense 450,950 444,573 549,642 668,578 ---------- ----------- ----------- ----------- TAXABLE-EQUIVALENT NET INTEREST INCOME 683,735 667,185 606,369 502,277 PROVISION FOR POSSIBLE LOAN LOSSES 43,265 64,302 79,551 64,028 OTHER INCOME Trust 65,888 66,782 62,396 53,256 Service charges 72,659 71,045 66,463 57,653 Credit card fees 26,588 25,689 22,205 20,861 Securitization revenue -- -- -- -- Investment banking and brokerage 14,400 14,936 13,227 10,926 Securities gains (losses) 2,579 5,301 6,207 5,400 Other 54,447 61,836 53,958 47,141 ---------- ----------- ----------- ----------- Total Other Income 236,561 245,589 224,456 195,237 OTHER EXPENSE Salaries 233,430 222,139 203,026 180,017 Employee benefits 55,345 53,410 42,459 39,345 Net occupancy 36,475 37,429 32,657 27,907 Equipment 41,410 41,245 36,723 34,893 Other 188,516 215,959 214,780 204,328 ---------- ----------- ----------- ----------- Total Other Expense 555,176 570,182 529,645 486,490 ---------- ----------- ----------- ----------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 321,855 278,290 221,629 146,996 INCOME TAXES Income taxes 113,165 96,074 69,681 28,418 Tax-equivalent adjustment 16,616 17,147 16,204 14,034 ---------- ----------- ----------- ----------- Adjusted Income Taxes 129,781 113,221 85,885 42,452 ---------- ----------- ----------- ----------- NET INCOME $ 192,074 $ 165,069 $ 135,744 $ 104,544 ========== =========== =========== =========== PER COMMON SHARE DATA Net income $ 3.19 $ 2.79 $ 2.41 $ 2.34 Dividends declared 1.12 .99 .93 .93 Book value 23.32 21.59 19.44 18.12 TAX-EQUIVALENT ADJUSTMENT Loans $ 4,170 $ 4,689 $ 5,183 $ 5,782 Investment in debt and equity securities 12,446 12,458 11,021 8,252 ------- ------- ------- ------- Total Tax-equivalent Adjustment $16,616 $17,147 $16,204 $14,034 ======= ======= ======= ======= Taxable-equivalent basis.
GROWTH RATE -------------------------------- ONE YEAR FIVE YEARS -------- ---------- INTEREST INCOME Interest and fees on loans and leases Investments in debt and equity securities Trading Taxable Tax-exempt Total Investments in Debt and Equity Securities Due from banks--interest bearing Federal funds sold and repurchase agreements Total Interest Income Tax-equivalent adjustment Taxable-equivalent Interest Income INTEREST EXPENSE Deposits Borrowed funds Total Interest Expense TAXABLE-EQUIVALENT NET INTEREST INCOME 4.0% 7.4% PROVISION FOR POSSIBLE LOAN LOSSES 94.4 2.1 OTHER INCOME Trust 12.2 8.3 Service charges 7.0 6.9 Credit card fees 37.2 5.3 Securitization revenue (30.4) -- Investment banking and brokerage 14.6 3.6 Securities gains (losses) -- -- Other 15.5 11.2 Total Other Income 8.2 8.7 OTHER EXPENSE Salaries 5.0 7.1 Employee benefits 8.5 9.6 Net occupancy 6.3 7.7 Equipment 13.5 7.7 Other 33.7 2.4 Total Other Expense 15.1 5.5 TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES (18.3) 15.7 INCOME TAXES Income taxes (21.0) 28.1 Tax-equivalent adjustment (8.6) 1.5 Adjusted Income Taxes (19.5) 21.7 NET INCOME (17.5) 12.9 PER COMMON SHARE DATA Net income (17.1) 5.8 Dividends declared 24.2 12.0 Book value 1.8 7.9 TAX-EQUIVALENT ADJUSTMENT Loans (3.2) (5.8) Investment in debt and equity securities (10.6) 5.6 Total Tax-equivalent Adjustment (8.6) 1.5 Taxable-equivalent basis.
55 58 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SIX YEAR CONSOLIDATED AVERAGE BALANCE SHEET ($ in Thousands)
1996 1995 ----------------------- ----------------------- VOLUME RATE VOLUME RATE ------ -------- ------ -------- ASSETS Earning Assets Loans and leases Commercial $ 3,105,296 8.33% $ 2,944,525 8.73% Real estate--commercial 2,080,972 8.64 1,983,621 8.96 Real estate--construction 330,556 9.20 326,875 8.90 Real estate--residential 3,975,520 8.16 3,834,980 8.02 Consumer 1,712,198 8.84 1,652,761 8.66 Credit card 846,501 12.86 776,295 14.29 ----------- ----------- Total Loans and Leases 12,051,043 8.74 11,519,057 8.90 Investments in debt and equity securities Trading 3,350 5.16 7,760 5.55 Taxable 3,918,208 6.06 3,814,691 5.95 Tax-exempt 414,013 7.96 448,139 8.21 ----------- ----------- Total Investments in Debt and Equity Securities 4,335,571 6.24 4,270,590 6.19 Short-term investments Due from banks--interest bearing 68,653 5.90 41,751 5.96 Federal funds sold and repurchase agreements 213,073 5.75 296,046 6.16 ----------- ----------- Total Short-term Investments 281,726 5.79 337,797 6.14 ----------- ----------- Total Earning Assets 16,668,340 8.04 16,127,444 8.13 Non-earning Assets Cash and due from banks 926,565 879,427 Bank premises and equipment 322,197 300,123 Other assets 401,662 365,710 Reserve for possible loan losses (200,207) (210,250) ----------- ----------- Total Assets $18,118,557 $17,462,454 =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 2,449,759 $ 2,196,851 Interest bearing demand 2,230,054 2.15 2,140,415 2.19 Money market accounts 2,043,224 3.87 1,799,973 3.94 Savings 1,058,191 2.27 1,103,034 2.37 Consumer time certificates under $100,000 5,282,478 5.51 5,129,797 5.42 Other time 184,334 4.18 122,187 6.33 ----------- ----------- Total Core Deposits 13,248,040 4.16 12,492,257 4.17 Time certificates $100,000 and over 978,902 5.57 914,225 5.80 Foreign 184,182 5.70 210,873 6.21 ----------- ----------- Total Purchased Deposits 1,163,084 5.59 1,125,098 5.88 ----------- ----------- Total Deposits 14,411,124 4.30 13,617,355 4.34 Short-term borrowings 1,273,481 5.44 1,548,210 5.56 Bank notes 260,587 5.88 214,658 6.37 Long-term debt 314,885 7.50 332,042 7.52 ----------- ----------- Total Acquired Funds 16,260,077 4.51 15,712,265 4.59 Other liabilities 246,150 212,935 ----------- ----------- Total Liabilities 16,506,227 15,925,200 SHAREHOLDERS' EQUITY 1,612,330 1,537,254 ----------- ----------- Total Liabilities and Shareholders' Equity $18,118,557 $17,462,454 =========== =========== Taxable-equivalent basis.
56 59
1994 1993 1992 ----------------------- ----------------------- ----------------------- VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ --------- ASSETS Earning Assets Loans and leases Commercial $ 2,722,197 7.48% $ 2,561,385 7.01% $ 2,562,719 7.48% Real estate--commercial 1,767,244 8.03 1,682,352 7.99 1,649,169 8.42 Real estate--construction 291,705 7.26 284,717 7.62 279,952 8.21 Real estate--residential 3,204,356 7.73 3,204,482 7.88 3,207,985 8.78 Consumer 1,448,310 8.18 1,228,669 9.00 1,169,905 9.81 Credit card 762,247 15.99 674,671 16.24 528,171 16.23 ----------- ----------- ----------- Total Loans and Leases 10,196,059 8.38 9,636,276 8.39 9,397,901 8.89 Investments in debt and equity securities Trading 10,947 5.12 14,008 5.32 11,510 5.75 Taxable 4,056,958 5.55 4,185,721 5.95 3,718,143 7.06 Tax-exempt 465,192 8.18 438,919 8.50 351,801 9.91 ----------- ----------- ----------- Total Investments in Debt and Equity Securities 4,533,097 5.82 4,638,648 6.19 4,081,454 7.31 Short-term investments Due from banks--interest bearing 66,340 4.31 101,182 3.45 201,462 4.31 Federal funds sold and repurchase agreements 294,364 4.51 376,134 3.41 316,492 4.22 ----------- ----------- ----------- Total Short-term Investments 360,704 4.48 477,316 3.42 517,954 4.25 ----------- ----------- ----------- Total Earning Assets 15,089,860 7.52 14,752,240 7.54 13,997,309 8.26 Non-earning Assets Cash and due from banks 865,361 855,986 781,117 Bank premises and equipment 280,683 271,127 249,086 Other assets 369,885 415,486 463,872 Reserve for possible loan losses (211,452) (196,835) (190,646) ----------- ----------- ----------- Total Assets $16,394,337 $16,098,004 $15,300,738 =========== =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 2,240,713 $ 2,289,104 $ 1,947,869 Interest bearing demand 2,270,852 1.87 2,095,793 2.12 1,771,774 2.94 Money market accounts 1,906,229 3.01 1,967,339 2.74 1,834,830 3.35 Savings 1,196,964 2.32 1,168,855 2.56 991,306 3.75 Consumer time certificates under $100,000 4,747,573 4.39 5,053,439 4.63 5,379,754 5.68 Other time 39,822 3.26 83,373 2.73 108,937 3.86 ----------- ----------- ----------- Total Core Deposits 12,402,153 3.32 12,657,903 3.51 12,034,470 4.57 Time certificates $100,000 and over 753,883 4.16 737,990 3.80 788,975 4.29 Foreign 108,986 4.95 31,093 4.38 23,433 3.71 ----------- ----------- ----------- Total Purchased Deposits 862,869 4.26 769,083 3.83 812,408 4.27 ----------- ----------- ----------- Total Deposits 13,265,022 3.39 13,426,986 3.54 12,846,878 4.54 Short-term borrowings 1,204,078 4.26 895,154 2.96 872,148 3.69 Bank notes 12,603 6.19 -- -- -- -- Long-term debt 334,277 7.43 312,670 7.75 274,432 8.08 ----------- ----------- ----------- Total Acquired Funds 14,815,980 3.59 14,634,810 3.60 13,993,458 4.56 Other liabilities 212,490 237,164 243,329 ----------- ----------- ----------- Total Liabilities 15,028,470 14,871,974 14,236,787 SHAREHOLDERS' EQUITY 1,365,867 1,226,030 1,063,951 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $16,394,337 $16,098,004 $15,300,738 =========== =========== =========== GROWTH RATE 1991 --------------- ----------------------- ONE FIVE VOLUME RATE YEAR YEARS ------ -------- ---- ----- ASSETS Earning Assets Loans and leases Commercial $ 2,466,730 9.09% 5.5% 4.7% Real estate--commercial 1,474,735 9.77 4.9 7.1 Real estate--construction 261,655 9.79 1.1 4.8 Real estate--residential 2,879,247 10.12 3.7 6.7 Consumer 1,126,859 10.96 3.6 8.7 Credit card 429,511 16.05 9.0 14.5 ----------- Total Loans and Leases 8,638,737 10.16 4.6 6.9 Investments in debt and equity securities Trading 19,041 6.95 (56.8) (29.4) Taxable 2,677,460 8.55 2.7 7.9 Tax-exempt 258,388 10.06 (7.6) 9.9 ----------- Total Investments in Debt and Equity Securities 2,954,889 8.67 1.5 8.0 Short-term investments Due from banks--interest bearing 236,358 6.61 64.4 (21.9) Federal funds sold and repurchase agreements 361,677 5.96 (28.0) (10.0) ----------- Total Short-term Investments 598,035 6.22 (16.6) (14.0) ----------- Total Earning Assets 12,191,661 9.60 3.4 6.5 Non-earning Assets Cash and due from banks 669,490 5.4 6.7 Bank premises and equipment 217,613 7.4 8.2 Other assets 471,989 9.8 (3.2) Reserve for possible loan losses (177,822) (4.8) 2.4 ----------- Total Assets $13,372,931 3.8 6.3 =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 1,571,144 11.5 9.3 Interest bearing demand 1,355,146 4.46 4.2 10.5 Money market accounts 1,393,581 4.92 13.5 8.0 Savings 727,721 5.40 (4.1) 7.8 Consumer time certificates under $100,000 5,197,157 7.36 3.0 .3 Other time 87,247 4.94 50.9 16.1 ----------- Total Core Deposits 10,331,996 6.34 6.1 5.1 Time certificates $100,000 and over 846,620 5.12 7.1 2.9 Foreign 30,986 6.14 (12.7) 42.8 ----------- Total Purchased Deposits 877,606 5.16 3.4 5.8 ----------- Total Deposits 11,209,602 6.23 5.8 5.2 Short-term borrowings 805,046 5.49 (17.7) 9.6 Bank notes -- -- 21.4 -- Long-term debt 266,925 9.01 (5.2) 3.4 ----------- Total Acquired Funds 12,281,573 6.24 3.5 5.8 Other liabilities 206,171 15.6 3.6 ----------- Total Liabilities 12,487,744 3.6 5.7 SHAREHOLDERS' EQUITY 885,187 4.9 12.7 ----------- Total Liabilities and Shareholders' Equity $13,372,931 3.8 6.3 =========== Taxable-equivalent basis.
57 60 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 Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders, which information is incorporated herein by reference. The following is a list, as of January 31, 1997, 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.
ALL POSITIONS AND OFFICES NAME AGE HELD WITH MERCANTILE ---- --- ------------------------- Thomas H. Jacobsen 57 Chairman of the Board, President and Chief Executive Officer W. Randolph Adams 52 Chairman and Chief Executive Officer of Mercantile Bank National Association and Mercantile Trust Company National Association John Q. Arnold 52 Senior Executive Vice President and Chief Financial Officer Dennis O. Battles 49 Executive Vice President John H. Beirise 51 Group President--Investment Banking Richard C. King 52 President and Chief Executive Officer, Mercantile Bank (Kansas/Kansas City) John W. McClure 50 Group President--Community Banking Jon W. Bilstrom 50 General Counsel and Secretary Jon P. Pierce 56 Executive Vice President, Human Resources Arthur G. Heise 48 Senior Vice President and Auditor Michael T. Normile 47 Senior Vice President, Finance and Control
The executive officers were appointed by and serve at the pleasure of the Board of Directors of Mercantile. Messrs. Jacobsen, Adams, Arnold, Beirise, McClure, Bilstrom, Pierce, Heise and Normile have served as executive officers of either Mercantile or Mercantile Bank for at least the last five years. Mr. Battles was Senior Vice President and Division Manager at NatWest Bank N.A. prior to joining Mercantile in July of 1993. 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 Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders, which is incorporated herein by reference. 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 Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders, which is incorporated herein by reference. 58 61 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 Registrant's Proxy Statement for the 1997 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: Listed in Item 8 hereof. (2) Financial Statement Schedules: None. (3) Exhibits: See Exhibit Index at page 64 hereof. (b) Reports on Form 8-K Registrant filed one (1) Current Report on Form 8-K on December 30, 1996. In that Report, under Item 5, Registrant disclosed that on December 22, 1996, it had entered into, and briefly described certain of the terms of, an Agreement and Plan of Reorganization (the "Merger Agreement") with Roosevelt Financial Group, Inc. ("Roosevelt"). Pursuant to that Merger Agreement, Roosevelt is to be merged with and into a wholly-owned subsidiary of Registrant, with the shareholders of Roosevelt to receive, at the election of the holder thereof as provided in the Merger Agreement, either (i) 0.4211 of a share (the "Exchange Ratio") of Mercantile common stock, par value $5.00 per share ("Mercantile Common Stock"), and the associated preferred share purchase rights under Mercantile's Rights Agreement, dated May 23, 1988, or (ii) $22.00 in cash, for each share of Roosevelt common stock, par value $0.01 per share, provided that the aggregate number of shares of Mercantile Common Stock that shall be issued in the Merger (the "Stock Amount") shall, subject to allocation procedures set forth in the Merger Agreement, not exceed 13,042,110 shares less the number of shares of Mercantile Common Stock issuable upon exercise of Roosevelt stock options or restricted stock outstanding as of the Effective Time. The Current Report also briefly described the terms of a Stock Option Agreement between Registrant as grantee and Roosevelt as issuer, and agreements between Registrant and certain directors of Roosevelt, who in the aggregate have voting power over approximately 2.3% of the outstanding shares of Roosevelt common stock, to vote their shares in favor of the Merger, all entered into simultaneously with execution of the Merger Agreement. 59 62 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: February 19, 1997 By: /s/ THOMAS H. JACOBSEN ------------------------------------ Thomas H. Jacobsen Chairman of the Board, President, Chief Executive Officer and Director POWER OF ATTORNEY We, the undersigned officers and directors of Mercantile Bancorporation Inc., hereby severally and individually constitute and appoint Thomas H. Jacobsen and John Q. Arnold, 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, Chief Executive February 19, 1997 - ------------------------------ Officer and Director (Thomas H. Jacobsen) Principal Executive Officer s/JOHN Q. ARNOLD Senior Executive Vice President and Chief February 19, 1997 - ------------------------------ Financial Officer (John Q. Arnold) Principal Financial Officer s/MICHAEL T. NORMILE Senior Vice President, Finance and Control February 19, 1997 - ------------------------------ (Michael T. Normile) Principal Accounting Officer Director - ------------------------------ (Harry M. Cornell, Jr.) s/WILLIAM A. HALL Director February 19, 1997 - ------------------------------ (William A. Hall) 60 63 s/THOMAS A. HAYS Director February 19, 1997 - ------------------------------ (Thomas A. Hays) s/FRANK LYON, JR. Director February 19, 1997 - ------------------------------ (Frank Lyon, Jr.) s/EDWARD A. MUELLER Director February 19, 1997 - ------------------------------ (Edward A. Mueller) s/ROBERT W. MURRAY Director February 19, 1997 - ------------------------------ (Robert W. Murray) s/HARVEY SALIGMAN Director February 19, 1997 - ------------------------------ (Harvey Saligman) s/CRAIG D. SCHNUCK Director February 19, 1997 - ------------------------------ (Craig D. Schnuck) s/ROBERT L. STARK Director February 19, 1997 - ------------------------------ (Robert L. Stark) s/PATRICK T. STOKES Director February 19, 1997 - ------------------------------ (Patrick T. Stokes) s/JOHN A. WRIGHT Director February 19, 1997 - ------------------------------ (John A. Wright)
61 64 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- No. 3-1 Restated Articles of Incorporation of the Registrant, as amended and currently in effect, filed as Exhibit 3(i) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, 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 Amendment No. 2 to Registrant's Registration Statement No. 333-17757, 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 Form of Indenture Regarding Floating Rate Junior Subordinated Definable Interest Debentures due 2027 between the Registrant and the Chase Manhattan Bank, as Trustee. No. 4-3 Form of First Supplemental Indenture Regarding Floating Rate Junior Subordinated Definable Interest Debentures Due 2027 between the Registrant and the Chase Manhattan Bank, as Trustee. No. 4-4 Rights Agreement dated as of May 23, 1988, between Registrant and Mercantile Bank National Association, 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, 1988, 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 (Commission File No. 1-11792), is incorporated herein by reference. No. 10-2 The Mercantile Bancorporation Inc. Executive 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. 10-3 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 (Commission File No. 1-11792), is incorporated herein by reference. No. 10-4 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 (Commission File No. 1-11792), is incorporated herein by reference. 62 65 Exhibit No. Description ----------- ----------- No. 10-5 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-6 to Registrant's report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. No. 10-6 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. 10-7 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. 10-8 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. 10-9 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 (Commission File No. 1-11792), is incorporated herein by reference. No. 10-10 Form of Change of Control Employment Agreement for 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 (Commission File No. 1-11792), is incorporated herein by reference. No. 10-11 Agreement and Plan of Reorganization dated August 4, 1995, by and between Mercantile Bancorporation Inc. and Hawkeye Bancorporation, filed as Exhibit 2.1 to Registrant's Registration Statement No. 33-63609, is incorporated herein by reference. No. 10-12 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. 10-13 Agreement and Plan of Reorganization dated October 27, 1996, and between Mercantile Bancorporation Inc., Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 2.1 to Registrant's Report on Form 8-K filed on November 6, 1996, is incorporated herein by reference. No. 10-14 Amendment to Agreement and Plan of Reorganization, dated January 24, 1997, by and among Registrant, Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 10-16 to Amendment No. 2 to Registrant's Registration Statement No. 333-17757, is incorporated herein by reference. No. 10-15 Stock Option Agreement, dated October 27, 1996, by and between Mercantile Bancorporation Inc., as grantee, and Mark Twain Bancshares, Inc., as issuer, filed as Exhibit 2.2 to Registrant's Report on Form 8-K filed on November 6, 1996, is incorporated herein by reference. No. 10-16 Agreement and Plan of Reorganization, dated December 22, 1996, by and between Mercantile Bancorporation Inc. and Roosevelt Financial Group, Inc., filed as Exhibit 2.1 to Registrant's Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference. No. 10-17 Stock Option Agreement, dated December 22, 1996, by and between Mercantile Bancorporation Inc., as grantee, and Roosevelt Financial Group, Inc., as issuer, filed as Exhibit 2.1 to Registrant's Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference. No. 21 Subsidiaries of the Registrant as of January 31, 1997. No. 23 Consent of KPMG Peat Marwick LLP. No. 24 Power of Attorney (on signature page). No. 27 Financial Data Schedule.
63 EX-4.2 2 FORM OF INDENTURE 1 =============================================================================== MERCANTILE BANCORPORATION INC. as Issuer INDENTURE Dated as of February 4, 1997 THE CHASE MANHATTAN BANK as Trustee SUBORDINATED DEBT SECURITIES =============================================================================== 2 TIE-SHEET --------- of provisions of Trust Indenture Act of 1939 with Indenture dated as of February 4, 1997 between Mercantile Bancorporation Inc., as Issuer, and The Chase Manhattan Bank, as Trustee:
ACT SECTION INDENTURE SECTION 310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 310(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 310(a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 310(a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 310(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 310(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08; 6.10(a)(b) and (d) 310(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) and (b) . . . . . . . . . . . . . . . . . . . . . . . 6.13 311(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.01; 4.02(a) 312(b) and (c) . . . . . . . . . . . . . . . . . . . . . . . 4.02(b) and (c) 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.04(a) 313(b)(1). . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 313(b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . 4.04(a) 313(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.04(a) 313(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.04(b) 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03 314(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 314(c)(1) and (2). . . . . . . . . . . . . . . . . . . . . . 13.06 314(c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 314(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 314(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.06 314(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a)(c) and (d). . . . . . . . . . . . . . . . . . . . . . 6.01 315(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.08 315(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.09 316(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . 5.01; 5.07 316(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 316(a) last sentence . . . . . . . . . . . . . . . . . . . . 7.04 316(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04 317(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.02 317(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.04(a) 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.08
THIS TIE-SHEET IS NOT PART OF THE INDENTURE AS EXECUTED. 3 TABLE OF CONTENTS ----------------- Page ---- Parties 1 Recitals 1 Authorization of Indenture 1 Compliance with Legal Requirements 1 Purpose of and Consideration for Indenture 1 ARTICLE I DEFINITIONS SECTION 1.01. Definitions 1 Affiliate 2 Authenticating Agent 2 Bankruptcy Law 2 Board of Directors 2 Board Resolution 2 Business Day 2 Capital Securities 2 Capital Securities Guarantee 2 Certificate 3 Common Securities 3 Common Securities Guarantee 3 Company 3 Custodian 3 Debt Security or Debt Securities 3 Debt Security Register 3 Declaration 3 Default 3 Depositary 3 Event of Default 4 Exchange Act 4 Global Security 4 Indenture 4 Institutional Trustee 4 Interest 4 Interest Payment Date 4 Mercantile Trust 4 Mortgage 4 Officers' Certificate 4 Opinion of Counsel 5 Original Issue Date 5 Original Issue Discount Security 5 4 outstanding 5 Person 6 Predecessor Security 6 Principal Office of the Trustee 6 Responsible Officer 6 Securityholder, holder of Debt Securities 6 Senior Indebtedness 6 Subsidiary 7 Trust Indenture Act 7 Trust Securities 7 Trustee 7 Yield to Maturity 7 ARTICLE II DEBT SECURITIES SECTION 2.01. Forms Generally 8 SECTION 2.02. Form of Trustee's Certificate of Authentication 8 SECTION 2.03. Amount Unlimited; Issuable in Series 8 SECTION 2.04. Authentication and Dating 10 SECTION 2.05. Date and Denomination of Debt Securities 11 SECTION 2.06. Execution of Debt Securities 13 SECTION 2.07. Exchange and Registration of Transfer of Debt Securities 14 SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Debt Securities 16 SECTION 2.09. Temporary Debt Securities 17 SECTION 2.10. Cancellation of Debt Securities Paid, etc. 17 SECTION 2.11. Global Securities 18 SECTION 2.12. CUSIP Numbers 19 ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest 19 SECTION 3.02. Offices for Notices and Payments, etc. 19 SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office 20 SECTION 3.04. Provision as to Paying Agent 20 SECTION 3.05. Certificate to Trustee 21 SECTION 3.06. Compliance with Consolidation Provisions 21 SECTION 3.07. Limitation on Dividends 21 SECTION 3.08. Covenants as to Mercantile Trusts 22 SECTION 3.09. Calculation of Original Issue Discount 22 ARTICLE IV SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists 23 ii 5 SECTION 4.02. Preservation and Disclosure of Lists 23 SECTION 4.03. [Reserved] 24 SECTION 4.04. Reports by the Trustee 24 ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT SECTION 5.01. Events of Default 25 SECTION 5.02. Payment of Debt Securities on Default; Suit Therefor 27 SECTION 5.03. Application of Moneys Collected by Trustee 29 SECTION 5.04. Proceedings by Securityholders 29 SECTION 5.05. Proceedings by Trustee 30 SECTION 5.06. Remedies Cumulative and Continuing 30 SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders 30 SECTION 5.08. Notice of Defaults 31 SECTION 5.09. Undertaking to Pay Costs 32 ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of Trustee 32 SECTION 6.02. Reliance on Documents, Opinions, etc. 33 SECTION 6.03. No Responsibility for Recitals, etc. 34 SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities 35 SECTION 6.05. Moneys to be Held in Trust 35 SECTION 6.06. Compensation and Expenses of Trustee 35 SECTION 6.07. Officers' Certificate as Evidence 36 SECTION 6.08. Conflicting Interest of Trustee 36 SECTION 6.09. Eligibility of Trustee 36 SECTION 6.10. Resignation or Removal of Trustee 37 SECTION 6.11. Acceptance by Successor Trustee 38 SECTION 6.12. Succession by Merger, etc. 39 SECTION 6.13. Limitation on Rights of Trustee as a Creditor 39 SECTION 6.14. Authenticating Agents 40 ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders 41 SECTION 7.02. Proof of Execution by Securityholders 41 SECTION 7.03. Who Are Deemed Absolute Owners 42 SECTION 7.04. Debt Securities Owned by Company Deemed Not Outstanding 42 SECTION 7.05. Revocation of Consents; Future Holders Bound 42 iii 6 ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purposes of Meetings 43 SECTION 8.02. Call of Meetings by Trustee 43 SECTION 8.03. Call of Meetings by Company or Securityholders 44 SECTION 8.04. Qualifications for Voting 44 SECTION 8.05. Regulations 44 SECTION 8.06. Voting 45 SECTION 8.07. Quorum; Actions 45 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures without Consent of Securityholders 46 SECTION 9.02. Supplemental Indentures with Consent of Securityholders 48 SECTION 9.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures 49 SECTION 9.04. Notation on Debt Securities 49 SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee 49 ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 10.01. Company May Consolidate, etc., on Certain Terms 50 SECTION 10.02. Successor Entity to be Substituted 50 SECTION 10.03. Opinion of Counsel to be Given to Trustee 51 ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.01. Discharge of Indenture 51 SECTION 11.02. Deposited Moneys to be Held in Trust by Trustee 52 SECTION 11.03. Paying Agent to Repay Moneys Held 52 SECTION 11.04. Return of Unclaimed Moneys 52 ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. Indenture and Debt Securities Solely Corporate Obligations 52 iv 7 ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Successors 53 SECTION 13.02. Official Acts by Successor Entity 53 SECTION 13.03. Surrender of Company Powers 53 SECTION 13.04. Addresses for Notices, etc. 53 SECTION 13.05. Governing Law 53 SECTION 13.06. Evidence of Compliance with Conditions Precedent 54 SECTION 13.07. Non-Business Days 54 SECTION 13.08. Trust Indenture Act to Control 54 SECTION 13.09. Table of Contents, Headings, etc. 54 SECTION 13.10. Execution in Counterparts 55 SECTION 13.11. Separability 55 SECTION 13.12. Assignment 55 SECTION 13.13. Acknowledgment of Rights 55 ARTICLE XIV REDEMPTION OF SECURITIES -- MANDATORY AND OPTIONAL SINKING FUND SECTION 14.01. Applicability of Article 56 SECTION 14.02. Notice of Redemption; Selection of Debt Securities 56 SECTION 14.03. Payment of Debt Securities Called for Redemption 57 SECTION 14.04. Mandatory and Optional Sinking Fund 57 ARTICLE XV SUBORDINATION OF DEBT SECURITIES SECTION 15.01. Agreement to Subordinate 59 SECTION 15.02. Default on Senior Indebtedness 60 SECTION 15.03. Liquidation; Dissolution; Bankruptcy 60 SECTION 15.04. Subrogation 61 SECTION 15.05. Trustee to Effectuate Subordination 62 SECTION 15.06. Notice by the Company 62 SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness 63 SECTION 15.08. Subordination May Not Be Impaired 64 v 8 THIS INDENTURE, dated as of February 4, 1997, between Mercantile Bancorporation Inc., a Missouri corporation (hereinafter sometimes called the "Company"), and The Chase Manhattan Bank, a New York banking corporation, as trustee (hereinafter sometimes called the "Trustee"), W I T N E S S E T H : WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue from time to time of its subordinated unsecured debentures, notes or other evidence of indebtedness to be issued in one or more series (the "Debt Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and, to provide the terms and conditions upon which the Debt Securities are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; and WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed; NOW, THEREFORE, This Indenture Witnesseth: In consideration of the premises, and the purchase of the Debt Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debt Securities or of a series thereof, as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. ----------- The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), or which are by reference therein defined in the Securities Act of 1933, as amended (the "Securities Act"), shall (except as herein otherwise expressly provided or unless the context otherwise requires) have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. 9 "Affiliate" means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities or other ownership interests of the specified Person, (b) any Person 10% or more of whose outstanding voting securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person, (c) any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, (d) a partnership in which the specified Person is a general partner, (e) any executive officer or director of the specified Person, and (f) if the specified Person is an individual, any entity of which the specified Person is an executive officer, director or general partner. "Authenticating Agent" shall mean any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.14. "Bankruptcy Law" shall mean Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" shall mean the board of directors or the executive committee or any other duly authorized designated officers of the Company. "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" shall mean, with respect to any series of Debt Securities, any day other than a Saturday, Sunday or any other day on which banking institutions in New York City (in the State of New York) and St. Louis (in the State of Missouri) are permitted or required by any applicable law to close. "Capital Securities" shall mean undivided beneficial interests in the assets of a Mercantile Trust which rank pari passu ---- ----- with Common Securities issued by such Mercantile Trust; provided, however, that upon the occurrence of an Event - -------- ------- of Default (as defined in the Declaration with respect to such Mercantile Trust), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Capital Securities Guarantee" shall mean, in respect of any Mercantile Trust, any guarantee that the Company may enter into with The Chase Manhattan Bank or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of such Mercantile Trust. "Certificate" shall mean a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company. "Common Securities" shall mean undivided beneficial interests in the assets of a Mercantile Trust which rank pari ---- passu with Capital Securities issued by such Mercantile - ----- Trust; provided, however, that upon the occurrence of an -------- ------- Event of Default (as defined in the 2 10 Declaration with respect to such Mercantile Trust), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Common Securities Guarantee" shall mean, in respect of any Mercantile Trust, any guarantee that the Company may enter into with any Person or Persons and that operates directly or indirectly for the benefit of holders of Common Securities of such Mercantile Trust. "Company" shall mean Mercantile Bancorporation Inc., a Missouri corporation, and, subject to the provisions of Article X, shall include its successors and assigns. "Custodian" shall mean any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. "Debt Security" or "Debt Securities" shall have the meaning stated in the first recital of this Indenture and more particularly means any debt security or debt securities, as the case may be, authenticated and delivered under this Indenture. "Debt Security Register" shall have the meaning specified in Section 2.07. "Declaration," with respect to a Mercantile Trust, shall mean the Amended and Restated Declaration of Trust of such Mercantile Trust, as amended or supplemented from time to time. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Depositary" shall mean, with respect to Debt Securities of any series for which the Company shall determine that such Debt Securities will be issued as a Global Security, The Depository Trust Company, New York, New York, another clearing agency, or any successor registered as a clearing agency under the Exchange Act, or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to either Section 2.03 or 2.11. "Event of Default" shall mean any event specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Global Security" shall mean, with respect to any series of Debt Securities, a Debt Security executed by the Company and delivered by the Trustee to the Depositary or pursuant to the Depositarys instruction, all in accordance with this Indenture, which shall be registered in the name of the Depositary or its nominee. "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both, and shall include the form and terms of particular series of Debt Securities established as contemplated hereunder. 3 11 "Institutional Trustee" has the meaning set forth in the Declaration of the applicable Mercantile Trust. "Interest" shall mean, when used with respect to noninterest bearing Debt Securities, interest payable after maturity. "Interest Payment Date," when used with respect to any installment of interest on a Debt Security of a particular series, shall mean the date specified in such Debt Security or in a Board Resolution or in an indenture supplemental hereto with respect to such series as the fixed date on which an installment of interest with respect to Debt Securities of that series is due and payable. "Mercantile Trust" shall mean a Delaware business trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debt Securities under this Indenture, of which the Company is the sponsor. "Mortgage" shall mean and include any mortgage, pledge, lien, security interest, conditional sale or other title retention agreement or other similar encumbrance. "Officers' Certificate" shall mean a certificate signed by the Chairman of the Board, the Vice Chairman, the President, any Managing Director or any Vice President, and by the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 13.06 if and to the extent required by the provisions of such Section. "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 13.06 if and to the extent required by the provisions of such Section. "Original Issue Date" of any Debt Security (or any portion thereof) shall mean the earlier of (a) the date of such Debt Security or (b) the date of any Debt Security (or portion thereof) for which such Debt Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. "Original Issue Discount Security" shall mean any Debt Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 5.01. The term "outstanding," when used with reference to Debt Securities, shall, subject to the provisions of Section 7.04, mean, as of any particular time, all Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except 4 12 (a) Debt Securities theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Debt Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that, if such Debt Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Article Fourteen or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Debt Securities paid pursuant to Section 2.08 or in lieu of or in substitution for which other Debt Securities shall have been authenticated and delivered pursuant to the terms of Section 2.08 unless proof satisfactory to the Company and the Trustee is presented that any such Debt Securities are held by bona fide holders in due course. In determining whether the holders of the requisite principal amount of outstanding Debt Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 5.01. "Person" shall mean any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debt Security means every previous Debt Security evidencing all or a portion of the same debt as that evidenced by such particular Debt Security; and, for the purposes of this definition, any Debt Security authenticated and delivered under Section 2.08 in lieu of a lost, destroyed or stolen Debt Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Debt Security. "Principal Office of the Trustee," or other similar term, shall mean the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at the time of the execution of this Indenture shall be 450 West 33rd Street -- 15th Floor, New York, New York 10004. "Responsible Officer" shall mean, with respect to the Trustee, any officer within the Principal Office of the Trustee, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officers knowledge of and familiarity with the particular subject. 5 13 "Securityholder," "holder of Debt Securities," or other similar terms, shall mean any Person in whose name at the time a particular Debt Security is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. "Senior Indebtedness" means, with respect to the Company (except any other obligations which rank pari ---- passu with the Debt Securities of a series), (i) the - ----- principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company, including, without limitation, any current or future indebtedness under any indenture (other than this Indenture) to which the Company is a party; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of the Company for the reimbursement of any letter of credit, any bankers acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), except for (1) any indebtedness between or among the Company or any Affiliate of the Company and (2) any series of Debt Securities issued pursuant to this Indenture and guarantees in respect of any such series of Debt Securities. Senior Indebtedness does not include the Debt Securities of any series or any junior subordinated debt securities issued in the future with subordination terms substantially similar to the Debt Securities of any series. Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness. "Subsidiary" shall mean with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939 as in force at the date of execution of this Indenture, except as provided in Section 9.03; provided, however, -------- ------- 6 14 that, in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" shall mean, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Securities" shall mean Common Securities and Capital Securities of a Mercantile Trust. "Trustee" shall mean the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. The term "Trustee" as used with respect to a particular series of Debt Securities shall mean the trustee with respect to that series. "Yield to Maturity" shall mean the yield to maturity on a series of Debt Securities, calculated at the time of issuance of such series of Debt Securities, or if applicable, at the most recent predetermination of interest on such series and calculated in accordance with accepted financial practice. ARTICLE II DEBT SECURITIES SECTION 2.01. Forms Generally. --------------- The Debt Securities of each series shall be in substantially the form as shall be established by or pursuant to a Board Resolution and as set forth in an Officers' Certificate of the Company or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any law or with any rules made pursuant thereto or with any rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Debt Securities. In the event the Debt Securities are issued in definitive form pursuant to this Indenture, such Debt Securities shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debt Securities, as evidenced by their execution of such Debt Securities. 7 15 SECTION 2.02. Form of Trustee's Certificate of -------------------------------- Authentication. - -------------- The Trustee's certificate of authentication on all Debt Securities shall be in substantially the following form: This is one of the Debt Securities of the series designated therein referred to in the within-mentioned Indenture. The Chase Manhattan Bank, as Trustee By ------------------------- Authorized Officer SECTION 2.03. Amount Unlimited; Issuable in Series. ------------------------------------ The aggregate principal amount of Debt Securities which may be authenticated and delivered under this Indenture is unlimited. The Debt Securities may be issued in one or more series up to the aggregate principal amount of Debt Securities of that series from time to time authorized by or pursuant to a Board Resolution of the Company or pursuant to one or more indentures supplemental hereto. Prior to the initial issuance of Debt Securities of any series, there shall be established in or pursuant to a Board Resolution of the Company and set forth in an Officers' Certificate of the Company or established in one or more indentures supplemental hereto: (1) the title of the Debt Securities of the series (which shall distinguish Debt Securities of the series from all other Debt Securities); (2) any limit upon the aggregate principal amount of the Debt Securities of the series which may be authenticated and delivered under this Indenture (except for Debt Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Debt Securities of the series pursuant to Section 2.07, 2.08, 2.09, 9.04 or 14.03); (3) the date or dates on which the principal of and premium, if any, on the Debt Securities of the series is payable; (4) the rate or rates at which the Debt Securities of the series shall bear interest, if any, or the method by which such interest may be determined, the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable or the manner of determination of such Interest Payment Dates and the record dates for the determination of holders to whom interest is payable on any such Interest Payment Dates; (5) the place or places where the principal of, and premium, if any, and any interest on Debt Securities of the series shall be payable; 8 16 (6) the right, if any, to extend the interest payment periods and the duration of such extension; (7) the price or prices at which, the period or periods within which and the terms and conditions upon which Debt Securities of the series may be redeemed, in whole or in part, at the option of the Company, pursuant to any sinking fund or otherwise: (8) the obligation, if any, of the Company to redeem, purchase or repay Debt Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Securityholder thereof and the price or prices at which and the period or periods within which, and the terms and conditions upon which Debt Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (9) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Debt Securities of the series shall be issuable; (10) if other than the principal amount thereof, the portion of the principal amount of Debt Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.01 or provable in bankruptcy pursuant to Section 5.02; (11) any Events of Default with respect to the Debt Securities of a particular series, if not set forth herein; (12) the form of the Debt Securities of the series including the form of the certificate of authentication of such series; (13) any trustee, authenticating or paying agents, warrant agents, transfer agents or registrars with respect to the Debt Securities of such series; (14) whether the Debt Securities of the series shall be issued in whole or in part in the form of one or more Global Securities and, in such case, the Depositary for such Global Security or Securities, and whether beneficial owners of interests in any such Global Securities may exchange such interests for other Debt Securities of such series in the manner provided in Section 2.07, and the manner and the circumstances under which and the place or places where any such exchanges may occur if other than in the manner provided in Section 2.07, and any other terms of the series relating to the global nature of the Global Securities of such series and the exchange, registration or transfer thereof and the payment of any principal thereof, or interest or premium, if any, thereon; (15) if the Debt Securities of the series are issued pursuant to an exemption from registration under the Securities Act; and (16) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). 9 17 All Debt Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such resolution of the Board of Directors or in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to a Board Resolution of the Company, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate of the Company setting forth the terms of the series. SECTION 2.04. Authentication and Dating. ------------------------- At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Debt Securities of any series executed by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debt Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Vice Chairman, the President, one of its Managing Directors or one of its Vice Presidents and by its Secretary, any Assistant Secretary, Treasurer or any Assistant Treasurer, without any further action by the Company hereunder. In authenticating such Debt Securities, and accepting the additional responsibilities under this Indenture in relation to such Debt Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon: (1) a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company as the case may be; (2) an executed supplemental indenture, if any; (3) an Officers' Certificate prepared in accordance with Section 13.06 setting forth the form and terms of the Debt Securities if and as required pursuant to Sections 2.01 and 2.03, respectively; and (4) an Opinion of Counsel prepared in accordance with Section 13.06 which shall also state: (a) that the form of such Debt Securities has been established by or pursuant to a Board Resolution or by a supplemental indenture as permitted by Section 2.01 in conformity with the provisions of this Indenture; (b) that the terms of such Debt Securities have been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.03 in conformity with the provisions of this Indenture; 10 18 (c) that such Debt Securities, when authenticated and delivered by the Trustee and issued by the Company in each case in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company; and (d) that all laws and requirements in respect of the execution and delivery by the Company of the Debt Securities, have been complied with and that authentication and delivery of the Debt Securities by the Trustee will not violate the terms of this Indenture. The Trustee shall have the right to decline to authenticate and deliver any Debt Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders. SECTION 2.05. Date and Denomination of Debt Securities. ---------------------------------------- The Debt Securities shall be issuable as registered Debt Securities without coupons and in such denominations as shall be specified as contemplated by Section 2.03. In the absence of any such specification with respect to the Debt Securities of any series, the Debt Securities of such series shall be issuable in the denominations of $1,000 and any multiple thereof. The Debt Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Every Debt Security shall be dated the date of its authentication, shall bear interest, if any, from such date and shall be payable on such dates, in each case, as contemplated by Section 2.03. The interest installment on any Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Debt Securities of that series shall be paid to the Person in whose name said Debt Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment. In the event that any Debt Security of a particular series or portion thereof is called for redemption and the redemption date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debt Security will be paid upon presentation and surrender of such Debt Security as provided in Section 14.03. Any interest on any Debt Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date for a Debt Security of the same series (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (1) or clause (2) below: (1) The Company may make payment of any Defaulted Interest on Debt Securities to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest 11 19 proposed to be paid on each such Debt Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than ten days prior to the date of the proposed payment and not less than ten days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Debt Security Register, not less than ten days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest on any Debt Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. In respect of any series of Debt Securities in which the right to extend the interest payment periods has been provided pursuant to Section 2.03(6), any interest scheduled to become payable on an Interest Payment Date occurring during a valid extension of an interest payment period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debt Securities. Unless otherwise set forth in a Board Resolution of the Company or one or more indentures supplemental hereto establishing the terms of any series of Debt Securities pursuant to Section 2.01 hereof, the term "regular record date" as used in this Section with respect to a series of Debt Securities with respect to any Interest Payment Date for such series shall mean either the fifteenth day of the month immediately preceding the month in which an Interest Payment Date established for such series pursuant to Section 2.01 hereof shall occur, if such Interest Payment Date is the first day of a month, or the last day of the month immediately preceding the month in which an Interest Payment Date established for such series pursuant to Section 2.01 hereof shall occur, if such Interest Payment Date is the fifteenth day of a month, whether or not such date is a Business Day. 12 20 Subject to the foregoing provisions of this Section, each Debt Security of a series delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debt Security of such series shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debt Security. SECTION 2.06. Execution of Debt Securities. ---------------------------- The Debt Securities shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Vice Chairman, President, one of its Managing Directors or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents and by the manual or facsimile signature of its Secretary, one of its Assistant Secretaries, its Treasurer or one of its Assistant Treasurers, under its corporate seal which may be affixed thereto or printed, engraved or otherwise reproduced thereon, by facsimile or otherwise, and which need not be attested. Only such Debt Securities as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized officer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debt Security executed by the Company shall be conclusive evidence that the Debt Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Debt Securities shall cease to be such officer before the Debt Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debt Securities nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debt Securities had not ceased to be such officer of the Company; and any Debt Security may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debt Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. SECTION 2.07. Exchange and Registration of Transfer ------------------------------------- of Debt Securities. - ------------------ Subject to Section 2.03(14), Debt Securities of any series may be exchanged for a like aggregate principal amount of Debt Securities of the same series of other authorized denominations. Debt Securities to be exchanged may be surrendered at the principal corporate trust office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debt Security or Debt Securities which the Securityholder making the exchange shall be entitled to receive. Subject to Section 2.03(14), upon due presentment for registration of transfer of any Debt Security of any series at the principal corporate trust office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company shall execute, the Company or the 13 21 Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debt Security or Debt Securities of the same series for a like aggregate principal amount. Registration or registration of transfer of any Debt Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Debt Security, shall be deemed to complete the registration or registration of transfer of such Debt Security. The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.02, a register (the "Debt Security Register") for each series of Debt Securities issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debt Securities as in this Article Two provided. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. All Debt Securities presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by, the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debt Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of (a) any Debt Security for a period of 15 days next preceding the date of selection of Debt Securities of such series for redemption, or (b) any Debt Securities of any series selected, called or being called for redemption in whole or in part, except in the case of any Debt Securities of any series to be redeemed in part, the portion thereof not so to be redeemed. Notwithstanding the foregoing, if pursuant to Section 2.03, a series of Debt Securities are issued pursuant to an exemption from registration under the Securities Act, such Debt Securities may not be transferred except in compliance with the restricted securities legend set forth below (the "Restrictive Securities Legend"), unless otherwise determined by the Company pursuant to Section 2.03 and in accordance with applicable law: THE DEBT SECURITIES HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. NEITHER THIS DEBT SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS DEBT SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH DEBT SECURITY PRIOR TO THE DATE WHICH IS 14 22 THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH MERCANTILE BANCORPORATION INC. (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS DEBT SECURITY OR ANY PREDECESSOR OF THIS DEBT SECURITY (THE "RESALE RESTRICTIONS TERMINATION DATE") ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE DEBT SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE DEBT SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANYS RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS DEBT SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. DEBT SECURITIES OWNED BY A PURCHASER THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER MAY NOT BE HELD IN BOOK-ENTRY FORM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTIONS TERMINATION DATE. Prior to any distribution of the Debt Securities to the holders of Capital Securities in accordance with the related Declaration, the Company and the Trustee shall enter into a supplemental indenture pursuant to Article IX to provide for transfer procedures and restrictions with respect to the Debt Securities substantially similar to those contained in the Declaration with respect to Capital Securities of the corresponding series to the extent applicable in the circumstances existing at the time of such distribution for purposes of assuring, if applicable, that no registration of such Debt Securities is required under the Securities Act of 1933, as amended. SECTION 2.08. Mutilated, Destroyed, Lost or Stolen ------------------------------------ Debt Securities. - --------------- In case any temporary or definitive Debt Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debt Security of the same series bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debt Security, or in lieu of and in substitution for the Debt Security so destroyed, lost or stolen. In every case the 15 23 applicant for a substituted Debt Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debt Security and of the ownership thereof. The Trustee may authenticate any such substituted Debt Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debt Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debt Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debt Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debt Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof. Every substituted Debt Security of any series issued pursuant to the provisions of this Section 2.08 by virtue of the fact that any such Debt Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debt Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debt Securities of the same series duly issued hereunder. All Debt Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debt Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.09. Temporary Debt Securities. ------------------------- Pending the preparation of definitive Debt Securities of any series, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debt Securities that are typed, printed or lithographed. Temporary Debt Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Debt Securities but with such omissions, insertions and variations as may be appropriate for temporary Debt Securities, all as may be determined by the Company. Every such temporary Debt Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debt Securities. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debt Securities and thereupon any or all temporary Debt Securities of such series may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as 16 24 provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debt Securities a like aggregate principal amount of such definitive Debt Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debt Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Debt Securities of the same series authenticated and delivered hereunder. SECTION 2.10. Cancellation of Debt Securities Paid, etc. ----------------------------------------- All Debt Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debt Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debt Securities canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debt Securities unless the Company otherwise directs the Trustee in writing. If the Company shall acquire any of the Debt Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debt Securities unless and until the same are surrendered to the Trustee for cancellation. SECTION 2.11. Global Securities. ----------------- (a) If the Company shall establish pursuant to Section 2.03 that the Debt Securities of a particular series are to be issued as a Global Security, then the Company shall execute and the Trustee shall, in accordance with Section 2.04, authenticate and deliver, a Global Security that (i) shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, all or a specified portion of the outstanding Debt Securities of such series, (ii) shall be registered in the name of the Depositary or its nominee, (iii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositarys instruction and (iv) shall bear a legend substantially to the following effect: "Except as otherwise provided in Section 2.11 of the Indenture, this Debt Security may be transferred, in whole but not in part, only to another nominee of the Depositary or to a successor Depositary or to a nominee of such successor Depositary." (b) Notwithstanding the provisions of Section 2.07, the Global Security of a series may be transferred, in whole but not in part and only in the manner provided in Section 2.07, only to another nominee of the Depositary for such series, or to a successor Depositary for such series selected or approved by the Company or to a nominee of such successor Depositary. (c) If at any time the Depositary for a series of the Debt Securities notifies the Company that it is unwilling or unable to continue as Depositary for such series or if at any time the Depositary for such series shall no longer be registered or in good standing under the Exchange Act, or other applicable statute or regulation, and a successor Depositary for such 17 25 series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, this Section 2.11 shall no longer be applicable to the Debt Securities of such series and the Company will execute, and subject to Section 2.07, the Trustee, upon written request of the Company, will authenticate and make available for delivery the Debt Securities of such series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security of such series in exchange for such Global Security. In addition, the Company may at any time determine that the Debt Securities of any series shall no longer be represented by a Global Security and that the provisions of this Section 2.11 shall no longer apply to the Debt Securities of such series. In such event the Company will execute and subject to Section 2.07, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and make available for delivery the Debt Securities of such series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security of such series in exchange for such Global Security. Upon the exchange of the Global Security for such Debt Securities in definitive registered form without coupons, in authorized denominations, the Global Security shall be canceled by the Trustee. Such Debt Securities in definitive registered form issued in exchange for the Global Security pursuant to this Section 2.11(c) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Debt Securities to the Depositary for delivery to the Persons in whose names such Debt Securities are so registered. SECTION 2.12. CUSIP Numbers. ------------- The Company in issuing the Debt Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Securityholders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debt Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debt Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers. ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest. ------------------------------------------ The Company covenants and agrees for the benefit of each series of Debt Securities that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on each of the Debt Securities of that series at the place, at the respective times and in the manner provided in such Debt Securities. At the option of the Company, each installment of interest on the Debt Securities of any series may be paid (i) by mailing checks for such interest payable to the order of the holders of Debt Securities entitled thereto as they appear 18 26 on the registry books of the Company or (ii) if so specified with respect to the Debt Securities of such series as contemplated by Section 2.03, by wire transfer to any account with a banking institution located in the United States designated by such Person to the paying agent no later than the related record date. SECTION 3.02. Offices for Notices and Payments, etc. ------------------------------------- So long as any of the Debt Securities remain outstanding, the Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where the Debt Securities of each series may be presented for payment, an office or agency where the Debt Securities of that series may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Debt Securities of that series or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.03, such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in the Borough of Manhattan, The City of New York, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the principal corporate trust office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside the Borough of Manhattan, The City of New York, where the Debt Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, -------- ------- that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in the Borough of Manhattan, The City of New York, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.03. Appointments to Fill Vacancies in --------------------------------- Trustee's Office. - ---------------- The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 3.04. Provision as to Paying Agent. ---------------------------- (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Debt Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.04, 19 27 (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Debt Securities of such series (whether such sums have been paid to it by the Company or by any other obligor on the Debt Securities of such series) in trust for the benefit of the holders of the Debt Securities of such series; (2) that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debt Securities of such series) to make any payment of the principal of and premium, if any, or interest, if any, on the Debt Securities of such series when the same shall be due and payable; and (3) that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest, if any, on the Debt Securities of any series, set aside, segregate and hold in trust for the benefit of the holders of the Debt Securities of such series a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debt Securities of such series) to make any payment of the principal of and premium, if any, or interest, if any, on the Debt Securities of such series when the same shall become due and payable. Whenever the Company shall have one or more paying agents for any series of Debt Securities, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on any Debt Securities of such series, deposit with a paying agent a sum sufficient to pay the principal, premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Debt Securities hereunder, or for any other reason, pay, or direct any paying agent to pay to the Trustee all sums held in trust for any such series by the Company or any such paying agent, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04. SECTION 3.05. Certificate to Trustee. ---------------------- The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year in each year, so long as Debt Securities of any series are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers 20 28 of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.06. Compliance with Consolidation Provisions. ---------------------------------------- The Company will not, while any of the Debt Securities remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article X hereof are complied with. SECTION 3.07. Limitation on Dividends. ----------------------- If Debt Securities of a series are initially issued to a Mercantile Trust or a trustee of such trust in connection with the issuance of Trust Securities by such Mercantile Trust (regardless of whether Debt Securities continue to be held by such trust) and (i) there shall have occurred and be continuing any event that would constitute an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under a Capital Securities Guarantee or a Common Securities Guarantee with respect to securities issued by such trust, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debt Securities of such series by extending the interest payment period as provided herein and such period, or any extension thereof, shall be continuing, then (a) the Company shall not declare or pay any dividend on, make a distribution with respect to, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of its capital stock or rights to acquire such capital stock (other than (i) purchases or acquisitions of shares of any such capital stock or rights to acquire such capital stock in connection with the satisfaction by the Company of its obligations under any employee benefit plans, (ii) as a result of a reclassification of the Company's capital stock or rights to acquire such capital stock or the exchange or conversion of one class or series of the Company's capital stock or rights to acquire such capital stock for another class or series of the Company's capital stock or rights to acquire such capital stock, (iii) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (iv) dividends and distributions made on the Company's capital stock or rights to acquire such capital stock with the Company's capital stock or rights to acquire such capital stock, or (v) any declaration of a dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto), or make any guarantee payments (other than payments under a Capital Securities Guarantee or a Common Securities Guarantee) with respect to the foregoing and (b) the Company shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Debt ---- ----- Securities of such series. SECTION 3.08. Covenants as to Mercantile Trusts. --------------------------------- In the event Debt Securities of a series are initially issued to a Mercantile Trust or the Institutional Trustee of such Mercantile Trust in connection with the issuance of Trust 21 29 Securities by such Mercantile Trust, for so long as such Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities of such Mercantile Trust; provided, however, that any permitted successor of the - -------- ------- Company under this Indenture may succeed to the Company's ownership of such Common Securities. The Company, as owner of a majority of the Common Securities of such Mercantile Trust, shall use its reasonable efforts to cause such Mercantile Trust (a) to remain a statutory business trust, except in connection with a distribution of Debt Securities of such series to the holders of such Trust Securities in liquidation of such Mercantile Trust, the redemption of all of the Trust Securities of such Mercantile Trust or certain mergers, consolidations or amalgamations, each as permitted by the Declaration of such Mercantile Trust, and (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes and (c) to use its reasonable efforts to cause each holder of Trust Securities issued by such Mercantile Trust to be treated as owning an undivided beneficial interest in the Debt Securities of such series issued to such Mercantile Trust. SECTION 3.09. Calculation of Original Issue ----------------------------- Discount. - -------- The Company shall file with the Trustee promptly at the end of each calendar year a written notice specifying the amount of original issue discount (including daily rates and accrual periods), if any, accrued on outstanding Debt Securities as of the end of such year. ARTICLE IV SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists. ---------------------- The Company covenants and agrees that it will furnish or caused to be furnished to the Trustee: (a) on each regular record date for each series of Debt Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of such series of Debt Securities as of such record date (and on dates to be determined pursuant to Section 2.03 for non-interest bearing securities in each year); and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished under this Section 4.01 so long as the Trustee is in possession thereof by reason of its acting as Debt Security registrar for such series. SECTION 4.02. Preservation and Disclosure of Lists. ------------------------------------ (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of each series of Debt Securities (1) 22 30 contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Debt Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished. (b) In case three or more holders of Debt Securities of any series (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debt Security of such series for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debt Securities of such series or with holders of all Debt Securities with respect to their rights under this Indenture or under such Debt Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within five Business Days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, or (2) inform such applicants as to the approximate number of holders of such series or all Debt Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of such series or all Debt Securities, as the case may be, whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Debt Securities of such series or all Debt Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such 23 31 tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Debt Securities, by receiving and holding the same, agrees with Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debt Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 4.03. [Reserved] SECTION 4.04. Reports by the Trustee. ---------------------- (a) The Trustee shall transmit to Securityholders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) of the Trust Indenture Act, the Trustee shall, within 60 days after each May 15 following the date of this Indenture deliver to Securityholders a brief report, dated as of such May 15, which complies with the provisions of such Section 313(a). (b) A copy of each such report shall, at the time of such transmission to Securityholders, be filed by the Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission, if required by applicable law, and with the Company. The Company will promptly notify the Trustee when the Debt Securities are listed on any stock exchange. ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT SECTION 5.01. Events of Default. ----------------- The following Events of Default with respect to Debt Securities of any series or such other events as may be established with respect to the Debt Securities of that series as contemplated by Section 2.03 hereof shall be "Events of Default" with respect to Debt Securities of that series: (a) the Company defaults in the payment of any interest upon any Debt Securities of that series when it becomes due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an -------- ------- interest payment period by the 24 32 Company in accordance with the terms of such Debt Securities shall not constitute a default in the payment of interest for this purpose; or (b) the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debt Securities of that series as and when the same shall become due and payable either at maturity, upon redemption (including redemption for any sinking fund), by declaration of acceleration or otherwise; provided, however, that a valid extension -------- ------- of the maturity of such Debt Securities shall not constitute a default for this purpose; or (c) the Company defaults with respect to indebtedness for money borrowed resulting in acceleration of such indebtedness having an aggregate principal amount in excess of $25 million and such acceleration is not rescinded or annulled within 30 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Debt Securities of that series, a written notice specifying such acceleration and stating that such Notice is a "Notice of Default" hereunder; or (d) the Company defaults in the performance of, or breaches, any of its covenants or agreements in this Indenture or in the terms of that series of Debt Securities established as contemplated in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Debt Securities of that series, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (f) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (g) as to Debt Securities of any series issued to a Mercantile Trust, such Mercantile Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of the Debt Securities of such series to holders of such Trust Securities in liquidation of their interests 25 33 in such Mercantile Trust, (ii) the redemption of all of the outstanding Trust Securities of such Mercantile Trust or (iii) certain mergers, consolidations or amalgamations, each as permitted by the Declaration of such Mercantile Trust. If an Event of Default occurs and is continuing with respect to any series of Debt Securities, then, and in each and every such case, unless the principal of all of the Debt Securities of that series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities of that series then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Debt Securities of that series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all Debt Securities of that series and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Debt Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of the Debt Securities of any series (or of all the Debt Securities, as the case may be) shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debt Securities of such series (or of all the Debt Securities, as the case may be) and the principal of and premium, if any, on any and all Debt Securities of such series (or of all the Debt Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Debt Securities of such series (or at the respective rates of interest or Yields to Maturity of all the Debt Securities, as the case may be) to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys' and counsel, and all other amounts due to the Trustee pursuant to Section 6.06, and if any and all Events of Default under this Indenture, other than the non-payment of the principal of or premium, if any, on Debt Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debt Securities of such series (or of all the Debt Securities, as the case may be) then outstanding, by written notice to the Company and to the Trustee, may waive all defaults with respect to that series (or with respect to all Debt Securities, as the case may be, in such case, treated as a single class) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or 26 34 annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debt Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debt Securities shall continue as though no such proceeding had been taken. SECTION 5.02. Payment of Debt Securities on Default; -------------------------------------- Suit Therefor. - ------------- The Company covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Debt Securities of any series as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Debt Securities of any series as and when the same shall have become due and payable, whether at maturity of the Debt Securities of that series or upon redemption or by declaration of acceleration or otherwise -- then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debt Securities of that series the whole amount that then shall have become due and payable on all such Debt Securities of that series for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) upon the overdue installments of interest at the rate or Yield to Maturity (in the case of Original Issue Discount Securities) borne by the Debt Securities of that series; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.06. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debt Securities and collect in the manner provided by law out of the property of the Company or any other obligor on such Debt Securities wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debt Securities of any series under Title 11, United States Code, or any other applicable law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debt Securities of any series, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debt Securities of any series shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest (or, if the Debt Securities of that series are Original Issue Discount Securities such portion of the principal amount as may be specified in the terms of that series) owing and unpaid in respect of 27 35 the Debt Securities of such series and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.06 and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debt Securities of any series, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debt Securities or any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.06. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debt Securities of any series or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Debt Securities, may be enforced by the Trustee without the possession of any of the Debt Securities, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debt Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Debt Securities, and it shall not be necessary to make any holders of the Debt Securities parties to any such proceedings. SECTION 5.03. Application of Moneys Collected by ---------------------------------- Trustee. - ------- Any moneys collected by the Trustee shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debt Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: 28 36 First: To the payment of costs and expenses of collection applicable to such series and reasonable compensation to the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.06; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Debt Securities of such series for principal (and premium, if any), and interest on the Debt Securities of such series, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debt Securities for principal (and premium, if any) and interest, respectively; and Fourth: The balance, if any, to the Company. SECTION 5.04. Proceedings by Securityholders. ------------------------------ No holder of any Debt Security of any series shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debt Securities of such series and unless the holders of not less than 25% in aggregate principal amount of the Debt Securities of that series then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding; provided that no holder of Debt Securities of -------- ---- any series shall have any right to prejudice the rights of any other holder of Debt Securities of such series, obtain priority or preference over any other such holder or enforce any right under this Indenture except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debt Securities of the applicable series. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debt Security to receive payment of the principal of, premium, if any, and interest, on such Debt Security when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 5.05. Proceedings by Trustee. ---------------------- In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of 29 37 the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.06. Remedies Cumulative and Continuing. ---------------------------------- Except as otherwise provided in Section 2.08, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debt Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to such series, and no delay or omission of the Trustee or of any holder of any of the Debt Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.07. Direction of Proceedings and Waiver of -------------------------------------- Defaults by Majority of Securityholders. - --------------------------------------- The holders of a majority in aggregate principal amount of the Debt Securities of any or all series affected (voting as one class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such series; provided, however, that (subject to the provisions of - -------- ------- Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of any series of the Debt Securities, or of all the Debt Securities, as the case may be, the holders of a majority in aggregate principal amount of the Debt Securities of that series at the time outstanding may on behalf of the holders of all of the Debt Securities of such series waive (or modify any previously granted waiver of) any past default or Event of Default, including any default or Event of Default the conditions for the occurrence of which are established pursuant to Section 2.03, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debt Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debt Security affected, or (c) in respect of the covenants contained in Section 3.08; provided, however, that if the Debt -------- ------- Securities of such series are held by a Mercantile Trust or a trustee of such trust, such waiver or modification to such waiver shall not 30 38 be effective until the holders of a majority in liquidation preference of Trust Securities of the applicable Mercantile Trust shall have consented to such waiver or modification to such waiver; provided, further, that if the consent of the holder of each outstanding Debt Security is required, such waiver shall not be effective until each holder of the Trust Securities of the applicable Mercantile Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debt Securities of such series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said default or Event of Default shall for all purposes of the Debt Securities of that series (or of all Securities, as the case may be) and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08. Notice of Defaults. ------------------ The Trustee shall, within 90 days after the occurrence of a default with respect to the Debt Securities of any series, mail to all Securityholders of that series, as the names and addresses of such holders appear upon the Debt Security Register, notice of all defaults with respect to that series known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of written notice specified in clause (c) of Section 5.01); and provided that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Debt Securities of such series, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series; and provided further, that in the case of any default of the character specified in Section 5.01(c) no such notice to Securityholders of such series shall be given until at least 60 days after the occurrence thereof but shall be given within 90 days after such occurrence. SECTION 5.09. Undertaking to Pay Costs. ------------------------ All parties to this Indenture agree, and each holder of any Debt Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders of any series, holding in the aggregate more than 10% in principal amount of the Debt Securities of that series outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debt Security against the Company on or after the same shall have become due and payable. 31 39 ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of ------------------------------ Trustee. - ------- With respect to the holders of any series of Debt Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to Debt Securities of that series and after the curing or waiving of all Events of Default which may have occurred, with respect to Debt Securities of that series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Debt Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default with respect to Debt Securities of a series and after the curing or waiving of all Events of Default with respect to that series which may have occurred (1) the duties and obligations of the Trustee with respect to Debt Securities of such series shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to such series as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any 32 40 remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is ground for believing that the repayment of such funds or liability is not assured to it under the terms of this Indenture or indemnity satisfactory to the Trustee against such risk is not reasonably assured to it. SECTION 6.02. Reliance on Documents, Opinions, etc. ------------------------------------- Except as otherwise provided in Section 6.01: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to a series of the Debt Securities (that has not been cured or waived) to exercise with respect to Debt Securities of that series such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless 33 41 requested in writing to do so by the holders of not less than a majority in principal amount of the outstanding Debt Securities of the series affected thereby; provided, however, that if the payment within -------- ------- a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; and (h) the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debt Securities unless either (1) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (2) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debt Securities or by any holder of the Debt Securities. SECTION 6.03. No Responsibility for Recitals, etc. ----------------------------------- The recitals contained herein and in the Debt Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debt Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debt Securities or the proceeds of any Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04. Trustee, Authenticating Agent, Paying ------------------------------------- Agents, Transfer Agents or Registrar May Own Debt Securities. - ------------------------------------------------------------ The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Debt Security registrar, in its individual or any other capacity, may become the owner or pledgee of Debt Securities with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debt Security registrar. SECTION 6.05. Moneys to be Held in Trust. -------------------------- Subject to the provisions of Section 11.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company . So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time upon the written order of the Company, signed by 34 42 the Chairman of the Board of Directors, the President, a Managing Director, a Vice President, the Treasurer or an Assistant Treasurer of the Company. SECTION 6.06. Compensation and Expenses of Trustee. ------------------------------------ The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such reasonable compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debt Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debt Securities. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01(d), Section 5.01(e) or Section 5.01(f), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture. SECTION 6.07. Officers' Certificate as Evidence. --------------------------------- Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the 35 43 Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.08. Conflicting Interest of Trustee. ------------------------------- If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act, subject to the penultimate paragraph of such section. SECTION 6.09. Eligibility of Trustee. ---------------------- The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person permitted to act as trustee by the Securities and Exchange Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee; provided such corporation -------- shall be otherwise eligible and qualified under this Article. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. SECTION 6.10. Resignation or Removal of Trustee. --------------------------------- (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Debt Securities by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the applicable series of Debt Securities at their addresses as they shall appear on the Debt Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed with respect to any series of Debt Securities and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities of the applicable series for at least six months may, subject to 36 44 the provisions of Section 5.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee. (b) In case at any time any of the following shall occur-- (1) the Trustee shall fail to comply with the provisions of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.09, any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities of the applicable series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint successor Trustee. (c) Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debt Securities of any series at the time outstanding may at any time remove the Trustee with respect to such series and nominate a successor Trustee with respect to the applicable series of Debt Securities, which shall be deemed appointed as successor Trustee with respect to the applicable series unless within ten Business Days after such nomination the Company objects thereto, in which case the Trustee so removed or any Securityholder of the applicable series, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.10 provided, may petition any court of competent jurisdiction for an appointment of a successor Trustee with respect to such series. (d) Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.11. SECTION 6.11. Acceptance by Successor Trustee. ------------------------------- Any successor Trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting 37 45 such appointment hereunder, and thereupon the resignation or removal of the retiring Trustee with respect to all or any applicable series shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee thereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.06. If a successor Trustee is appointed with respect to the Debt Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Debt Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debt Securities of any series as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor Trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09. In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder. Upon acceptance of appointment by a successor Trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debt Securities of any applicable series at their addresses as they shall appear on the Debt Security Register. If the Company fails to mail such notice within ten Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company. SECTION 6.12. Succession by Merger, etc. ------------------------- Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or 38 46 consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided such corporation shall be otherwise eligible -------- and qualified under this Article. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debt Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debt Securities so authenticated; and in case at that time any of the Debt Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Debt Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debt Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the -------- ------- certificate of authentication of any predecessor Trustee or authenticate Debt Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13. Limitation on Rights of Trustee as a ------------------------------------ Creditor. - -------- The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. SECTION 6.14. Authenticating Agents. --------------------- There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debt Securities of any series issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debt Securities of such series; provided that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debt Securities of any series. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $5,000,000 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.14 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with 39 47 the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.14 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign with respect to one or more or all series of Debt Securities by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to one or more or all series of Debt Securities by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.14, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent with respect to the applicable series eligible under this Section 6.14, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of the applicable series of Debt Securities as the names and addresses of such holders appear on the Debt Security Register. Any successor Authenticating Agent with respect to all or any series upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to such series of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders. ------------------------- Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debt Securities of any or all series may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debt Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article Eight, or (c) by a combination of such instrument or instruments 40 48 and any such record of such a meeting of such Securityholders or (d) by any other method the Trustee deems satisfactory. If the Company shall solicit from the Securityholders of any series any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such series for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debt Securities of that series have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debt Securities of that series shall be computed as of the record date; provided, however, that no such authorization, agreement - -------- ------- or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 7.02. Proof of Execution by Securityholders. ------------------------------------- Subject to the provisions of Section 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debt Securities shall be proved by the Debt Security Register or by a certificate of the Debt Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03. Who Are Deemed Absolute Owners. ------------------------------ Prior to due presentment for registration of transfer of any Debt Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debt Security registrar may deem the Person in whose name such Debt Security shall be registered upon the Debt Security Register to be, and may treat him as, the absolute owner of such Debt Security (whether or not such Debt Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and (subject to Section 2.05) interest on such Debt Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debt Security. 41 49 SECTION 7.04. Debt Securities Owned by Company -------------------------------- Deemed Not Outstanding. - ---------------------- In determining whether the holders of the requisite aggregate principal amount of Debt Securities have concurred in any direction, consent or waiver under this Indenture, Debt Securities which are owned by the Company or any other obligor on the Debt Securities or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debt Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debt Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debt Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgees right to vote such Debt Securities and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05. Revocation of Consents; Future Holders -------------------------------------- Bound. - ----- At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debt Securities specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.01) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.01) of a Debt Security (or any Debt Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debt Securities the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Debt Security (or so far as concerns the principal amount represented by any exchanged or substituted Debt Security). Except as aforesaid any such action taken by the holder of any Debt Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Debt Security, and of any Debt Security issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debt Security or any Debt Security issued in exchange or substitution therefor. ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purposes of Meetings. -------------------- A meeting of Securityholders of any or all series may be called at any time and from time to time pursuant to the provisions of this Article Eight for any of the following purposes: 42 50 (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debt Securities under any other provision of this Indenture or under applicable law. SECTION 8.02. Call of Meetings by Trustee. --------------------------- The Trustee may at any time call a meeting of Securityholders of any or all series to take any action specified in Section 8.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Securityholders of any or all series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debt Securities of each series affected at their addresses as they shall appear on the Debt Securities Register for each series affected. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03. Call of Meetings by Company or ------------------------------ Securityholders. - --------------- In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debt Securities of any or all series, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders of any or all series, as the case may be, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in said Borough of Manhattan for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. SECTION 8.04. Qualifications for Voting. ------------------------- To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Debt Securities with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debt Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any 43 51 representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05. Regulations. ----------- Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debt Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 7.04, at any meeting each holder of Debt Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount (in the case of Original Issue Discount Securities, such principal amount to be determined as provided in the definition "outstanding") of Debt Securities held or represented by him; provided, however, that no -------- ------- vote shall be cast or counted at any meeting in respect of any Debt Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debt Securities held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 8.06. Voting. ------ The vote upon any resolution submitted to any meeting of holders of Debt Securities with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debt Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Debt Securities voting in favor of or against any resolution. The record shall be signed and 44 52 verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 8.07. Quorum; Actions. --------------- The Persons entitled to vote a majority in principal amount of the Debt Securities of a series shall constitute a quorum for a meeting of Securityholders of such series; provided, however, that if any action is to be taken at - -------- ------- such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the Debt Securities of a series, the Persons holding or representing such specified percentage in principal amount of the Debt Securities of such series will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders of such series, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.02, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Debt Securities of such series which shall constitute a quorum. Except as limited by the proviso in the first paragraph of Section 9.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Debt Securities of that series; provided, however, that, except as limited by the -------- ------- proviso in the first paragraph of Section 9.02, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the Debt Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of a not less than such specified percentage in principal amount of the Debt Securities of that series. Any resolution passed or decision taken at any meeting of holders of Debt Securities of any series duly held in accordance with this Section shall be binding on all the Securityholders of such series, whether or not present or represented at the meeting. 45 53 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures without ------------------------------- Consent of Securityholders. - -------------------------- The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect), without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company, pursuant to Article X hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of all or any series of Debt Securities (and if such covenants are to be for the benefit of less than all series of Debt Securities stating that such covenants are expressly being included for the benefit of such series) as the Board of Directors shall consider to be for the protection of the holders of such Debt Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional - -------- ------- covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not adversely affect the interests of the holders of the Debt Securities of any series; (d) to add to, delete from, or revise the terms of Debt Securities of any series, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debt Securities, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities relating to such series as required by Section 2.07 (for purposes of assuring that no registration of Debt Securities of a series subject to transfer restrictions is required under the Securities Act of 1933, as amended); provided that any such action shall not adversely affect the interests of the holders of the Debt Securities of any series then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debt Securities of a series substantially similar to those that were applicable to Capital Securities of the related series shall not be deemed to adversely affect the holders of the Debt Securities); 46 54 (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debt Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.11; (f) to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Debt Securities of any series, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or any series of Debt Securities, or to add to the rights of the holders of any series of Debt Securities. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustees own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Debt Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02. Supplemental Indentures with Consent ------------------------------------ of Securityholders. - ------------------ With the consent (evidenced as provided in Section 7.01) of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding of all series affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act, then in effect, applicable to indentures qualified thereunder) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities of each series so affected; provided, -------- however, that no such supplemental indenture shall without - ------- the consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the fixed maturity of any Debt Security of any series, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debt Securities, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 5.01 or the amount thereof provable in bankruptcy pursuant to Section 5.02, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the 47 55 aforesaid percentage of Debt Securities the holders of which are required to consent to any such supplemental indenture; provided, -------- further, that if the Debt Securities of such series are held by a - ------- Mercantile Trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in liquidation preference of Trust Securities of the applicable Trust shall have consented to such supplemental indenture; provided further, that if the consent of the Securityholder of each outstanding Debt Security is required, such supplemental indenture shall not be effective until each holder of the Trust Securities of the applicable Mercantile Trust shall have consented to such supplemental indenture. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Debt Securities, or which modifies the rights of Securityholders of such series with respect to such covenant or provision, shall be deemed not to affect the rights under this Indenture or the Securityholders of any other series. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustees own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders of all series affected thereby as their names and addresses appear upon the Debt Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03. Compliance with Trust Indenture Act; ------------------------------------ Effect of Supplemental Indentures. - --------------------------------- Any supplemental indenture executed pursuant to the provisions of this Article IX shall comply with the Trust Indenture Act, as then in effect to the extent applicable to indentures qualified under the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debt Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments 48 56 and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04. Notation on Debt Securities. --------------------------- Debt Securities of any series authenticated and delivered after the execution of any supplemental indenture affecting such series pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debt Securities of any series so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debt Securities of any series then outstanding. SECTION 9.05. Evidence of Compliance of Supplemental -------------------------------------- Indenture to be Furnished to Trustee. - ------------------------------------ The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall, in addition to the documents required by Section 13.06, receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof. ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 10.01. Company May Consolidate, etc., on --------------------------------- Certain Terms. - ------------- Nothing contained in this Indenture or in the Debt Securities of any series shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other corporation (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby -------- ------- covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of (and premium, if any) and interest on all of the Debt Securities of all series in accordance with the terms of each series, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture with respect to each series or established with respect to such series to be kept or performed by the Company, shall be expressly assumed by supplemental indenture (which shall conform to the provisions of the Trust 49 57 Indenture Act, as then in effect, applicable to indentures qualified thereunder) satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property. SECTION 10.02. Successor Entity to be Substituted. ---------------------------------- In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debt Securities. Such successor entity thereupon may cause to be signed, and may issue either in its own name or in the name of Mercantile Bancorporation Inc., any or all of the Debt Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debt Securities which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debt Securities which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debt Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debt Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debt Securities had been issued at the date of the execution hereof. SECTION 10.03. Opinion of Counsel to be Given to --------------------------------- Trustee. - ------- The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall receive, in addition to the Opinion of Counsel required by Section 9.05, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article X complies with the provisions of this Article X. ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.01. Discharge of Indenture. ---------------------- When (a) the Company shall deliver to the Trustee for cancellation all Debt Securities theretofore authenticated (other than any Debt Securities which shall have been 50 58 destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and not theretofore canceled, or (b) all the Debt Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debt Securities (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Debt Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.04, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.05, 2.07, 2.08, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof shall survive until such Debt Securities shall mature and be paid. Thereafter, Sections 6.10 and 11.04 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debt Securities. SECTION 11.02. Deposited Moneys to be Held in Trust ------------------------------------ by Trustee. - ---------- Subject to the provisions of Section 11.04, all moneys deposited with the Trustee pursuant to Section 11.01 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debt Securities for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest. SECTION 11.03. Paying Agent to Repay Moneys Held. --------------------------------- Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Debt Securities (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. 51 59 SECTION 11.04. Return of Unclaimed Moneys. -------------------------- Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debt Securities and not applied but remaining unclaimed by the holders of Debt Securities for two years after the date upon which the principal of, and premium, if any, or interest on such Debt Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debt Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. Indenture and Debt Securities Solely ------------------------------------ Corporate Obligations. - --------------------- No recourse for the payment of the principal of or premium, if any, or interest on any Debt Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debt Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation of the Company, either directly or through the Company or any successor corporation of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debt Securities. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Successors. ---------- All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. SECTION 13.02. Official Acts by Successor Entity. --------------------------------- Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company. 52 60 SECTION 13.03. Surrender of Company Powers. --------------------------- The Company by instrument in writing executed by authority of 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor. SECTION 13.04. Addresses for Notices, etc. -------------------------- Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Debt Securities on the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company, One Mercantile Center, P.O. Box 524, St. Louis, Missouri 63166-0524, Attention: Jon W. Bilstrom, General Counsel. Any notice, direction, request or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, 450 West 33rd Street, New York, New York 10001, Attention: Global Trust Services. SECTION 13.05. Governing Law. ------------- This Indenture and each Debt Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State, without regard to conflict of laws principles thereof. SECTION 13.06. Evidence of Compliance with --------------------------- Conditions Precedent. - -------------------- Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. 53 61 SECTION 13.07. Non-Business Days. ----------------- Subject to Section 2.03, in any case where the date of payment of interest on or principal of the Debt Securities will be a Saturday, Sunday or a day on which banking institutions in New York City (in the State of New York) and St. Louis (in the State of Missouri) are permitted or required by any applicable law to close, the payment of such interest on or principal of the Debt Securities need not be made on such date but may be made on the next succeeding day not a Saturday, Sunday or a day on which banking institutions in such cities are permitted or required by any applicable law to close, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date. SECTION 13.08. Trust Indenture Act to Control. ------------------------------ If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 13.09. Table of Contents, Headings, etc. -------------------------------- The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.10. Execution in Counterparts. ------------------------- This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 13.11. Separability. ------------ In case any one or more of the provisions contained in this Indenture or in the Debt Securities of any series shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debt Securities, but this Indenture and such Debt Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 13.12. Assignment. ---------- The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. 54 62 SECTION 13.13. Acknowledgment of Rights. ------------------------ The Company acknowledges that, with respect to any Debt Securities held by any Mercantile Trust or the Institutional Trustee of such Mercantile Trust, if the Institutional Trustee of such Mercantile Trust fails to enforce its rights under this Indenture as the holder of the series of Debt Securities held as the assets of such Mercantile Trust after the holders of a majority in liquidation amount of the Capital Securities of such Mercantile Trust have so directed such Institutional Trustee, a holder of record of such Capital Securities may to the fullest extent permitted by law institute legal proceedings directly against the Company to enforce such Institutional Trustees rights under this Indenture without first instituting any legal proceedings against such Institutional Trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the applicable series of Debt Securities on the date such interest (or premium, if any) or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company acknowledges that a holder of record of Capital Securities of the Mercantile Trust that purchased the applicable series of Debt Securities may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of (or premium, if any) or interest on the applicable series of Debt Securities having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Securities of such holder on or after the respective due date specified in the applicable series of Debt Securities. ARTICLE XIV REDEMPTION OF SECURITIES -- MANDATORY AND OPTIONAL SINKING FUND SECTION 14.01. Applicability of Article. ------------------------ The provisions of this Article shall be applicable to the Debt Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Debt Securities of a series except as otherwise specified as contemplated by Section 2.03 for Debt Securities of such series. SECTION 14.02. Notice of Redemption; Selection of ---------------------------------- Debt Securities. - --------------- In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debt Securities of any series in accordance with their terms, it shall fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Debt Securities of such series so to be redeemed as a whole or in part at their last addresses as the same appear on the Debt Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debt Security of a series designated for redemption as a whole or in part 55 63 shall not affect the validity of the proceedings for the redemption of any other Debt Security of such series. Each such notice of redemption shall specify the CUSIP number of the Debt Securities to be redeemed, the date fixed for redemption, the redemption price at which Debt Securities of such series are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debt Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Debt Securities of such series are to be redeemed the notice of redemption shall specify the numbers of the Debt Securities of that series to be redeemed. In case any Debt Security of a series is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debt Security, a new Debt Security or Debt Securities of that series in principal amount equal to the unredeemed portion thereof will be issued. On or prior to the redemption date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Debt Securities so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If all, or less than all, the Debt Securities of a series are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the redemption date as to the aggregate principal amount of Debt Securities of that series to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debt Securities of that series or portions thereof (in integral multiples of $1,000, except as otherwise set forth in the applicable form of Debt Security) to be redeemed. SECTION 14.03. Payment of Debt Securities Called for ------------------------------------- Redemption. - ---------- If notice of redemption has been given as provided in Section 14.02 or Section 14.04, the Debt Securities or portions of Debt Securities of the series with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Debt Securities at the redemption price, together with interest accrued to said date) interest on the Debt Securities or portions of Debt Securities of any series so called for redemption shall cease to accrue. On presentation and surrender of such Debt Securities at a place of payment specified in said notice, the said Debt Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption. Upon presentation of any Debt Security of any series redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debt Security or Debt Securities of such 56 64 series of authorized denominations, in principal amount equal to the unredeemed portion of the Debt Security so presented. SECTION 14.04. Mandatory and Optional Sinking Fund. ----------------------------------- The minimum amount of any sinking fund payment provided for by the terms of Debt Securities of any series is herein referred to as a "mandatory sinking fund payment," and any payment in excess of such minimum amount provided for by the terms of Debt Securities of any series is herein referred to as an "optional sinking fund payment." The last date on which any such payment may be made is herein referred to as a "sinking fund payment date." In lieu of making all or any part of any mandatory sinking fund payment with respect to any Debt Securities of a series in cash, the Company may at its option (a) deliver to the Trustee Debt Securities of that series theretofore purchased by the Company and (b) may apply as a credit Debt Securities of that series which have been redeemed either at the election of the Company pursuant to the terms of such Debt Securities or through the application of optional sinking fund payments pursuant to the next succeeding paragraph, in each case in satisfaction of all or any part of any mandatory sinking fund payment, provided that such Debt Securities have not been previously so credited. Each such Debt Security so delivered or applied as a credit shall be credited at the sinking fund redemption price for such Debt Securities and the amount of any mandatory sinking fund shall be reduced accordingly. If the Company intends so to deliver or credit such Debt Securities with respect to any mandatory sinking fund payment it shall deliver to the Trustee at least 60 days prior to the next succeeding sinking fund payment date for such series (a) a certificate signed by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer of the Company specifying the portion of such sinking fund payment, if any, to be satisfied by payment of cash and the portion of such sinking fund payment, if any, which is to be satisfied by delivering and crediting such Debt Securities and the basis for such credit and stating that such Debt Securities have not been previously so credited and (b) any Debt Securities to be so delivered. All Debt Securities so delivered to the Trustee shall be canceled by the Trustee and no Debt Securities shall be authenticated in lieu thereof. If the Company fails to deliver such certificate and Debt Securities at or before the time provided above, the Company shall not be permitted to satisfy any portion of such mandatory sinking fund payment by delivery or credit of Debt Securities. At its option the Company may pay into the sinking fund for the retirement of Debt Securities of any particular series, on or before each sinking fund payment date for such series, any additional sum in cash as specified by the terms of such series of Debt Securities. If the Company intends to exercise its right to make any such optional sinking fund payment, it shall deliver to the Trustee at least 60 days prior to the next succeeding sinking fund payment date for such series a certificate signed by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer of the Company stating that the Company intends to exercise such optional right and specifying the amount which the Company intends to pay on such sinking fund payment date. If the Company fails to deliver such certificate at or before the time provided above, the Company shall not be permitted to make any optional sinking fund payment with 57 65 respect to such sinking fund payment date. To the extent that such right is not exercised in any year it shall not be cumulative or carried forward to any subsequent year. If the sinking fund payment or payments (mandatory or optional) made in cash plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or a lesser sum if the Company shall so request) with respect to the Debt Securities of any particular series, it shall be applied by the Trustee or one or more paying agents on the next succeeding sinking fund payment date to the redemption of Debt Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. The Trustee shall select, in the manner provided in Section 14.02, for redemption on such sinking fund payment date a sufficient principal amount of Debt Securities of such series to absorb said cash, as nearly as may be, and the Trustee shall, at the expense and in the name of the Company, thereupon cause notice of redemption of Debt Securities of such series to be given in substantially the manner and with the effect provided in Sections 14.02 and 14.03 for the redemption of Debt Securities of that series in part at the option of the Company, except that the notice of redemption shall also state that the Debt Securities of such series are being redeemed for the sinking fund. Any sinking fund moneys not so applied or allocated by the Trustee or any paying agent to the redemption of Debt Securities of that series shall be added to the next cash sinking fund payment received by the Trustee or such paying agent and, together with such payment, shall be applied in accordance with the provisions of this Section 14.04. Any and all sinking fund moneys held by the Trustee or any paying agent on the maturity date of the Debt Securities of any particular series, and not held for the payment or redemption of particular Debt Securities of such series, shall be applied by the Trustee or such paying agent, together with other moneys, if necessary, to be deposited sufficient for the purpose, to the payment of the principal of the Debt Securities of that series at maturity. On or before 10:00 a.m. on each sinking fund payment date, the Company shall pay to the Trustee or to one or more paying agents in cash a sum equal to all interest accrued to the date fixed for redemption on Debt Securities to be redeemed on the next following sinking fund payment date pursuant to this Section. Neither the Trustee nor any paying agent shall redeem any Debt Securities of a series with sinking fund moneys, and the Trustee shall not mail any notice of redemption of Debt Securities for such series by operation of the sinking fund, during the continuance of a default in payment of interest on such Debt Securities or of any Event of Default (other than an Event of Default occurring as a consequence of this paragraph), except that if the notice of redemption of any Debt Securities shall theretofore have been mailed in accordance with the provisions hereof, the Trustee or any paying agent shall redeem such Debt Securities if cash sufficient for that purpose shall be deposited with the Trustee or such paying agent for that purpose in accordance with the terms of this Article XIV. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default shall occur and any moneys thereafter paid into the sinking fund shall, during the continuance of such default or Event of Default, be held as security for the payment of all such Debt Securities; provided, however, that in case such Event of Default or - -------- ------- default, shall have been cured or waived as provided herein, 58 66 such moneys shall thereafter be applied on the next succeeding sinking fund payment date on which such moneys may be applied pursuant to the provisions of this Section 14.04. ARTICLE XV SUBORDINATION OF DEBT SECURITIES SECTION 15.01. Agreement to Subordinate. ------------------------ The Company covenants and agrees, and each holder of Debt Securities issued hereunder and under any supplemental indenture or by any Board Resolution ("Additional Provisions") by such Securityholders acceptance thereof likewise covenants and agrees, that all Debt Securities shall be issued subject to the provisions of this Article XV; and each holder of a Debt Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, and premium, if any, and interest on all Debt Securities issued hereunder and under any Additional Provisions shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any default or Event of Default hereunder. SECTION 15.02. Default on Senior Indebtedness. ------------------------------ In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption and sinking fund payments) of, or premium, if any, or interest on the Debt Securities. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall, subject to Section 15.06, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. 59 67 SECTION 15.03. Liquidation; Dissolution; ------------------------- Bankruptcy. - ---------- Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debt Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or moneys worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness of the Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness of the Company, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debt Securities to the payment of all Senior Indebtedness of the Company, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such 60 68 holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article X of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article X of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04. Subrogation. ----------- Subject to the payment in full of all Senior Indebtedness of the Company, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debt Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debt Securities be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture, any Additional Provisions or in the Debt Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Debt Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debt Securities the principal of (and premium, if any) and interest on the Debt Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debt Securities and creditors of the Company, other than the holders of Senior Indebtedness of the Company, nor shall anything herein or therein prevent the Trustee or the holder of any Debt Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court 61 69 of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. SECTION 15.05. Trustee to Effectuate Subordination. ----------------------------------- Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. SECTION 15.06. Notice by the Company. --------------------- The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture or any Additional Provisions, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the -------- ------- Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Debt Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness of the Company (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence 62 70 to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 15.07. Rights of the Trustee; Holders of --------------------------------- Senior Indebtedness. - ------------------- The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture or any Additional Provisions shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture or any Additional Provisions against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06. SECTION 15.08. Subordination May Not Be Impaired. --------------------------------- No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debt Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection 63 71 of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, and any other Person. The Chase Manhattan Bank hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions herein above set forth. 64 72 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. MERCANTILE BANCORPORATION INC. By ----------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Trustee By ----------------------------- Name: Title: 65 EX-4.3 3 FIRST SUPPLEMENTAL INDENTURE 1 ------------------------------------- FIRST SUPPLEMENTAL INDENTURE between MERCANTILE BANCORPORATION INC., as Issuer, and THE CHASE MANHATTAN BANK, as Trustee Dated as of February 4, 1997 ------------------------------------- 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .2 ARTICLE II GENERAL TERMS AND CONDITIONS OF THE DEBENTURES . . . . . . . . .4 ARTICLE III REDEMPTION OF THE DEBENTURES. . . . . . . . . . . . . . . . . .10 ARTICLE IV EXTENSION OF INTEREST PAYMENT PERIOD. . . . . . . . . . . . . .10 ARTICLE V EXPENSES AND GUARANTEE. . . . . . . . . . . . . . . . . . . . .12 ARTICLE VI FORM OF DEBENTURE . . . . . . . . . . . . . . . . . . . . . . .13 ARTICLE VII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .22 i 3 FIRST SUPPLEMENTAL INDENTURE, dated as of February 4, 1997 (the "First Supplemental Indenture"), between Mercantile Bancorporation Inc., a Missouri corporation (the "Company") and The Chase Manhattan Bank, as trustee (the "Trustee"), under the Indenture dated as of February 4, 1997 between the Company and the Trustee (the "Indenture"). WHEREAS, the Company executed and delivered the Indenture to the Trustee to provide for the issuance of the Company's unsecured junior subordinated debt securities to be issued from time to time in one or more series as might be determined by the Company under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Indenture; WHEREAS, pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a series of its Debt Securities to be known as Floating Rate Junior Subordinated Deferrable Interest Debentures due 2027 (the "Initial Debentures"), and to provide for, if and when issued in exchange for the Initial Debentures pursuant to the Indenture and the Registration Agreement, a series of its Debt Securities to be known as Floating Rate Junior Subordinated Deferrable Interest Debentures due 2027 (the "Exchange Debentures" and together with the Initial Debentures, the "Debentures"), the form and substance of each such series of Debentures and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this First Supplemental Indenture; WHEREAS, Mercantile Capital Trust I, a Delaware statutory business trust (the "Trust"), has offered for sale pursuant to an exemption from the registration requirements of the Securities Act of 1933, $150,000,000 aggregate liquidation amount of Floating Rate Capital Trust Pass-through Securities (the "Initial Capital Securities"), representing undivided beneficial interests in the assets of the Trust and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Company of its common securities, in $154,640,000 aggregate principal amount of the Debentures; WHEREAS, the Trust may offer and issue Floating Rate Capital Trust Pass-through Securities (the "Exchange Capital Securities") in exchange for the Initial Capital Securities; and WHEREAS, the Company has requested that the Trustee execute and deliver this First Supplemental Indenture; all requirements necessary to make this First Supplemental Indenture a valid instrument in accordance with its terms, and to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed; and the execution and delivery of this First Supplemental Indenture has been duly authorized in all respects; NOW THEREFORE, in consideration of the purchase and acceptance of the Initial Debentures by the holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of each series of Debentures and the terms, provisions and conditions thereof, the Company covenants and agrees with the Trustee as follows: 4 ARTICLE I DEFINITIONS SECTION 1.1 ----------- Unless the context otherwise requires: (a) a term defined in the Indenture has the same meaning when used in this First Supplemental Indenture; (b) a term defined anywhere in this First Supplemental Indenture has the same meaning throughout; (c) the singular includes the plural and vice versa; (d) a reference to a Section or Article is to a Section or Article of this First Supplemental Indenture; (e) headings are for convenience of reference only and do not affect interpretation; (f) the following terms have the meanings given to them in the Declaration: (i) Administrators; (ii) Business Day; (iii) Capital Security Certificate; (iv) Capital Treatment Event; (v) Clearing Agency; (vi) Delaware Trustee; (vii) Depositary; (viii) Distribution; (ix) Institutional Trustee; (x) Purchase Agreement; and (xi) Tax Event; (g) the following terms have the meanings given to them in this Section 1.1(g): "Additional Interest" shall have the meaning set forth in Section 2.5(d). "Calculation Agent" means any Person authorized by the Company to determine the interest rate of the Debentures, which shall be The Chase Manhattan Bank, until a successor is appointed. "Compounded Interest" shall have the meaning set forth in Section 4.1. "Declaration" means the Amended and Restated Declaration of Trust of the Trust, dated as of February 4, 1997, as amended or supplemented from time to time. "Deferred Interest" shall have the meaning set forth in Section 4.1. "Determination Date" means, with respect to any interest period, the date that is two London Business Days prior to the first day of such interest period. 2 5 "Dissolution Event" means that, subject to the receipt by the Company of prior approval from the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, the Trust is to be dissolved in accordance with the Declaration, and the Debentures held by the Institutional Trustee are to be distributed to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Declaration. --- ---- "Extension Period" shall have the meaning set forth in Section 4.1. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Global Debenture" shall have the meaning set forth in Section 2.4(a)(i). "interest" shall include all interest payable on a series of Debentures including any Additional Interest, Compounded Interest and Special Interest, if applicable. "LIBOR" means, with respect to a quarterly interest period relating to an Interest Payment Date (in the following order of priority): (i) the rate (expressed as a percentage per annum) for Eurodollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date; (ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date, LIBOR will be the arithmetic mean (if necessary rounded upwards to the nearest whole multiple of .00001%) of the rates (expressed as percentages per annum) for Eurodollar deposits having a three-month maturity that appear on Reuters Monitor Money Rates Page LIBO ("Reuters Page LIBO") as of 11:00 a.m. (London time) on such Determination Date; (iii) if such rate does not appear on Reuters Page LIBO as of 11:00 a.m. (London time) on the related Determination Date, the Calculation Agent will request the principal London offices of four leading banks in the London interbank market to provide such banks offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for Eurodollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, LIBOR will be the arithmetic mean (if necessary rounded upwards to the nearest whole multiple of .00001%) of such quotations; (iv) if fewer than two such quotations are provided as requested in clause (iii) above, the Calculation Agent will request four major New York City banks to provide such banks offered quotations (expressed as percentages per annum) to leading European banks for loans in Eurodollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such 3 6 quotations are provided, LIBOR will be the arithmetic mean (if necessary rounded upwards to the nearest whole multiple of .00001%) of such quotations; and (v) if fewer than two such quotations are provided as requested in clause (iv) above, LIBOR will be LIBOR determined with respect to the interest period immediately preceding such current interest period. If the rate for Eurodollar deposits having a three- month maturity that initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may be, as of 11:00 a.m. (London time) on the related Determination Date is superseded on Telerate Page 3750 or Reuters Page LIBO, as the case may be, by a corrected rate before 12:00 noon (London time) on such Determination Date, the corrected rate as so substituted on the applicable page will be the applicable LIBOR for such Determination Date. "London Business Day" means any day, other than a Saturday or Sunday, on which banks are open for business in London. "Maturity Date" means February 1, 2027. "Non-Book-Entry Capital Securities" shall have the meaning set forth in Section 2.4(a)(ii). "Record Date" shall have the meaning set forth in the Debentures. "Redemption Price" shall have the meaning set forth in Section 3.1. "Registration Agreement" means the Registration Rights Agreement, dated January 29, 1997, relating to the Debentures and the other securities described therein among the Company, the Trust and the initial purchasers named therein. "Registered Exchange Offer" has the meaning set forth in the Registration Agreement. "Special Interest" has the meaning set forth in Section 2.5(f)(iii). ARTICLE II GENERAL TERMS AND CONDITIONS OF THE DEBENTURES SECTION 2.1 ----------- The Initial Debentures and the Exchange Debentures are hereby authorized as two series of Debt Securities. The aggregate principal amount of Debentures outstanding at any time shall not exceed $154,640,000 (except as set forth in Section 2.03(2) of the Indenture). Upon receipt of a written order of the Company for the authentication and delivery of a series of Debentures and satisfaction of the requirements of Section 2.04 of the Indenture, the Trustee 4 7 shall authenticate (a) Initial Debentures for original issuance in an aggregate principal amount not to exceed $154,640,000 (except as set forth in Section 2.03(2) of the Indenture) or (b) Exchange Debentures for issuance pursuant to a Registered Exchange Offer for Initial Debentures in a principal amount equal to the principal amount of Initial Debentures exchanged in such Registered Exchange Offer. The Initial Debentures shall be issued pursuant to an exemption from registration under the Securities Act and the Restricted Securities Legend shall appear thereon, unless otherwise determined by the Company in accordance with applicable law. The Initial Debentures may not be transferred except in compliance with the Restricted Securities Legend set forth in Section 2.07 of the Indenture, unless otherwise determined by the Company in accordance with applicable law. The Initial Debentures shall be issued in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof, and the Exchange Debentures shall be issuable in minimum denominations of $1,000 and any integral multiple thereof. SECTION 2.2 ----------- At the Maturity Date, the Debentures shall mature and the principal thereof shall be due and payable together with all accrued and unpaid interest thereon including Compounded Interest, Additional Interest and Special Interest thereon, if any. SECTION 2.3 ----------- Except as provided in Section 2.4, Debentures of a series shall be issued in fully registered certificated form without interest coupons. Principal and interest on Debentures of a series issued in certificated form will be payable, the transfer of such Debentures will be registrable and such Debentures will be exchangeable for Debentures of such series bearing identical terms and provisions at the office or agency of the Company in the Borough of Manhattan, The City of New York, which office or agency shall initially be the corporate trust office of the Trustee; provided, however, that payment of -------- ------- interest may be made at the option of the Company by check mailed to the holder of any Debenture at such address as shall appear in the Debt Security Register for such series of Debentures or by wire transfer to an account appropriately designated by such holder. Notwithstanding the foregoing, so long as the holder of any Debentures of a series is the Institutional Trustee, the payment of the principal of and interest (including Compounded Interest, Additional Interest and Special Interest, if any) on the Debentures held by the Institutional Trustee will be made at such place and to such account as may be designated by the Institutional Trustee. SECTION 2.4 ----------- (a) In connection with a Dissolution Event, (i) except as provided in clause (ii) of this sentence, Debentures of a series in certificated form may be presented to the Trustee by the Institutional Trustee in exchange for a Global Security for such series in an aggregate principal amount equal to 5 8 the aggregate principal amount of all outstanding Debentures of such series (a "Global Debenture"), to be registered in the name of The Depository Trust Company, New York, New York, or its nominee (hereby designated to be the Depositary for Debentures of such series), and delivered by the Trustee to the Depositary or its custodian for crediting to the accounts of the Depositarys participants pursuant to the instructions of the Administrators of the Trust, which instructions shall be provided in accordance with the terms of the Declaration; the Company upon any such presentation shall execute a Global Debenture for such series in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with the Indenture and this First Supplemental Indenture; payments on the Debentures of a series issued as a Global Debenture will be made to the Depositary; (ii) if any Capital Securities of a series are not held by the Clearing Agency or its nominee ("Non-Book-Entry Capital Securities"), the Debentures in certificated form of the series held by the Trust corresponding to such Capital Securities of such series may be presented to the Trustee by the Institutional Trustee and any Capital Security Certificate which represents such Non-Book-Entry Capital Securities will be deemed to represent beneficial interests in Debentures so presented to the Trustee by the Institutional Trustee having an aggregate principal amount equal to the aggregate liquidation amount of such Non-Book- Entry Capital Securities until such Capital Security Certificates are presented to the Debt Security registrar for registration of transfer or reissuance at which time such Capital Security Certificates will be canceled and a Debenture of the series previously held by the Trust registered in the name of the holder of the Capital Security Certificate or the transferee of the holder of such Capital Security Certificate, as the case may be, with an aggregate principal amount equal to the aggregate liquidation amount of the Capital Security Certificate canceled, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with the Indenture and this First Supplemental Indenture; upon issue of such Debentures of such series, Debentures of such series with an equivalent aggregate principal amount that were presented by the Institutional Trustee to the Trustee will be deemed to have been canceled; and (iii) prior to the distribution of Debentures of a series held by the Institutional Trustee to the holders of Trust Securities, the Company and the Trustee shall enter into a supplemental indenture pursuant to Article IX of the Indenture to provide for transfer procedures and restrictions with respect to such Debentures of such series substantially similar to those contained in the Declaration with respect to Capital Securities of the corresponding series to the extent applicable in the circumstances existing at the time of distribution of Debentures of such series in connection with a Dissolution Event for purposes of assuring that no registration of Debentures of such series is required under the Securities Act of 1933, as amended. (b) A Global Debenture may be transferred, in whole but not in part, only by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the 6 9 Depositary or another nominee of the Depositary, or to a successor Depositary selected or approved by the Company or to a nominee of such successor Depositary. (c) If at any time the Depositary notifies the Company that it is unwilling or unable to continue as Depositary or if at any time the Depositary shall no longer be registered or in good standing under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation, and a successor Depositary is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, the Company will execute, and, subject to Article II of the Indenture, the Trustee, upon written request of the Company, will authenticate and make available for delivery, Debentures of each series in definitive registered form without coupons, in authorized denominations, and in an aggregage principal amount equal to the principal amount of the Global Debenture of such series in exchange for such Global Debenture. In addition, the Company may at any time determine that the Debentures of a series shall no longer be represented by a Global Debenture. In such event the Company will execute, and subject to Section 2.07 of the Indenture, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and deliver Debentures of such series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Debenture of such series in exchange for such Global Debenture. A Global Debenture shall also be exchangeable for Debentures in definitive form upon the occurrence of an Event of Default. Upon the exchange of a Global Debenture for Debentures in definitive registered form without coupons, in authorized denominations, such Global Debenture shall be canceled by the Trustee. Such Debentures in definitive registered form issued in exchange for such Global Debenture shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Debentures to the Depositary for delivery to the Persons in whose names such Debentures are so registered. SECTION 2.5 ----------- (a) The Company shall appoint a Calculation Agent, which may be the Trustee, to determine LIBOR as of the Determination Date for each quarterly interest period and to calculate the interest rate and the amount of interest due for each such interest period. Absent manifest error, the Calculation Agents determination of LIBOR and its calculation of the interest rate for each interest period shall be final and binding on the holders of the Debentures. (b) The amount of interest payable for any period will be computed on the basis of the actual number of days elapsed in a year of twelve 30-day months. In the event that any date on which interest is payable on the Debentures of a series is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. 7 10 (c) The indebtedness evidenced by all Debentures of a series is subordinate and junior in right of payment to the prior payment in full of all present and future Senior Indebtedness and pari passu in right of payment with all Debentures of each other series. - ---- ----- (d) If, at any time while the holder of any Debentures of a series is the Institutional Trustee, the Trust is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, the Company shall pay as additional interest ("Additional Interest") on the Debentures held by the Institutional Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust after paying any such taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust and the Institutional Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed. (e) If an Initial Debenture is exchanged in a Registered Exchange Offer prior to the Record Date for the first Interest Payment Date following such exchange, accrued and unpaid interest, if any, on such Initial Debenture, up to but not including the date of issuance of the Exchange Debenture or Exchange Debentures issued in exchange for such Initial Debenture, shall be paid on the first Interest Payment Date for such Exchange Debenture or Exchange Debentures to the Securityholder or Securityholders of such Exchange Debenture or Exchange Debentures on the first Record Date with respect to such Exchange Debenture or Exchange Debentures. If an Initial Debenture is exchanged in a Registered Exchange Offer subsequent to the Record Date for the first Interest Payment Date following such exchange but on or prior to such Interest Payment Date, then any such accrued and unpaid interest with respect to such Initial Debenture and any accrued and unpaid interest on the Exchange Debenture or Exchange Debentures issued in exchange for such Initial Debenture, through the day before such Interest Payment Date, shall be paid on such Interest Payment Date to the Securityholder of such Initial Debenture on such Record Date. (f) The following terms relate to Special Interest: (i) In the event that either (A) the Exchange Offer Registration Statement (as such term is defined in the Registration Agreement) is not filed with the Securities and Exchange Commission (the "Commission") on or prior to the 90th day following the Closing Date (as such term is defined in the Registration Agreement), (B) the Exchange Offer Registration Statement is not declared effective by the Commission on or prior to the 120th day following the Closing Date or (C) the Registered Exchange Offer (as such term is defined in the Registration Agreement) is not consummated or a Shelf Registration Statement (as such term is defined in the Registration Agreement) with respect to the Initial Debentures is not declared effective by the Commission on or prior to the 150th day following the Closing Date, interest shall accrue (in addition to the stated interest on Initial Debentures) from and including the next day following each of (1) such 90-day period in the case of clause (A) above, (2) such 120-day period in the case of clause (B) above and (3) such 150-day period in the case of clause (C) above. In each case, such additional interest shall accrue at a rate 8 11 per annum equal to 0.25% of the principal amount of the Initial Debentures (determined daily). The aggregate amount of additional interest payable pursuant to the above provisions will in no event exceed 0.75% per annum of the principal amount of the Initial Debentures (determined daily). Upon (X) the filing of the Exchange Offer Registration Statement after the 90-day period described in clause (A) above, (Y) the effectiveness of the Exchange Offer Registration Statement after the 120- day period described in clause (B) above or (Z) the consummation of the Registered Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after the 150-day period described in clause (C) above, the additional interest payable on the Initial Debentures, with respect to such clause (A), (B) or (C), as the case may be, from the date of such filing, effectiveness or consummation, as the case may be, shall cease to accrue. (ii) In the event that a Shelf Registration Statement filed with respect to the Initial Debentures is declared effective pursuant to the terms of the Registration Agreement, if the Company or the Trust fails to keep such Shelf Registration Statement continuously effective for the period required by the Registration Agreement, then from the next day following such time as the Shelf Registration Statement is no longer effective until the earlier of (A) the date that the Shelf Registration Statement is again deemed effective, (B) the date that is the third anniversary of the effective date or (C) the date as of which all of the Initial Debentures are sold pursuant to the Shelf Registration Statement or may be sold without registration pursuant to Rule 144 under the Securities Act of 1933, interest shall accrue on the Initial Debentures (in addition to the stated interest on the Initial Debentures) at a rate per annum equal to 0.25% of the principal amount of the Initial Debentures (determined daily), to be increased to 0.50% per annum of the principal amount of the Initial Debentures (determined daily) if and when such Shelf Registration Statement is no longer effective for 30 days or more. (iii) Any additional interest that accrues with respect to the Initial Debentures as provided in this paragraph is referred to as "Special Interest." For all purposes of the Indenture, this Supplemental Indenture and the Initial Debentures, Special Interest shall be treated as interest and shall be payable on the same Interest Payment Dates and to the Securityholders of record on the same record dates as would be the case for stated interest. SECTION 2.6 ----------- If at any time the holder of all Debentures of a series ceases to be the Institutional Trustee and, at such time, the Capital Securities issued by the Trust are rated by at least one nationally recognized statistical rating agency, then the Company shall use its best efforts to obtain from at least one nationally recognized statistical rating agency a rating for the Debentures of such series. 9 12 ARTICLE III REDEMPTION OF THE DEBENTURES SECTION 3.1 ----------- If a Tax Event or a Capital Treatment Event shall occur and be continuing, the Company shall have the right, subject to the receipt by the Company of prior approval from the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, to redeem, upon not less than 30 days nor more than 60 days' notice, the Debentures in whole or in part, at any time, within 90 days following the occurrence of such Tax Event or Capital Treatment Event, as the case may be, at a redemption price equal to 100% of the principal amount to be redeemed plus accrued but unpaid interest to the date of such redemption (the "Redemption Price"). If Debentures are only partially redeemed pursuant to this Section 3.1, Debentures shall be redeemed pro rata or by lot or by any other method --- ---- utilized by the Trustee. The Redemption Price shall be paid prior to 11:00 a.m., New York City time, on the date of such redemption or such earlier time as the Company determines, provided that -------- the Company shall deposit with the Trustee an amount sufficient to pay the Redemption Price by 10:00 a.m., New York City time, on the date the Redemption Price is to be paid. SECTION 3.2 ----------- At any time on or after February 1, 2007, the Company shall have the right, subject to the provisions of Article XIV of the Indenture and to the receipt by the Company of prior approval from the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, to redeem the Debentures, in whole or in part, from time to time, at the Redemption Price. Any redemption pursuant to this Section 3.2 will be made upon not less than 30 days' nor more than 60 days' notice to the holders of the relevant Debentures. If Debentures are only partially redeemed pursuant to this Section 3.2, Debentures shall be redeemed pro rata or by lot or by any --- ---- other method utilized by the Trustee. The Redemption Price shall be paid prior to 11:00 a.m., New York City time, on the date of such redemption or such earlier time as the Company determines, provided that the Company shall deposit with the Trustee an - -------- amount sufficient to pay the Redemption Price by 10:00 a.m., New York City time, on the date the Redemption Price is to be paid. The Debentures are not entitled to the benefit of any sinking fund. ARTICLE IV EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1 ----------- The Company shall have the right, subject to the conditions set forth herein, to defer payments of interest on the Debentures of a series by extending the interest payment period on the Debentures of a series at any time and from time to time during the term of the 10 13 Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest shall be due and payable; provided that -------- ---- (i) no Extension Period may extend beyond the Maturity Date and (ii) no Extension Period may commence or be extended so long as the Company is in default in the payment of any interest upon any Debentures of such series or has not paid all Deferred Interest from a prior completed Extension Period. At the termination of an Extension Period for the Debentures of a series or, if not an Interest Payment Date, on the Interest Payment Date immediately following termination of such Extension Period for the Debentures of such series, the Company shall pay all interest then accrued and unpaid on the Debentures, together with interest thereon at a variable annual rate equal to LIBOR plus 0.85%, compounded quarterly (to the extent permitted by applicable law) ("Compounded Interest") and any Additional Interest (together with Compounded Interest, "Deferred Interest"), which Deferred Interest shall be payable to the holders of the Debentures of such series in whose names the Debentures are registered in the Debt Security Register on the record date for the payment of interest on such Interest Payment Date. Before the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest then due, the Company may commence a new Extension Period, subject to the foregoing requirements. SECTION 4.2 ----------- (a) If the Institutional Trustee is the only registered holder of the Debentures of a series at the time the Company initiates an Extension Period, the Company shall give written notice to the Administrators, the Institutional Trustee and the Trustee of its initiation of such Extension Period one Business Day before the earlier of (i) the date on which distributions on the Capital Securities of the corresponding series are payable, or (ii) the date the Administrators are required to give notice to holders of the Capital Securities of the corresponding series (or any national securities exchange or other organization on which such Capital Securities are listed, if any) of the record date or the distribution payment date, in each case with respect to distributions on the Trust Securities the payment of which is being deferred. (b) If the Institutional Trustee is not the only registered holder of the Debentures of a series at the time the Company initiates an Extension Period, the Company shall give the holders of the Debentures of such series and the Trustee written notice of its initiation of such Extension Period at least ten Business Days before the earlier of (i) the next succeeding Interest Payment Date or (ii) the date the Company is required to give notice to holders of the Debentures of such series (or any national securities exchange or other organization on which the Capital Securities of the corresponding series are listed, if any) of the record or payment date of such interest, in each case with respect to interest payments the payment of which is being deferred. 11 14 ARTICLE V EXPENSES AND GUARANTEE SECTION 5.1 ----------- In connection with the offering, sale and issuance of the Debentures of a series and in connection with the sale of any Trust Securities by the Trust, the Company, in its capacity as borrower with respect to the Debentures of such series, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of Debentures of such series, including commissions to the underwriters payable pursuant to the Purchase Agreement and compensation of the Trustee under the Indenture in accordance with the provisions of Section 6.06 of the Indenture; (b) pay all debts and other obligations (other than with respect to the Trust Securities) and costs and expenses of the Trust (including, but not limited to, costs and expenses relating to the organization of the Trust, the offering, sale and issuance of the Trust Securities (including commissions to the underwriters in connection therewith), the fees and expenses, if any, of the Institutional Trustee, the Delaware Trustee and each Administrator, the costs and expenses relating to the operation of the Trust, including, without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Trust assets of the Trust); (c) be primarily and fully liable for any indemnification obligations arising with respect to the Declaration or the Purchase Agreement or the Registration Agreement; and (d) pay any and all taxes, duties, assessments or governmental charges of whatever nature and all liabilities, costs and expenses with respect thereto (other than United States withholding taxes attributable to the Trust or assets of the Trust) to which the Trust may become subject. SECTION 5.2 ----------- Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Institutional Trustee, as the case may be, pursuant to Section 5.7 of the Declaration, the Company shall pay to the Delaware Trustee or the Institutional Trustee, as the case may be, all amounts owing to the Delaware Trustee or the Institutional Trustee, as the case may be, under Sections 10.4 and 10.6 of the Declaration accrued to the date of such termination, removal or resignation. 12 15 ARTICLE VI FORM OF DEBENTURE The Debentures and the Trustees certificate of authentication to be endorsed thereon are to be substantially in the following forms and are expressly made a part of this First Supplemental Indenture: (FACE OF DEBENTURE) [IF THE DEBENTURE IS TO BE A GLOBAL DEBENTURE, INSERT: This Debenture is a Global Debenture within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depositary or a nominee of a Depositary. This Debenture is exchangeable for Debentures of this series registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Debenture may be registered except in limited circumstances. Except as otherwise provided in Section 2.11 of the Indenture, this Debenture may be transferred, in whole but not in part, only to another nominee of the Depositary or to a successor Depositary or to a nominee of such successor Depositary. Unless this Debenture is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any Debenture of this series issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.] [IF THIS DEBENTURE IS ONE OF A SERIES ORIGINALLY ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, AS SPECIFIED PURSUANT TO SECTION 2.03 OF THE INDENTURE, INSERT THE FOLLOWING UNLESS OTHERWISE DETERMINED BY THE COMPANY - - - THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. NEITHER THIS DEBENTURE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS DEBENTURE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH DEBENTURE PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH MERCANTILE BANCORPORATION INC. (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS DEBENTURE OR ANY PREDECESSOR OF THIS DEBENTURE (THE "RESALE RESTRICTIONS TERMINATION DATE") ONLY 13 16 (A) TO THE COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE DEBENTURES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE DEBENTURE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANYS RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS DEBENTURE AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. DEBENTURES OWNED BY A PURCHASER THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER MAY NOT BE HELD IN BOOK-ENTRY FORM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTIONS TERMINATION DATE.] No. --------------------- MERCANTILE BANCORPORATION INC. FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE DUE 2027 MERCANTILE BANCORPORATION INC., a Missouri corporation (the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ------------ or registered assigns, the principal sum of ---------------- Dollars ($--------- ) on February 1, 2027, and to pay interest on said principal sum from February 4, 1997, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on the first day of February, May, August and November of each year commencing May 1, 1997, at a variable annual rate equal to LIBOR plus 0.85% until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at a variable annual rate equal to LIBOR plus 0.85% compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed on the basis of the actual number of 14 17 days elapsed in a year of twelve 30-day months. In the event that any date on which interest is payable on this Debenture is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debenture (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the Record Date for such interest installment, [which shall be the close of business on the Business Day next preceding such Interest Payment Date]. [IF PURSUANT TO THE PROVISIONS OF THE INDENTURE THE DEBENTURES OF THIS SERIES ARE NO LONGER REPRESENTED SOLELY BY A GLOBAL DEBENTURE, SUBSTITUTE THE FOLLOWING FOR THE FOREGOING BRACKETED TEXT -- which shall be the close of business on the 15th day next preceding such Interest Payment Date.] Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such Record Date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of this series of Debentures not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. In the event the Debentures of this series are issued in non-book entry form, the principal of and interest on this Debenture shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, -------- however, that payment of interest may be made at the option - ------- of the Company by check mailed to the registered holder at such address as shall appear in the Debt Security Register or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Institutional Trustee. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior 15 18 Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. If this Debenture is exchanged in a Registered Exchange Offer prior to the Record Date for the first Interest Payment Date following such exchange, accrued and unpaid interest, if any, on this Debenture, up to but not including the date of issuance of the Exchange Debenture or Exchange Debentures issued in exchange for this Debenture, shall be paid on the first Interest Payment Date for such Exchange Debenture or Exchange Debentures to the Securityholder or Securityholders of such Exchange Debenture or Exchange Debentures on the first Record Date with respect to such Exchange Debenture or Exchange Debentures. If this Debenture is exchanged in a Registered Exchange Offer subsequent to the Record Date for the first Interest Payment Date following such exchange but on or prior to such Interest Payment Date, then any such accrued and unpaid interest with respect to this Debenture and any accrued and unpaid interest on the Exchange Debenture or Exchange Debentures issued in exchange for this Debenture, through the day before such Interest Payment Date, shall be paid on such Interest Payment Date to the Securityholder of this Debenture on such Record Date. If any time the Trust shall be required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States or any other taxing authority, then, in any such case, the Company shall pay as additional interest on the Debentures held by the Institutional Trustee such additional amounts as shall be required so that the net amounts received and retained by the Trust after paying any such taxes, duties, assessments or other governmental charges will equal the amounts the Trust and the Institutional Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed. [IF THIS DEBENTURE IS AN INITIAL DEBENTURE INSERT -- In addition, the interest rate payable on the Debentures of this series is subject to increase as provided in the Indenture if, pursuant to the Registration Agreement either (A) the Exchange Offer Registration Statement (as such term is defined in the Registration Agreement) is not filed with the Securities and Exchange Commission (the "Commission") on or prior to the 90th day following the Closing Date (as such term is defined in the Registration Agreement), (B) the Exchange Offer Registration Statement is not declared effective by the Commission on or prior to the 120th day following the Closing Date or (C) the Registered Exchange Offer (as such term is defined in the Registration Agreement) is not consummated or a Shelf Registration Statement (as such term is defined in the Registration Agreement) with respect to the Initial Debentures is not declared effective by the Commission on or prior to the 150th day following the Closing Date. The interest rate payable on the Debentures of this series is also subject to adjustment in certain circumstances if a Shelf Registration Statement filed pursuant to the Registration Agreement is not kept continuously effective for a specified period, as provided in the Indenture.] This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. 16 19 The provisions of this Debenture are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. 17 20 IN WITNESS WHEREOF, the Company has caused this instrument to be executed. Dated -------------------- MERCANTILE BANCORPORATION INC. By: ------------------------- Name: Title: [Seal] By: ------------------------- Name: Title: CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Debt Securities of the series designated therein referred to in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee By ------------------------------ Authorized Officer 18 21 (REVERSE OF DEBENTURE) ---------------------- This Debenture is one of a duly authorized series of Debt Securities of the Company, all issued or to be issued in one or more series under and pursuant to an Indenture dated as of February 4, 1997, duly executed and delivered between the Company and The Chase Manhattan Bank, as Trustee (the "Trustee"), as supplemented by the First Supplemental Indenture dated as of February 4, 1997, between the Company and the Trustee (the Indenture as so supplemented, the "Indenture"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the series of Debt Securities (referred to herein as the "Debentures") of which this Debenture is a part. The summary of the terms of this Debenture contained herein does not purport to be complete and is qualified by reference to the Indenture. By the terms of the Indenture, the Debt Securities are issuable in series that may vary as to amount, date of maturity, rate of interest and in other respects as provided in the Indenture. This series of Debentures is limited in aggregate principal amount as specified in said First Supplemental Indenture. Upon the occurrence and continuation of a Tax Event or a Capital Treatment Event, this Debenture may become due and payable, in whole or in part, at any time, within 90 days following the occurrence of such Tax Event or Capital Treatment Event, as the case may be, at a redemption price equal to 100% of the principal amount being redeemed together with any accrued and unpaid interest thereon. The Company shall also have the right to redeem this Debenture at the option of the Company, in whole or in part, at any time or from time to time on or after February 1, 2007, at par plus accrued and unpaid interest to the redemption date. Any redemption pursuant to the preceding paragraph will be made, subject to the receipt by the Company of prior approval from the Board of Governors of the Federal Reserve System (the "Federal Reserve") if then required under applicable capital guidelines or policies of the Federal Reserve, upon not less than 30 days' nor more than 60 days' notice. If the Debentures are only partially redeemed by the Company, the Debentures will be redeemed pro rata or by lot or by any other method utilized --- ---- by the Trustee; provided that if, at the time of redemption, -------- the Debentures are registered as a Global Debenture, the Depositary shall determine the principal amount of such Debentures held by each of its direct participants to be redeemed pro rata in accordance with its procedures. - --- ---- In the event of redemption of this Debenture in part only, a new Debenture or Debentures of this series for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debentures may be declared due and payable, and upon such declaration of acceleration shall become due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debt 19 22 Securities of any series at the time outstanding affected thereby, as specified in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture - -------- ------- shall, among other things, without the consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the fixed maturity of any Debt Securities of any series, or reduce the principal amount thereof or any redemption premium thereon, or reduce the rate or extend the time of payment of interest thereon, or make the principal of, or interest or premium on, the Debt Securities payable in any coin or currency other than that provided in the Debt Securities, or impair or affect the right of any holder of Debt Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Debt Securities, the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debt Securities of a series at the time outstanding affected thereby as provided in the Indenture, on behalf of all of the holders of the Debt Securities of such series, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture with respect to such series, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Debt Securities of such series. Any such consent or waiver by the registered holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debenture and of any Debenture issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Debenture. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Debenture at the time and place and at the rate and in the money herein prescribed. The Company shall have the right at any time during the term of the Debentures and from time to time, subject to certain conditions, to defer payment of interest on the Debentures of a series by extending the interest payment period for Extension Periods, each not exceeding 20 consecutive quarterly periods as provided in the Indenture. Notwithstanding the foregoing, no Extension Period may extend beyond the maturity date of the Debentures. In the event that the Company exercises its right to extend an interest payment period, then during any Extension Period (a) the Company shall not declare or pay any dividends on, make any distribution with respect to, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of its capital stock or rights to acquire such capital stock (other than (i) purchases or acquisitions of shares of any such capital stock or rights to acquire such capital stock in connection with the satisfaction by the Company of its obligations under any employee benefit plans, (ii) as a result of a reclassification of the Company's capital stock or rights to acquire such capital stock or the exchange or conversion of one class or series of the Company's capital stock or rights to acquire such capital stock for another class or series of the Company's capital stock or rights to acquire such capital stock, (iii) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock 20 23 or the security being converted or exchanged, (iv) dividends and distributions made on the Company's capital stock or rights to acquire such capital stock with the Company's capital stock or rights to acquire such capital stock, or (v) any declaration of a dividend in connection with the implementation of a shareholder rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto), or make guarantee payments (other than payments under the Capital Securities Guarantee or the Common Securities Guarantee for the Trust) with respect to the foregoing and (b) the Company shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Debentures. Prior to - ---- ----- the termination of any such Extension Period, the Company may further defer payments of interest by extending the interest payment period; provided, however, that each such -------- ------- Extension Period, including all such previous and further extensions thereof, may not exceed 20 consecutive quarterly periods or extend beyond the maturity of the Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Company may commence a new Extension Period, subject to the terms set forth in the Indenture. No interest during an Extension Period, except on the date on which such Extension Period terminates (or if such date is not an Interest Payment Date, on the immediately following Interest Payment Date), shall be due and payable. As provided in the Indenture and subject to certain limitations herein and therein set forth, this Debenture is transferable by the registered holder hereof on the Debt Security Register of the Company, upon surrender of this Debenture for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or his attorney duly authorized in writing, and thereupon one or more new Debentures of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such registration of transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and the Debt Security registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debenture shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or 21 24 penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Debentures of this series are issuable only in registered form without coupons. A Global Debenture is exchangeable for Debentures in definitive form only under certain limited circumstances set forth in the Indenture. As provided in the Indenture and subject to certain limitations herein and therein set forth, Debentures of this series are exchangeable for a like aggregate principal amount of Debentures of this series of a different authorized denomination, as requested by the holder surrendering the same. [IF THIS DEBENTURE IS AN INITIAL DEBENTURE INSERT -- The Debentures of this series are issuable only in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. The Debentures of this series may be transferred only in blocks having an aggregate principal amount of not less than $100,000. Any transfer of Debentures of this series in a block having an aggregate principal amount of less than $100,000 shall be deemed to be void and of no legal effect whatsoever. Any transferee of Debentures of this series having an aggregate principal amount of less than $100,000 shall be deemed not to be the holder of such Debentures for any purpose, including, but not limited to, the receipt of payments on such Debentures, and such transferee shall be deemed to have no interest whatsoever in such Debentures.] All terms used in this Debenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THE DEBENTURES, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. ARTICLE VII MISCELLANEOUS SECTION 7.1 ----------- The Indenture, as supplemented by this First Supplemental Indenture, is in all respects ratified and confirmed, and this First Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. SECTION 7.2 ----------- The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this First Supplemental Indenture. 22 25 SECTION 7.3 ----------- This First Supplemental Indenture and each Debenture shall be deemed to be a contract made under the internal laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State without regard to conflict of laws principles thereof. SECTION 7.4 ----------- In case any one or more of the provisions contained in this First Supplemental Indenture or in a series of Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this First Supplemental Indenture or of such series of the Debentures, but this First Supplemental Indenture and such series of the Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. This First Supplemental Indenture may be executed in any number of counterparts each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. 23 26 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the day and year first above written. MERCANTILE BANCORPORATION INC. By: -------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Trustee By: -------------------------- Name: Title: 24 EX-21 4 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT NO. 21 MERCANTILE BANCORPORATION INC. SUBSIDIARIES AS OF FEBRUARY 20, 1997
STATE OR SUBSIDIARY JURISDICTION ---------- ------------ Mercantile Insurance Services, Inc. Missouri Supplemental Monetary Transfer System Missouri Ameribanc, Inc. Missouri Mercantile Bank of North Central Missouri Missouri Mercantile Bank of Pike County Missouri Mercantile Bank of Trenton Missouri Mercantile Bank of Northwest Missouri Missouri Mercantile Bank of Western Missouri Missouri Mercantile Bank of Missouri Valley Missouri Mercantile Trust Company National Association United States Mercantile Bank of Memphis Missouri Mercantile Bank of Kansas City Missouri MBTC Services, Inc. Kansas Mercantile Bank of Plattsburg Missouri Mercantile Bank of Illinois Illinois Metro Financial Service Corporation Inc. Illinois Mercantile Bank of South Central Missouri Missouri SoMo Investment Company, Inc. Missouri South Central Investments Inc. Illinois South Central Financial L.L.C. Illinois Mercantile Bank of Central Missouri Missouri Central Investments Inc. Illinois Central Financial L.L.C. Illinois Mercantile Bank of Southeast Missouri Missouri Southeast Investments Inc. Illinois Southeast Financial L.L.C. Illinois Mercantile Bank of Joplin Missouri Westmo Investments Inc. Illinois Western Financial L.L.C. Illinois Mercantile Bank of Topeka Kansas Mercantile Financial of Topeka Inc. Kansas 2 Mercantile Bank of St. Joseph Missouri Northern Investments Inc. Illinois Northern Financial L.L.C. Illinois Mercantile Bank (Kansas/Kansas City) Kansas Kansas Trust Company Kansas Kaw Valley Building Corporation, Inc. Kansas Mercantile Financial of Kansas, Inc. Kansas Mercantile Financial of Kansas L.L.C. Kansas Mercantile Bank of Illinois National Association United States Mercantile Bank of Southern Illinois Illinois TODAY'S BANK-EAST Illinois Today's Mortgage Source Inc. Illinois Today's Financial Services Company Illinois Today's Trust Company Illinois Today's Capital Management Group Inc. Illinois Mercantile Bank of Dubuque National Association United States Mercantile Bank of Arkansas Arkansas Security Service Corporation Arkansas Mercantile Bank FSB United States Shafer Farm Joint Venture Iowa S&L Service Corporation Iowa Mercantile Realty, Inc. Iowa Mercantile Bank of Eastern Iowa Iowa Waterloo Realty Company, Inc. Iowa Mercantile Bank of Western Iowa Iowa Western Iowa Realty Company, Inc. Iowa Mercantile Leasing Corporation Iowa Hawkeye Investment Center, Inc. Iowa TODAY'S BANK-WEST Illinois First National Bank of Salem United States Financial Ideas, Inc. Missouri MidAmerican Insurance Agency, Inc. Kansas Mississippi Valley Life Insurance Company Arizona Alton Downtown Parking, Inc. Illinois D.D. Development of Sterling Limited Partnership Illinois Mercantile Guaranteed Loans, Inc. Iowa Mercantile Service Corp. Iowa Mercantile Bank of Sterling/Rock Falls National Association United States 2 3 Mercantile Bank National Association (St. Louis) United States Mercantile Community Development Corp. Missouri Sangamon Investment Company Missouri Mercantile Business Credit, Inc. Missouri Mississippi Valley Advisors Inc. Missouri Mercantile Investment Services, Inc. Missouri Metropolitan Savings Service Corporation Missouri Lending Express, L.P. Missouri Mercantile Bank International Missouri Mercantile Trade Services Limited Missouri Manley Investment Services, Inc. Missouri Mercantile Mortgage Investment Company, Inc. Missouri Mercantile Center Associates Missouri Mercantile Center Redevelopment Corp. Missouri
3 EX-23 5 CONSENT OF EXPERT 1 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, No. 33-48952, and No. 33-57543, each on Form S-8, and No. 33-45863, No. 33-52986, No. 33-50579, No. 33-50981, No. 33-55439, No. 33-56603, No. 33-58467, No. 33-63609, No. 33-65087, No. 333-09803, and No. 333-17757, each on Form S-4, of Mercantile Bancorporation Inc. of our report dated January 15, 1997, relating to the consolidated balance sheets of Mercantile Bancorporation Inc. and subsidiaries as of December 31, 1996, 1995, and 1994, 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, 1996, which report appears in the Annual Report on Form 10-K of Mercantile Bancorporation Inc. for the fiscal year ended December 31, 1996. /s/ KPMG Peat Marwick LLP - -------------------------- KPMG Peat Marwick LLP St. Louis, Missouri February 20, 1997 EX-27 6 ARTICLE 9 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,223,911 91,616 234,212 500 3,691,509 346,566 349,738 12,772,920 196,627 18,986,959 14,819,887 1,787,673 267,577 302,795 0 0 232,462 1,401,565 18,986,959 1,049,439 259,634 16,308 1,325,381 514,764 622,992 702,389 71,014 (317) 637,307 290,036 191,947 0 0 191,947 3.10 3.10 4.30 59,799 33,638 3,017 33,368 201,780 102,093 18,544 196,627 196,627 0 73,258
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