-----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, Fz7blqCRCyO0Ut1TkhSzEMq0iuw+4I75dqiwlKmWrEUQrHiInAT3VM+I9OfxSXs2 KpPP+e40b7saEw/l10tROQ== 0000950114-96-000187.txt : 19960808 0000950114-96-000187.hdr.sgml : 19960808 ACCESSION NUMBER: 0000950114-96-000187 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960807 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11792 FILM NUMBER: 96605342 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-Q 1 MERCANTILE BANCORPORATION INC. FORM 10-Q 1 =============================================================================== FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 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 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. X ----- ------ YES NO INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. COMMON STOCK, $5.00 PAR VALUE, 59,935,832 SHARES OUTSTANDING AS OF THE CLOSE OF BUSINESS ON JULY 31, 1996. =============================================================================== 2 INDEX PART I--FINANCIAL INFORMATION
PAGE NO. -------- Item 1-- Financial Statements of Mercantile Bancorporation Inc. and Subsidiaries Consolidated Statement of Income Three months and six months ended June 30, 1996 and 1995 3 Consolidated Balance Sheet June 30, 1996 and 1995, and December 31, 1995 4 Consolidated Statement of Changes in Shareholders' Equity Six months ended June 30, 1996 and 1995 5 Consolidated Statement of Cash Flows Six months ended June 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7 Item 2-- Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II--OTHER INFORMATION Item 6--Exhibits and Reports on Form 8-K 21 Signature 22 Exhibit Index 23
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (THOUSANDS EXCEPT PER COMMON SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 1996 1995 1996 1995 ---- ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $259,105 $251,438 $516,149 $498,187 Investments in debt and equity securities Trading 46 108 141 271 Taxable 61,185 56,438 118,783 112,427 Tax-exempt 5,580 6,265 11,468 12,897 -------- -------- -------- -------- Total Investments in Debt and Equity Securities 66,811 62,811 130,392 125,595 Due from banks--interest bearing 940 215 1,770 559 Federal funds sold and repurchase agreements 3,476 4,636 7,261 8,955 -------- -------- -------- -------- Total Interest Income 330,332 319,100 655,572 633,296 INTEREST EXPENSE Interest bearing deposits 125,810 118,488 254,695 225,869 Foreign deposits 2,121 3,310 4,622 6,506 Short-term borrowings 15,757 21,689 29,871 45,588 Bank notes 3,937 4,087 7,909 5,757 Long-term debt 5,985 6,129 12,017 12,266 -------- -------- -------- -------- Total Interest Expense 153,610 153,703 309,114 295,986 -------- -------- -------- -------- NET INTEREST INCOME 176,722 165,397 346,458 337,310 PROVISION FOR POSSIBLE LOAN LOSSES 10,638 6,683 43,806 20,673 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 166,084 158,714 302,652 316,637 OTHER INCOME Trust 20,749 17,594 40,103 34,311 Service charges 19,905 18,820 39,177 37,320 Credit card fees 8,130 4,698 9,579 11,767 Securitization revenue 3,325 4,523 7,827 4,523 Mortgage banking 2,252 2,340 5,372 4,418 Investment banking and brokerage 3,216 2,873 6,359 5,177 Securities gains (losses) 98 2,152 (2,858) 2,098 Other 20,482 11,910 31,882 27,997 -------- -------- -------- -------- Total Other Income 78,157 64,910 137,441 127,611 OTHER EXPENSE Salaries 62,841 57,444 125,573 115,192 Employee benefits 15,895 13,748 32,419 28,543 Net occupancy 9,599 8,970 19,341 17,866 Equipment 12,158 10,771 23,732 21,266 Other 42,831 44,355 125,029 88,347 -------- -------- -------- -------- Total Other Expense 143,324 135,288 326,094 271,214 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 100,917 88,336 113,999 173,034 INCOME TAXES(1) 35,841 30,449 44,358 59,714 -------- -------- -------- -------- NET INCOME $ 65,076 $ 57,887 $ 69,641 $113,320 ======== ======== ======== ======== PER COMMON SHARE DATA Average shares outstanding 62,780,375 60,670,296 62,916,388 60,721,829 Net income $1.04 $.95 $1.10 $1.86 Dividends declared .41 .33 .82 .66 Includes the following nonrecurring merger-related amounts: Provision for possible loan losses $ 10,851 $ -- Other income (securities losses) (3,082) -- Other expense 41,678 -- Income tax benefit (15,599) -- -------- -------- Impact on Net Income $(40,012) $ -- ======== ======== Earnings per common share is calculated by dividing net income, less dividends on preferred stock, by weighted average common shares outstanding.
3 4 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (THOUSANDS)
JUNE 30 DEC. 31 JUNE 30 1996 1995 1995 ------- ------- ------- ASSETS Cash and due from banks $ 840,848 $ 1,112,088 $ 775,953 Due from banks--interest bearing 64,857 51,056 2,228 Federal funds sold and repurchase agreements 209,502 271,098 458,895 Investments in debt and equity securities Trading 255 3,677 5,123 Available-for-sale 4,428,289 4,207,079 740,821 Held-to-maturity (Estimated fair value of $3,475,633 at June 30, 1995) -- -- 3,453,263 ----------- ----------- ----------- Total Investments in Debt and Equity Securities 4,428,544 4,210,756 4,199,207 Loans held-for-sale 66,470 94,877 38,721 Loans and leases, net of unearned income 11,881,145 11,636,010 11,339,603 ----------- ----------- ----------- Total Loans and Leases 11,947,615 11,730,887 11,378,324 Reserve for possible loan losses (205,687) (201,780) (200,987) ----------- ----------- ----------- Net Loans and Leases 11,741,928 11,529,107 11,177,337 Bank premises and equipment 318,390 309,070 297,091 Due from customers on acceptances 6,309 2,622 2,711 Other assets 427,451 442,244 360,918 ----------- ----------- ----------- Total Assets $18,037,829 $17,928,041 $17,274,340 =========== =========== =========== LIABILITIES Deposits Non-interest bearing $ 2,567,425 $ 2,075,579 $ 1,913,944 Interest bearing 11,668,483 11,429,511 10,945,151 Foreign 97,362 209,170 192,715 ----------- ----------- ----------- Total Deposits 14,333,270 13,714,260 13,051,810 Federal funds purchased and repurchase agreements 1,108,416 1,552,945 1,356,655 Other short-term borrowings 163,554 210,791 589,372 Bank notes 275,000 250,000 250,000 Long-term debt 311,772 325,607 319,567 Bank acceptances outstanding 6,309 2,622 2,711 Other liabilities 232,703 232,229 204,169 ----------- ----------- ----------- Total Liabilities 16,431,024 16,288,454 15,774,284 Commitments and contingent liabilities -- -- -- JUNE 30 DEC. 31 JUNE 30 1996 1995 1995 ------- ------- ------- SHAREHOLDERS' EQUITY 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 63,279 63,887 61,578 316,394 319,434 307,890 Capital surplus 233,725 283,288 244,796 Retained earnings 1,083,683 1,085,269 964,784 Treasury stock, at cost 606 1,380 828 (26,997) (60,557) (29,567) ----------- ----------- ----------- Total Shareholders' Equity 1,606,805 1,639,587 1,500,056 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $18,037,829 $17,928,041 $17,274,340 =========== =========== ===========
4 5 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ($ IN THOUSANDS)
COMMON STOCK ---------------------- TOTAL OUTSTANDING PREFERRED CAPITAL RETAINED TREASURY SHAREHOLDERS' SHARES DOLLARS STOCK SURPLUS EARNINGS STOCK EQUITY ----------- ------- --------- ------- -------- -------- ------------ BALANCE AT DECEMBER 31, 1994, AS RESTATED 59,883,249 $299,885 $ 12,153 $230,940 $ 868,666 $ (2,954) $1,408,690 Net income 113,320 113,320 Common dividends declared: Mercantile Bancorporation Inc.--$.66 per share (31,998) (31,998) Pooled companies prior to acquisition (7,753) (7,753) Preferred dividends declared (510) (510) Issuance of common stock: Acquisition of Wedge Bank 969,954 4,850 1,649 7,314 13,813 Employee incentive plans 236,860 1,174 2,979 67 4,220 Convertible notes 331,075 1,655 6,935 8,590 Net fair value adjustment for available-for-sale securities 15,745 15,745 Purchase of treasury stock (736,100) (26,680) (26,680) Pre-merger transactions of pooled companies and other 65,007 326 2,293 2,619 ---------- -------- -------- -------- ---------- --------- ---------- BALANCE AT JUNE 30, 1995 60,750,045 $307,890 $ 12,153 $244,796 $ 964,784 $ (29,567) $1,500,056 ========== ======== ======== ======== ========== ========= ========== BALANCE AT DECEMBER 31, 1995, AS RESTATED 62,506,536 $319,434 $ 12,153 $283,288 $1,085,269 $ (60,557) $1,639,587 Net income 69,641 69,641 Common dividends declared--$.82 per share (51,598) (51,598) Preferred dividends declared (408) (408) Redemption of preferred stock (12,153) (531) (12,684) Issuance of common stock in acquisitions of: 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 177,521 822 (769) 534 587 Net fair value adjustment for available-for-sale securities (32,476) (32,476) Purchase of treasury stock (1,050,000) (47,678) (47,678) Reissuance and retirement of treasury stock (6,458) (50,708) 57,166 -- Other (2,299) (11) (94) (59) (164) ---------- -------- -------- -------- ---------- --------- ---------- BALANCE AT JUNE 30, 1996 62,673,041 $316,394 $ -- $233,725 $1,083,683 $ (26,997) $1,606,805 ========== ======== ======== ======== ========== ========= ==========
5 6 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS)
SIX MONTHS ENDED JUNE 30 1996 1995 ---- ---- OPERATING ACTIVITIES Net income $ 69,641 $ 113,320 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 43,806 20,673 Depreciation and amortization 20,111 18,917 Provision for deferred income taxes 5,483 1,467 Net change in loans held-for-sale 28,407 (17,338) Net change in accrued interest receivable (3,738) 1,776 Net change in accrued interest payable (20,055) 18,804 Other, net 64,635 4,574 ----------- ---------- Net Cash Provided by Operating Activities 208,290 162,193 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (1,072,571) (547,049) Proceeds from maturities 830,410 681,283 Proceeds from sales of available-for-sale securities 61,904 47,245 Net change in loans and leases (229,357) (772,522) Purchases of loans and leases (14,558) (93,521) Proceeds from sales of loans and leases 139,575 489,762 Purchases of premises and equipment (33,369) (31,044) Proceeds from sales of premises and equipment 6,573 2,204 Proceeds from sales of foreclosed property 15,454 8,889 Cash and cash equivalents from acquisitions, net of cash paid 41,782 8,362 Other, net (876) (3,883) ----------- ---------- Net Cash Used by Investing Activities (255,033) (210,274) FINANCING ACTIVITIES Net change in non-interest bearing, savings, interest bearing demand and money market deposit accounts 526,051 (393,433) Net change in time certificates of deposit under $100,000 (224,251) 214,781 Net change in time certificates of deposit $100,000 and over (49,530) 119,511 Net change in other time deposits 198,148 101,353 Net change in foreign deposits (111,808) (26,420) Net change in short-term borrowings (512,062) 79,394 Issuance of bank notes 25,000 150,000 Issuance of long-term debt 2,000 13,746 Principal payments on long-term debt (13,849) (15,713) Cash dividends paid (52,006) (40,261) Proceeds from issuance of common stock 541 1,482 Purchase of treasury stock (47,678) (26,680) Redemption of preferred stock (12,684) -- Other, net (164) 465 ----------- ---------- Net Cash Provided (Used) by Financing Activities (272,292) 178,225 ----------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (319,035) 130,144 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,434,242 1,106,933 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,115,207 $1,237,077 =========== ==========
6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 The consolidated financial statements include all adjustments which are, in the opinion of management, necessary for the fair statement of the results of these periods and are of a normal recurring nature. NOTE 2 Effective January 2, 1996, Mercantile Bancorporation Inc. (``Corporation'' or ``Mercantile'') acquired Hawkeye Bancorporation (``Hawkeye''), a $2 billion-asset holding company headquartered in Des Moines, Iowa. The Hawkeye acquisition was accounted for as a pooling-of-interests. The historical consolidated financial statements have been restated to reflect this transaction. Net income and net income per common share for Mercantile and Hawkeye prior to restatement were as follows:
(THOUSANDS EXCEPT PER COMMON SHARE DATA) THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1995 1995 ------------ ---------- MERCANTILE Net income $52,359 $102,062 Net income per common share .99 1.92 HAWKEYE Net income 5,528 11,258 Net income per common share .41 .83
7 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ---------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 1 HIGHLIGHTS
SECOND QUARTER SIX MONTHS ($ IN THOUSANDS EXCEPT PER COMMON SHARE DATA) 1996 1995 CHANGE 1996 1995 CHANGE - ---------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Net income $ 1.04 $ .95 9.5% $ 1.10 $ 1.86 (40.9)% Dividends declared .41 .33 24.2 .82 .66 24.2 Book value at June 30 25.64 24.49 4.7 25.64 24.49 4.7 Market price at June 30 44 1/2 44 7/8 (.8) 44 1/2 44 7/8 (.8) - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS AND SELECTED RATIOS EXCLUDING NONRECURRING MERGER-RELATED EXPENSE Net income $65,076 $57,887 12.4% $109,653 $113,320 (3.2)% Net income per common share 1.04 .95 9.5 1.74 1.86 (6.5) Return on assets 1.43% 1.35% 1.22% 1.32% Return on equity 16.15 15.64 13.35 15.50 Efficiency ratio 55.41 57.68 57.50 57.27 Other expense to average assets 3.15 3.14 3.15 3.17 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Taxable-equivalent net interest income $180,490 $169,627 6.4% $354,147 $345,945 2.4% Tax-equivalent adjustment 3,768 4,230 (10.9) 7,689 8,635 (11.0) Net interest income 176,722 165,397 6.8 346,458 337,310 2.7 Provision for possible loan losses 10,638 6,683 59.2 43,806 20,673 -- Other income 78,157 64,910 20.4 137,441 127,611 7.7 Other expense 143,324 135,288 5.9 326,094 271,214 20.2 Income taxes 35,841 30,449 17.7 44,358 59,714 (25.7) Net income 65,076 57,887 12.4 69,641 113,320 (38.5) - ---------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS AND DATA Return on assets 1.43% 1.35% .77% 1.32% Return on equity 16.15 15.64 8.48 15.50 Efficiency ratio 55.41 57.68 66.33 57.27 Other expense to average assets 3.15 3.14 3.62 3.17 Net interest rate margin 4.34 4.28 4.29 4.38 Equity to assets 8.91 8.68 Tier I capital to risk-adjusted assets 11.88 12.13 Total capital to risk-adjusted assets 14.95 15.33 Leverage 8.18 8.26 Reserve for possible loan losses to outstanding loans 1.72 1.77 Reserve for possible loan losses to non-performing loans 322.71 431.32 Non-performing assets to outstanding loans and foreclosed assets .60 .54 Banks 62 74 Banking offices 435 422 Full-time equivalent employees 7,745 7,476 - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Total assets $18,202,129 $17,215,011 5.7% $18,033,689 $17,112,621 5.4% Earning assets 16,640,147 15,863,294 4.9 16,525,407 15,802,073 4.6 Loans and leases 11,855,159 11,267,705 5.2 11,826,764 11,187,492 5.7 Deposits 14,746,270 13,504,748 9.2 14,333,830 13,372,543 7.2 Shareholders' equity 1,611,884 1,480,060 8.9 1,643,331 1,462,516 12.4 - ---------------------------------------------------------------------------------------------------------------------------------- All previously reported financial information has been restated to reflect the January 2, 1996 merger with Hawkeye Bancorporation, which was accounted for as a pooling-of-interests. Nonrecurring merger-related expense reduced net income and net income per common share by $40,012,000 and $.63, respectively, in the first quarter of 1996. Includes nonrecurring merger-related expense noted in (2) above. - ----------------------------------------------------------------------------------------------------------------------------------
8 9 PERFORMANCE SUMMARY Net income for Mercantile Bancorporation Inc. (``Corporation'' or ``Mercantile'') for the second quarter of 1996 was $65,076,000, a 12.4% improvement from the $57,887,000 earned in the same period a year ago. On a per common share basis, net income was $1.04, up 9.5% from the $.95 earned in last year's second quarter. Return on assets improved to 1.43% in the second quarter compared with 1.35% last year, while return on average equity was 16.15% versus 15.64% in 1995. For the first half of 1996, reported net income was $69,641,000, a decline of 38.5% from the $113,320,000 earned last year, and on a per common share basis was $1.10 versus $1.86 recorded in the first half of 1995. However, in the first quarter of 1996 the Corporation recorded nonrecurring merger-related amounts which reduced net income and net income per common share by $40,012,000 and $.63, respectively. Excluding these merger-related items, net income was $109,653,000 or $1.74 per common share, declines of 3.2% and 6.5% from the comparable first half of 1995 figures. Two additional items negatively impacted earnings for the first half of 1996. In the first quarter of 1996, $10,000,000 was added to the provision for loan losses to substantially cover an $11,000,000 loan charge-off to a specialty retailer that declared bankruptcy in late 1995, thereby reducing earnings per common share by $.10. Second, the co-branded credit card launched in May 1995 by SBC Communications Inc. (``SBC'') and Mercantile has negatively impacted earnings per common share this year. While market acceptance of the co-branded card has surpassed expectations, cardholder performance has differed from original forecasts. Even though the co-branded card product was not profitable in the second quarter of 1996, steps were taken in the current quarter which significantly improved its financial performance in comparison with the first quarter of 1996. All prior year figures have been restated to include the pre-acquisition accounts and results of operations of Hawkeye Bancorporation (``Hawkeye''), a bank holding company with assets totaling $2 billion, headquartered in Des Moines, Iowa. Hawkeye was merged with Mercantile on January 2, 1996 in a transaction accounted for as a pooling-of-interests. - --------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 2 ACQUISITIONS ($ IN THOUSANDS)
CONSIDERATION ---------------- ACCOUNTING DATE ASSETS DEPOSITS CASH SHARES METHOD ---- ------ -------- ---- ------ ---------- ACQUISITIONS COMPLETED Metro Savings Bank, F.S.B. Mar. 7, 1996 $ 80,857 $ 73,843 $ 5 197,902 Purchase Security Bank of Conway, F.S.B. Feb. 9, 1996 102,502 89,697 1 321,964 Purchase Hawkeye Bancorporation Jan. 2, 1996 1,978,540 1,739,811 80 7,892,196 Pooling First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 147,588 1 521,417 Pooling Southwest Bancshares, Inc. Aug. 1, 1995 187,701 155,628 1 674,975 Pooling AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 130,179 1 661,356 Pooling Plains Spirit Financial Corporation July 7, 1995 400,754 276,887 6,697 1,301,180 Purchase TCBankshares, Inc. May 1, 1995 1,422,798 1,217,740 -- 4,749,999 Pooling Central Mortgage Bancshares, Inc. May 1, 1995 654,584 571,105 8 2,537,723 Pooling UNSL Financial Corp Jan. 3, 1995 508,346 380,716 11 1,578,107 Pooling Wedge Bank Jan. 3, 1995 195,716 152,865 1 969,954 Pooling ACQUISITIONS PENDING Peoples State Bank 3rd Qtr. 1996 94,383 74,239 -- 325,843 Purchase Today's Bancorp, Inc. 4th Qtr. 1996 509,538 437,659 Purchase First Financial Corporation of America 4th Qtr. 1996 87,508 75,705 Purchase 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 those of Mercantile. In addition to Mercantile common stock issued, the Corporation assumed, through an exchange, the outstanding, non-convertible preferred stock of TCBankshares, Inc. The preferred stock was redeemed in the first quarter of 1996. Estimated shares to be issued in acquisition. The value of the consideration will total $87,250,000, which includes up to 1,177,066 shares of Mercantile common stock. The value of the consideration will total $14,980,000, which includes up to 258,783 shares of Mercantile common stock. ------------------------------------------------------------------------------------------------------------------------------
9 10 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 those of Mercantile, the historical financial statements of the Corporation were not restated. On February 9, 1996, the Corporation acquired Security Bank of Conway, F.S.B. (``Conway''), located in Conway, Arkansas, and on March 7, 1996, acquired Metro Savings Bank, F.S.B. (``Metro''), headquartered in Wood River, Illinois. The Conway and Metro acquisitions were accounted for as purchases; accordingly, the results of operations were included in the Consolidated Financial Statements from the respective acquisition dates. Exhibit 2 details acquisitions completed during 1995 and 1996 as well as three announced and pending acquisitions. Net interest income increased 6.8% to $176,722,000 for the second quarter of 1996 and was up 2.7% to $346,458,000 for the first six months of 1996. The net interest rate margin was 4.34% this quarter compared with 4.23% in the first quarter and 4.28% for the second quarter of 1995, while the year-to-date margin was 4.29% compared with 4.38% last year. Average earning assets for the first half of 1996 of $16.5 billion were 4.6% higher than the $15.8 billion last year, as average loan volume increased by 5.7%. This loan growth was funded through an increase in average core deposits. Other income was $78,157,000 for the second quarter of 1996, an increase of $13,247,000 or 20.4% from a year ago. Included in other income for the current quarter was a $10,000,000 gain on the transfer of the Corporation's merchant processing business. Also included in other income during the second quarter of 1996 was a $4,000,000 reimbursement for start-up costs Mercantile incurred in conjunction with the company's co-branded credit card program. The fundamental terms of the program have not been altered and comparable reimbursements will be received in the third and fourth quarters of 1996. For the first six months of 1996, other income was $137,441,000, an increase of $9,830,000 or 7.7% from last year. Included in 1996's first quarter was $3,082,000 in nonrecurring merger-related securities losses, while the first quarter of 1995 included a $5,155,000 gain on the sale of the Corporation's interest in a joint venture that provided the St. Louis market with ATM switching capabilities and $1,730,000 in equity security gains. Trust fees, service charges, investment banking and brokerage fees, letters of credit fees and mortgage banking income were all strong in 1996 when compared with last year. Second quarter non-interest expenses were $143,324,000 compared with $135,288,000 last year, an increase of 5.9%, and year-to-date were $326,094,000, up 20.2%. Non-interest expenses in the first quarter of 1996 included $41,678,000 in nonrecurring merger-related costs. Excluding merger costs, the year-to-date efficiency ratio was 57.50% compared with 57.27% last year, and the other expense to average assets ratio improved to 3.15% from 3.17% the prior year. On April 3, 1996, the Corporation announced plans to reduce its bank charters during the next year by approximately 80% through consolidations in order to achieve greater operational efficiencies. During the second quarter of 1996, two consolidation transactions were completed which reduced 12 bank charters into two charters. The exact cost savings associated with these consolidations is not known at this time, however, having fewer legal charters will lower administrative costs, accelerate the deployment of technology and allow staff more time to serve customers. The provision for possible loan losses for the second quarter of 1996 was $10,638,000 compared with $6,683,000 the prior year, and was $43,806,000 for the first six months of 1996 compared with $20,673,000 in 1995. In addition to the $10,851,000 in nonrecurring first quarter merger-related provision, $10,000,000 was recorded to offset a charge-off on a specialty retailer credit as previously discussed. Net charge-offs for the first six months of 1996 and 1995 were $42,037,000 and $25,662,000, respectively, and on an annualized basis were .71% of average loans compared with .46% last year. Excluding the 1996 specialty retailer charge-off discussed above, the year-to-date ratio of net charge-offs to average loans for 1996 was .52% and consisted largely of credit card losses. At June 30, 1996, the reserve for possible loan losses was $205,687,000 and provided coverage of 322.71% of non-performing loans compared with 245.18% at year-end and 431.32% last June 30. 10 11 Non-performing loans as of June 30, 1996 were $63,738,000 or .53% of total loans compared with the restated figures of $82,299,000 or .70% at year-end 1995, and $46,598,000 or .41% at June 30, 1995. Foreclosed assets declined to $8,061,000 compared with $12,591,000 at year's end and $15,159,000 last June 30. Consolidated assets of $18.0 billion were up 4.4% from a year ago. Core deposits increased by 11.1% to $13.3 billion, loans were $11.9 billion, up 5.0% from last year, and shareholders' equity of $1.6 billion was 7.1% higher than at June 30, 1995. Tier I capital to risk-adjusted assets was 11.88% compared with 12.13% last year, while Total capital to risk-adjusted assets at June 30, 1996 and 1995 was 14.95% and 15.33%, respectively. Tangible equity to assets was 8.32% at this quarter's end compared to 8.58% at year-end 1995 and 8.19% at June 30, 1995. The following financial commentary presents a more thorough discussion and analysis of the results of operations and financial condition of the Corporation for the first half and second quarter of 1996. NET INTEREST INCOME Net interest income for the second quarter of 1996 was $176,722,000, a 6.8% increase from the $165,397,000 earned last year, and for the first six months of 1996 was $346,458,000, $9,148,000 or 2.7% higher than last year. For the quarter, the net interest rate margin was 4.34% compared with 4.28% last year, while the year-to-date 1996 margin was 4.29%, down from 4.38% in last year's first six months. Factors contributing to the lower net interest rate margin in the first half of 1996 included the May 1995 credit card securitization and continued competitive pricing for both loans and deposits, partially offset by the benefits derived from repricing the co-branded credit card loan portfolio and from higher levels of non- interest bearing funds in the current year. Year-to-date average loans grew by $639,272,000 or 5.7% while investment securities grew 2.0%, as funding from core deposit growth outpaced loan growth. In December 1995, the Corporation redesignated the entire investment portfolio as available-for-sale, as allowed by the Financial Accounting Standards Board. Short-term investments are primarily used for short-term excess liquidity or balancing the interest rate sensitivity of the Corporation, and on average decreased by .2% during the first half of 1996. Average commercial loans for the six month period grew by $157,955,000 or 5.5%, while average commercial real estate mortgage and construction loans increased by $166,163,000 or 7.4%. When the effect of the sale of $225,000,000 in mortgages during the fourth quarter of 1995 is considered, average residential mortgage loans grew by $447,235,000 or 12.3%. Other consumer loans increased on average by $63,756,000 or 3.9% due to growth in indirect auto loans. Excluding the impact of the $400,000,000 in credit card loans securitized during May 1995, credit card loans increased on average by 66.6%. The SBC co-branded credit card added significantly to this growth while the core MasterCard(R) and VISA(R) portfolio declined as planned. - ------------------------------------------------------------------------------- EXHIBIT 3 LOANS AND LEASES ($ IN THOUSANDS)
JUNE 30 1996 1995 CHANGE ---- ---- ------ Commercial $ 3,113,182 $ 3,082,863 1.0% Real estate--commercial 2,102,590 1,941,530 8.3 Real estate--construction 286,011 347,245 (17.6) Real estate--residential 3,897,984 3,723,651 4.7 Consumer 1,707,447 1,638,352 4.2 Credit card loans managed 1,240,401 1,044,683 18.7 Securitized credit card loans (400,000) (400,000) -- ----------- ----------- Total Loans and Leases $11,947,615 $11,378,324 5.0 =========== =========== - -------------------------------------------------------------------------------
Average core deposits increased by $854,134,000 or 6.9% in the first six months of 1996. Mercantile was substantially core funded at 91.81% of total deposits and 79.63% of earning assets. Changes in average core deposits for the past six quarters are shown in the Consolidated Quarterly Average Balance Sheet on Pages 19 and 20 of this report. Average non-interest bearing deposits increased by $181,892,000 or 8.3% through the first six months of 1996. The United States Government is a significant cash management customer of Mercantile Bank of St. Louis N.A. and pays for services rendered via compensating balances. In response to the lack of an approved fiscal 1996 federal government budget, the Government withdrew all balances from the Corporation in November 1995 to help finance its funding requirements. The 11 12 withdrawal reduced average balances during the first quarter by approximately $400,000,000. The funds were redeposited with Mercantile Bank of St. Louis N.A. on April 9, 1996 and compensation via balances will be made for the period of time the balances were missing. Year-to-date average short-term borrowings decreased by $339,840,000, due primarily to the credit card securitization, the growth in core deposits, an increase in bank note funding and the return of the U.S. Government deposits. Average shareholders' equity grew by $180,815,000 or 12.4%, due largely to net earnings retained and stock issued in acquisitions. The results discussed above are consistent with Mercantile's overall corporate policy relative to rate sensitivity and liquidity, which is to produce the optimal yield and maturity mix consistent with interest rate expectations and projected liquidity needs. The Consolidated Quarterly Average Balance Sheet, with rates earned and paid, is summarized by quarter on Pages 19 and 20. OTHER INCOME Non-interest income increased 20.4% during the second quarter of 1996 to $78,157,000, and for the six months ended June 30, 1996 was $137,441,000 compared with $127,611,000 a year ago, an improvement of 7.7%. - ------------------------------------------------------------------------------------------------------------------------ EXHIBIT 4 OTHER INCOME ($ IN THOUSANDS)
SECOND QUARTER SIX MONTHS 1996 1995 CHANGE 1996 1995 CHANGE ---- ---- ------ ---- ---- ------ Trust $20,749 $17,594 17.9% $ 40,103 $ 34,311 16.9% Service charges 19,905 18,820 5.8 39,177 37,320 5.0 Credit card fees 8,130 4,698 73.1 9,579 11,767 (18.6) Securitization revenue 3,325 4,523 (26.5) 7,827 4,523 73.0 Mortgage banking 2,252 2,340 (3.8) 5,372 4,418 21.6 Investment banking and brokerage 3,216 2,873 11.9 6,359 5,177 22.8 Letters of credit fees 1,781 1,325 34.4 3,796 2,843 33.5 Securities gains 98 2,152 (95.4) 224 2,098 (89.3) Nonrecurring merger-related securities losses -- -- -- (3,082) -- -- Other 18,701 10,585 76.7 28,086 25,154 11.7 ------- ------- -------- -------- Total Other Income $78,157 $64,910 20.4 $137,441 $127,611 7.7 ======= ======= ======== ======== ---------------------------------------------------------------------------------------------------------------------
During the second quarter of 1996, the Corporation recorded a $10,000,000 gain on the transfer of its merchant processing business and received a $4,000,000 reimbursement for co-branded credit card start-up costs. The first quarter of 1996 was negatively impacted by securities losses of $3,082,000 incurred by recently acquired banks in investment portfolio restructurings. During the first quarter of 1995, the Corporation recorded a gain of $5,155,000 on the sale of its interest in a joint venture that provides ATM switching capabilities in the Midwest region and $1,730,000 in equity security gains. Excluding these one-time items, total non-interest income was up 4.8% on a year-to-date basis. Trust fees have been the largest source of non-interest income in 1996, and were $40,103,000 compared with $34,311,000 during 1995, an increase of 16.9%. Personal trust fees earned by Mercantile Trust Company N.A. were the largest source of trust revenue and increased 25.0% from last year. Income from Mississippi Valley Advisors Inc., the investment management subsidiary of Mercantile, rose by 32.7%. Mississippi Valley Advisors Inc. manages eleven proprietary mutual funds--the ARCH funds, which had assets of $2.3 billion at June 30, 1996 compared with $1.8 billion a year earlier, a growth of 27.3%. 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. 12 13 Second quarter service charge income of $19,905,000 was $1,085,000 or 5.8% higher than last year's second quarter, and increased 5.0% for the first six months of 1996. The increase in deposit service charges was due largely to selective fee increases and enhanced pricing of low-balance, high-transaction accounts. Year-to-date mortgage banking income increased by $954,000 or 21.6% as servicing revenue and gains on the sale of loans both improved over 1995 levels. Also, $535,000 of the increase was attributable to the additional servicing volume of Mercantile Bank, FSB, previously part of Plains Spirit Financial Corporation (``Plains Spirit''), which was acquired by Mercantile on July 7, 1995 in a purchase transaction. Mortgages serviced totaled $5.7 billion at June 30, 1996 compared to $4.6 billion at June 30, 1995. Year-to-date investment banking and brokerage fees were $6,359,000 compared with $5,177,000 last year, an increase of 22.8%; second quarter fees totaled $3,216,000, 11.9% higher than the same period a year earlier. This income is derived 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 the first half of 1996, reflecting market conditions and an increase in sales activity. Credit card fee income was $8,130,000 for the second quarter of 1996, a 73.1% increase from the 1995 level. For the first six months of 1996, credit card income was $9,579,000 or 18.6% lower than the comparable 1995 period. The 1996 results included the $4,000,000 co-branded credit card start-up cost reimbursement discussed previously. Credit card income primarily represents interchange fees received on transactions of Mercantile cardholders, 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 $12,352,000 in the first six months of 1996 and were insignificant in the first half of 1995. 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 transferred late in the second quarter of 1996, represented approximately 30% of total credit card fee income during the first six months of 1996. Securitization revenue for the first six months of 1996 was $7,827,000 compared with $4,523,000 last year, and represents amounts accruing to Mercantile on the $400,000,000 in credit card loans securitized in the 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. 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. OTHER EXPENSE Expenses other than interest expense and the provision for possible loan losses for the second quarter of 1996 were $143,324,000, an increase of 5.9% from the second quarter of 1995. For the first half of 1996, total other expenses were $326,094,000, a 20.2% increase from the 1995 level. Included in other expense in the first quarter of 1996 was $41,678,000 in expenses associated with mergers, largely for investment banking and other professional services, change in control and severance payments, and obsolete equipment write-offs. Other expense also increased as a result of purchase acquisitions for which prior period amounts have not been restated. Excluding nonrecurring merger costs, year-to-date operating expenses increased by 4.9% over 1995, yet declined to 3.15% of average assets compared with 3.17% last year. The efficiency ratio, defined as operating expenses as a percentage of taxable-equivalent net interest income and other income, was 57.50% versus 57.27% last year. 13 14 - ------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 5 OTHER EXPENSE ($ IN THOUSANDS)
SECOND QUARTER SIX MONTHS 1996 1995 CHANGE 1996 1995 CHANGE ---- ---- ------ ---- ---- ------ Salaries $ 62,841 $ 57,444 9.4% $125,573 $115,192 9.0% Employee benefits 15,895 13,748 15.6 32,419 28,543 13.6 -------- -------- -------- -------- Total Personnel Expense 78,736 71,192 10.6 157,992 143,735 9.9 Net occupancy 9,599 8,970 7.0 19,341 17,866 8.3 Equipment 12,158 10,771 12.9 23,732 21,266 11.6 Marketing/business development 2,969 3,595 (17.4) 5,288 6,442 (17.9) Postage and freight 5,736 5,071 13.1 11,175 9,759 14.5 Office supplies 3,141 3,204 (2.0) 6,471 6,389 1.3 Communications 2,720 2,541 7.0 5,419 4,802 12.8 Legal and professional 2,573 2,674 (3.8) 5,358 5,360 -- Credit card 3,411 2,645 29.0 7,241 5,251 37.9 FDIC insurance 1,285 7,217 (82.2) 2,541 14,424 (82.4) Foreclosed property expense (554) 131 -- (361) 680 -- Intangible asset amortization 2,740 2,167 26.4 5,386 4,372 23.2 Nonrecurring merger-related expense -- -- -- 41,678 -- -- Other 18,810 15,110 24.5 34,833 30,868 12.8 -------- -------- -------- -------- Total Other Expense $143,324 $135,288 5.9 $326,094 $271,214 20.2 ======== ======== ======== ======== RATIOS Efficiency ratio 55.41% 57.68% 57.50% 57.27% Other expense to average assets 3.15 3.14 3.15 3.17 Excludes nonrecurring merger-related expense. ----------------------------------------------------------------------------------------------------------------------------
Year-to-date salary expenses were 9.0% higher than last year, reflecting the costs of merit increases and employees added in acquisitions accounted for as purchases or poolings without restatement. Benefit costs were up by 13.6% due to the 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 18.6% this year in comparison with 1995. Occupancy and equipment costs through June 30, 1996 increased by 10.1% from the prior year, reflecting the costs of maintaining additional offices and an ongoing program of upgrading systems and equipment to further enhance productivity. Exhibit 5 details the composition of all other operating expenses. The increases in credit card, communications and postage expenses were due primarily to the costs of servicing SBC co-branded credit card customers. FDIC insurance decreased by 82.4% from last year. Exclusive of insurance premiums assessed on approximately $2.1 billion in thrift deposits insured by the SAIF fund, Mercantile affiliates paid the minimum in FDIC insurance during 1996. Intangible asset amortization increased by $1,014,000 or 23.2%, due primarily to the amortization of the goodwill recorded on the Plains Spirit, Metro and Conway acquisitions. RESERVE FOR POSSIBLE LOAN LOSSES The reserve for possible loan losses was $205,687,000 or 1.72% of loans outstanding at June 30, 1996 compared with $201,780,000 or 1.72% at year's end and $200,987,000 or 1.77% at June 30, 1995. The reserve coverage of non-performing loans was 322.71% compared with 245.18% at year-end and 431.32% last June 30. 14 15 - --------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 6 RESERVE FOR POSSIBLE LOAN LOSSES ($ IN THOUSANDS)
SECOND QUARTER SIX MONTHS ENDED JUNE 30 JUNE 30 1996 1995 1996 1995 ---- ---- ---- ---- BEGINNING BALANCE $211,608 $217,302 $201,780 $215,849 PROVISION 10,638 6,683 43,806 20,673 Charge-offs (20,334) (15,012) (52,055) (33,779) Recoveries 3,775 4,014 10,018 8,117 -------- -------- -------- -------- NET CHARGE-OFFS (16,559) (10,998) (42,037) (25,662) Acquired Reserves -- -- 2,138 2,127 Transfer to Mercantile Credit Card Master Trust -- (12,000) -- (12,000) -------- -------- -------- -------- ENDING BALANCE $205,687 $200,987 $205,687 $200,987 ======== ======== ======== ======== LOANS AND LEASES June 30 balance $11,947,615 $11,378,324 $11,947,615 $11,378,324 =========== =========== =========== =========== Average balance $11,855,159 $11,267,705 $11,826,764 $11,187,492 =========== =========== =========== =========== RATIOS Reserve balance to outstanding loans 1.72% 1.77% 1.72% 1.77% Reserve balance to non-performing loans 322.71 431.32 322.71 431.32 Net charge-offs to average loans .56 .39 .71 .46 Earnings coverage of net charge-offs 6.74x 8.64x 3.75x 7.55x ------------------------------------------------------------------------------------------------------------------------------
The year-to-date 1996 provision for possible loan losses was $43,806,000 compared with $20,673,000 last year. The first quarter of 1996 included a nonrecurring merger-related provision of $10,851,000, which was recorded largely to conform the credit policies of the recently acquired entities to those of Mercantile; an additional $10,000,000 in provision was recorded in the first quarter of 1996 to offset an $11,000,000 charge-off of a credit to a St. Louis-based specialty retailer that declared bankruptcy in late 1995. The annualized ratio of net charge-offs to average loans for the first six months of 1996 was .71% compared with .46% last year, while the corresponding net charge-off figures were $42,037,000 and $25,662,000, respectively. The $11,000,000 charge-off mentioned above increased the 1996 annualized ratio of net charge-offs to average loans by 19 basis points. Net credit card charge-offs were $27,859,000 in 1996 versus $20,625,000 last year, and represented 6.71% of average credit card loans compared with 5.15% in 1995. Approximately 38% of the 1996 credit card losses was a result of bankruptcy claims. In the second quarter of 1995, $12,000,000 of the Corporation's loan loss reserve was transferred with the securitized loans to the Mercantile Credit Card Master Trust in conjunction with the May 17, 1995 securitization. Excluding credit card net charge-offs and the $11,000,000 nonrecurring loss, net charge-offs were only $3,178,000 or .05% of average loans for the first six months of 1996. Mercantile evaluates the reserves of all banks on a quarterly basis to ensure the timely charge-off of loans and to determine the adequacy of those reserves. Management believes the consolidated reserve of 1.72% of total loans and 322.71% of non-performing loans as of June 30, 1996 was adequate based on the risks identified at such date in the respective portfolios. NON-PERFORMING ASSETS Non-performing loans (non-accrual and renegotiated loans) were $63,738,000 or .53% of total loans outstanding at June 30, 1996 compared with $81,573,000 or .69% at March 31, 1996 and $46,598,000 or .41% at June 30, 1995. Foreclosed assets at June 30, 1996 were $8,061,000 compared with $10,102,000 at March 31, 1996 and $15,159,000 last year. The ratio of non- performing assets to outstanding loans and foreclosed assets was .60% at June 30, 1996 compared with .77% at March 31, 1996 and .54% last year. 15 16 Non-accrual loans declined by $18,465,000 from the March 31, 1996 level due to a general overall improvement in credit quality and the sale of the Corporation's largest non-accrual loan in the secondary market. In addition, another customer fully paid a $4,500,000 loan that was classified as non- accrual. As of June 30, 1996, Mercantile had only four non-accrual loans with balances in excess of $1,000,000, the largest totaling $2,900,000. As significant, the Corporation held no foreclosed assets with a book value in excess of $700,000 and the three largest have a cumulative book value of less than $2,000,000. All loans classified as renegotiated were paying in accordance with their modified terms at June 30, 1996. Loans past due 90 days and still accruing interest consisted largely of credit card loans, consumer loans and residential real estate mortgage loans. CAPITAL RESOURCES Mercantile maintains a strong capital base which provides a solid foundation for anticipated future asset growth and promotes depositor and investor confidence. Capital management is a continuous process at Mercantile, and is intended to ensure that adequate capital is provided for current needs and anticipated growth. Mercantile's capital position has enabled it to profitably expand its balance sheet, while maintaining capital ratios stronger than those of other quality banking organizations, and well in excess of regulatory standards. - ------------------------------------------------------------------------ EXHIBIT 7 NON-PERFORMING ASSETS ($ IN THOUSANDS)
JUNE 30 DEC. 31 JUNE 30 1996 1995 1995 ------- ------- ------- NON-ACCRUAL LOANS Commercial $ 14,318 $ 39,222 $ 16,680 Real estate--commercial 18,837 17,953 13,958 Real estate--construction 666 342 389 Real estate--residential 22,012 17,327 9,169 Consumer 4,038 4,361 3,329 --------- --------- --------- Total Non-accrual Loans 59,871 79,205 43,525 RENEGOTIATED LOANS 3,867 3,094 3,073 --------- --------- --------- TOTAL NON-PERFORMING LOANS $ 63,738 $ 82,299 $ 46,598 ========= ========= ========= FORECLOSED ASSETS Foreclosed real estate $ 6,120 $ 9,951 $ 12,879 Other foreclosed assets 1,941 2,640 2,280 --------- --------- --------- TOTAL FORECLOSED ASSETS $ 8,061 $ 12,591 $ 15,159 ========= ========= ========= TOTAL NON-PERFORMING ASSETS $ 71,799 $ 94,890 $ 61,757 ========= ========= ========= PAST-DUE LOANS (90 DAYS OR MORE) $ 31,492 $ 27,242 $ 27,137 ========= ========= ========= RATIOS Non-performing loans to outstanding loans .53% .70% .41% Non-performing assets to outstanding loans and foreclosed assets .60 .81 .54 Non-performing assets to total assets .40 .53 .36 - ------------------------------------------------------------------------
At June 30, 1996, shareholders' equity was $1.6 billion, an increase of 7.1% from June 30, 1995. Net earnings retained, as well as stock issued under various employee benefit plans and in acquisitions accounted for as purchases or poolings-of-interests without restatement, increased shareholders' equity. Equity represented 8.91% of assets at June 30, 1996 compared with 8.68% a year ago. The parent company's double leverage ratio, which measures the extent to which the equity capital of its subsidiaries is supported by parent company debt rather than equity, decreased to 106.60% at June 30, 1996 from 107.93% at year-end and 108.60% at June 30, 1995. Exhibit 8 details significant capital ratios and intangible assets. As interest rates declined during 1995, the Corporation recorded a favorable adjustment to equity of $47,494,000 through December 31, 1995 for the available-for-sale investment securities held. In the first six months of 1996, the net fair value adjustment lowered equity by $32,476,000, due - ---------------------------------------------------------------------------------------------- EXHIBIT 8 RISK-BASED CAPITAL ($ IN THOUSANDS)
JUNE 30 DEC. 31 JUNE 30 1996 1995 1995 ------------ ------------ ------------ Capital Tier I $1,480,007 $1,509,061 $1,414,988 Total 1,862,676 1,890,362 1,787,563 Risk-adjusted assets 12,455,742 12,352,966 11,660,639 Tier I capital to risk-adjusted assets 11.88% 12.22% 12.13% Total capital to risk-adjusted assets 14.95 15.30 15.33 Leverage 8.18 8.54 8.26 Double leverage 106.60 107.93 108.60 Long-term debt to total capitalization 16.25 16.57 17.56 Intangible assets $115,855 $110,529 $91,962 - ----------------------------------------------------------------------------------------------
16 17 largely to an increase in longer-term interest rates, thus reducing the equity to assets ratio at June 30, 1996 in comparison with year-end. During the first six months of 1996, Mercantile repurchased 1,050,000 shares of its common stock via a designated broker dealer at an average cost of $45.41 per share. Some of the stock was reissued in the Conway and Metro acquisitions while some was held for reissuance in conjunction with the 1994 Stock Incentive Plan. The 493,000 remaining treasury shares will be reissued in the Peoples State Bank and Today's Bancorp, Inc. transactions. 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. On July 11, 1996, the Board of Directors authorized the repurchase of up to 6,000,000 shares of the Corporation's common stock over the next twelve-month period. This authorization is inclusive of shares to be repurchased in connection with the previously announced pending acquisitions and an odd-lot repurchase program to be offered to Mercantile shareholders who own 99 or fewer shares of the Corporation's common stock. During July 1996, Mercantile repurchased 2,748,600 shares of its common stock via registered broker dealers. The current liquidity level and capital ratios of the Corporation allows for the repurchase of these shares to be substantially funded internally. On April 25, 1996, the Board of Directors declared a cash dividend of $.41 per common share, which was paid July 1, 1996, representing a 39.42% payout of second quarter 1996 earnings. Book value per common share was $25.64 at June 30, 1996 compared with $24.49 a year earlier, an increase of 4.7%. Public debt ratings of the Corporation and Mercantile Bank of St. Louis N.A. are shown in Exhibit 9. - ------------------------------------------------------------------------------------------------------------- EXHIBIT 9 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 MERCANTILE BANK OF ST. LOUIS N.A. Bank Notes A1/P-1 A 6.375% Subordinated Notes, due 2004 A3 A A1 BBB+ 9.000% Mortgage-backed Notes, due 1999 AAA Certificates of Deposit TBW-1 A1/A-2 Letters of Credit TBW-1 A1/A-2 ----------------------------------------------------------------------------------------------------------
17 18 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED QUARTERLY STATEMENT OF INCOME (THOUSANDS EXCEPT PER COMMON SHARE DATA)
1995 1996 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. -------- -------- -------- -------- -------- -------- INTEREST INCOME Interest and fees on loans and leases $246,749 $251,438 $259,097 $263,768 $257,044 $259,105 Investments in debt and equity securities 62,784 62,811 64,016 62,554 63,581 66,811 Short-term investments 4,663 4,851 5,952 5,261 4,615 4,416 -------- -------- -------- -------- -------- -------- Total Interest Income 314,196 319,100 329,065 331,583 325,240 330,332 Tax-equivalent adjustment 4,405 4,230 4,125 3,810 3,921 3,768 -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INTEREST INCOME 318,601 323,330 333,190 335,393 329,161 334,100 INTEREST EXPENSE Deposits 110,577 121,798 130,959 132,529 131,386 127,931 Borrowed funds 31,706 31,905 32,487 28,573 24,118 25,679 -------- -------- -------- -------- -------- -------- Total Interest Expense 142,283 153,703 163,446 161,102 155,504 153,610 -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT NET INTEREST INCOME 176,318 169,627 169,744 174,291 173,657 180,490 PROVISION FOR POSSIBLE LOAN LOSSES 13,990 6,683 8,504 7,353 33,168 10,638 OTHER INCOME Trust 16,717 17,594 17,831 18,609 19,354 20,749 Service charges 18,500 18,820 19,011 19,077 19,272 19,905 Credit card fees 7,069 4,698 3,855 4,068 1,449 8,130 Securitization revenue -- 4,523 8,397 10,085 4,502 3,325 Mortgage banking 2,078 2,340 2,342 4,062 3,120 2,252 Investment banking and brokerage 2,304 2,873 3,194 2,995 3,143 3,216 Securities gains (losses) (54) 2,152 1,678 266 (2,956) 98 Other 16,087 11,910 15,697 14,875 11,400 20,482 -------- -------- -------- -------- -------- -------- Total Other Income 62,701 64,910 72,005 74,037 59,284 78,157 OTHER EXPENSE Personnel expense 72,543 71,192 75,805 79,085 79,256 78,736 Net occupancy and equipment 19,391 19,741 21,239 22,303 21,316 21,757 Other 43,992 44,355 38,862 45,240 82,198 42,831 -------- -------- -------- -------- -------- -------- Total Other Expense 135,926 135,288 135,906 146,628 182,770 143,324 -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 89,103 92,566 97,339 94,347 17,003 104,685 INCOME TAXES Income taxes 29,265 30,449 30,450 33,945 8,517 35,841 Tax-equivalent adjustment 4,405 4,230 4,125 3,810 3,921 3,768 -------- -------- -------- -------- -------- -------- Adjusted Income Taxes 33,670 34,679 34,575 37,755 12,438 39,609 -------- -------- -------- -------- -------- -------- NET INCOME $ 55,433 $ 57,887 $ 62,764 $ 56,592 $ 4,565 $ 65,076 ======== ======== ======== ======== ======== ======== NET INCOME PER COMMON SHARE $.91 $.95 $.99 $.89 $.07 $1.04 SIGNIFICANT RATIOS Return on assets 1.30% 1.35% 1.41% 1.27% .10% 1.43% Return on equity 15.35 15.64 15.75 13.91 1.09 16.15
18 19 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN THOUSANDS)
1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. ----------------- ----------------- ----------------- ----------------- VOLUME RATE VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ -------- ------ -------- ASSETS Earning Assets Loans and leases, net of unearned income Commercial $ 2,802,058 8.67% $ 2,951,939 8.85% $ 3,027,078 8.74% $ 2,994,035 8.66% Real estate--commercial 1,905,988 8.75 1,938,588 9.08 2,017,018 9.04 2,070,714 8.99 Real estate--construction 323,263 8.62 343,408 8.75 331,093 8.99 309,843 9.27 Real estate--residential 3,570,859 7.83 3,675,443 7.98 4,062,840 8.11 4,023,306 8.15 Consumer 1,630,222 8.18 1,629,008 8.55 1,674,574 8.93 1,676,466 8.99 Credit card 874,007 16.16 729,319 15.21 715,349 11.95 788,126 13.45 ----------- ----------- ----------- ----------- Total Loans and Leases 11,106,397 8.93 11,267,705 8.97 11,827,952 8.80 11,862,490 8.93 Investments in debt and equity securities Trading 12,375 5.27 6,907 6.25 4,203 5.42 7,646 5.39 Taxable 3,843,721 5.83 3,814,295 5.92 3,842,518 6.03 3,758,841 6.03 Tax-exempt 469,011 8.42 456,124 8.12 440,220 8.18 427,748 8.08 ----------- ----------- ----------- ----------- Total Investments in Debt and Equity Securities 4,325,107 6.11 4,277,326 6.16 4,286,941 6.25 4,194,235 6.24 Short-term investments 308,670 6.04 318,263 6.10 380,509 6.26 342,903 6.14 ----------- ----------- ----------- ----------- Total Earning Assets 15,740,174 8.10 15,863,294 8.15 16,495,402 8.08 16,399,628 8.18 Non-earning assets 1,268,919 1,351,717 1,343,947 1,374,196 ----------- ----------- ----------- ----------- Total Assets $17,009,093 $17,215,011 $17,839,349 $17,773,824 =========== =========== =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 2,114,066 $ 2,280,010 $ 2,275,567 $ 2,116,886 Interest bearing demand 2,217,850 2.08 2,123,323 2.22 2,088,349 2.24 2,133,652 2.22 Money market accounts 1,736,985 3.70 1,723,328 3.94 1,834,507 4.03 1,902,852 4.06 Savings 1,140,850 2.38 1,106,774 2.37 1,102,394 2.36 1,062,972 2.35 Consumer time certificates under $100,000 4,881,040 4.94 5,011,839 5.41 5,311,979 5.64 5,307,637 5.67 Other time 135,037 5.51 139,721 5.69 135,658 5.76 78,808 9.80 ----------- ----------- ----------- ----------- Total Core Deposits 12,225,828 3.82 12,384,995 4.16 12,748,454 4.34 12,602,807 4.37 Time certificates $100,000 and over 806,918 5.36 912,163 5.88 957,153 5.93 978,293 5.97 Foreign 206,123 6.20 207,590 6.38 206,349 6.21 223,291 6.06 ----------- ----------- ----------- ----------- Total Purchased Deposits 1,013,041 5.53 1,119,753 5.97 1,163,502 5.98 1,201,584 5.99 ----------- ----------- ----------- ----------- Total Deposits 13,238,869 3.98 13,504,748 4.34 13,911,956 4.50 13,804,391 4.54 Short-term borrowings 1,680,362 5.69 1,465,439 5.92 1,529,304 5.86 1,519,706 4.75 Bank notes 106,667 6.26 250,000 6.54 250,000 6.43 250,000 6.24 Long-term debt 327,972 7.52 321,633 7.62 341,550 7.09 338,135 7.85 ----------- ----------- ----------- ----------- Total Acquired Funds 15,353,870 4.30 15,541,820 4.64 16,032,810 4.75 15,912,232 4.67 Other liabilities 210,451 193,131 212,413 234,157 SHAREHOLDERS' EQUITY 1,444,772 1,480,060 1,594,126 1,627,435 ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $17,009,093 $17,215,011 $17,839,349 $17,773,824 =========== =========== =========== =========== SIGNIFICANT RATIOS Net interest rate spread 3.80% 3.51% 3.33% 3.51% Net interest rate margin 4.48 4.28 4.12 4.25 Taxable-equivalent basis.
19 20 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN THOUSANDS)
1996 1995 1996 1ST QTR. 2ND QTR. SIX MONTHS SIX MONTHS ----------------- ----------------- ----------------- ----------------- VOLUME RATE VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ -------- ------ -------- ASSETS Earning Assets Loans and leases, net of unearned income Commercial $ 3,006,310 8.38% $ 3,064,431 8.29% $ 2,877,415 8.76% $ 3,035,370 8.34% Real estate--commercial 2,133,882 8.69 2,119,736 8.60 1,922,378 8.91 2,126,807 8.65 Real estate--construction 300,847 8.99 289,408 9.48 333,396 8.69 295,130 9.23 Real estate--residential 3,833,423 8.14 3,857,914 8.21 3,623,436 7.90 3,845,671 8.18 Consumer 1,691,444 8.84 1,695,275 8.84 1,629,603 8.36 1,693,359 8.84 Credit card 832,458 12.77 828,395 13.30 801,264 15.74 830,427 13.03 ----------- ----------- ----------- ----------- Total Loans and Leases 11,798,364 8.75 11,855,159 8.78 11,187,492 8.95 11,826,764 8.76 Investments in debt and equity securities Trading 7,610 4.99 3,475 5.29 9,626 5.63 5,542 5.09 Taxable 3,854,326 5.98 4,057,430 6.04 3,828,925 5.88 3,955,884 6.01 Tax-exempt 434,268 8.02 414,396 7.94 462,534 8.28 424,330 7.98 ----------- ----------- ----------- ----------- Total Investments in Debt and Equity Securities 4,296,204 6.19 4,475,301 6.21 4,301,085 6.13 4,385,756 6.20 Short-term investments 316,095 5.84 309,687 5.70 313,496 6.07 312,887 5.77 ----------- ----------- ----------- ----------- Total Earning Assets 16,410,663 8.02 16,640,147 8.03 15,802,073 8.12 16,525,407 8.03 Non-earning assets 1,454,584 1,561,982 1,310,548 1,508,282 ----------- ----------- ----------- ----------- Total Assets $17,865,247 $18,202,129 $17,112,621 $18,033,689 =========== =========== =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 2,037,439 $ 2,721,330 $ 2,197,495 $ 2,379,387 Interest bearing demand 2,238,451 2.19 2,231,716 2.12 2,170,326 2.15 2,235,089 2.16 Money market accounts 1,971,778 3.89 2,030,992 3.81 1,730,119 3.82 2,001,386 3.85 Savings 1,073,847 2.29 1,077,854 2.25 1,123,714 2.38 1,075,845 2.27 Consumer time certificates under $100,000 5,358,411 5.59 5,303,994 5.50 4,946,805 5.18 5,331,197 5.54 Other time 39,256 19.88 234,904 3.33 137,391 5.60 137,080 5.70 ----------- ----------- ----------- ----------- Total Core Deposits 12,719,182 4.28 13,600,790 4.12 12,305,850 3.99 13,159,984 4.20 Time certificates $100,000 and over 1,027,545 5.63 993,405 5.51 859,832 5.63 1,010,475 5.57 Foreign 174,667 5.73 152,075 5.58 206,861 6.29 163,371 5.66 ----------- ----------- ----------- ----------- Total Purchased Deposits 1,202,212 5.65 1,145,480 5.52 1,066,693 5.76 1,173,846 5.59 ----------- ----------- ----------- ----------- Total Deposits 13,921,394 4.42 14,746,270 4.26 13,372,543 4.16 14,333,830 4.34 Short-term borrowings 1,434,235 3.94 1,030,693 6.12 1,572,305 5.80 1,232,465 4.85 Bank notes 265,385 5.99 275,000 5.73 178,729 6.44 270,192 5.85 Long-term debt 325,149 7.42 321,894 7.44 324,113 7.57 323,523 7.43 ----------- ----------- ----------- ----------- Total Acquired Funds 15,946,163 4.47 16,373,857 4.50 15,447,690 4.47 16,160,010 4.49 Other liabilities 244,304 216,388 202,415 230,348 SHAREHOLDERS' EQUITY 1,674,780 1,611,884 1,462,516 1,643,331 ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $17,865,247 $18,202,129 $17,112,621 $18,033,689 =========== =========== =========== =========== SIGNIFICANT RATIOS Net interest rate spread 3.55% 3.53% 3.65% 3.54% Net interest rate margin 4.23 4.34 4.38 4.29 Taxable-equivalent basis.
20 21 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: The Registrant filed no Current Reports on Form 8-K during the quarter ended June 30, 1996. 21 22 SIGNATURE Pursuant to the requirements 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 August 7, 1996 /s/ JOHN Q. ARNOLD ----------------------------- --------------------------------- John Q. Arnold Chief Financial Officer 22 23 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- 27 Financial Data Schedule Included herein
23 EX-27 2 ARTICLE 9 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 840,848 64,857 209,502 255 4,428,289 0 0 11,947,615 205,687 18,037,829 14,333,270 1,271,970 239,012 311,772 0 0 289,397 1,317,408 18,037,829 516,149 130,392 9,031 655,572 259,317 309,114 346,458 43,806 (2,858) 326,094 113,999 69,641 0 0 69,641 1.10 1.10 4.29 59,871 31,492 3,867 0 201,780 52,055 10,018 205,687 205,687 0 0 Information only reported at fiscal year-end date.
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