-----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, Cme97VcMDJ6cyha6fRPHCPXSdplCzKpdsl1C8bpvmrcICFH6uSOO/xbUMn94ruex IrGZf3cMkLEiSZdxIEF5RQ== 0000950114-97-000477.txt : 19971113 0000950114-97-000477.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950114-97-000477 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-11792 FILM NUMBER: 97716940 BUSINESS ADDRESS: STREET 1: 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 SEPTEMBER 30, 1997 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, $.01 PAR VALUE, 130,289,361 SHARES OUTSTANDING AS OF THE CLOSE OF BUSINESS ON OCTOBER 31, 1997. THE NUMBER OF SHARES OUTSTANDING HAS BEEN RESTATED TO GIVE EFFECT TO A THREE-FOR-TWO STOCK SPLIT DISTRIBUTED ON OCTOBER 1, 1997. =============================================================================== 2 INDEX PART I--FINANCIAL INFORMATION
PAGE NO. -------- Item 1-- Financial Statements Consolidated Statement of Income Three months and nine months ended September 30, 1997 and 1996 3 Consolidated Balance Sheet September 30, 1997 and 1996, and December 31, 1996 4 Consolidated Statement of Changes in Shareholders' Equity Nine months ended September 30, 1997 and 1996 5 Consolidated Statement of Cash Flows Nine months ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2-- Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II--OTHER INFORMATION Item 6--Exhibits and Reports on Form 8-K 25 Signature 27 Exhibit Index 28
SPECIAL NOTE Certain statements in this report that relate to the plans, objectives or future performance of Mercantile Bancorporation Inc. may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on Management's current expectations. Actual strategies and results in future periods may differ materially from those currently expected because of various risks and uncertainties. 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1997 1996 1997 1996 ---- ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $415,068 $307,512 $1,068,027 $ 911,974 Investments in debt and equity securities Trading 1,640 564 4,440 2,562 Taxable 112,875 71,231 246,824 211,858 Tax-exempt 4,949 5,547 15,467 17,139 -------- -------- ---------- ---------- Total Investments in Debt and Equity Securities 119,464 77,342 266,731 231,559 Due from banks--interest bearing 3,014 1,019 6,050 2,801 Federal funds sold and repurchase agreements 5,016 2,618 11,379 9,989 -------- -------- ---------- ---------- Total Interest Income 542,562 388,491 1,352,187 1,156,323 INTEREST EXPENSE Interest bearing deposits 210,964 145,798 508,884 444,504 Foreign deposits 7,707 2,674 19,146 7,296 Short-term borrowings 50,727 23,410 101,487 59,425 Bank notes 2,687 4,070 7,860 11,979 Long-term debt 18,343 5,922 35,152 18,406 -------- -------- ---------- ---------- Total Interest Expense 290,428 181,874 672,529 541,610 -------- -------- ---------- ---------- NET INTEREST INCOME 252,134 206,617 679,658 614,713 PROVISION FOR POSSIBLE LOAN LOSSES 27,478 12,614 73,616 57,915 -------- -------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 224,656 194,003 606,042 556,798 OTHER INCOME Trust 24,865 21,058 71,688 64,464 Service charges 27,236 22,372 72,625 65,553 Investment banking and brokerage 10,086 7,971 25,828 24,169 Credit card fees 5,649 9,427 16,421 19,310 Securitization revenue 3,357 4,198 15,374 12,025 Mortgage banking 7,378 2,458 12,884 7,919 Securities gains (losses) 2,034 15 4,901 (2,609) Other 22,631 17,055 59,542 51,234 -------- -------- ---------- ---------- Total Other Income 103,236 84,554 279,263 242,065 OTHER EXPENSE Salaries 91,056 74,254 249,795 221,324 Employee benefits 20,320 17,049 57,555 53,312 Net occupancy 15,368 12,608 40,514 36,437 Equipment 16,696 13,506 45,517 39,034 Intangible asset amortization 14,655 2,904 23,637 8,640 Loss on the sale of credit card loans 50,000 -- 50,000 -- Other 108,239 55,099 235,386 183,214 -------- -------- ---------- ---------- Total Other Expense 316,334 175,420 702,404 541,961 -------- -------- ---------- ---------- INCOME BEFORE INCOME TAXES 11,558 103,137 182,901 256,902 INCOME TAXES 8,902 33,995 73,071 92,614 -------- -------- ---------- ---------- NET INCOME $ 2,656 $ 69,142 $ 109,830 $ 164,288 ======== ======== ========== ========== PER COMMON SHARE DATA Average shares outstanding 130,152,828 113,964,249 119,079,189 116,249,358 Net income $.02 $.61 $.92 $1.41 Dividends declared .287 .273 .861 .819 Includes the following nonrecurring amounts: Provision for possible loan losses $ 13,800 $ -- $ 20,340 $ 10,851 Other income (securities losses) -- -- -- (3,082) Loss on the sale of credit card loans 50,000 -- 50,000 -- Other expense 69,530 12,385 121,393 54,063 Income tax benefit (43,379) (4,335) (59,356) (19,934) -------- ------- --------- -------- Impact on Net Income $(89,951) $(8,050) $(132,377) $(48,062) ======== ======== ========= ========= 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)
SEPT. 30 DEC. 31 SEPT. 30 1997 1996 1996 -------- ------- -------- ASSETS Cash and due from banks $ 1,043,236 $ 1,296,053 $ 1,071,543 Due from banks--interest bearing 303,276 96,453 75,163 Federal funds sold and repurchase agreements 171,703 265,498 199,391 Investments in debt and equity securities Trading 137,761 31,272 44,473 Available-for-sale (Amortized cost of $6,868,197, $4,139,525, and $4,428,521, respectively) 6,904,529 4,149,674 4,397,816 Held-to-maturity (Estimated fair value of $280,467, $567,152 and $582,672, respectively) 277,311 565,045 585,067 ----------- ----------- ----------- Total Investments in Debt and Equity Securities 7,319,601 4,745,991 5,027,356 Loans held-for-sale 72,852 66,373 63,943 Loans and leases, net of unearned income 19,047,945 14,886,257 14,207,842 ----------- ----------- ----------- Total Loans and Leases 19,120,797 14,952,630 14,271,785 Reserve for possible loan losses (257,261) (230,372) (233,631) ----------- ----------- ----------- Net Loans and Leases 18,863,536 14,722,258 14,038,154 Bank premises and equipment 448,935 367,311 346,554 Intangible assets 821,726 186,181 126,469 Receivable for credit card loans sold 372,835 -- -- Other assets 635,515 350,634 379,645 ----------- ----------- ----------- Total Assets $29,980,363 $22,030,379 $21,264,275 =========== =========== =========== LIABILITIES Deposits Non-interest bearing $ 3,134,713 $ 3,003,972 $ 3,083,009 Interest bearing 18,308,044 14,080,592 13,563,887 Foreign 669,483 251,887 328,717 ----------- ----------- ----------- Total Deposits 22,112,240 17,336,451 16,975,613 Federal funds purchased and repurchase agreements 2,299,527 1,781,011 1,347,149 Other short-term borrowings 1,472,186 206,253 239,286 Bank notes 175,000 175,000 275,000 Long-term debt 1,019,092 304,831 305,291 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 -- -- Other liabilities 397,639 281,182 297,630 ----------- ----------- ----------- Total Liabilities 27,625,684 20,084,728 19,439,969 Commitments and contingent liabilities -- -- -- SEPT. 30 DEC. 31 SEPT. 30 1997 1996 1996 -------- ------- -------- SHAREHOLDERS' EQUITY Preferred stock--no par value Shares authorized 5,000 5,000 5,000 Shares issued and outstanding -- -- -- -- -- -- Common stock--$.01 par value at September 30, 1997, and $5.00 par value at December 31, 1996 and September 30, 1996 Shares authorized 200,000 200,000 200,000 Shares issued 130,446 118,821 118,280 1,304 594,107 591,400 Capital surplus 939,387 34,956 31,231 Retained earnings 1,393,875 1,392,218 1,342,401 Valuation on available-for-sale securities 25,527 8,571 (4,078) Treasury stock, at cost 157 2,591 4,638 (5,414) (84,201) (136,648) ----------- ----------- ----------- Total Shareholders' Equity 2,354,679 1,945,651 1,824,306 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $29,980,363 $22,030,379 $21,264,275 =========== =========== ===========
4 5 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ($ IN THOUSANDS)
COMMON STOCK --------------------- TOTAL OUTSTANDING PREFERRED CAPITAL RETAINED TREASURY SHAREHOLDERS' SHARES DOLLARS STOCK SURPLUS EARNINGS STOCK EQUITY ----------- ------- --------- ------- ------------ -------- ------------- BALANCE AT DECEMBER 31, 1995 116,815,628 $594,430 $ 12,153 $ 88,284 $1,281,183 $ (60,557) $1,915,493 Net income 164,288 164,288 Common dividends declared: Mercantile Bancorporation Inc.--$.819 per share (76,234) (76,234) Pooled company prior to acquisition (15,017) (15,017) Preferred dividends declared (408) (408) Redemption of preferred stock (12,153) (531) (12,684) Issuance of common stock in acquisitions of: Peoples State Bank 488,756 849 14,791 15,640 Metro Savings Bank, F.S.B. 296,853 57 14 8,983 9,054 Security Bank of Conway, F.S.B. 482,946 75 14,614 14,689 First Sterling Bancorp, Inc. 782,126 3,911 572 13,772 18,255 Issuance of common stock for: Employee incentive plans 285,427 1,057 (2,823) 2,100 334 Convertible notes 409,527 2,048 2,507 4,555 Net fair value adjustment on available-for-sale securities (29,855) (29,855) Purchase of treasury stock (5,847,900) (173,686) (173,686) Reissuance and retirement of treasury stock (9,688) (47,478) 57,166 -- Pre-merger transactions of pooled company and other (71,417) (358) (10,812) 1,111 (59) (10,118) ----------- -------- -------- -------- ---------- --------- ---------- BALANCE AT SEPTEMBER 30, 1996 113,641,946 $591,400 $ -- $ 31,231 $1,338,323 $(136,648) $1,824,306 =========== ======== ======== ======== ========== ========= ========== BALANCE AT DECEMBER 31, 1996 116,229,704 $594,107 $ -- $ 34,956 $1,400,789 $ (84,201) $1,945,651 Net income 109,830 109,830 Common dividends declared: Mercantile Bancorporation Inc.--$.861 per share (95,086) (95,086) Pooled company prior to acquisition (12,812) (12,812) Issuance of common stock in acquisitions of: Roosevelt Financial Group, Inc. 18,948,884 123 353,128 6,872 280,981 641,104 Regional Bancshares, Inc. 900,625 (474) 361 28,813 28,700 Change in par value of common stock from $5.00 per share to $.01 per share (587,001) 587,001 -- Issuance of common stock for: Employee incentive plans 695,266 320 6,166 4,773 11,259 Convertible notes 75,384 80 758 838 Net fair value adjustment on available-for-sale securities 9,451 9,451 Purchase of treasury stock (6,750,199) (285,958) (285,958) Reissuance and retirement of treasury stock (7,396) (42,950) 50,346 -- Pre-merger transactions of pooled company and other 189,697 1,071 802 (3) (168) 1,702 ----------- -------- -------- -------- ---------- --------- ---------- BALANCE AT SEPTEMBER 30, 1997 130,289,361 $ 1,304 $ -- $939,387 $1,419,402 $ (5,414) $2,354,679 =========== ======== ======== ======== ========== ========= ========== Includes valuation on available-for-sale securities.
5 6 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 1997 1996 ---- ---- OPERATING ACTIVITIES Net income $ 109,830 $ 164,288 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 73,616 57,915 Depreciation and amortization 39,137 32,200 Provision for deferred income taxes (credits) (78) (10,401) Net change in loans held-for-sale (6,479) 30,934 Net change in trading securities (147,357) 19,910 Net change in accrued interest receivable (283) 3,644 Net change in accrued interest payable 37,544 (17,376) Other, net (52,297) 97,512 ----------- ---------- Net Cash Provided by Operating Activities 53,633 378,626 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (2,023,967) (1,329,445) Proceeds from maturities 2,051,277 1,225,237 Proceeds from sales of available-for-sale securities 344,937 98,171 Net change in loans and leases (702,073) (545,760) Purchases of loans and leases (248,655) (91,349) Proceeds from sales of loans and leases 411,926 222,323 Purchases of premises and equipment (69,196) (49,999) Proceeds from sales of premises and equipment 3,701 7,979 Proceeds from sales of foreclosed property 36,989 25,651 Cash and cash equivalents from acquisitions, net of cash paid (273,175) 37,240 Sale of banking offices (167,488) (8,821) Other, net 6,143 15,641 ----------- ---------- Net Cash Used by Investing Activities (629,581) (393,132) FINANCING ACTIVITIES Net change in non-interest bearing, savings, interest bearing demand and money market deposit accounts 963,518 482,548 Net change in time certificates of deposit under $100,000 (1,714,159) (315,587) Net change in time certificates of deposit $100,000 and over 12,400 (39,253) Net change in other time deposits (68,623) 194,218 Net change in foreign deposits 417,596 119,547 Net change in short-term borrowings 475,624 (380,687) Issuance of bank notes -- 25,000 Issuance of long-term debt 607,501 2,607 Issuance of company-obligated mandatorily redeemable preferred securities 150,000 -- Principal payments on long-term debt (13,401) (31,975) Cash dividends paid (107,898) (91,659) Proceeds from issuance of common stock 12,685 856 Purchase of treasury stock (297,733) (192,066) Redemption of preferred stock -- (12,684) Other, net (1,351) 1,389 ----------- ---------- Net Cash Provided (Used) by Financing Activities 436,159 (237,746) ----------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS (139,789) (252,252) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,658,004 1,598,349 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,518,215 $1,346,097 =========== ==========
6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A ACCOUNTING POLICIES 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, with the exception of the nonrecurring charges disclosed in Note 1 of the Consolidated Statement of Income on Page 4. Derivative Financial Instruments: Mercantile Bancorporation Inc. ("Mercantile" or "Corporation") is a party to certain financial instruments, primarily to stabilize interest rate margins and to hedge against interest rate movements. An instrument designated to hedge an asset or liability carried at cost is accounted for on an accrual basis, in which the interest income or interest expense of the related asset or liability is adjusted for the net amount of any interest receivable or payable generated by the hedging instrument. There is no market valuation on these interest rate contracts. If the underlying assets or liabilities hedged are no longer recorded on the Consolidated Balance Sheet (e.g., due to sale), the gain or loss related to the interest rate contract is recognized through earnings immediately. In the normal course of business, the Corporation does not maintain trading positions in interest rate derivative financial instruments. The Corporation's non-hedging transactions are 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. These contracts are recorded at their fair value with gains or losses included in the Consolidated Statement of Income. Mercantile has entered into foreign exchange forward contracts, primarily to facilitate customers' foreign exchange requirements. The Corporation maintains a generally matched position; therefore, exchange rate and market risks are minimal. Credit risk to the Corporation could result from non-performance by a counterparty to a contract. Credit risk is managed as indicated in the previous paragraph. Unrealized gains and losses on these foreign exchange forward contracts are reflected in the Consolidated Statement of Income. NOTE B NEW ACCOUNTING STANDARDS Financial Accounting Standard ("FAS") 128, "Earnings per Share," was issued in February 1997. This statement is effective in the fourth quarter of 1997 and requires additional reporting of earnings per share which gives effect to dilutive common share equivalents such as stock options or convertible notes. The Corporation does not anticipate a significant impact when reporting diluted earnings per share. FAS 130, "Reporting Comprehensive Income," and FAS 131, "Disclosures about Segments of an Enterprise and Related Information," were issued in June 1997. Disclosures prescribed in FAS 130 and FAS 131 will be required for periods beginning after December 15, 1997. Additionally, in January 1997 the Securities and Exchange Commission issued Release No. 33-7386 relating to derivatives and exposures to market risk from derivative and other financial instruments. The market risk disclosures are required commencing with the Corporation's 1997 Annual Report on Form 10-K. Mercantile is currently evaluating the impact of FAS 130, FAS 131 and Release No. 33-7386 on future financial statement disclosures. 7 8 NOTE C ACQUISITIONS Effective April 25, 1997, the Corporation acquired Mark Twain Bancshares, Inc. ("Mark Twain"), a $3.2 billion-asset bank holding company headquartered in St. Louis, Missouri. The Mark Twain 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 Mark Twain prior to the pooling-of-interests were as follows:
(THOUSANDS EXCEPT PER COMMON SHARE DATA) THREE MONTHS NINE MONTHS ENDED ENDED SEPT. 30, SEPT. 30, 1996 1996 ------------ ----------- MERCANTILE Net income $55,676 $125,317 Net income per common share .61 1.34 MARK TWAIN Net income $13,466 $ 38,971 Primary earnings per share .83 2.38
On July 1, 1997, the Corporation acquired Roosevelt Financial Group, Inc. ("Roosevelt"), a $7.3 billion-asset thrift holding company headquartered in St. Louis, Missouri. The Roosevelt acquisition was accounted for as a purchase. Unaudited pro forma combined consolidated financial data including the Corporation and Roosevelt as of or for the nine months ending September 30, 1997 and 1996 is disclosed 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 consideration; and 2) interest on $650 million of senior debt, subordinated debt and redeemable preferred securities issued in 1997 largely to finance the Roosevelt acquisition, offset by interest earned on funds not utilized in the acquisition.
(THOUSANDS EXCEPT PER COMMON SHARE DATA) AS OF OR FOR THE NINE MONTHS ENDED SEPT. 30, SEPT. 30, 1997 1996 --------------- --------------- Total assets $31,081,791 Net interest income $790,591 781,963 Other income 266,689 273,662 Net income 69,261 153,904 Net income per common share .54 1.19
NOTE D COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE CAPITAL TRUST I Mercantile Capital Trust I is a wholly-owned subsidiary of the Corporation; its sole assets are the $150,000,000 in mandatorily redeemable preferred securities, and considered together, the back-up undertakings constitute a full and unconditional guarantee by Mercantile Bancorporation Inc. of the trust's obligations under the preferred securities. 8 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ----------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 1 HIGHLIGHTS
THIRD QUARTER NINE MONTHS ($ IN THOUSANDS EXCEPT PER COMMON SHARE DATA) 1997 1996 CHANGE 1997 1996 CHANGE - ---------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Net income $ .02 $ .61 (96.7)% $ .92 $ 1.41 (34.8)% Dividends declared .287 .273 5.1 .861 .819 5.1 Book value at September 30 18.07 16.05 12.6 18.07 16.05 12.6 Market price at September 30 50 3/4 34 11/16 46.3 50 3/4 34 11/16 46.3 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS AND SELECTED RATIOS EXCLUDING NONRECURRING EXPENSE Adjusted net income $92,607 $77,192 20.0% $242,207 $212,350 14.1% Adjusted net income per common share .71 .68 4.4 2.03 1.82 11.5 Return on assets 1.24% 1.47% 1.31% 1.35% Return on equity 15.26 16.81 15.69 14.97 Efficiency ratio 54.80 55.23 54.71 55.94 Other expense to average assets 2.63 3.11 2.86 3.10 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Taxable-equivalent net interest income $255,875 $210,640 21.5% $691,270 $626,976 10.3% Tax-equivalent adjustment 3,741 4,023 (7.0) 11,612 12,263 (5.3) Net interest income 252,134 206,617 22.0 679,658 614,713 10.6 Provision for possible loan losses 27,478 12,614 -- 73,616 57,915 27.1 Other income 103,236 84,554 22.1 279,263 242,065 15.4 Other expense 316,334 175,420 80.3 702,404 541,961 29.6 Income taxes 8,902 33,995 (73.8) 73,071 92,614 (21.1) Net income 2,656 69,142 (96.2) 109,830 164,288 (33.1) - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS AND DATA Return on assets .04% 1.32% .59% 1.05% Return on equity .44 15.06 7.12 11.58 Efficiency ratio 88.09 59.43 72.37 62.36 Other expense to average assets 4.23 3.35 3.79 3.45 Net interest rate margin 3.71 4.32 4.08 4.33 Tier I capital to risk-adjusted assets 8.66 11.12 Total capital to risk-adjusted assets 12.06 13.87 Leverage 5.88 8.03 Tangible equity to tangible assets 5.26 8.03 Equity to assets 7.85 8.58 Reserve for possible loan losses to outstanding loans 1.35 1.64 Reserve for possible loan losses to non-performing loans 221.85 356.05 Non-performing loans to outstanding loans .61 .46 Banks 25 42 Banking offices 583 481 Full-time equivalent employees 9,402 8,652 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Total assets $29,933,772 $20,952,533 42.9% $24,717,869 $20,954,358 18.0% Earning assets 27,328,250 19,410,578 40.8 22,652,557 19,323,264 17.2 Loans and leases 19,549,835 14,076,883 38.9 16,627,096 13,908,580 19.5 Deposits 22,270,869 16,839,551 32.3 18,979,581 16,740,662 13.4 Shareholders' equity 2,426,843 1,836,700 32.1 2,057,835 1,891,571 8.8 - ----------------------------------------------------------------------------------------------------------------------------------- All previously reported financial information has been restated to reflect the April 25, 1997 merger with Mark Twain Bancshares, Inc., which was accounted for as a pooling-of-interests. All per share amounts have been restated to give effect to a three-for-two stock split that was distributed on October 1, 1997. Nonrecurring expense reduced net income in the first nine months of 1997 and 1996 by $132,377,000 and $48,062,000, respectively. Includes nonrecurring expense noted in (2) above. - ------------------------------------------------------------------------------------------------------------------------------------
9 10 PERFORMANCE SUMMARY Net income for Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") for the third quarter of 1997 was $2,656,000 versus $69,142,000 earned in the same period a year ago. Net income per common share was $.02 in the third quarter of 1997 and $.61 in the third quarter of 1996. Year-to-date net income and net income per common share was $109,830,000 and $.92 in 1997, compared with $164,288,000 and $1.41 in 1996. To allow comparison of the fundamental financial performance of Mercantile, it is helpful to exclude certain one-time charges from the results of operations of both years. The Corporation recorded one-time acquisition costs for Roosevelt Financial Group, Inc. ("Roosevelt") in the third quarter of 1997, and for both Mark Twain Bancshares, Inc. ("Mark Twain") and Regional Bancshares, Inc. in the second quarter of 1997. Last year, similar expenses were recorded for the four acquisitions noted in Exhibit 3 that closed during the first quarter of 1996. Another one-time expense resulted in a pre-tax charge to earnings of $50,000,000 in the third quarter of 1997. The Corporation sold $405 million in former co-branded credit card receivables to Direct Merchants Credit Card Bank, N.A. ("Direct Merchants") at a discount. This sale was announced on September 25, 1997 and closed on October 17, 1997. A final nonrecurring expense was recorded in the third quarter of 1996 when 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. This one-time assessment totaled $12,385,000. Exhibit 2 presents "adjusted" results, which represents reported net income as adjusted for one-time costs in both years. - -------------------------------------------------------------------------------- EXHIBIT 2 ADJUSTED RESULTS
EARNINGS NET INCOME PER COMMON RETURN ON (THOUSANDS) SHARE ASSETS ----------- ---------- --------- THIRD QUARTER ENDED SEPTEMBER 30, 1997: REPORTED $ 2,656 $ .02 .04% ACQUISITION EXPENSES 57,451 .44 .77 LOSS ON THE SALE OF CREDIT CARD LOANS 32,500 .25 .43 -------- ----- ---- ADJUSTED $ 92,607 $ .71 1.24% ======== ===== ==== NINE MONTHS ENDED SEPTEMBER 30, 1997: REPORTED $109,830 $ .92 .59% ACQUISITION EXPENSES 99,877 .84 .54 LOSS ON THE SALE OF CREDIT CARD LOANS 32,500 .27 .18 -------- ----- ---- ADJUSTED $242,207 $2.03 1.31% ======== ===== ==== Third quarter ended September 30, 1996: Reported $ 69,142 $ .61 1.32% Special SAIF assessment 8,050 .07 .15 -------- ----- ---- Adjusted $ 77,192 $ .68 1.47% ======== ===== ==== Nine months ended September 30, 1996: Reported $164,288 $1.41 1.05% Acquisition expenses 40,012 .34 .25 Special SAIF assessment 8,050 .07 .05 -------- ----- ---- Adjusted $212,350 $1.82 1.35% ======== ===== ==== - --------------------------------------------------------------------------------
Mercantile's largest acquisition to date, with St. Louis-based Roosevelt, closed on July 1, 1997 and was accounted for under the purchase method of accounting. As such, historical financial statements were not restated. Sections which follow explain in further detail Roosevelt's impact on the Corporation's earnings, the reserve for possible loan losses, non-performing assets and capital resources. Other acquisitions completed since January 1, 1996 and two previously announced and pending acquisitions are noted on Exhibit 3. All prior figures have been restated to include the pre-acquisition accounts and results of operations of Mark Twain, which was merged with Mercantile on April 25, 1997 in a transaction accounted for as a pooling-of-interests. Additionally, on July 16, 1997 the Board of Directors declared a three-for-two stock split, in the form of a dividend, that was distributed on October 1, 1997. All per common share amounts in this Management's Discussion and Analysis have been restated to reflect this stock split. After excluding the nonrecurring items detailed above, adjusted net income for the third quarter of 1997 was $92,607,000, 20.0% higher than 1996 quarterly adjusted net income of $77,192,000. On a per common share basis, adjusted net income was $.71 compared with $.68 last year, an improvement of 4.4%. Roosevelt's net income approximated $25,500,000 in the 10 11 --------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 3 ACQUISITIONS ($ IN THOUSANDS)
CONSIDERATION -------------------- GROSS ACCOUNTING DATE ASSETS DEPOSITS CASH SHARES METHOD ---- ------ -------- ---- ------ ---------- ACQUISITIONS COMPLETED Roosevelt Financial Group, Inc. Jul. 1, 1997 $7,251,985 $5,317,514 $374,477 18,948,884 Purchase Mark Twain Bancshares, Inc. Apr. 25, 1997 3,227,972 2,519,474 73 24,088,713 Pooling Regional Bancshares, Inc. Mar. 5, 1997 171,979 135,954 12,300 900,625 Purchase Today's Bancorp, Inc. Nov. 7, 1996 501,418 432,104 34,912 1,690,587 Purchase First Financial Corporation of America Nov. 1, 1996 87,649 76,791 3,253 388,113 Purchase Peoples State Bank Aug. 22, 1996 95,657 75,149 -- 488,756 Purchase Metro Savings Bank, F.S.B. Mar. 7, 1996 80,857 73,843 5 296,853 Purchase Security Bank of Conway, F.S.B. Feb. 9, 1996 102,502 89,697 1 482,946 Purchase Hawkeye Bancorporation Jan. 2, 1996 1,978,540 1,739,811 80 11,838,294 Pooling First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 147,588 1 782,126 Pooling ACQUISITIONS PENDING AT SEPT. 30, 1997 Horizon Bancorp, Inc. 1st Qtr. 1998 550,679 470,385 -- 2,550,000 Pooling HomeCorp, Inc. 2nd Qtr. 1998 326,877 299,148 -- 951,380 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 those of Mercantile. Estimated number of shares to be issued in acquisition. --------------------------------------------------------------------------------------------------------------------------------
third quarter of 1997, partially offset by goodwill amortization of $10,089,000 related to the Roosevelt transaction and acquisition funding costs. Year-to-date adjusted net income in 1997 was $242,207,000, an increase of 14.1% over 1996's $212,350,000. Net income per common share was $2.03 versus $1.82 last year, an increase of 11.5%. Since there was a significant amount of goodwill added to the Corporation's balance sheet in conjunction with the purchase of Roosevelt, it is meaningful to review cash based earnings, which excludes intangible asset amortization. In the first nine months of 1997, cash based adjusted net income per common share was $2.22, up 17.5% from the $1.89 earned in 1996. See Exhibit 4 for other cash based performance ratios and similar favorable comparisons to 1996. --------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 4 CASH BASED EARNINGS ($ IN THOUSANDS EXCEPT PER COMMON SHARE DATA)
THIRD QUARTER NINE MONTHS 1997 1996 CHANGE 1997 1996 CHANGE ---- ---- ------ ---- ---- ------ Adjusted net income $ 92,607 $77,192 20.0% $242,207 $212,350 14.1% Add back: Goodwill amortization 13,299 1,979 -- 19,472 5,823 -- Other intangible asset amortization 1,356 925 46.6 4,165 2,817 47.9 -------- ------- -------- -------- Total Intangible Asset Amortization 14,655 2,904 -- 23,637 8,640 -- Less: Tax effect (447) (336) 33.0 (1,369) (1,001) 36.8 -------- ------- -------- -------- Cash Based Adjusted Net Income $106,815 $79,760 33.9 $264,475 $219,989 20.2 ======== ======= ======== ======== Average Common Shares Outstanding 130,152,828 113,964,249 14.2 119,079,189 116,249,358 2.4 Cash Based Adjusted Earnings per Common Share $.82 $.70 17.1 $2.22 $1.89 17.5 CASH BASED ADJUSTED PERFORMANCE RATIOS Return on tangible assets 1.47% 1.53% 1.45% 1.41% Return on tangible equity 26.88 18.63 21.39 16.53 Efficiency ratio 50.72 54.25 52.28 54.95 Other expense to average tangible assets 2.50 3.08 2.78 3.07 -------------------------------------------------------------------------------------------------------------------------------
11 12 Net interest income increased 22.0% to $252,134,000 for the third quarter of 1997 and 10.6% to $679,658,000 for the first nine months of 1997. The net interest rate margin in the third quarter of 1997 declined to 3.71% from historical levels in the 4.30% range. The year-to-date margin was 4.08% in 1997 compared with 4.33% in 1996 as it was negatively affected by the Roosevelt third quarter acquisition. The acquisition of Roosevelt had a significant effect on the Corporation's mix of earning assets and costing sources of funds. Average earning assets for the first nine months of 1997 of $22.7 billion were 17.2% higher than last year. The Roosevelt acquisition added $2.2 billion to average earning assets for the first nine months of 1997, accounting for a significant part of the growth in earning assets. Other income was $103,236,000 for the third quarter of 1997, an increase of $18,682,000 or 22.1% from a year ago. Growth in core fee businesses and the impact of Roosevelt on service charges and mortgage banking revenue largely accounted for the increase. For the first nine months of 1997, other income was $279,263,000, an improvement of $37,198,000 or 15.4% from last year. Third quarter non-interest expenses were up 80.3% from a year ago and totaled $316,334,000 compared with $175,420,000 last year, and year-to-date were $702,404,000, up 29.6%. Other expense in the third quarter of 1997 included nonrecurring merger-related expenses of $69,530,000 and the $50,000,000 loss on the sale of former co-branded credit card loans. Expenses for the third quarter of 1996 reflected the one-time SAIF assessment of $12,385,000 discussed earlier. Excluding these items from both years, quarter-to-date 1997 other expenses increased by 20.7% over 1996. Year-to-date adjusted expense, which excludes nonrecurring other expense, was 8.8% higher than last year. The provision for possible loan losses for the third quarter of 1997 was $27,478,000 compared with $12,614,000 the prior year, and was $73,616,000 for the first nine months of 1997 compared with $57,915,000 in 1996. Nonrecurring merger-related provision of $13,800,000 was recorded in the third quarter of 1997 in addition to the $6,540,000 included in the second quarter of this year. The provision for possible loan losses in 1996 was affected by $10,851,000 in nonrecurring first quarter merger-related provision and $10,000,000 recorded to offset a charge-off on a specialty retailer credit. Year-to-date net charge-offs for 1997 and 1996 were $66,959,000 and $59,756,000, respectively, and on an annualized basis totaled .54% of average loans compared with .57% last year. At September 30, 1997, the reserve for possible loan losses was $257,261,000 and provided coverage of 221.85% of non-performing loans compared with 318.99% at year-end and 356.05% last year. Non-performing assets as of September 30, 1997 were $169,989,000 or .57% of total assets, compared with $96,919,000 or .42% at June 30, 1997, and $82,436,000 or .39% at September 30, 1996. An increase of $20,392,000 in non-performing loans was attributable to Roosevelt. Additionally, there were $35,599,000 in investment securities classified as non-performing assets, primarily acquired with the Roosevelt transaction, which incurred a change in value that is considered an "other than temporary" impairment. Foreclosed assets were $18,430,000 compared with $13,497,000 at June 30, 1997 and $15,579,000 last September 30. Consolidated assets of $30.0 billion were up 41.0% from last September 30. Core deposits increased by 28.1% to $19.9 billion; loans were $19.1 billion, up 34.0% from last year; and shareholders' equity of $2.4 billion was 29.1% higher than at September 30, 1996. All measures of capital adequacy remained adequate. Tier I capital to risk-adjusted assets was 8.66% while Total capital to risk-adjusted assets at September 30, 1997 was 12.06%. The ratio of tangible equity to tangible assets was 5.26% at September 30, 1997. The Corporation is committed to raising this ratio to exceed 6.00% by the end of 1998. The following financial commentary presents a more thorough discussion and analysis of the results of operations and financial condition of the Corporation for the third quarter and first nine months of 1997. NET INTEREST INCOME Net interest income for the third quarter of 1997 was $252,134,000, a $45,517,000 or 22.0% increase from the $206,617,000 earned last year, and for the first nine months of 1997 was $679,658,000, a $64,945,000 or 10.6% improvement from last year. Net interest income for both the third quarter and first nine months of 1997 attributable to the Roosevelt acquisition 12 13 was $46,400,000. Excluding Roosevelt, third quarter net interest income was .4% lower than last year while year-to-date net interest income improved over last year by 3.0%. As previously indicated, the acquisition of Roosevelt caused a significant shift in the mix of earning assets and funding sources. This shift and the cost of the debt issued to acquire Roosevelt caused a 59 basis-point decline in Mercantile's quarterly net interest rate margin from the second quarter of 1997. Lower- yielding residential real estate mortgage loans as a percentage of earning assets increased from 21.18% in the second quarter of 1997 to 30.18% in the third quarter of 1997; likewise, the ratio of higher-cost consumer time certificates under $100,000 to total core deposits increased from 38.76% to 45.91%. Since the Roosevelt acquisition closed on July 1, 1997, these ratios will continue to change and will have an unfavorable impact on the net interest rate margin when compared to prior periods as the interest spreads between these dominant uses and sources of Roosevelt funds are narrower than typical bank products. The decline in the net interest rate margin in 1997 was also attributable to continued competitive pricing for both loans and deposits, the interest expense incurred on recent debt issues, a greater dependence on wholesale funding than in 1996 and higher levels of non-performing assets. - -------------------------------------------------------------------------- EXHIBIT 5 LOANS AND LEASES ($ IN THOUSANDS)
SEPTEMBER 30 1997 1996 CHANGE ---- ---- ------ Commercial $ 4,364,873 $ 3,939,894 10.8% Real estate--commercial 2,938,841 2,760,383 6.5 Real estate--construction 713,937 551,993 29.3 Real estate--residential mortgage 8,300,206 4,032,794 -- Real estate--home equity credit lines 505,956 368,647 37.2 Consumer 2,001,806 1,763,297 13.5 Credit card loans managed 695,178 1,254,777 (44.6) Securitized credit card loans (400,000) (400,000) -- ----------- ----------- Total Loans and Leases $19,120,797 $14,271,785 34.0 =========== =========== - --------------------------------------------------------------------------
Investment securities averaged $5.6 billion in the first nine months of 1997, and increased by $521,488,000 or 10.2% from 1996. The Roosevelt acquisition increased quarterly average investment securities by $2.5 billion between the second and third quarters of 1997. The held-to-maturity and available-for-sale portfolio as of September 30, 1997 consisted of 60.58% in U.S. and other government agency securities, including 28.67% in mortgage-related issues, 6.12% in state and municipal securities and 33.30% of other miscellaneous securities. The comparable distribution at September 30, 1996 was 86.57%, 31.48%, 10.46% and 2.97%, respectively. The change in the mix of the investment portfolio from the prior year was primarily attributable to Roosevelt, which owned a higher concentration of government and privately issued mortgage-backed securities and collateralized mortgage obligations. The privately issued collateralized mortgage obligations are included in miscellaneous securities. Also included in other miscellaneous securities as of September 30, 1997 was $105,226,000 transferred from the credit card loan portfolio in accordance with Financial Accounting Standard ("FAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Affecting loan growth figures from 1996 to 1997 is the amount of loans added from the Roosevelt acquisition. Year-to-date average loans grew by approximately 9.7% excluding those from the acquisition. Including acquired balances, year-to-date average commercial loans grew by $501,325,000 or 13.0%. The Corporation experienced commercial loan growth on a system-wide basis. Average commercial real estate mortgage loans increased by $126,258,000 or 4.5%. The Corporation does not engage in lending to emerging markets, including those in Latin America and in the Asian Pacific region. Residential real estate mortgage loans averaged $5.6 billion in the first nine months of 1997, an increase of $1.8 billion or 48.1% from 1996. The Roosevelt purchase acquisition added approximately $3.8 billion to the Corporation's residential real estate mortgage loan portfolio as of September 30, 1997. These residential mortgage loans added from the acquisition, as well as continued customer preference for adjustable-rate mortgages that Mercantile generally retains on the balance sheet, accounted for the increase. Home equity credit lines averaged $421,641,000 in the first nine months of 1997, a 14.1% increase over the prior year. Average credit card loans were $753,385,000, which reflected a managed decline and the September 1997 transfer of the balance of loans sold to Direct Merchants to a receivable account that was not included in the Corporation's loan totals. Other consumer loans increased on average by $166,868,000 or 9.6%, due primarily to growth in indirect loans and leases. Mercantile does not engage in sub-prime consumer lending in its own loan portfolio. 13 14 Average core deposits increased by $1.8 billion or 11.6% in the first nine months of 1997. The Roosevelt acquisition added $1.6 billion to average core deposits. This was offset by the reduction of approximately $167 million in deposits sold in conjunction with the federally mandated divestiture of certain branch offices. Mercantile remained substantially core funded at 90.54% of total deposits and 75.86% of earning assets for the first nine months of 1997 versus 91.94% and 79.65%, respectively, in 1996. Changes in average core deposits for the past seven quarters are shown in the Consolidated Quarterly Average Balance Sheet on Pages 23 and 24 of this report. Average non-interest bearing deposits increased by $137,078,000 or 4.8% through the first nine months of 1997. The United States Government is a significant cash management customer of Mercantile Bank N.A. and pays for services rendered via compensating balances. In the first quarter of 1996, the government withdrew approximately $400,000,000 of such compensating balances to help finance its funding requests due to the lack of an approved 1996 fiscal budget at that time. Revenue accruals were made in 1996 to record the benefit of those missing deposits to better match revenue with services delivered. These balances were redeposited in the second quarter of 1996, but the average balances for the first nine months of 1996 were lower as a result. Year-to-date average short-term borrowings increased by 70.5%, which was caused by the addition of Roosevelt's short-term FHLB advances and an increase in federal funds purchased. Roosevelt's short-term borrowings increased the year-to-date average by approximately $395,000,000. Average long-term debt increased by $360,598,000 due to the issuance of $150,000,000 of floating-rate capital trust securities in February 1997 and the June 1997 issuance of $500,000,000 in senior and subordinated debt. The factors 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 23 and 24. OTHER INCOME Non-interest income increased 22.1% during the third quarter of 1997 to $103,236,000, and for the nine month period was $279,263,000 compared with $242,065,000 a year ago, an improvement of 15.4%. --------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 6 OTHER INCOME ($ IN THOUSANDS)
THIRD QUARTER NINE MONTHS 1997 1996 CHANGE 1997 1996 CHANGE ---- ---- ------ ---- ---- ------ Trust $24,865 $21,058 18.1% $ 71,688 $ 64,464 11.2% Service charges 27,236 22,372 21.7 72,625 65,553 10.8 Investment banking and brokerage 10,086 7,971 26.5 25,828 24,169 6.9 Credit card fees 5,649 9,427 (40.1) 16,421 19,310 (15.0) Securitization revenue 3,357 4,198 (20.0) 15,374 12,025 27.9 Mortgage banking 7,378 2,458 -- 12,884 7,919 62.7 Securities gains 2,034 15 -- 4,901 473 -- Nonrecurring merger-related securities losses -- -- -- -- (3,082) -- Other 22,631 17,055 32.7 59,542 51,234 16.2 -------- ------- -------- -------- Total Other Income $103,236 $84,554 22.1 $279,263 $242,065 15.4 ======== ======= ======== ======== --------------------------------------------------------------------------------------------------------------------------------
The first quarter of 1996 was negatively impacted by securities losses of $3,082,000 incurred by recently acquired banks in investment portfolio restructurings. The second quarter of 1996 was favorably influenced by a $10,000,000 gain on the transfer of the Corporation's merchant processing business. The second and third quarters of 1996 each included $4,000,000 in reimbursements for co-branded credit card start-up costs; no such payments were received in 1997. Pre-tax 14 15 gains on the sale of leveraged leases of $3,542,000 were included in the third quarter 1996 results. In the first quarter of 1997, a $2,300,000 gain was recognized on the sale of Mark Twain's merchant credit card processing business. The first three quarters of 1997 also included $4,901,000 in securities gains. Excluding all of these items, non-interest income grew by $48,457,000 or 21.7% for the first nine months of 1997. Year-to-date trust fees were $71,688,000 compared with $64,464,000 during 1996, an increase of 11.2%. Personal trust fees earned by Mercantile Trust Company N.A. were the largest source of trust revenue and increased 19.9% from last year. Income from Mississippi Valley Advisors Inc., the investment management subsidiary of Mercantile, rose by 29.9%. Mississippi Valley Advisors Inc. manages 16 proprietary mutual funds--the ARCH funds, which had assets of $3.5 billion at September 30, 1997. Increases in the value of assets managed and successful new business development efforts largely accounted for the 1997 growth in trust fees. This has been partially offset by the absence of fees from the indenture trust and agency business, which was sold in the fourth quarter of 1996. Indenture trust and agency fees totaled $2,641,000 in the first nine months of 1996. Service charge income of $27,236,000 was up 21.7% for the third quarter and increased by 10.8% in the first nine months of 1997. Roosevelt added $7,300,000 to the Corporation's deposit service charges during the third quarter and first nine months of 1997, thereby accounting for the growth. Year-to-date mortgage banking income increased by $4,965,000 or 62.7%. Mortgages serviced totaled $13.9 billion at September 30, 1997 compared with $5.8 billion at September 30, 1996. Roosevelt added $8.4 billion to servicing volume, which increased servicing fees by $4,176,000 in the third quarter and first nine months of 1997. Year-to-date investment banking and brokerage fees were $25,828,000 compared with $24,169,000 last year, an increase of 6.9%. 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. There was a $780,000 decline in commission income earned on fixed income securities in 1997, due mainly to the compressed yield curve. If $1,854,000 in revenue attributable to Roosevelt during the third quarter of 1997 is excluded, investment banking and brokerage revenue is down .8% from the first nine months of 1996. Credit card fee income was $5,649,000 for the third quarter of 1997, down 40.1% from last year. For the first nine months of 1997, credit card income was $16,421,000 or 15.0% lower than the comparable 1996 period. The year-to-date 1996 results included the reimbursement of $8,000,000 for co-branded credit card start-up costs previously mentioned. Credit card income primarily represents interchange fees received on transactions of Mercantile cardholders and cardholders' miscellaneous fees. This source of income in 1996 included $4,045,000 in fees charged to merchants for processing credit card transactions. The Mercantile business was sold in the second quarter of 1996 and the Mark Twain operation was sold in the first quarter of 1997. Transaction-based rebates paid to SBC Communications Inc. and MercRewards VISA(R) cardholders were netted against credit card fee income; these rebates totaled $3,381,000 in the first nine months of 1997 versus $16,996,000 in 1996. By terms of its sale agreement with Direct Merchants, Mercantile will be reimbursed for its cost to service the co-branded cards that were sold effective September 25, 1997. Securitization revenue for the first nine months of 1997 was $15,374,000 compared with $12,025,000 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, as well as amounts recognized under FAS 125 for investor certificate loans that were sold and reclassified to the investment portfolio. No former co-branded loans were included 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 15 16 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. Miscellaneous income of $59,542,000 was 16.2% higher than in 1996. Excluding the one-time gains previously mentioned from both years, year-to-date miscellaneous income increased by 51.9% over the first nine months of 1996. Significant revenue items in 1997 included a $10,670,000 improvement in cash management fees, due partially to the timing of receipts in the fourth quarter of 1996 and first nine months of 1997. Securities gains of $4,901,000 were realized on the sale of available-for-sale investment securities during the first nine months of 1997 compared with $473,000 in gains last year. OTHER EXPENSE Expenses other than interest expense and the provision for possible loan losses for the third quarter of 1997 were $316,334,000 compared with $175,420,000 in the prior year. For the first nine months of 1997, total other expenses were $702,404,000, a 29.6% increase from the 1996 level. Included in other expense in the first nine months of 1997 was $121,393,000 in nonrecurring expenses, largely associated with the Mark Twain and Roosevelt mergers, for: 1) investment banking and other professional services; 2) change in control and severance payments; 3) contract penalties; 4) a loss incurred on the sale of unnecessary Roosevelt interest rate floors; 5) write-downs of duplicative branches and equipment held for sale to fair market value; 6) transition and duplicative costs related to systems, etc.; and 7) other adjustments to conform the acquirees' accounting policies to those of Mercantile. Nonrecurring merger-related expense of a similar nature which totaled $41,678,000 was recorded in the first nine months of 1996. On September 25, 1997, the Corporation announced the sale of its former co-branded credit card loans to Direct Merchants. The terms of the sale contract resulted in a pre-tax loss of $50,000,000, which represented the discount on the loan balances, the write-off of an intangible asset associated with the cards, investment banking fees and accruals for severance and other expenses. Adjusted other expense, which excludes the nonrecurring merger-related costs, the co-branded credit card loss and the September 1996 special SAIF assessment, was $531,011,000 for the first nine months of 1997 compared with $487,898,000 in 1996, an increase of 8.8%. Adjusted other expense as a percentage of average assets improved to 2.86% versus 3.10% in 1996. The efficiency ratio, defined as adjusted operating expenses as a percentage of taxable-equivalent net interest income and other income, was 54.71% compared with 55.94% last year. Operating expense from the Roosevelt acquisition and from other 1996 and 1997 acquisitions accounted for as purchases increased the Corporation's expenses by more than $31,000,000. If such expenses from acquired entities are excluded from the adjusted total, non-interest expense for the first nine months of 1997 was approximately 2% higher than last year. Year-to-date personnel expenses were $32,714,000 or 11.9% higher than last year, largely reflecting the costs of merit increases and compensation for employees added in acquisitions. Roosevelt added approximately $10,000,000 to personnel expense in the third quarter and first nine months of 1997, thereby accounting for nearly one-third of the growth. Also, expenses of $3,000,000 were incurred on compensation plans based on the market value of Mercantile's common stock, which has increased by 46.3% from September 30, 1996. Occupancy and equipment costs through September 30, 1997 increased by 14.0% from the prior year, reflecting the addition of Roosevelt's expenses, the costs of maintaining additional offices, expenses associated with modifying computer application systems for the year 2000 and an ongoing program of upgrading systems and equipment to further enhance productivity. Year-to-date total other expense of $5,642,000 was incurred to ensure that systems are ready for the date transition to the year 2000, and it is expected that the Corporation will expend between $20,000,000 and $25,000,000 between October 1, 1997 and December 31, 1998 to complete this project. 16 17 --------------------------------------------------------------------------------------------------------------- EXHIBIT 7 OTHER EXPENSE ($ IN THOUSANDS)
THIRD QUARTER NINE MONTHS 1997 1996 CHANGE 1997 1996 CHANGE ---- ---- ------ ---- ---- ------ Salaries $ 91,056 $ 74,254 22.6% $249,795 $221,324 12.9% Employee benefits 20,320 17,049 19.2 57,555 53,312 8.0 -------- -------- -------- -------- Total Personnel Expense 111,376 91,303 22.0 307,350 274,636 11.9 Net occupancy 15,368 12,608 21.9 40,514 36,437 11.2 Equipment 16,696 13,506 23.6 45,517 39,034 16.6 Postage and freight 6,209 5,853 6.1 18,219 18,114 .6 Marketing/business development 4,603 2,972 54.9 11,510 9,031 27.4 Office supplies 3,594 3,091 16.3 10,223 9,798 4.3 Communications 4,309 3,059 40.9 10,918 9,255 18.0 Legal and professional 2,675 2,670 .2 8,414 8,890 (5.4) Credit card 3,194 4,069 (21.5) 8,025 11,310 (29.0) FDIC insurance 961 1,185 (18.9) 2,472 3,732 (33.8) Nonrecurring FDIC insurance -- 12,385 -- -- 12,385 -- Foreclosed property expense (1,356) (316) -- (5,575) (819) -- (recoveries) Intangible asset amortization 14,655 2,904 -- 23,637 8,640 -- Loss on the sale of credit card loans 50,000 -- -- 50,000 -- -- Nonrecurring merger-related expense 69,530 -- -- 121,393 41,678 -- Other 14,520 20,131 (27.9) 49,787 59,840 (16.8) -------- -------- -------- -------- Total Other Expense $316,334 $175,420 80.3 $702,404 $541,961 29.6 ======== ======== ======== ======== --------------------------------------------------------------------------------------------------------------
Exhibit 7 details the composition of all other operating expenses. Marketing and business development expense in the third quarter of 1997 was $4,603,000, $1,631,000 more than in the same period of 1996. In the third quarter of 1997, Mercantile initiated a corporate-wide image advertising program which will run into 1998. Year-to-date credit card fees declined by $3,285,000 or 29.0%, due primarily to the absence of the costs associated with the merchant processing businesses which were sold. Recoveries related to foreclosed property, net of associated expenses, were $5,575,000 in the first nine months of 1997 compared with recoveries of $819,000 in 1996. Also during the third quarter of 1997, there was a reduction of miscellaneous expense of $3,345,000 caused largely by gains on the federally-mandated divestitures of selected Mercantile branch offices. The miscellaneous expense reduction on branch sale gains excludes those from the sales of Roosevelt offices necessitated by anti-trust laws, which reduced the goodwill amount associated with the Roosevelt acquisition. Intangible asset amortization was $23,637,000 in the first nine months of 1997 versus $8,640,000 in 1996. The increase was caused by additional amortization on goodwill recorded in 1996 and 1997 purchase acquisitions, which is being amortized using the straight-line method over 15 years. The Roosevelt purchase acquisition increased goodwill by $605,320,000, resulting in significantly higher intangible asset amortization expense during the third quarter of 1997. Third quarter intangible asset amortization was $14,655,000 compared with $4,603,000 in the second quarter of 1997. INCOME TAXES For the nine months ended September 30, 1997, the Corporation recorded income tax expense of $73,071,000 compared with 1996 expense of $92,614,000. The income tax benefit relating to nonrecurring charges totaled $59,356,000 in the first nine months of 1997 and $19,934,000 in the prior year, resulting in year-to-date adjusted income tax expense for 1997 of $132,427,000 versus $112,548,000 in 1996. The Corporation's year-to-date adjusted effective tax rate increased from 34.64% in 1996 to 35.35% in 1997. This higher effective tax rate was primarily caused by the lack of tax deductibility on the goodwill amortization from the Roosevelt acquisition, partially offset by a reduction in state and local taxes. 17 18 RESERVE FOR POSSIBLE LOAN LOSSES The reserve for possible loan losses was $257,261,000 or 1.35% of loans outstanding at September 30, 1997. This compared with $230,372,000 or 1.54% at year's end and $233,631,000 or 1.64% at September 30, 1996. The reserve coverage of non-performing loans was 221.85% compared with 318.99% at year-end and 356.05% last year. As of September 30, 1997, 43.41% of the Corporation's total loan portfolio was invested in residential real estate mortgage loans, for which the loan loss experience averaged only .03% for the past two years. If those loans are excluded from total loans, the reserve for possible loan losses represented 2.38% of loans outstanding at September 30, 1997. The year-to-date 1997 provision for possible loan losses was $73,616,000 compared with $57,915,000 last year. The year-to-date provision includes nonrecurring merger-related provisions of $20,340,000 in 1997 and $10,851,000 in 1996, which were recorded largely to conform the credit policies of recently acquired entities to those of Mercantile. The adjusted provision for possible loan losses was $53,276,000 in the first nine months of 1997 compared with $47,064,000 in 1996, which included a $10,000,000 special provision to partially 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 chargeoffs to average loans for the first nine months of 1997 was .54% compared with .57% last year, while the corresponding net charge-off figures were $66,959,000 and $59,756,000, respectively. Excluding securitized credit cards, net credit card charge-offs were $50,097,000 in 1997 versus $42,968,000 last year, and represented 8.87% of average credit card loans compared with 6.84% in 1996. On the managed portfolio, the ratio of net charge-offs to average credit card loans was 8.91% versus 7.61% in the first nine months of 1996. By credit policy, losses are taken on credit card loans after six cycles of nonpayment, or within 15 days of receipt of personal bankruptcy notice, if earlier. Approximately 39% of the 1997 credit card losses were a result of bankruptcy claims. The former co-branded credit card loans had net charge-offs of $36,551,000 in 1997 compared with $23,168,000 in 1996. The 1997 charge-offs, which averaged $12,000,000 per quarter, as well as the related net interest income, fees and operating expenses will not be included in Mercantile's financial condition or results of operations starting October 1, 1997, as a result of the aforementioned sale. Excluding those related to credit card loans, net charge-offs were $16,862,000 or .14% of average loans for the first nine months of 1997 compared with $16,788,000 or .17% in 1996. -------------------------------------------------------------------------------------- EXHIBIT 8 RESERVE FOR POSSIBLE LOAN LOSSES ($ IN THOUSANDS)
THREE MONTHS NINE MONTHS 1997 1996 1997 1996 ---- ---- ---- ---- BEGINNING BALANCE $234,684 $236,885 $230,372 $232,288 PROVISION 27,478 12,614 73,616 57,915 Charge-offs (27,790) (22,042) (82,916) (75,681) Recoveries 4,272 5,128 15,957 15,925 -------- -------- -------- -------- NET CHARGE-OFFS (23,518) (16,914) (66,959) (59,756) Acquired Reserves 18,617 1,046 20,232 3,184 -------- -------- -------- -------- ENDING BALANCE $257,261 $233,631 $257,261 $233,631 ======== ======== ======== ======== LOANS AND LEASES September 30 balance $19,120,797 $14,271,785 $19,120,797 $14,271,785 =========== =========== =========== =========== Average balance $19,549,835 $14,076,883 $16,627,096 $13,908,580 =========== =========== =========== =========== RATIOS Reserve balance to outstanding loans 1.35% 1.64% 1.35% 1.64% Reserve balance to non-performing loans 221.85 356.05 221.85 356.05 Net charge-offs to average loans .48 .48 .54 .57 Includes nonrecurring merger-related provision of $13,800,000 in the third quarter of 1997, $20,340,000 in the nine months ended September 30, 1997, and $10,851,000 in the nine months ended September 30, 1996. -------------------------------------------------------------------------------------
18 19 Mercantile evaluates the loan portfolios and 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 1.35% of total loans and 221.85% of non-performing loans as of September 30, 1997 was adequate based on the risks identified at such date in the portfolios. NON-PERFORMING ASSETS Nonperforming loans (non-accrual and renegotiated loans) were $115,960,000 or .61% of total loans outstanding at September 30, 1997 compared with $82,182,000 or .53% at June 30, 1997 and $65,617,000 or .46% at September 30, 1996. By the Corporation's definition, all non-accrual and renegotiated commercial-related loans are considered impaired as defined by FAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS 118. Impaired loans totaled $61,247,000 at September 30, 1997 and averaged $54,282,000 during the first nine months of 1997. Foreclosed assets at September 30, 1997 were $18,430,000 compared with $13,497,000 at June 30, 1997 and $15,579,000 last year. Non-accrual loans increased by $34,022,000 from the June 30, 1997 level; this was caused by the addition of $20,392,000 from the Roosevelt acquisition and two commercial credits totaling $14,225,000 added by Mercantile Bank N.A. The Roosevelt non-accrual loans were primarily secured by residential real estate. All loans classified as renegotiated were performing in accordance with their modified terms at September 30, 1997. Foreclosed assets increased by $4,933,000 from June 30, 1997 largely due to the addition of Roosevelt's foreclosed assets. As of September 30, 1997, Mercantile had only three non-accrual loans with balances in excess of $5,000,000, the largest totaling $7,500,000. As significant, the Corporation held only two foreclosed assets with a book value in excess of $1,000,000 with a cumulative book value of less than $3,000,000. Loans past due 90 days and still accruing interest were down by $13,306,000 from the June 30, 1997 level. Past due co-branded credit card loans which were sold in the third quarter totaled $15,422,000 at June 30, 1997. The Roosevelt acquisition added $1,629,000 to the total. Exhibit 9 presents data on non-performing assets. A category for non-performing investment securities has been added to the exhibit this quarter, which is primarily due to securities held by Roosevelt. Roosevelt owned pools of privately-issued adjustable-rate mortgage backed securities where the majority of the underlying collateral is California residential real estate. The loan pools backing these securities have been affected by high delinquency and foreclosure rates, and higher than anticipated losses on foreclosed property sales. As a result, these securities are no longer - ----------------------------------------------------------------------------------------- EXHIBIT 9 NON-PERFORMING ASSETS ($ IN THOUSANDS)
SEPT. 30 DEC. 31 SEPT. 30 1997 1996 1996 -------- ------- -------- NON-ACCRUAL LOANS Commercial $ 37,954 $21,577 $17,252 Real estate--commercial 17,815 15,739 16,140 Real estate--construction 3,045 1,346 931 Real estate--residential mortgage 45,696 23,272 21,791 Real estate--home equity credit lines 66 14 66 Consumer 6,589 5,011 4,027 -------- ------- ------- TOTAL NON-ACCRUAL LOANS 111,165 66,959 60,207 RENEGOTIATED LOANS 4,795 5,260 5,410 -------- ------- ------- TOTAL NON-PERFORMING LOANS 115,960 72,219 65,617 FORECLOSED ASSETS Foreclosed real estate 16,449 13,942 13,372 Other foreclosed assets 1,981 2,829 2,207 -------- ------- ------- TOTAL FORECLOSED ASSETS 18,430 16,771 15,579 -------- ------- ------- TOTAL NON-PERFORMING LOANS AND FORECLOSED ASSETS 134,390 88,990 81,196 Impaired investment securities 35,599 1,240 1,240 -------- ------- ------- TOTAL NON-PERFORMING ASSETS $169,989 $90,230 $82,436 ======== ======= ======= PAST-DUE LOANS (90 DAYS OR MORE) Commercial $ 4,142 $ 2,406 $ 1,714 Real estate--commercial 569 643 1,141 Real estate--construction 74 147 60 Real estate--residential mortgage 2,902 3,432 4,748 Real estate--home equity credit lines 712 237 174 Consumer 3,012 5,487 4,352 Credit card 5,788 21,608 20,610 -------- ------- ------- TOTAL PAST-DUE LOANS $ 17,199 $33,960 $32,799 ======== ======= ======= RATIOS Non-performing loans to outstanding loans .61% .48% .46% Non-performing loans and foreclosed assets to total loans and foreclosed assets .70 .59 .57 Non-performing assets to total assets .57 .41 .39 Past-due loans 90 days or more are not included in non-performing asset totals or ratios. - -----------------------------------------------------------------------------------------
19 20 investment grade and Roosevelt recorded an "other than temporary" write-down of $22,000,000 on these securities during 1995. The current net book value of these mortgage backed securities is net of that 1995 write-down. Additionally, as of September 30, 1997, the Corporation owned $40,596,000 of insured FHA and government guaranteed VA loans on non-accrual status which were acquired in the Roosevelt transaction. Since these loans are fully insured or guaranteed for the payment of both principal and interest by the United States Government, the Corporation does not consider these loans to be non-performing assets. As such, they are not included in Mercantile's non-performing or past due over 90 days and still accruing loan totals. This treatment is consistent with Roosevelt's past disclosure for these loans. CAPITAL RESOURCES Mercantile maintains a capital base which provides a 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 provided for both current needs and anticipated growth. This strategy has enabled the Corporation to profitably expand its balance sheet, while maintaining regulatory capital ratios that exceed minimum capital requirements. At September 30, 1997, shareholders' equity was $2.4 billion, an increase of 29.1% from September 30, 1996. The increase from last year was primarily derived from retained earnings and acquisitions, partially offset by share repurchases and the one-time charges previously discussed. Since December 31, 1996, the Corporation repurchased 6,750,199 shares of its common stock via designated broker-dealers at an average cost of $42.36 per share. A small portion of that stock was held for reissuance in conjunction with the 1994 Stock Incentive Plan, while the remainder was reissued in the Roosevelt transaction in July 1997. The Corporation has no current authorization to repurchase shares in the open market, other than those to be repurchased for the 1994 Stock Incentive Plan or for the Mercantile Bancorporation Inc. Shareholder Investment Plan, which is to begin operating in the fourth quarter of 1997. In addition, Mercantile can repurchase up to ten percent of the total share consideration in the pending acquisitions of Horizon Bancorp, Inc. and HomeCorp, Inc. In order to finance a part of the Roosevelt acquisition, the Corporation formed Mercantile Capital Trust I on January 29, 1997. Through this trust, Mercantile obtained $150,000,000 of floating-rate debt which, for regulatory purposes, is considered part of Tier I capital. Senior and subordinated debt securities in the amount of $500 million were issued in June 1997, mainly for the same purpose. The tangible equity to tangible assets ratio was 5.26% at September 30, 1997 compared with 7.00% at June 30, 1997. The lower ratio reflected the impact of the Roosevelt goodwill, the Roosevelt conforming adjustments and the loss incurred on the sale of the co-branded credit card portfolio. The Corporation plans to raise that ratio to exceed 6.00% in 1998 largely via retained earnings. The Parent Company's double leverage ratio, which measures the extent to which the equity capital of its subsidiaries is supported by Parent Company debt rather than equity, was 129.26% at September 30, 1997 compared with 104.57% at year-end 1996. The Corporation plans to lower that ratio throughout 1998. At September 30, 1997, the ratio of long-term debt to total capitalization increased to 33.18% reflecting the impact of the debt issued earlier in the year to finance the Roosevelt acquisition. Exhibit 10 details significant capital ratios. Public debt ratings of the Corporation and Mercantile Bank N.A. are shown in Exhibit 11. Moody's Investor Service raised ratings on Mercantile's capital trust securities, senior notes and subordinated notes on July 31, 1997. - -------------------------------------------------------------------------------- EXHIBIT 10 RISK-BASED CAPITAL ($ IN THOUSANDS)
SEPT. 30 DEC. 31 SEPT. 30 1997 1996 1996 -------- ------- -------- Capital Tier I $ 1,716,423 $ 1,749,466 $ 1,690,809 Total 2,389,286 2,175,712 2,108,860 Risk-adjusted assets 19,819,603 15,905,622 15,207,097 Tier I capital to risk-adjusted assets 8.66% 11.00% 11.12% Total capital to risk-adjusted assets 12.06 13.68 13.87 Leverage 5.88 8.12 8.03 Tangible equity to tangible assets 5.26 8.05 8.03 Double leverage 129.26 104.57 107.90 - --------------------------------------------------------------------------------
20 21 -------------------------------------------------------------------------------------------------------------------- EXHIBIT 11 DEBT RATINGS
THOMSON STANDARD MOODY'S FITCH BANKWATCH & POOR'S ------- ----- --------- -------- MERCANTILE BANCORPORATION INC. Issuer Rating B Commercial Paper F1 TBW-1 6.800% Senior Notes, due 2001 A2 BBB+ 7.050% Senior Notes, due 2004 A2 BBB+ 7.625% Subordinated Notes, due 2002 A3 BBB+ BBB 7.300% Subordinated Notes, due 2007 A3 BBB Floating Rate Capital Trust Pass-Through Securities(SM) a2 BBB- MERCANTILE BANK N.A. Bank Notes A1/P-1 A 6.375% Subordinated Notes, due 2004 A2 A A- 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 --------------------------------------------------------------------------------------------------------------------
On July 16, 1997, the Board of Directors declared a three-for-two stock split, in the form of a dividend, which was distributed on October 1, 1997. On October 15, 1997, the Board of Directors declared a cash dividend of $.287 per common share which will be paid January 2, 1998. Book value per common share was $18.07 at September 30, 1997 compared with $16.05 a year earlier, an increase of 12.6%. 21 22 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED QUARTERLY STATEMENT OF INCOME ($ IN THOUSANDS EXCEPT PER COMMON SHARE DATA)
1996 1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR. -------- -------- -------- -------- -------- -------- -------- INTEREST INCOME Interest and fees on loans and leases $301,389 $303,073 $307,512 $317,682 $321,271 $331,688 $415,068 Investments in debt and equity securities 75,883 78,334 77,342 74,783 73,282 73,985 119,464 Short-term investments 4,651 4,502 3,637 4,075 3,909 5,490 8,030 -------- -------- -------- -------- -------- -------- -------- Total Interest Income 381,923 385,909 388,491 396,540 398,462 411,163 542,562 Tax-equivalent adjustment 4,179 4,061 4,023 4,090 3,857 4,014 3,741 -------- -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INTEREST INCOME 386,102 389,970 392,514 400,630 402,319 415,177 546,303 INTEREST EXPENSE Deposits 153,725 149,603 148,472 152,189 153,762 155,597 218,671 Borrowed funds 27,660 28,748 33,402 31,111 32,739 40,003 71,757 -------- -------- -------- -------- -------- -------- -------- Total Interest Expense 181,385 178,351 181,874 183,300 186,501 195,600 290,428 -------- -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT NET INTEREST INCOME 204,717 211,619 210,640 217,330 215,818 219,577 255,875 PROVISION FOR POSSIBLE LOAN LOSSES 34,149 11,152 12,614 15,100 18,443 27,695 27,478 OTHER INCOME Trust 21,059 22,347 21,058 22,152 22,801 24,022 24,865 Service charges 21,214 21,967 22,372 23,363 22,798 22,591 27,236 Investment banking and brokerage 8,567 7,631 7,971 8,075 7,982 7,760 10,086 Credit card fees 1,561 8,322 9,427 8,652 5,399 5,373 5,649 Securitization revenue 4,502 3,325 4,198 3,983 7,292 4,725 3,357 Mortgage banking 3,168 2,293 2,458 2,788 2,778 2,728 7,378 Securities gains (losses) (2,722) 98 15 2,526 1,049 1,818 2,034 Other 12,446 21,733 17,055 23,876 18,001 18,910 22,631 -------- -------- -------- -------- -------- -------- -------- Total Other Income 69,795 87,716 84,554 95,415 88,100 87,927 103,236 OTHER EXPENSE Personnel expense 92,260 91,073 91,303 91,093 97,722 98,252 111,376 Net occupancy and equipment 24,428 24,929 26,114 28,244 26,528 27,439 32,064 Other 87,008 46,843 58,003 57,370 41,345 94,784 172,894 -------- -------- -------- -------- -------- -------- -------- Total Other Expense 203,696 162,845 175,420 176,707 165,595 220,475 316,334 -------- -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 36,667 125,338 107,160 120,938 119,880 59,334 15,299 INCOME TAXES Income taxes 15,403 43,216 33,995 35,921 41,028 23,141 8,902 Tax-equivalent adjustment 4,179 4,061 4,023 4,090 3,857 4,014 3,741 -------- -------- -------- -------- -------- -------- -------- Adjusted Income Taxes 19,582 47,277 38,018 40,011 44,885 27,155 12,643 -------- -------- -------- -------- -------- -------- -------- NET INCOME $ 17,085 $ 78,061 $ 69,142 $ 80,927 $ 74,995 $ 32,179 $ 2,656 ======== ======== ======== ======== ======== ======== ======== NET INCOME PER COMMON SHARE $.14 $.67 $.61 $.70 $.65 $.29 $.02 SIGNIFICANT RATIOS Return on assets .33% 1.48% 1.32% 1.51% 1.38% .58% .04% Return on equity 3.50 16.57 15.06 17.05 15.63 7.07 .44
22 23 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN THOUSANDS)
1996 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 $ 3,809,367 8.52% $ 3,889,805 8.42% $ 3,913,530 8.39% $ 4,071,583 8.38% Real estate--commercial 2,788,474 8.79 2,783,201 8.68 2,769,282 8.67 2,780,313 8.61 Real estate--construction 517,735 9.15 493,196 9.40 504,516 9.11 565,702 9.17 Real estate--residential mortgage 3,723,120 8.05 3,753,296 8.12 3,924,199 8.09 4,142,319 8.04 Real estate--home equity credit lines 374,156 9.79 367,855 9.76 366,899 9.73 376,366 9.68 Consumer 1,741,215 8.93 1,744,060 8.93 1,745,806 8.88 1,815,552 8.78 Credit card 832,807 12.77 828,728 13.30 852,651 12.69 873,195 12.69 ----------- ----------- ----------- ----------- Total Loans and Leases 13,786,874 8.78 13,860,141 8.78 14,076,883 8.78 14,625,030 8.73 Investments in debt and equity securities Trading 80,820 6.36 46,224 6.14 36,909 6.09 61,987 6.62 Taxable 4,549,195 6.04 4,741,940 6.08 4,637,674 6.15 4,457,449 6.13 Tax-exempt 438,975 8.02 419,012 7.94 407,746 8.03 408,634 7.85 ----------- ----------- ----------- ----------- Total Investments in Debt and Equity Securities 5,068,990 6.22 5,207,176 6.23 5,082,329 6.30 4,928,070 6.28 Short-term investments 318,456 5.78 316,621 5.63 251,366 5.66 283,689 5.62 ----------- ----------- ----------- ----------- Total Earning Assets 19,174,320 8.10 19,383,938 8.09 19,410,578 8.04 19,836,789 8.03 Non-earning assets 1,629,100 1,723,196 1,541,955 1,560,218 ----------- ----------- ----------- ----------- Total Assets $20,803,420 $21,107,134 $20,952,533 $21,397,007 =========== =========== =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 2,436,622 $ 3,127,700 $ 3,049,048 $ 2,811,011 Interest bearing demand 2,466,330 2.18 2,463,727 2.12 2,404,524 2.11 2,488,966 2.12 Money market accounts 2,576,809 3.87 2,665,609 3.80 2,690,505 3.84 2,752,013 3.85 Savings 1,137,417 2.33 1,141,065 2.29 1,115,226 2.28 1,097,718 2.28 Consumer time certificates under $100,000 6,224,647 5.64 6,132,446 5.55 6,027,972 5.49 6,141,077 5.47 Other time 41,415 19.18 237,030 3.35 235,903 3.31 229,722 3.25 ----------- ----------- ----------- ----------- Total Core Deposits 14,883,240 4.33 15,767,577 4.18 15,523,178 4.15 15,520,507 4.15 Time certificates $100,000 and over 1,221,758 5.63 1,182,028 5.52 1,127,078 5.49 1,194,693 5.48 Foreign 174,667 5.66 152,075 5.52 189,295 5.53 220,239 5.69 ----------- ----------- ----------- ----------- Total Purchased Deposits 1,396,425 5.65 1,334,103 5.53 1,316,373 5.51 1,414,932 5.53 ----------- ----------- ----------- ----------- Total Deposits 16,279,665 4.47 17,101,680 4.31 16,839,551 4.28 16,935,439 4.29 Short-term borrowings 1,683,491 4.06 1,275,348 5.82 1,415,786 6.47 1,703,705 5.05 Bank notes 265,385 5.92 275,000 5.66 275,000 5.79 227,174 5.78 Long-term debt 337,317 7.54 325,583 7.36 312,379 7.42 305,211 7.41 ----------- ----------- ----------- ----------- Total Acquired Funds 18,565,858 4.52 18,977,611 4.53 18,842,716 4.58 19,171,529 4.46 Other liabilities 283,148 245,315 273,117 326,991 SHAREHOLDERS' EQUITY 1,954,414 1,884,208 1,836,700 1,898,487 ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $20,803,420 $21,107,134 $20,952,533 $21,397,007 =========== =========== =========== =========== SIGNIFICANT RATIOS Net interest rate spread 3.58% 3.56% 3.46% 3.57% Net interest rate margin 4.29 4.39 4.32 4.36 Taxable-equivalent basis. Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
23 24 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN THOUSANDS)
1997 1996 1997 1ST QTR. 2ND QTR. 3RD QTR. NINE MONTHS NINE MONTHS ----------------- ------------------ ------------------ ------------------ ----------------- VOLUME RATE VOLUME RATE VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ASSETS Earning Assets Loans and leases, net of unearned income Commercial $ 4,245,981 8.41% $ 4,438,250 8.56% $ 4,430,927 8.45% $ 3,871,060 8.44% $ 4,372,385 8.47% Real estate-- commercial 2,853,272 8.63 2,893,046 8.78 2,971,986 8.74 2,780,278 8.71 2,906,536 8.72 Real estate-- construction 580,920 8.89 638,771 8.93 682,806 8.82 505,147 9.22 634,535 8.88 Real estate-- residential mortgage 4,256,417 7.93 4,336,540 7.94 8,247,314 7.80 3,800,655 8.08 5,628,046 7.85 Real estate--home equity credit lines 384,342 9.62 384,161 9.96 495,202 9.78 369,627 9.76 421,641 9.78 Consumer 1,851,364 8.83 1,895,587 8.88 1,983,293 8.93 1,743,700 8.91 1,910,568 8.88 Credit card 820,140 13.31 702,617 13.33 738,307 12.83 838,113 12.92 753,385 13.16 ----------- ----------- ----------- ----------- ----------- Total Loans and Leases 14,992,436 8.60 15,288,972 8.72 19,549,835 8.52 13,908,580 8.78 16,627,096 8.60 Investments in debt and equity securities Trading 68,823 6.81 93,156 7.00 101,176 6.41 54,586 6.24 87,837 6.72 Taxable 4,330,115 6.17 4,326,163 6.22 6,826,593 6.62 4,642,922 6.09 5,170,108 6.37 Tax-exempt 397,502 7.95 383,181 8.00 368,367 7.98 421,857 8.00 382,908 7.98 ----------- ----------- ----------- ----------- ----------- Total Investments in Debt and Equity Securities 4,796,440 6.33 4,802,500 6.38 7,296,136 6.68 5,119,365 6.25 5,640,853 6.49 Short-term investments 284,131 5.50 385,227 5.64 482,279 6.52 295,319 5.69 384,608 5.98 ----------- ----------- ----------- ----------- ----------- Total Earning Assets 20,073,007 8.13 20,476,699 8.13 27,328,250 7.93 19,323,264 8.08 22,652,557 8.05 Non-earning assets 1,687,833 1,892,478 2,605,522 1,631,094 2,065,312 ----------- ----------- ----------- ----------- ----------- Total Assets $21,760,840 $22,369,177 $29,933,772 $20,954,358 $24,717,869 =========== =========== =========== =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 2,748,108 $ 3,082,060 $ 3,191,498 $ 2,871,777 $ 3,008,855 Interest bearing demand 2,550,948 2.14 2,528,212 2.09 2,593,358 1.96 2,444,717 2.14 2,557,660 2.06 Money market accounts 2,791,936 3.89 2,783,727 3.95 3,577,148 4.02 2,644,475 3.84 3,053,813 3.96 Savings 1,091,994 2.27 1,103,230 2.27 1,407,438 2.43 1,131,175 2.30 1,202,042 2.33 Consumer time certificates under $100,000 6,181,763 5.48 6,113,801 5.48 9,278,140 5.55 6,127,986 5.56 7,202,575 5.51 Other time 155,230 4.71 160,942 4.25 160,564 3.63 171,685 4.60 158,931 4.19 ----------- ----------- ----------- ----------- ----------- Total Core Deposits 15,519,979 4.18 15,771,972 4.18 20,208,146 4.41 15,391,815 4.22 17,183,876 4.27 Time certificates $100,000 and over 1,286,701 5.49 1,219,901 5.52 1,533,394 5.69 1,176,771 5.55 1,347,565 5.57 Foreign 344,388 5.48 468,671 5.67 529,329 5.70 172,076 5.57 448,140 5.63 ----------- ----------- ----------- ----------- ----------- Total Purchased Deposits 1,631,089 5.50 1,688,572 5.58 2,062,723 5.71 1,348,847 5.56 1,795,705 5.61 ----------- ----------- ----------- ----------- ----------- Total Deposits 17,151,068 4.33 17,460,544 4.34 22,270,869 4.55 16,740,662 4.35 18,979,581 4.42 Short-term borrowings 1,810,192 5.05 2,101,845 5.25 3,527,331 5.63 1,458,053 5.35 2,486,079 5.38 Bank notes 175,000 5.81 175,000 5.95 175,000 6.01 271,807 5.79 175,000 5.92 Long-term debt 398,052 7.36 530,593 7.07 1,120,356 6.41 325,047 7.44 685,645 6.76 ----------- ----------- ----------- ----------- ----------- Total Acquired Funds 19,534,312 4.51 20,267,982 4.57 27,093,556 4.82 18,795,569 4.54 22,326,305 4.65 Other liabilities 306,844 279,784 413,373 267,218 333,729 SHAREHOLDERS' EQUITY 1,919,684 1,821,411 2,426,843 1,891,571 2,057,835 ----------- ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $21,760,840 $22,369,177 $29,933,772 $20,954,358 $24,717,869 =========== =========== =========== =========== =========== SIGNIFICANT RATIOS Net interest rate spread 3.62% 3.56% 3.11% 3.54% 3.40% Net interest rate margin 4.36 4.30 3.71 4.33 4.08 Taxable-equivalent basis. Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
24 25 Item 6. Exhibits and Reports on Form 8-K. Exhibits 27. Financial Data Schedule Reports on Form 8-K: During the quarter ended September 30, 1997, Registrant filed three (3) Current Reports on Form 8-K as follows: 1) In its Current Report on Form 8-K, dated July 1, 1997 and filed on July 14, 1997, under Item 2, Registrant disclosed that it had, effective July 1, 1997, consummated its acquisition of Roosevelt through the merger of Roosevelt with and into a wholly owned subsidiary of Registrant. Under Item 7, Registrant incorporated by reference the following audited financial statements of Roosevelt from Roosevelt's Annual Report on Form 10-K for the fiscal year ended December 31, 1996: 1. Independent Auditors' Report; 2. Consolidated Balance Sheets as of December 31, 1996 and 1995; 3. Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994; 4. Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994; and 5. Notes to Consolidated Financial Statements. The following unaudited financial statements of Roosevelt and its subsidiaries were incorporated by reference from Mark Twain's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997: 1. Condensed Consolidated Balance Sheets as of March 31, 1997 and 1996, and December 31, 1996; 2. Condensed Consolidated Statements of Income for the Three Months Ended March 31, 1997 and 1996; 3. Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996; and 4. Notes to Condensed Consolidated Financial Statements. The following unaudited pro forma combined consolidated financial statements of Registrant reflecting the merger with Roosevelt were incorporated by reference from Registrant's Registration Statement on Form S-4 filed May 19, 1997: 1. Pro Forma Combined Consolidated Balance Sheet as of March 31, 1997; 2. Pro Forma Combined Consolidated Income Statements for the Years Ended December 31, 1996, 1995 and 1994 and the Three Months Ended March 31, 1997 and 1996; and 3. Notes to Pro Forma Combined Consolidated Financial Statements. 2) In its Current Report on Form 8-K dated and filed September 25, 1997, under Item 5, Registrant presented the following pro forma combined consolidated financial statements of Registrant reflecting the merger with Roosevelt: 1. Pro Forma Combined Consolidated Balance Sheet as of June 30, 1997; 2. Pro Forma Combined Consolidated Income Statements for the Year Ended December 31, 1996 and the Six Months Ended June 30, 1997; and 3. Notes to Pro Forma Combined Consolidated Financial Statements. 25 26 3) In its Current Report on Form 8-K dated September 25, 1997 and filed on October 3, 1997, under Item 5, Registrant disclosed that it was accelerating the conversion of Roosevelt's banking systems to Registrant's systems by more than six months. In connection with the assimilation, Registrant recorded a one-time after-tax charge of $.44 per share. In addition, Registrant announced the Purchase Agreement dated September 25, 1997 with Direct Merchants, pursuant to which Direct Merchants agreed to acquire former co-branded credit card accounts. In connection with the transaction, Registrant recorded a one-time pre-tax charge of $50,000,000, or an after-tax charge of $.25 per share for the third quarter of 1997. 26 27 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 November 13, 1997 /s/ JOHN Q. ARNOLD ----------------------------- ------------------------------ John Q. Arnold Chief Financial Officer 27 28 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- 27 Financial Data Schedule Included herein 28 EX-27 2 MERCANTILE BANCORPORATION INC. FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1,043,236 303,276 171,703 137,761 6,904,529 277,311 280,467 19,120,797 257,261 29,980,363 22,112,240 3,771,713 397,639 1,169,092 0 0 1,304 2,353,375 29,980,363 1,068,027 266,731 17,429 1,352,187 528,030 672,529 679,658 73,616 4,901 702,404 182,901 109,830 0 0 109,830 .92 .92 4.08 111,165 17,199 4,795 0 230,372 82,916 15,957 257,261 257,261 0 0 Only reported at fiscal year-end date.
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