-----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, MUPrbSZcK1eP1CIoOrr5DuRW8gePV0FS6QS+8TexjZljLpkEQ8q9Ohp+FMzI5jbp nj4ceSWo5+Y+7VT3IdzQSg== 0001068800-98-000027.txt : 19981116 0001068800-98-000027.hdr.sgml : 19981116 ACCESSION NUMBER: 0001068800-98-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98748124 BUSINESS ADDRESS: STREET 1: 7TH & WASHINGTON TRAM 19 1 STREET 2: ONE MERCANTILE CENTER STREET CITY: ST LOUIS STATE: MO ZIP: 63101-1643 BUSINESS PHONE: 3144252525 MAIL ADDRESS: STREET 1: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166 FORMER COMPANY: FORMER CONFORMED NAME: MERCANTILE TRUST CO DATE OF NAME CHANGE: 19720229 10-Q 1 MERCANTILE BANCORPORATION INC. FORM 10-Q ============================================================================== 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, 1998 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, 157,351,861 SHARES OUTSTANDING AS OF THE CLOSE OF BUSINESS ON OCTOBER 30, 1998. ============================================================================== INDEX PART I--FINANCIAL INFORMATION
PAGE NO. -------- Item 1--Financial Statements Consolidated Statement of Income Three months and nine months ended September 30, 1998 and 1997 3 Consolidated Balance Sheet September 30, 1998 and 1997, and December 31, 1997 4 Consolidated Statement of Changes in Shareholders' Equity Nine months ended September 30, 1998 and 1997 5 Consolidated Statement of Cash Flows Nine months ended September 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2-- Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3-- Quantitative and Qualitative Disclosures Regarding Market Risk There have been no material changes from the information provided in the December 31, 1997 Form 10-K. PART II--OTHER INFORMATION Item 5--Other Information 28 Item 6--Exhibits and Reports on Form 8-K 28 Signature 30 Exhibit Index 31
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 1998 1997 ---- ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $443,631 $462,063 $1,331,843 $1,204,182 Investments in debt and equity securities Trading 1,819 1,641 6,730 4,443 Taxable 138,986 123,657 415,993 278,911 Tax-exempt 5,491 6,324 17,546 19,469 -------- -------- ---------- ---------- Total Investments in Debt and Equity Securities 146,296 131,622 440,269 302,823 Due from banks--interest bearing 3,285 3,192 9,861 6,561 Federal funds sold and repurchase agreements 4,049 5,535 12,555 13,036 -------- -------- ---------- ---------- Total Interest Income 597,261 602,412 1,794,528 1,526,602 INTEREST EXPENSE Interest bearing deposits 226,286 236,494 687,115 582,429 Foreign deposits 5,697 7,708 19,555 19,147 Short-term borrowings 38,864 53,001 139,117 108,228 Bank notes 374 2,687 3,065 7,860 Long-term debt and mandatorily redeemable preferred securities 52,961 18,800 124,574 36,408 -------- -------- ---------- ---------- Total Interest Expense 324,182 318,690 973,426 754,072 -------- -------- ---------- ---------- NET INTEREST INCOME 273,079 283,722 821,102 772,530 PROVISION FOR POSSIBLE LOAN LOSSES 23,871 29,209 39,752 78,728 -------- -------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 249,208 254,513 781,350 693,802 OTHER INCOME Trust 27,442 26,888 84,386 77,535 Service charges 30,498 29,770 87,815 79,941 Investment banking and brokerage 9,760 10,837 30,652 28,021 Mortgage banking 6,149 7,819 21,051 14,691 Gain on sale of mortgage servicing rights -- -- 23,155 -- Credit card fees 3,045 5,836 9,128 16,927 Securitization revenue 5,775 3,357 14,818 15,374 Securities gains 2,297 2,131 9,584 5,248 Gain on sale of subsidiaries 48,051 -- 48,051 -- Miscellaneous 28,822 25,706 84,901 67,386 -------- -------- ---------- ---------- Total Other Income 161,839 112,344 413,541 305,123 OTHER EXPENSE Salaries 106,007 101,728 312,385 280,613 Employee benefits 18,148 22,800 58,727 64,595 Net occupancy 17,448 17,018 49,647 45,373 Equipment 21,160 18,307 63,273 50,318 Intangible asset amortization 14,311 15,276 43,369 25,180 Loss on sale of credit card loans -- 50,000 -- 50,000 Miscellaneous 134,078 114,038 229,015 252,178 -------- -------- ---------- ---------- Total Other Expense 311,152 339,167 756,416 768,257 -------- -------- ---------- ---------- INCOME BEFORE INCOME TAXES 99,895 27,690 438,475 230,668 INCOME TAXES 36,751 14,334 153,325 89,245 -------- -------- ---------- ---------- NET INCOME $ 63,144 $ 13,356 $ 285,150 $ 141,423 ======== ======== ========== ========== PER SHARE DATA Basic earnings per share $.41 $.09 $1.87 $1.03 Diluted earnings per share .41 .09 1.84 1.01 Dividends declared .31 .287 .93 .861 Includes the following nonrecurring amounts: Provision for possible loan losses $ 19,600 $ 13,800 $ 19,600 $ 20,340 Securities losses 1,649 -- 1,649 -- Gain on sale of subsidiaries (48,051) -- (48,051) -- Loss on sale of credit card loans -- 50,000 -- 50,000 Miscellaneous expense 89,192 69,530 89,192 121,393 Income tax benefit (15,028) (43,379) (15,028) (59,356) -------- -------- ---------- ---------- Reduction of Net Income $ 47,362 $ 89,951 $ 47,362 $ 132,377 ======== ======== ========== ==========
3 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (THOUSANDS)
SEPT. 30 SEPT. 30 1998 DEC. 31 1997 (UNAUDITED) 1997 (UNAUDITED) ----------- ------- ----------- ASSETS Cash and due from banks $ 1,175,006 $ 1,330,512 $ 1,169,211 Due from banks--interest bearing 153,408 251,909 313,591 Federal funds sold and repurchase agreements 214,889 303,859 192,999 Investments in debt and equity securities Trading 98,301 70,536 137,817 Available-for-sale (Amortized cost of $8,956,729, $8,023,157 and $7,585,601, respectively) 9,061,675 8,059,066 7,624,053 Held-to-maturity (Estimated fair value of $117,538, $341,954 and $374,419, respectively) 116,007 335,279 365,195 ----------- ----------- ----------- Total Investments in Debt and Equity Securities 9,275,983 8,464,881 8,127,065 Loans held-for-sale 129,569 96,955 83,879 Loans and leases, net of unearned income 21,871,875 21,265,000 21,098,142 ----------- ----------- ----------- Total Loans and Leases 22,001,444 21,361,955 21,182,021 Reserve for possible loan losses (308,869) (284,165) (286,042) ----------- ----------- ----------- Net Loans and Leases 21,692,575 21,077,790 20,895,979 Bank premises and equipment 541,099 531,650 513,418 Intangible assets 794,593 839,285 853,722 Receivable for credit card loans sold -- -- 372,835 Other assets 748,968 532,304 685,848 ----------- ----------- ----------- Total Assets $34,596,521 $33,332,190 $33,124,668 =========== =========== =========== LIABILITIES Deposits Non-interest bearing $ 3,788,416 $ 3,956,138 $3,463,883 Interest bearing 20,426,340 20,267,878 20,520,898 Foreign 327,551 585,439 669,483 ---------- ----------- ---------- Total Deposits 24,542,307 24,809,455 24,654,264 Federal funds purchased and repurchase agreements 1,562,384 2,127,443 2,420,159 Other short-term borrowings 1,000,750 1,551,097 1,546,227 Bank notes 25,000 175,000 175,000 Long-term Federal Home Loan Bank advances 2,888,728 578,484 261,538 Other long-term debt 793,026 789,687 789,731 Company obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 150,000 150,000 Other liabilities 575,652 388,722 428,337 ---------- ----------- ---------- Total Liabilities 31,537,847 30,569,888 30,425,256 Commitments and contingent liabilities -- -- -- SEPT. 30 DEC. 31 SEPT. 30 1998 1997 1997 -------- ------- -------- SHAREHOLDERS' EQUITY Preferred stock--no par value Shares authorized 5,000 5,000 5,000 Shares issued and outstanding -- -- -- -- -- -- Common stock--$.01 par value Shares authorized 400,000 200,000 200,000 Shares issued 157,346 148,874 148,624 1,574 1,489 1,486 Capital surplus 996,239 1,016,844 1,015,555 Retained earnings 1,993,671 1,724,752 1,660,354 Accumulated other comprehensive income 70,607 25,222 27,431 Treasury stock, at cost 76 162 157 (3,417) (6,005) (5,414) ----------- ----------- ----------- Total Shareholders' Equity 3,058,674 2,762,302 2,699,412 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $34,596,521 $33,332,190 $33,124,668 =========== =========== ===========
4 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) ($ IN THOUSANDS)
COMMON STOCK ---------------------- TOTAL OUTSTANDING CAPITAL RETAINED TREASURY SHAREHOLDERS' SHARES DOLLARS SURPLUS EARNINGS STOCK EQUITY ----------- ------- ------- ------------ -------- ------------- BALANCE AT DECEMBER 31, 1996 134,174,597 $ 683,832 $ 16,091 $1,647,521 $ (84,201) $2,263,243 Net income 141,423 141,423 Common dividends declared: Mercantile Bancorporation Inc.--$.861 per share (95,086) (95,086) Pooled companies prior to acquisition (24,313) (24,313) 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 (676,575) 676,575 -- Issuance of common stock for: Employee incentive plans 695,266 320 6,166 4,773 11,259 Convertible notes 75,384 80 758 838 Other comprehensive income 11,014 11,014 Purchase of treasury stock (6,750,199) (285,958) (285,958) Reissuance of treasury stock (7,396) (42,950) 50,346 -- Pre-merger transactions of pooled companies and other 422,151 1,102 6,261 (7) (168) 7,188 ----------- --------- ---------- ---------- --------- ---------- BALANCE AT SEPTEMBER 30, 1997 148,466,708 $ 1,486 $1,015,555 $1,687,785 $ (5,414) $2,699,412 =========== ========= ========== ========== ========= ========== BALANCE AT DECEMBER 31, 1997 148,712,307 $ 1,489 $1,016,844 $1,749,974 $ (6,005) $2,762,302 Net income 285,150 285,150 Common dividends declared: Mercantile Bancorporation Inc.--$.93 per share (130,853) (130,853) Pooled companies prior to acquisition (10,466) (10,466) Issuance of common stock in acquisitions of: First Financial Bancorporation 3,139,069 31 8,534 50,343 58,908 Financial Services Corporation of the Midwest 2,071,448 21 5,093 27,730 32,844 HomeCorp, Inc. 854,760 9 6,727 13,792 20,528 Horizon Bancorp, Inc. 2,549,970 25 10,755 35,615 357 46,752 Issuance of common stock for: Employee incentive plans 1,453,000 13 38,467 7,462 45,942 Convertible notes 23,892 1 265 266 Other comprehensive income 43,007 43,007 Reissuance of treasury stock (94,471) 94,471 -- Purchase of treasury stock (1,806,250) (99,702) (99,702) Pre-merger transactions of pooled companies and other 271,638 (15) 4,025 (14) 3,996 ----------- --------- ---------- ---------- --------- ---------- BALANCE AT SEPTEMBER 30, 1998 157,269,834 $ 1,574 $ 996,239 $2,064,278 $ (3,417) $3,058,674 =========== ========= ========== ========== ========= ========== Includes accumulated other comprehensive income.
5 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 1998 1997 ---- ---- OPERATING ACTIVITIES Net income $ 285,150 $ 141,423 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 39,752 78,728 Depreciation and amortization 55,323 44,397 Provision for deferred income taxes (credits) (6,593) (78) Net change in loans held-for-sale (26,540) (8,502) Net change in trading securities (4,088) (147,324) Net change in accrued interest receivable (5,479) 59 Net change in accrued interest payable 11,282 39,932 Other, net (72,171) (57,119) ----------- ----------- Net Cash Provided by Operating Activities 276,636 91,516 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (5,463,631) (2,754,785) Proceeds from maturities 3,859,077 2,576,787 Proceeds from sales of available-for-sale securities 1,283,036 430,056 Net change in loans and leases 146,108 (781,599) Purchases of loans and leases (434,839) (248,655) Proceeds from sale of mortgage servicing rights 26,330 -- Proceeds from sales of loans and leases 640,738 413,823 Purchases of premises and equipment (62,764) (75,349) Proceeds from sales of premises and equipment 19,361 4,011 Proceeds from sales of foreclosed property 41,198 38,153 Cash and cash equivalents from acquisitions, net of cash paid 125,833 (231,736) Sale of banking offices, net of cash paid 57,947 (167,488) Other, net 18,046 (8,252) ----------- ----------- Net Cash Provided (Used) by Investing Activities 256,440 (805,034) FINANCING ACTIVITIES Net change in non-interest bearing, savings, interest bearing demand and money market deposit accounts (376,849) 915,819 Net change in time certificates of deposit under $100,000 (949,703) (1,668,756) Net change in time certificates of deposit $100,000 and over 32,068 11,197 Net change in other time deposits (60,772) (21,219) Net change in foreign deposits (257,888) 417,596 Net change in short-term borrowings (1,166,957) 524,887 Principal payments on bank notes (150,000) -- Issuance of long-term FHLB advances and other long-term debt 2,336,500 616,835 Issuance of company-obligated mandatorily redeemable preferred securities -- 150,000 Principal payments on long-term debt (65,906) (13,402) Cash dividends paid (135,222) (119,044) Proceeds from issuance of common stock for employee incentive plans and pre-merger transactions of pooled companies 18,496 18,176 Purchase of treasury stock (99,702) (297,733) Other, net (118) (1,351) ----------- ----------- Net Cash Provided (Used) by Financing Activities (876,053) 533,005 ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS (342,977) (180,513) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,886,280 1,856,314 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,543,303 $ 1,675,801 =========== ===========
6 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 as disclosed with an asterisk on the Consolidated Statement of Income on page 3. NOTE B NEW ACCOUNTING STANDARDS Financial Accounting Standard ("FAS") 128, "Earnings per Share," was issued in February 1997. This statement, effective in the fourth quarter of 1997, requires additional reporting of earnings per share which gives effect to dilutive common share equivalents such as stock options or convertible notes. The Corporation's disclosure under FAS 128 is included in Note C to the Consolidated Financial Statements. FAS 130, "Reporting Comprehensive Income," was issued in June 1997. Comprehensive income is defined as net income plus certain items that are recorded directly to shareholders' equity, such as unrealized gains and losses on available-for-sale securities. Components of the Corporation's comprehensive income are included in Note E. FAS 131, "Disclosures about Segments of an Enterprise and Related Information," is effective for financial statements for periods beginning after December 15, 1997, but interim period reporting is not required in 1998. An operating segment is defined under FAS 131 as a component of an enterprise that engages in business activities that generate revenue and expense for which operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance. Mercantile is currently evaluating the impact of FAS 131 on future financial statement disclosures. FAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," addresses disclosure of such benefit plans and is effective for fiscal years beginning after December 31, 1997. The Corporation does not anticipate a significant impact when making these new disclosures. FAS 133, "Accounting for Derivative Instruments and Hedging Activities," which was issued in June 1998, establishes accounting and reporting standards for derivative instruments and hedging activities. Under FAS 133, derivatives are recognized on the balance sheet at fair value as an asset or liability. Changes in the fair value of derivatives are reported as a component of other comprehensive income or recognized as earnings through the income statement depending on the nature of the instrument. FAS 133 is effective for all quarters of fiscal years beginning after June 15, 1999 with earlier adoption permitted. The Corporation is currently evaluating FAS 133's effect. FAS 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," is effective in the first fiscal quarter beginning after December 15, 1998. FAS 134 is not anticipated to impact Mercantile. NOTE C EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. 7 Diluted earnings per share gives effect to both the increase in the average shares outstanding that would have resulted from both the exercise of dilutive stock options and the conversion of the entire balance of outstanding convertible notes. Net income is increased in the diluted earnings per share computation by interest expense that would not be incurred on notes if they converted, net of taxes. The components of basic and diluted earnings per share are as follows:
(THOUSANDS EXCEPT PER SHARE DATA) THIRD QUARTER NINE MONTHS 1998 1997 1998 1997 ---- ---- ---- ---- BASIC Net income $63,144 $13,356 $285,150 $141,423 Weighted average shares outstanding 153,427,490 148,327,222 152,150,676 137,117,594 BASIC EARNINGS PER SHARE $.41 $.09 $1.87 $1.03 DILUTED Net income $63,144 $13,356 $285,150 $141,423 Interest on convertible notes, net of taxes 10 14 33 69 ------- ------- -------- -------- Diluted Net Income $63,154 $13,370 $285,183 $141,492 ======= ======= ======== ======== Weighted average common shares outstanding 153,427,490 148,327,222 152,150,676 137,117,594 Employee incentive plans 2,209,843 2,731,394 2,494,483 2,303,074 Convertible notes 83,850 108,834 91,849 146,850 ----------- ----------- ----------- ----------- Diluted Average Shares Outstanding 155,721,183 151,167,450 154,737,008 139,567,518 =========== =========== =========== =========== DILUTED EARNINGS PER SHARE $.41 $.09 $1.84 $1.01
All per share amounts and average shares outstanding have been restated to give effect to a three-for-two stock split distributed on October 1, 1997. Per share data for 1997 gives effect to the computational and reporting requirements of FAS 128. NOTE D ACQUISITIONS On July 1, 1998, the Corporation acquired CBT Corporation ("CBT") of Paducah, Kentucky, and Firstbank of Illinois Co. ("Firstbank"), headquartered in Springfield, Illinois. The CBT and Firstbank acquisitions were accounted for under the pooling-of-interests method, and accordingly, Mercantile's financial statements have been restated. Net income and basic earnings per share prior to this restatement were as follows:
(THOUSANDS EXCEPT PER SHARE DATA) SIX MONTHS ENDED JUNE 30, 1998 ----------------- MERCANTILE Net income $198,902 Basic earnings per share 1.50 CBT Net income 7,151 Basic earnings per share 1.40 FIRSTBANK Net income 15,953 Basic earnings per share 1.21
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 for the nine months ending September 30, 1997 is 8 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 SHARE DATA) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 --------------------------------- Net interest income $849,323 Other income 292,549 Net income 100,854 Basic earnings per share .69
In the third quarter of 1998, the Corporation consummated its acquisitions of: 1) Financial Services Corporation of the Midwest ("FSCM"), headquartered in Rock Island, Illinois; 2) Iowa City-based First Financial Bancorporation ("First Financial"); and 3) Bruno, Stolze & Company, Inc. ("Bruno Stolze"), a St. Louis-based discount brokerage company. The acquisitions of FSCM and First Financial were accounted for as poolings-of-interests. However, due to their immateriality the Corporation did not restate its financial statements. The Bruno Stolze acquisition was accounted for under the purchase method of accounting. NOTE E COMPREHENSIVE INCOME Comprehensive income as defined by FAS 130 is as follows:
(THOUSANDS) THIRD QUARTER NINE MONTHS 1998 1997 1998 1997 ---- ---- ---- ---- Net income $ 63,144 $13,356 $285,150 $141,423 Other comprehensive income before tax: Holding gains on available-for-sale securities 61,172 20,951 75,749 22,193 Less: Reclassification adjustment for securities gains included in net income above (2,297) (2,131) (9,584) (5,248) -------- ------- -------- -------- Other Comprehensive Income Before Tax 58,875 18,820 66,165 16,945 Income Taxes Related to Other Comprehensive Income (20,606) (6,587) (23,158) (5,931) -------- ------- -------- -------- Other Comprehensive Income Net of Tax 38,269 12,233 43,007 11,014 -------- ------- -------- -------- COMPREHENSIVE INCOME $101,413 $25,589 $328,157 $152,437 ======== ======= ======== ========
NOTE F COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE CAPITAL TRUST I Mercantile Capital Trust I is a subsidiary of which the Corporation owns all the outstanding common securities; its sole assets are the $150,000,000 in mandatorily redeemable preferred securities, and considered together, the back-up undertakings constitute a full and unconditional guarantee by the Corporation of the trust's obligations under the preferred securities. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ----------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 1 HIGHLIGHTS
THIRD QUARTER NINE MONTHS ($ IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 CHANGE 1998 1997 CHANGE - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Diluted earnings per share $.41 $.09 --% $1.84 $1.01 82.2% Basic earnings per share .41 .09 -- 1.87 1.03 81.6 Dividends declared .31 .287 8.0 .93 .861 8.0 Book value at September 30 19.45 18.18 7.0 19.45 18.18 7.0 Market price at September 30 48 3/8 50 3/4 (4.7) 48 3/8 50 3/4 (4.7) - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS AND SELECTED RATIOS EXCLUDING NONRECURRING AMOUNTS Adjusted net income $110,506 $103,307 7.0% $332,512 $273,800 21.4% Adjusted diluted earnings per share .71 .68 4.4 2.15 1.96 9.7 Adjusted basic earnings per share .72 .70 2.9 2.19 2.00 9.5 Return on assets 1.29% 1.25% 1.29% 1.32% Return on equity 14.84 14.94 15.24 15.30 Efficiency ratio 56.56 54.83 55.58 54.69 Other expense to average assets 2.59 2.66 2.59 2.87 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Taxable-equivalent net interest income $276,985 $288,199 (3.9)% $833,434 $786,290 6.0% Tax-equivalent adjustment 3,906 4,477 (12.8) 12,332 13,760 (10.4) Net interest income 273,079 283,722 (3.8) 821,102 772,530 6.3 Provision for possible loan losses 23,871 29,209 (18.3) 39,752 78,728 (49.5) Other income 161,839 112,344 44.1 413,541 305,123 35.5 Other expense 311,152 339,167 (8.3) 756,416 768,257 (1.5) Income taxes 36,751 14,334 -- 153,325 89,245 71.8 Net income 63,144 13,356 -- 285,150 141,423 -- - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS AND DATA Return on assets .74% .16% 1.10% .68% Return on equity 8.48 1.93 13.07 7.90 Efficiency ratio 70.91 84.68 60.66 70.39 Other expense to average assets 3.63 4.11 2.93 3.69 Net interest rate margin 3.51 3.79 3.56 4.13 Tangible equity to tangible assets 6.70 5.72 Equity to assets 8.84 8.15 Tier I capital to risk-adjusted assets 9.87 9.35 Total capital to risk-adjusted assets 12.75 12.56 Leverage 7.12 6.30 Reserve for possible loan losses to outstanding loans 1.40 1.35 Reserve for possible loan losses to non-performing loans 231.98 217.65 Non-performing loans to outstanding loans .61 .62 Banks 20 37 Banking offices 628 666 Full-time equivalent employees 10,919 10,905 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Total assets $34,260,343 $33,030,120 3.7% $34,414,208 $27,749,161 24.0% Earning assets 31,275,935 30,208,065 3.5 31,344,274 25,478,078 23.0 Loans and leases 21,673,393 21,587,546 .4 21,690,744 18,621,892 16.5 Deposits 24,371,409 24,788,328 (1.7) 24,793,816 21,452,650 15.6 Shareholders' equity 2,979,246 2,766,664 7.7 2,909,216 2,385,789 21.9 - ----------------------------------------------------------------------------------------------------------------------------------- All previously reported financial information has been restated to reflect the July 1, 1998 mergers with Firstbank of Illinois Co. and CBT Corporation, which were accounted for as poolings-of-interests. Nonrecurring amounts reduced net income in the first nine months of 1998 and 1997 by $47,362,000 and $132,377,000, respectively. Includes nonrecurring amounts noted in (2) above. - -----------------------------------------------------------------------------------------------------------------------------------
10 PERFORMANCE SUMMARY Net income for Mercantile Bancorporation Inc. ("Mercantile" or "Corporation") was $63,144,000 in the third quarter of 1998 versus $13,356,000 in the same period of 1997. Basic and diluted earnings per share was $.41 compared with $.09 in the third quarter of 1997. Net income for the nine months ended September 30, 1998 was $285,150,000 compared with $141,423,000 last year, and the corresponding diluted earnings per share figures were $1.84 and $1.01, respectively. The comparison of operating results from 1997 to 1998 is significantly affected by several factors. The Corporation recorded one-time after-tax acquisition costs of $76,783,000 ($.49 per share) in the third quarter of 1998. Additionally, in the third quarter the Corporation recorded a gain on the required divestiture of the two Missouri banks owned by Firstbank of Illinois Co. ("Firstbank"). The sale of these banks, which had total assets of approximately $300 million, resulted in an after-tax gain of $.19 per share. Thus the one-time acquisition costs net of the sale proceeds was $.30 per share in the third quarter of 1998. In 1997, similar expense was recorded 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. Another one-time expense resulted in a pre-tax charge to earnings of $50,000,000 in the third quarter of 1997, as the Corporation sold $405 million in former co-branded credit card receivables to Direct Merchants Credit Card Bank, N.A. at a discount. Exhibit 2 presents third quarter and year-to-date 1997 and 1998 results adjusted to exclude such nonrecurring amounts, and as shown, year-to-date adjusted diluted earnings per share was $2.15 in 1998, up 9.7% from the 1997 comparable figure of $1.96. For the third quarter of 1998, the adjusted figure was $.71, up 4.4% from the 1997 comparable per share amount. - ------------------------------------------------------------------------------- EXHIBIT 2 ADJUSTED RESULTS
DILUTED NET INCOME EARNINGS RETURN ON (THOUSANDS) PER SHARE ASSETS ----------- --------- --------- THIRD QUARTER ENDED SEPTEMBER 30, 1998: Reported $ 63,144 $ .41 .74% Acquisition expenses 76,783 .49 .89 Gain on sale of subsidiaries (29,421) (.19) (.34) -------- ----- ---- Adjusted $110,506 $ .71 1.29% ======== ===== ==== NINE MONTHS ENDED SEPTEMBER 30, 1998: Reported $285,150 $1.84 1.10% Acquisition expenses 76,783 .50 .30 Gain on sale of subsidiaries (29,421) (.19) (.11) -------- ----- ---- Adjusted $332,512 $2.15 1.29% ======== ===== ==== THIRD QUARTER ENDED SEPTEMBER 30, 1997: Reported $ 13,356 $ .09 .16% Acquisition expenses 57,451 .38 .70 Loss on sale of credit card loans 32,500 .21 .39 -------- ----- ---- Adjusted $103,307 $ .68 1.25% ======== ===== ==== NINE MONTHS ENDED SEPTEMBER 30, 1997: Reported $141,423 $1.01 .68% Acquisition expenses 99,877 .72 .48 Loss on sale of credit card loans 32,500 .23 .16 -------- ----- ---- Adjusted $273,800 $1.96 1.32% ======== ===== ==== - -------------------------------------------------------------------------------
11 The Corporation believes it is significant to disclose cash based earnings, which excludes intangible asset amortization, because it is more indicative of cash flows, and thus, the Corporation's ability to support growth and pay dividends. Mercantile added $608 million of goodwill to its balance sheet in conjunction with the purchase of Roosevelt on July 1, 1997. Intangible asset amortization for the first nine months of 1998 was $43,369,000 compared with $25,180,000 for the same 1997 period. Third quarter 1998 cash based adjusted diluted earnings per share was $.80, up 2.6% from the $.78 earned in 1997. See Exhibit 3 for other cash based performance ratios. - ----------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 3 CASH BASED EARNINGS ($ IN THOUSANDS EXCEPT PER SHARE DATA)
THIRD QUARTER NINE MONTHS 1998 1997 CHANGE 1998 1997 CHANGE ---- ---- ------ ---- ---- ------ Adjusted Net Income $110,506 $103,307 7.0% $332,512 $273,800 21.4% Add Back: Goodwill amortization 13,700 13,876 (1.3) 41,503 20,884 98.7 Other intangible asset amortization 611 1,400 (56.4) 1,866 4,296 (56.6) -------- -------- -------- -------- Total Intangible Asset Amortization 14,311 15,276 (6.3) 43,369 25,180 72.2 Less: Tax effect (221) (461) (52.1) (673) (1,410) (52.3) -------- -------- -------- -------- CASH BASED ADJUSTED NET INCOME $124,596 $118,122 5.5 $375,208 $297,570 26.1 ======== ======== ======== ======== CASH BASED ADJUSTED DILUTED EARNINGS PER SHARE $.80 $.78 2.6 $2.43 $2.13 14.1 CASH BASED ADJUSTED PERFORMANCE RATIOS Return on tangible assets 1.49% 1.47% 1.49% 1.45% Return on tangible equity 22.91 24.90 23.93 20.34 Efficiency ratio 52.91 51.02 51.96 52.38 Other expense to average tangible assets 2.48 2.54 2.48 2.79 - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit 4 details acquisitions completed during 1997 and 1998. On July 1, 1998, Mercantile completed the acquisition of CBT Corporation ("CBT") of Paducah, Kentucky, a bank holding company with assets totaling $1.0 billion. The merger was accounted for as a pooling-of-interests. Also on July 1, 1998, Mercantile completed the acquisition of Firstbank, a $2.3 billion- asset bank holding company headquartered in Springfield, Illinois. This merger was also accounted for as a pooling-of-interests. Mercantile converted the banks in the Firstbank group to its operating systems on September 18, 1998. At that time, nine offices in Illinois located in the St. Louis metropolitan area joined Mercantile Bank N.A. and the remaining banks became part of Mercantile Bank of Illinois. All prior period financial results have been restated to reflect the poolings with CBT and Firstbank. - ----------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 4 ACQUISITIONS ($ IN THOUSANDS)
CONSIDERATION ----------------- GROSS ACCOUNTING DATE ASSETS DEPOSITS CASH SHARES METHOD ---- ------ -------- ---- ------ ---------- BANK ACQUISITIONS COMPLETED First Financial Bancorporation Sept. 28, 1998 $ 558,483 $ 477,573 $ -- 3,139,069 Pooling Financial Services Corporation of the Midwest Aug. 3, 1998 514,051 414,350 4 2,071,448 Pooling CBT Corporation July 1, 1998 1,006,384 695,923 34 5,123,214 Pooling Firstbank of Illinois Co. July 1, 1998 2,285,146 1,969,600 64 13,352,641 Pooling HomeCorp, Inc. Mar. 2, 1998 335,137 309,157 14 854,760 Pooling Horizon Bancorp, Inc. Feb. 2, 1998 536,507 454,230 2 2,549,970 Pooling Roosevelt Financial Group, Inc. July 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 NONBANK ACQUISITION COMPLETED Bruno, Stolze & Company, Inc. Sept. 30, 1998 Purchase The Corporation's historical financial statements were not restated for the acquisition due to the immateriality of the acquiree's financial condition and results of operations to those of Mercantile. Terms of the transaction not disclosed. - -----------------------------------------------------------------------------------------------------------------------------------
12 On August 3, 1998, Mercantile acquired Financial Services Corporation of the Midwest, a $514 million one-bank holding company headquartered in Rock Island, Illinois. The company's subsidiary bank, The Rock Island Bank N.A. has the leading market share position in Rock Island County, which forms the eastern half of the Quad Cities metropolitan area. On September 28, 1998, the Corporation completed its acquisition of First Financial Bancorporation, headquartered in Iowa City, Iowa. First Financial is the $558 million one-bank holding company for First National Bank Iowa, which operates in ten locations in the Iowa City / Cedar Rapids corridor. Both of these banks will be merged into Mercantile banks in November 1998 and their systems will be converted at the same time. These acquisitions meet the requirements for treatment as poolings-of-interests; however, due to the immateriality of their financial condition and results of operations to that of Mercantile, the historical financial statements of the Corporation were not restated. Finally, on September 30, 1998, Mercantile announced the completion of the acquisition of St. Louis-based Bruno, Stolze & Company, Inc., by Mercantile Investment Services, Inc., the Corporation's broker-dealer subsidiary. This acquisition accelerates Mercantile's expansion into the fast-growing discount brokerage business. There are currently no acquisitions pending. Mercantile's acquisition of Roosevelt on July 1, 1997 was accounted for as a purchase. Thus, historical financial statements were not restated and Roosevelt's results of operations are included in Mercantile's financial results only from July 1, 1997 forward. This accounting makes year-to-date 1997 and 1998 comparisons somewhat difficult. Net interest income was up 6.3% to $821,102,000 for the first nine months of 1998 yet decreased 3.8% to $273,079,000 for the third quarter of 1998 when compared with the third quarter of 1997. The net interest rate margin stabilized at 3.51% this quarter compared with 3.53% in the second quarter of 1998 and 3.79% for the third quarter of 1997, while the year-to-date margin was 3.56% compared with 4.13% last year. The third quarter 1997 acquisition of Roosevelt, continued competitive pricing for both loans and deposits, accelerated mortgage asset refinancings and prepayments, the flat yield curve, and the divestiture of selected credit card portfolios significantly impacted the Corporation's mix of earning assets and costing sources of funds, and thus lowered the rate margin. Average earning assets for the first three quarters of 1998 of $31.3 billion were 23.0% higher than the $25.5 billion reported last year, as average loan volume increased by 16.5%. For the first nine months of 1998, other income was $413,541,000, an increase of $108,418,000 or 35.5% from last year. Included in 1998 other income was a $48,051,000 gain on the sale of two Firstbank subsidiaries that were divested due to state restrictions on deposit concentration and $1,649,000 in securities losses due to portfolio restructurings of several recently acquired banks. Additionally, Mercantile recorded a $23,155,000 pre-tax gain on the sale of mortgage servicing rights in the first quarter of 1998. Excluding these items non-interest income grew by 12.7% in 1998. Adjusted third quarter non-interest expenses were $221,960,000 compared with $219,637,000 last year, an increase of 1.1%. Excluding the one-time adjustments, year-to-date operating expenses were up by 11.8%, due largely to the inclusion of Roosevelt in three quarters of 1998 but only one quarter of 1997 through September 30. The Corporation is committed to reducing its cost base and has engaged a consultant to assist it in its analysis of this issue. Certain one-time charges will be incurred in this restructuring effort. At a minimum, a $15,000,000 charge relating to staff rightsizing will be taken in the fourth quarter of 1998. Significant additional charges resulting from centralization and branch closings, consolidation of back office functions and possible further staff rightsizing may be taken in the fourth quarter as well, following completion by the Corporation of such analysis. The provision for possible loan losses for the third quarter of 1998 was $23,871,000 compared with $29,209,000 the prior year, and was $39,752,000 for the first nine months of 1998 compared with $78,728,000 in 1997. The provision in 1998 and 1997 included $19,600,000 and $20,340,000, respectively, in acquisition-related expense. Net charge-offs were $30,703,000 versus $70,584,000 last year, and on an annualized basis were .19% of average loans compared with .51% last year. The lower provision and charge-offs were primarily due to the decrease in average credit card loans, which was caused by the sale of non-strategic credit card receivables in the third quarter of 1997 and first quarter of 1998. Partially offsetting this decrease was $5,600,000 of charge-offs in the third quarter of 1998 related to recently acquired banks. At September 30, 1998, the reserve for possible loan losses was $308,869,000 and provided coverage of 231.98% of non-performing loans compared with 241.91% at year-end and 217.65% last September 30. 13 Non-performing loans (i.e., non-accrual and renegotiated loans) as of September 30, 1998 were $133,145,000 or .61% of total loans compared with $120,765,000 or .55% at June 30, 1998 and $131,422,000 or .62% at September 30, 1997. Foreclosed assets totaled $16,276,000 at September 30, 1998 compared with $23,293,000 at June 30, 1998 and $21,203,000 last September 30. Consolidated assets of $34.6 billion were up 4.4% from a year ago. Total deposits decreased by .5% to $24.5 billion, loans were $22.0 billion, up 3.9% from last year, and shareholders' equity of $3.1 billion was 13.3% higher than at September 30, 1997. All measures of capital adequacy remained adequate. Tier I capital to risk-adjusted assets was 9.87% while total capital to risk-adjusted assets at September 30, 1998 was 12.75%. The following financial commentary presents a more thorough discussion and analysis of the results of operations and financial position of the Corporation for the third quarter and first nine months of 1998. NET INTEREST INCOME Net interest income for the third quarter of 1998 was $273,079,000, a 3.8% decrease from the $283,722,000 earned last year, and for the first nine months of 1998 was $821,102,000, 6.3% higher than last year. For the quarter, the net interest rate margin was 3.51% compared with 3.79% last year, and the year-to-date margin was 3.56% compared with 4.13% last year. The acquisition of Roosevelt caused a significant shift in the mix of earning assets and funding sources. These shifts, combined with the cost of debt issued to acquire Roosevelt and the sale of the former co-branded credit card portfolio, resulted in an estimated 60-basis-point decline in the net interest rate margin during the second half of 1997. The third quarter and year-to-date 1998 net interest rate margins dropped further due to competitive pressures on both deposit and loan pricing, accelerated mortgage asset prepayments and refinancings, the flat yield curve, and the divestiture of selected portions of the Corporation's remaining credit card portfolio. It is possible that margins could continue to decline in the fourth quarter and 1999 for these same reasons. Average earning assets for the first nine months of 1998 grew by $5.9 billion or 23.0% when compared with 1997, and average loans grew by $3.1 billion or 16.5%. This growth was funded by an increase of $3.0 billion or 15.7% in average core deposits, a $291 million increase in purchased deposits, a $770 million increase in short-term borrowed funds and $650 million of long-term debt issued in the first half of 1997. The net result of these funding changes likewise caused a reduction in the rate margin. - ------------------------------------------------------------------------------- EXHIBIT 5 LOANS AND LEASES ($ IN THOUSANDS)
SEPTEMBER 30 1998 1997 CHANGE ---- ---- ------ Commercial $ 5,654,349 $ 4,789,208 18.1% Real estate--commercial 3,902,864 3,530,393 10.6 Real estate--construction 813,529 714,861 13.8 Real estate--residential mortgage 8,239,045 8,793,386 (6.3) Real estate--home equity credit loans 540,294 581,300 (7.1) Consumer 2,819,513 2,477,695 13.8 Credit card loans issued 431,850 695,178 (37.9) Securitized credit card loans (400,000) (400,000) -- ----------- ----------- Total Loans and Leases $22,001,444 $21,182,021 3.9 =========== =========== - -------------------------------------------------------------------------------
Investment securities averaged $9.1 billion in the first nine months of 1998, and increased by 42.1% from 1997. Roosevelt increased investment securities by approximately $2.7 billion. The held-to-maturity and available-for-sale portfolios as of September 30, 1998 consisted of 67.56% in U.S. and other government agency securities, including 33.52% in mortgage-related issues, 5.24% in state and municipal securities, and 27.20% of other miscellaneous securities. The comparable distribution at September 30, 1997 was 62.96%, 27.17%, 6.95% and 30.09%, respectively. State and municipal securities decreased from $555 million at September 30, 1997 to $481 million this year due to paydowns and the lack of attractive reinvestment opportunities. Miscellaneous securities are largely privately issued mortgage-backed securities and collateralized mortgage obligations. Total investment securities declined on average by 2.4% from the second to the third quarter of 1998 due to paydowns on mortgage securities, sales from portfolio restructurings and the lack of reinvestment opportunities. Year-to-date average commercial loans increased by $648 million or 13.5%, while average commercial real estate mortgage loans increased by $186 million or 5.4% and construction loans increased by $96 million or 15.1%. 14 Year-to-date average residential real estate mortgage loans increased by $2.4 billion or 38.9%. The Roosevelt acquisition added approximately $3.9 billion in volume on July 1, 1997, thereby more than accounting for this loan growth. Quarterly average residential mortgage loans declined however for the third consecutive quarter. These declines resulted from both prepayments and customer refinancings to fixed-rate residential mortgage loans that Mercantile generally sells. Home equity credit loans averaged $559 million in the first nine months of 1998, a 15.2% increase over the prior year, again reflecting the impact of the Roosevelt acquisition. Home equity credit loans likewise have declined for three consecutive quarters for the same reasons. Consumer loans increased on average by $283 million or 11.9% over the first nine months of 1997. Over 40% of the growth was in the indirect loan portfolio of Mercantile Bank N.A. Average credit card loans were down $591 million or 78.5% in 1998. The largest part of the decline was due to the sale of $405 million in loans related to co-branded cards on September 25, 1997. Prior to that date, the Corporation had managed to a $224 million decline due to more aggressive risk-based pricing of the cards, as well as transferring $123 million of loans to the investment portfolio as required by FAS 125. Partially offsetting the sale, the managed decline and the FAS 125 transfer was the addition of $112 million in Roosevelt credit card loans on July 1, 1997; the out-of-territory Roosevelt credit card loans were subsequently sold in March 1998. Average core deposits increased by $3.0 billion or 15.7% in the first nine months of 1998. At September 30, 1998, Mercantile was substantially core funded at 90.70% of total deposits and 70.34% of earning assets. As anticipated, Mercantile has experienced certificate of deposit run-off from former Roosevelt depositors, largely due to changed pricing policies and intense competition in major markets. Additionally, the low rate environment in 1998 has not made certificates of deposit attractive to certain customers, thereby causing further deposit run-off. Changes in average core deposits for the past seven quarters are shown in the Consolidated Quarterly Average Balance Sheet on pages 25 and 26 of this report. Average non-interest bearing deposits increased by $516 million or 15.5% over the first nine months of 1997. Some of the growth occurred due to the Roosevelt acquisition and part of the remaining growth came from the U.S. Government, a significant cash management customer of Mercantile Bank N.A. that pays for services rendered via compensating balances. These average balances have increased from $691 million in the first nine months of 1997 to $752 million in 1998. Partially offsetting this increase was growth of $170 million in cash and due from banks; this growth was minimized by both float and reserve reduction efforts. Year-to-date average interest bearing demand, savings, money market accounts and consumer time certificates under $100,000 increased by 6.1%, 20.5%, 18.6% and 17.8%, respectively, largely due to the Roosevelt acquisition. Roosevelt had a greater percentage of consumer time certificates in its total core deposits, and as a result, Mercantile's year-to-date average of consumer time certificates to total core deposits increased to 42.98% from 42.20% in 1997, even though certificates of deposit continued to decline. Average short-term borrowings increased by $770 million or 28.9% over the first nine months of 1997; this increase funded earning asset growth and replaced the decline in bank notes outstanding. In the second quarter of 1998, Mercantile established a $3.0 billion bank note offering program that is now an available funding source to the five largest affiliate banks, however, no funding was outstanding from the new bank note program as of September 30, 1998. Year-to-date average long-term debt increased by $2.1 billion. The increase was due to long-term FHLB advances acquired in the Roosevelt transaction and subsequent borrowings incurred to lower wholesale borrowing costs and improve liquidity. In addition, long-term debt was issued by the Corporation in the first half of 1997 to fund the acquisition of Roosevelt. Average shareholders' equity increased by $523 million or 21.9%, due to net earnings retained, shares issued in acquisitions and a favorable adjustment in the fair value of available-for-sale securities. 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 25 and 26. 15 OTHER INCOME Non-interest income increased 44.1% during the third quarter of 1998 to $161,839,000, and for the nine months was $413,541,000 compared with $305,123,000 a year ago, an improvement of 35.5%. In September 1998, Firstbank divested its two Missouri banks due to state restrictions on deposit concentrations. These banks had total assets of approximately $300 million. A pre-tax gain of $48,051,000 was recorded in the third quarter of 1998. Additionally, Mercantile recorded a $23,155,000 gain on the sale of mortgage servicing rights in the first quarter of 1998. Excluding these two items, other income for the nine months ended September 30, 1998 was 12.2% higher than in the year-earlier period. Deposit service charges were the largest source of non-interest income in 1998, and were $87,815,000 compared with $79,941,000 during 1997, an increase of 9.8%. For the quarter, service charge revenue was up 2.4% from a year ago. The increase was generated by additional deposits and fees from acquired customer bases, partially offset by attrition. Trust fees were the second largest source of non-interest income in 1998, and for the nine months of 1998 were $84,386,000 compared with $77,535,000 during 1997, an increase of 8.8%. Personal trust fees earned by Mercantile Trust Company N.A. were the largest source of trust revenue and increased slightly from last year. Income from Mississippi Valley Advisors Inc., the investment management subsidiary of Mercantile, rose by 17.1%. Mississippi Valley Advisors Inc. manages 17 proprietary mutual funds--the ARCH funds, which had assets of $4.1 billion at September 30, 1998 compared with $3.5 billion last year. Quarterly trust fees grew only by 2.1% over 1997 due to less favorable market conditions. Increases in the value of assets managed and successful new business development efforts accounted for the year-to-date growth in trust fees. Partially offsetting these increases was the reduction in trust fees caused by the sales of Mercantile's document custody business and Mark Twain's corporate trust division. - ----------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 6 OTHER INCOME ($ IN THOUSANDS)
THIRD QUARTER NINE MONTHS 1998 1997 CHANGE 1998 1997 CHANGE ---- ---- ------ ---- ---- ------ Trust $ 27,442 $ 26,888 2.1% $ 84,386 $ 77,535 8.8% Service charges 30,498 29,770 2.4 87,815 79,941 9.8 Retail brokerage revenue 4,624 5,130 (9.9) 14,818 8,916 66.2 Other investment banking 5,136 5,707 (10.0) 15,834 19,105 (17.1) Mortgage banking 6,149 7,819 (21.4) 21,051 14,691 43.3 Gain on sale of mortgage servicing rights -- -- -- 23,155 -- -- Credit card fees 3,045 5,836 (47.8) 9,128 16,927 (46.1) Securitization revenue 5,775 3,357 72.0 14,818 15,374 (3.6) Securities gains 2,297 2,131 7.8 9,584 5,248 82.6 Gain on sale of subsidiaries 48,051 -- -- 48,051 -- -- Miscellaneous 28,822 25,706 12.1 84,901 67,386 26.0 -------- -------- -------- -------- Total Other Income $161,839 $112,344 44.1 $413,541 $305,123 35.5 ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------------------------
In January 1998, the Corporation sold $1.9 billion in loan servicing which reduced originated mortgage servicing assets by approximately $3.2 million. A pre-tax gain of $23,155,000 was recognized in the first quarter of 1998. This sale was consistent with the Corporation's goals to "right size" the servicing portfolio as all Mercantile servicing operations were consolidated in Nevada, Missouri. The sale also lowered the prepayment risk associated with the servicing portfolio and helped to fund the Corporation's systems cost to become Year 2000 compliant. All other mortgage banking income was $21,051,000 in the first nine months of 1998 versus $14,691,000 the prior year. The growth was attributable to Roosevelt's servicing volume and the higher than expected level of refinancing activity in 1998. Mortgages serviced totaled $11.4 billion at September 30, 1998 compared with $13.9 billion at September 30, 1997. Total originated and purchased mortgage servicing rights on the balance sheet at September 30, 1998 totaled $48 million. The Corporation recorded a $2,700,000 valuation reserve on purchased mortgage servicing rights in the third quarter of 1998 due to accelerated refinancing activity. In this current low interest rate environment, the value of servicing rights will be carefully monitored in future quarters. 16 Year-to-date retail brokerage revenue was $14,818,000 compared with $8,916,000 last year. Roosevelt's customer base had a positive impact on this source of revenue. Comparative third quarter revenue was down by $506,000 or 9.9% due to unfavorable market conditions in 1998. Other investment banking income for the first nine months of 1998 was 17.1% lower than last year due to lower levels of activity in institutional fixed income sales and the exit from the international currency bond business. For the first nine months and third quarter of 1998, credit card income was significantly less than the comparable 1997 periods. Credit card income primarily represents interchange fees received on transactions of Mercantile cardholders and cardholders' miscellaneous fees. The two aforementioned portfolio sales largely accounted for the decline in credit card income. Securitization revenue for the first nine months of 1998 was $14,818,000 compared with $15,374,000 last year, and represents amounts accruing to Mercantile on the $400 million in credit card loans securitized in the Mercantile Credit Card Master Trust during May 1995, as well as $2,200,000 recognized in 1997 under FAS 125 for investor certificate loans that were sold and reclassified to the investment portfolio. Excluding that one-time accounting gain, securitization revenue increased by $1,644,000 or 12.5%. 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. Year-to-date miscellaneous income of $84,901,000 was 26.0% higher than in 1997. The corporate trust business of Mark Twain was sold in the first quarter of 1998 at a $2,002,000 gain. Mercantile had previously sold its comparable corporate trust business during 1996. The Corporation also sold the out-of-market Roosevelt credit card portfolio in the first quarter of 1998 at a gain of $2,658,000. Excluding these two 1998 gains and the 1997 gain of $2,300,000 on the sale of Mark Twain's merchant credit card processing business, year-to-date miscellaneous income increased by 23.3% over 1997. Credit life and other insurance product sales, loan syndication fees, operating lease income, and ATM, official check and debit card fees accounted for the increase. Net securities gains of $9,584,000 were realized through September 30, 1998 on the restructuring of the available-for-sale investment portfolio compared with $5,248,000 in gains last year. Net securities gains in the third quarter of 1998, net of $1,649,000 in nonrecurring losses, totaled $2,297,000 versus $2,131,000 in 1997. OTHER EXPENSE For the first nine months of 1998, expenses other than interest expense and the provision for possible loan losses were $756,416,000, a 1.5% decrease from the 1997 level. If the nonrecurring merger-related expenses of $89,192,000 in 1998 and $121,393,000 in 1997, and the $50,000,000 loss on the sale of the credit card portfolio in 1997 are excluded, adjusted other expense increased by $70,360,000 or 11.8% over 1997. The adjusted efficiency ratio was 55.58% compared with 54.69% in 1997 while the operating expense to average asset ratio improved to 2.59% from 2.87%. Year-to-date salary expenses increased by $31,772,000 or 11.3% from last year. The impact of Roosevelt on salaries for the first nine months of 1998 was estimated to be $12,000,000. Additionally, temporary help salaries rose by $9,333,000 and were primarily utilized in operations, mortgage banking and in the Year 2000 effort. The decline in year-to-date 1998 employee benefit expense was due largely to the Corporation's decision to modify its defined benefit pension plan to a cash balance plan, cost-effective changes to 401(k) and employee welfare plans, an increase in temporary help salaries for which few benefits are paid, and a general decline in the Corporation's stock price, which is the basis for certain employee benefit expenses. Occupancy and equipment costs through September 30, 1998 increased by 18.0% from the prior year, reflecting the costs of maintaining additional offices and a consistent program of upgrading systems and equipment to improve customer service and enhance employee efficiency. A new deposit system that has been installed throughout most of the Corporation also increased equipment expense in 1998 over 1997. Exhibit 7 details the composition of all other operating expenses. General increases reflect the impact of Roosevelt through September 30 in the Corporation's results for nine months of 1998 versus three months in 1997. Credit card expense declined by $3,672,000 or 45.8%, due primarily to the absence of the costs associated with the portfolios that were sold. Mercantile contributed $1,600,000 to its charitable foundation in the first quarter of 1998, which increased miscellaneous expense. Additionally, 17 there was $559,000 in foreclosure expense in the first nine months of 1998 compared with recoveries related to foreclosed property of $5,490,000 in 1997. - ---------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 7 OTHER EXPENSE ($ IN THOUSANDS)
THIRD QUARTER NINE MONTHS 1998 1997 CHANGE 1998 1997 CHANGE ---- ---- ------ ---- ---- ------ Salaries $106,007 $101,728 4.2% $312,385 $280,613 11.3% Employee benefits 18,148 22,800 (20.4) 58,727 64,595 (9.1) -------- -------- -------- -------- Total Personnel Expense 124,155 124,528 (.3) 371,112 345,208 7.5 Net occupancy 17,448 17,018 2.5 49,647 45,373 9.4 Equipment 21,160 18,307 15.6 63,273 50,318 25.7 Postage and freight 6,918 6,827 1.3 20,798 20,030 3.8 Marketing/business development 4,283 5,085 (15.8) 12,906 13,013 (.8) Office supplies 4,371 4,153 5.2 13,060 11,775 10.9 Communications 4,816 4,758 1.2 14,084 12,204 15.4 Data processing 4,040 4,751 (15.0) 13,471 14,241 (5.4) Legal and professional 3,806 3,300 15.3 11,741 10,343 13.5 Credit card 1,276 3,194 (60.1) 4,353 8,025 (45.8) FDIC insurance 1,382 1,050 31.6 4,204 2,692 56.2 Foreclosed property expense (recoveries) 647 (1,296) -- 559 (5,490) -- Miscellaneous 13,347 12,686 5.2 44,647 43,952 1.6 -------- -------- -------- -------- Adjusted Other Expense Before Intangible Asset Amortization 207,649 204,361 1.6 623,855 571,684 9.1 Intangible asset amortization 14,311 15,276 (6.3) 43,369 25,180 72.2 -------- -------- -------- -------- Adjusted Other Expense 221,960 219,637 1.1 667,224 596,864 11.8 Nonrecurring merger-related expense 89,192 69,530 (28.3) 89,192 121,393 (26.5) Loss on sale of credit card loans -- 50,000 -- -- 50,000 -- -------- -------- -------- -------- Total Other Expense $311,152 $339,167 (8.3) $756,416 $768,257 (1.5) ======== ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------------------------
Intangible asset amortization was $43,369,000 in the first nine months of 1998 compared with $25,180,000 in 1997. The increase was caused by additional amortization on goodwill recorded on 1997 purchase acquisitions that are being amortized using the straight-line method over 15 years. During 1997, Mercantile recorded adjustments related to the acquisitions of Roosevelt, Mark Twain and Regional Bancshares, Inc. These adjustments totaled $121,393,000 and were originally recorded as an accrued liability. Of that original liability, $102,541,000 has been utilized at September 30, 1998 and $18,852,000 remains to absorb future cash payments. These nonrecurring expenses included: 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. Of the comparable $89,192,000 liability recorded in the third quarter of 1998 for this year's acquisitions, $31,347,000 has been utilized at September 30, 1998 and $57,845,000 remains to absorb future payments. INCOME TAXES For the nine months ended September 30, 1998, the Corporation recorded income tax expense of $153,325,000 compared with 1997 expense of $89,245,000. Both years included tax benefits recorded on the nonrecurring charges. Excluding those benefits, the adjusted effective tax rate decreased to 33.61% in 1998 from 35.18% in 1997. The implementation of various business strategies that included the realignment of corporate entities consistent with the plan of reducing bank charters resulted in a $7,000,000 tax benefit in the second quarter of 1998 and an additional $8,000,000 benefit in the third quarter of 1998. A comparable tax benefit is expected to be recorded in the fourth quarter of 1998. 18 RESERVE FOR POSSIBLE LOAN LOSSES The reserve for possible loan losses was $308,869,000 or 1.40% of loans outstanding at September 30, 1998 compared with $284,165,000 or 1.33% at year's end and 1.35% at September 30, 1997. Approximately 40% of the Corporation's total loan portfolio is invested in residential real estate loans for which the loan loss experience averaged only .03% for the past five years. If residential mortgages and its allocated reserve are excluded, the reserve represents 2.07% of outstanding loans at September 30, 1998. In addition, the Corporation does not engage in lending to emerging markets or invest in hedge funds. The year-to-date 1998 provision for possible loan losses was $39,752,000, which included a nonrecurring provision of $19,600,000 that was made largely to conform the credit policies of recently acquired entities to those of Mercantile. The provision for possible loan losses exceeded year-to-date 1998 net charge-offs of $30,703,000 by $9,049,000 or 29.5%. The annualized ratio of net charge-offs to average loans for the first nine months of 1998 declined to .19% from .51% last year. The lower 1998 charge-off ratio was due to improvement in overall credit quality and the decline in average credit card loans from portfolio sales in late 1997 and early 1998. Net charge-offs in the third quarter of 1998 included $5,600,000 related to recently acquired banks. Mercantile evaluates the reserves of all banks on a quarterly basis to ensure the timely charge-off of loans and to determine the adequacy of those reserves. Management believes the consolidated reserve as of September 30, 1998 was adequate based on the risks identified at such date in the respective portfolios. - --------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 8 RESERVE FOR POSSIBLE LOAN LOSSES ($ IN THOUSANDS)
THIRD QUARTER NINE MONTHS 1998 1997 1998 1997 ---- ---- ---- ---- BEGINNING BALANCE $292,795 $263,237 $284,165 $257,718 PROVISION 23,871 29,209 39,752 78,728 Charge-offs (20,588) (29,681) (48,027) (87,944) Recoveries 4,892 4,660 17,324 17,360 -------- -------- -------- -------- NET CHARGE-OFFS (15,696) (25,021) (30,703) (70,584) Acquired Reserves 7,899 18,617 15,655 20,180 -------- -------- -------- -------- ENDING BALANCE $308,869 $286,042 $308,869 $286,042 ======== ======== ======== ======== LOANS AND LEASES September 30 balance $22,001,444 $21,182,021 $22,001,444 $21,182,021 =========== =========== =========== =========== Average balance $21,673,393 $21,587,546 $21,690,744 $18,621,892 =========== =========== =========== =========== RATIOS Reserve balance to outstanding loans 1.40% 1.35% 1.40% 1.35% Reserve balance to non-performing loans 231.98 217.65 231.98 217.65 Net charge-offs to average loans .29 .46 .19 .51 Includes nonrecurring provision of $19,600,000 and $20,340,000 in the first nine months of 1998 and 1997, respectively. - ----------------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS Non-performing loans (non-accrual and renegotiated loans) were $133,145,000 or .61% of total loans outstanding at September 30, 1998. 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 $59,612,000 at September 30, 1998 and averaged $66,296,000 for the first nine months of 1998. Foreclosed assets at September 30, 1998 were $16,276,000. The ratio of non-performing loans and foreclosed assets to outstanding loans and foreclosed assets was .68% at September 30, 1998 compared with .66% at June 30, 1998 and .72% last year. 19 Non-accrual loans increased by $10,502,000 from the June 30, 1998 level, largely reflecting the conforming of acquirees' accounting policies to those of Mercantile. Foreclosed property decreased by $7,017,000 from the prior quarter due to sales. As of September 30, 1998, Mercantile had only eight non-accrual loans with balances in excess of $1,000,000; the largest totaled $4,912,000. As significant, the Corporation held only one foreclosed asset with a book value in excess of $1,000,000. Over 40% of the Corporation's non-accrual loans are residential mortgage loans for which losses have averaged only .03% for the past five years. All loans classified as renegotiated were paying in accordance with their modified terms at September 30, 1998. Over one-half of the loans past due 90 days or more and still accruing interest consisted of consumer loans and residential real estate mortgage loans. Exhibit 9 details the composition of loans past due 90 days and over. - ----------------------------------------------------------------------------------- EXHIBIT 9 NON-PERFORMING ASSETS ($ IN THOUSANDS)
SEPT. 30 DEC. 31 SEPT. 30 1998 1997 1997 -------- ------- -------- NON-ACCRUAL LOANS Commercial $ 26,888 $ 42,602 $ 47,964 Real estate--commercial 28,232 18,362 20,881 Real estate--construction 2,620 1,948 3,045 Real estate--residential mortgage 55,768 42,870 47,626 Real estate--home equity credit loans 1,799 228 66 Consumer 11,343 7,124 6,972 -------- -------- -------- Total Non-accrual Loans 126,650 113,134 126,554 RENEGOTIATED LOANS 6,495 4,335 4,868 -------- -------- -------- TOTAL NON-PERFORMING LOANS 133,145 117,469 131,422 FORECLOSED ASSETS Foreclosed real estate 12,717 16,869 17,810 Other foreclosed assets 3,559 4,229 3,393 -------- -------- -------- TOTAL FORECLOSED ASSETS 16,276 21,098 21,203 -------- -------- -------- TOTAL NON-PERFORMING LOANS AND FORECLOSED ASSETS 149,421 138,567 152,625 Impaired investment securities 68,253 85,887 35,599 -------- -------- -------- TOTAL NON-PERFORMING ASSETS $217,674 $224,454 $188,224 ======== ======== ======== PAST-DUE LOANS (90 DAYS OR MORE) Commercial $ 8,722 $ 5,656 $ 5,284 Real estate--commercial 4,195 467 572 Real estate--construction 856 -- 74 Real estate--residential mortgage 7,760 3,587 3,556 Real estate--home equity credit loans 576 1,856 712 Consumer 6,956 5,355 3,639 Credit card 418 5,411 5,788 -------- -------- -------- Total Past-due Loans $ 29,483 $ 22,332 $ 19,625 ======== ======== ======== RATIOS Non-performing loans to outstanding loans .61% .55% .62% Non-performing loans and foreclosed assets to outstanding loans and foreclosed assets .68 .65 .72 Non-performing assets to total assets .63 .67 .57 Excludes insured FHA and government-guaranteed VA loans that were acquired primarily in the Roosevelt transaction and are contractually past due more than 90 days. Since these loans are fully insured or guaranteed for the payment of both principal and interest by the U.S. Government, the Corporation does not consider these loans to be non-performing assets, consistent with Roosevelt's past disclosure for these loans. The total of such insured or guaranteed loans was $28,836,000 at September 30, 1998, $37,677,000 at December 31, 1997, and $40,596,000 at September 30, 1997. Past-due loans 90 days or more are not included in non-performing asset totals or ratios. - -----------------------------------------------------------------------------------
The Corporation's impaired investment securities were primarily acquired in the Roosevelt transaction, and have decreased from June 30, 1998 by $5,656,000 due to paydowns. During 1998, impaired investment securities have declined by $17,634,000. Roosevelt owned pools of privately issued mortgage-backed securities. The current yield on the net book value of these impaired securities was 6.24% at September 30, 1998. 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 Mercantile to profitably expand its balance sheet, while maintaining capital ratios that exceed minimum regulatory capital requirements. At September 30, 1998, shareholders' equity was $3.1 billion, an increase of 13.3% from September 30, 1997. This increase was derived primarily from the four 1998 bank acquisitions accounted for as poolings without restatement and a $43,007,000 favorable FAS 115 adjustment, partially offset by dividends and share repurchases. As of September 30, 1998, the balance of the valuation on available-for-sale securities increased shareholders' equity by $71 million. 20 In the first nine months of 1998, the Corporation repurchased 1,806,250 shares of its common stock via designated broker-dealers at an average cost of $55.20 per share. Only 28,125 shares were repurchased in each the second and third quarters of 1998 to match systematic pattern needs. The remaining 1,750,000 shares were purchased in the first quarter and have been reissued since then. As of September 30, 1998, Mercantile had only 76,443 treasury shares and none were tainted for pooling-of-interests accounting purposes. The Parent Company's double leverage ratio, which measures the extent to which the equity capital of its subsidiaries is supported by Parent Company debt rather than equity, improved to 122.83% at September 30, 1998 compared with 125.38% at year-end 1997. Intangible assets totaled $795 million at September 30, 1998 compared with $854 million a year ago. Intangible assets consisted primarily of $737 million in goodwill and $48 million in mortgage servicing rights. The decrease largely reflects the impact of the Roosevelt goodwill amortization for the past twelve months. The tangible equity to tangible assets ratio improved to 6.70% at September 30, 1998 from 5.72% at September 30, 1997, exceeding the 6.00% goal the Corporation established during the third quarter of 1997. Additionally, all regulatory capital ratios have improved since year-end 1997 and significantly exceed regulatory minimums. On August 11, 1998, the Board of Directors declared a quarterly cash dividend of $.31 per share of common stock. This dividend was paid October 1, 1998 to shareholders of record at the end of business September 10, 1998. Book value per common share was $19.45 at September 30, 1998 compared with $18.18 a year earlier, an increase of 7.0%. Exhibit 10 details significant capital ratios. Public debt ratings of the Corporation and Mercantile Bank N.A. are shown in Exhibit 11. - ------------------------------------------------------------------------------- EXHIBIT 10 RISK-BASED CAPITAL ($ IN MILLIONS)
SEPT. 30 DEC. 31 SEPT. 30 1998 1997 1997 -------- ------- -------- Capital Tier I $ 2,383 $ 2,104 $ 2,028 Total 3,079 2,779 2,725 Risk-adjusted assets 24,147 22,373 21,696 Tier I capital to risk-adjusted assets 9.87% 9.40% 9.35% Total capital to risk-adjusted assets 12.75 12.42 12.56 Leverage 7.12 6.52 6.30 Tangible equity to tangible assets 6.70 5.92 5.72 Double leverage 122.83 125.38 126.63 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- EXHIBIT 11 DEBT RATINGS
SEPTEMBER 30, 1998 ------------------------------------------- FITCH THOMSON STANDARD MOODY'S IBCA 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 (long-term/short-term) A1/P-1 A A-/A-2 6.375% subordinated notes, due 2004 A2 A A- BBB+ 9.000% mortgage-backed notes, due 1999 Aaa Certificates of deposit (long-term/short-term) TBW-1 A-/A-2 Letters of credit TBW-1 A-/A-2 - -------------------------------------------------------------------------------------------------------------------
21 YEAR 2000 Financial institutions are particularly vulnerable to Year 2000 issues because of heavy reliance in the industry on electronic data processing and funds transfer systems. In 1996, the Corporation initiated a formal and centralized Year 2000 Program with the objective of addressing all aspects of the Year 2000 issue. All business units of the organization were brought into the Program through the creation of a Year 2000 Operational Task Force. A Program Manager, who provides monthly Year 2000 status reports to executive management and quarterly reports to the Board of Directors, was appointed. The Corporation has completed the assessment, analysis and planning phases of its Year 2000 Program and is well into the execution phase. A comprehensive Year 2000 Program Plan was developed and implemented in the third quarter of 1997. The Plan addresses both Information Technology ("IT") projects, such as insuring that data processing and data network applications are Year 2000 compliant, and non-IT projects, such as insuring that all building facilities and security systems having "embedded technology" will be operational when Year 2000 arrives. Of the projects identified, approximately 52% have been completed, and approximately 47% more are currently in progress. It is planned and expected that 97% of all identified projects will be completed by December 31, 1998. As part of its Plan, Mercantile identified those systems and business applications which are "mission critical," that is, systems and business applications which, if they failed, would render Mercantile incapable of performing core business processes. As of September 30, 1998, renovation of such identified mission-critical applications was estimated to be 93% complete. In fact, approximately 90% of all business applications already have been reintroduced to production, or are in testing. It is the goal of the Program to have all mission-critical applications renovated and substantially tested "2000 compliant" by no later than December 31, 1998. As a financial institution, Mercantile's Year 2000 efforts are subjected to regulation and monitoring by bank and bank holding company regulatory agencies. These agencies, under the auspices of the Federal Financial Institutions Examination Council ("FFIEC"), have established specific guidelines and interim deadlines for achieving Year 2000 compliance. Mercantile's Program has met all of the deadlines and complied with all guidelines to date, and fully intends and expects to continue to do so. In addition to Year 2000 compatibility of all Mercantile applications, Mercantile's Year 2000 program addresses third party Year 2000 issues. Mercantile has numerous customers, vendors, service providers, counterparties and other business relationships with third parties. Failure of any of these parties to address Year 2000 issues could result in significant and in some cases material disruptions of business and costs to Mercantile. Mercantile has undertaken an assessment of all third-party relationships and thus far has completed its evaluation of such relationships which are considered to be material. Follow up plans have been put in place to deal with relationships which have been identified as "high risk". Loan loss reserves have been set aside where appropriate. In addition, all customers with whom Mercantile exchanges electronic data have received notification of Year 2000-related date format impacts. Finally, plans are being finalized now to perform Year 2000 date testing with a representative sample of third party customers and others in 1999. Review of third party relationships will be an ongoing process throughout 1999. Mercantile estimates that its total costs related to Year 2000 remediation will be approximately $30,000,000. Year-to-date expenses of the Program are $11,212,000. Personnel costs for internal personnel and outside consultants working on the program, and the cost of setting up testing environments are the largest components of the total program cost. Other costs include costs for training, and for required hardware and software replacement, upgrade or renovation. Year 2000 expenditures are expensed as incurred. It is not expected that Year 2000 costs or activities will have a material adverse impact on operations of the Corporation. The principal risks associated with the Year 2000 problem can be grouped into two categories. The first is the risk that Mercantile does not successfully ready its operations for the next century. The second is the risk of disruption of Mercantile operations due to operational failures of third parties. The first category includes those risks which are largely under Mercantile's control. As set forth above, Management believes it will be able to make the necessary corrections to its internal systems on time and 22 therefore that there is little risk of any internal critical system or asset not being Year 2000 ready by the end of 1999. In the unlikely event that Mercantile does not successfully complete its remediation on time, it could be materially adversely affected as a result of disruption of core business processes. The second risk category is largely outside of Mercantile's control. Computer failure of third parties may jeopardize Mercantile operations. The most serious impact on Mercantile operations from Year 2000 failures of others would result if basic services such as telecommunications, electric power and service provided by other financial institutions and governmental agencies were disrupted. Similarly, operational failures affecting Mercantile's sources of major funding, larger borrowers and capital market counterparties could affect the ability of such parties to continue to provide funding or meet obligations when due. Significant public disclosure of the state of readiness among basic infrastructure and other suppliers, funding sources and counterparties has not generally been available. Although inquiries are underway to assess this potential risk, Mercantile does not yet have the necessary information to estimate the likelihood of such significant disruptions. An initial plan is being developed to address funding issues and will be completed in early 1999. The review of this plan will be an ongoing process throughout 1999. There can be no assurance that Year 2000 failures of third parties will not have a material adverse impact on Mercantile. Mercantile is developing remediation contingency plans and business resumption contingency plans specific to the Year 2000 issues. Remediation contingency plans address the actions to be taken if the current approach to remediating a system is falling behind schedule or otherwise appears in jeopardy of failing to deliver a Year 2000 ready system when needed. Business resumption contingency plans address the actions that would be taken if core business processes and critical business functions cannot be carried out in the normal manner upon entering the next century due to system or supplier failure. Remediation contingency plans with trigger dates for review and implementation have been developed for mission-critical applications. The effort to develop business resumption contingency plans is in progress. The first two phases of this effort, Organizational Planning Guidelines and Business Impact Analysis, are complete. The third and fourth phases, Plan Development and Method for Validation of Plans, are approximately 10% and 5% complete, respectively. These phases are due to be completed in the first six months of 1999, as required by FFIEC guidelines. The review of these plans will be an ongoing process throughout 1999. 23 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED QUARTERLY STATEMENT OF INCOME ($ IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1998 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR. -------- -------- -------- -------- -------- -------- -------- INTEREST INCOME Interest and fees on loans and leases $365,300 $376,819 $462,063 $447,634 $442,332 $445,880 $443,631 Investments in debt and equity securities 84,566 86,635 131,622 136,714 144,117 149,856 146,296 Short-term investments 4,767 6,103 8,727 7,728 6,731 8,351 7,334 -------- -------- -------- -------- -------- -------- -------- Total Interest Income 454,633 469,557 602,412 592,076 593,180 604,087 597,261 Tax-equivalent adjustment 4,575 4,708 4,477 4,324 4,235 4,191 3,906 -------- -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INTEREST INCOME 459,208 474,265 606,889 596,400 597,415 608,278 601,167 INTEREST EXPENSE Deposits 177,308 180,066 244,202 241,373 237,420 237,267 231,983 Borrowed funds 35,284 42,724 74,488 75,495 83,039 91,518 92,199 -------- -------- -------- -------- -------- -------- -------- Total Interest Expense 212,592 222,790 318,690 316,868 320,459 328,785 324,182 -------- -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT NET INTEREST INCOME 246,616 251,475 288,199 279,532 276,956 279,493 276,985 PROVISION FOR POSSIBLE LOAN LOSSES 20,090 29,429 29,209 7,627 8,537 7,344 23,871 OTHER INCOME Trust 24,716 25,931 26,888 26,393 28,128 28,816 27,442 Service charges 25,178 24,993 29,770 29,117 28,244 29,073 30,498 Investment banking and brokerage 8,721 8,463 10,837 10,160 11,066 9,826 9,760 Mortgage banking 3,515 3,357 7,819 11,934 29,098 8,959 6,149 Securities gains (losses) 1,046 2,071 2,131 2,401 4,453 2,834 2,297 Other 33,182 31,606 34,899 29,065 35,962 35,243 85,693 -------- -------- -------- -------- -------- -------- -------- Total Other Income 96,358 96,421 112,344 109,070 136,951 114,751 161,839 OTHER EXPENSE Personnel expense 109,973 110,707 124,528 121,782 125,178 121,779 124,155 Net occupancy and equipment 29,733 30,633 35,325 36,278 37,042 37,270 38,608 Other 47,020 101,024 179,314 60,061 58,318 65,677 148,389 -------- -------- -------- -------- -------- -------- -------- Total Other Expense 186,726 242,364 339,167 218,121 220,538 224,726 311,152 -------- -------- -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 136,158 76,103 32,167 162,854 184,832 162,174 103,801 INCOME TAXES Income taxes 46,270 28,641 14,334 53,131 65,738 50,836 36,751 Tax-equivalent adjustment 4,575 4,708 4,477 4,324 4,235 4,191 3,906 -------- -------- -------- -------- -------- -------- -------- Adjusted Income Taxes 50,845 33,349 18,811 57,455 69,973 55,027 40,657 -------- -------- -------- -------- -------- -------- -------- NET INCOME $ 85,313 $ 42,754 $ 13,356 $105,399 $114,859 $107,147 $ 63,144 ======== ======== ======== ======== ======== ======== ======== PER SHARE DATA Basic earnings per share $.64 $.33 $.09 $.71 $.76 $.71 $.41 Diluted earnings per share .63 .32 .09 .70 .75 .69 .41 SIGNIFICANT RATIOS Return on assets 1.38% .67% .16% 1.27% 1.35% 1.23% .74% Return on equity 15.25 7.97 1.93 15.39 16.03 14.88 8.48
24 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN MILLIONS)
1997 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 $ 4,666 8.55% $ 4,861 8.66% $ 4,858 8.57% $ 4,907 8.59% Real estate--commercial 3,407 8.57 3,451 8.73 3,550 8.69 3,550 8.65 Real estate--construction 584 8.89 640 8.94 684 8.82 736 8.84 Real estate--residential mortgage 4,728 7.96 4,813 7.99 8,738 7.84 8,765 7.76 Real estate--home equity credit loans 442 9.55 446 9.84 566 9.68 585 9.71 Consumer 2,312 9.06 2,354 9.11 2,453 9.17 2,493 9.12 Credit card 820 13.31 703 13.33 738 12.83 286 10.03 ------- ------- ------- ------- Total Loans and Leases 16,959 8.65 17,268 8.76 21,587 8.59 21,322 8.42 Investments in debt and equity securities Trading 69 6.81 93 7.00 101 6.41 155 6.68 Taxable 4,978 6.17 5,046 6.23 7,520 6.58 7,750 6.60 Tax-exempt 485 8.16 469 8.18 465 8.08 462 8.10 ------- ------- ------- ------- Total Investments in Debt and Equity Securities 5,532 6.35 5,608 6.41 8,086 6.67 8,367 6.68 Short-term investments 350 5.45 428 5.64 535 6.39 498 6.08 ------- ------- ------- ------- Total Earning Assets 22,841 8.15 23,304 8.16 30,208 7.97 30,187 7.84 Non-earning assets 1,883 2,098 2,822 2,910 ------- ------- ------- ------- Total Assets $24,724 $25,402 $33,030 $33,097 ======= ======= ======= ======= LIABILITIES Acquired Funds Deposits Non-interest bearing $ 3,065 $ 3,412 $ 3,522 $ 3,636 Interest bearing demand 2,911 2.12 2,884 2.07 2,945 1.95 2,997 1.90 Money market accounts 3,050 3.96 3,056 4.01 3,854 4.07 3,879 4.04 Savings 1,326 2.31 1,336 2.31 1,636 2.43 1,582 2.48 Consumer time certificates under $100,000 7,141 5.49 7,092 5.50 10,287 5.56 10,006 5.60 Other time 201 4.93 205 4.60 207 4.16 208 4.82 ------- ------- ------- ------- Total Core Deposits 17,694 4.20 17,985 4.20 22,451 4.41 22,308 4.41 Time certificates $100,000 and over 1,538 5.53 1,482 5.57 1,808 5.71 1,868 5.71 Foreign 344 5.48 469 5.67 529 5.70 487 5.66 ------- ------- ------- ------- Total Purchased Deposits 1,882 5.54 1,951 5.62 2,337 5.73 2,355 5.71 ------- ------- ------- ------- Total Deposits 19,576 4.36 19,936 4.37 24,788 4.56 24,663 4.55 Short-term borrowings 1,980 5.06 2,283 5.23 3,703 5.60 3,725 5.34 Bank notes 175 5.81 175 5.95 175 6.01 175 5.99 Long-term debt 420 7.33 554 7.07 1,145 6.42 1,345 6.41 ------- ------- ------- ------- Total Acquired Funds 22,151 4.52 22,948 4.57 29,811 4.81 29,908 4.79 Other liabilities 335 307 452 450 SHAREHOLDERS' EQUITY 2,238 2,147 2,767 2,739 ------- ------- ------- ------- Total Liabilities and Shareholders' Equity $24,724 $25,402 $33,030 $33,097 ======= ======= ======= ======= SIGNIFICANT RATIOS Net interest rate spread 3.63% 3.59% 3.16% 3.05% Net interest rate margin 4.38 4.33 3.79 3.67 Taxable-equivalent basis. Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
25 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN MILLIONS)
1998 1ST QTR. 2ND QTR. 3RD QTR. -------------------- --------------------- -------------------- VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ -------- ASSETS Earning Assets Loans and leases, net of unearned income Commercial $ 5,152 8.48% $ 5,608 8.38% $ 5,566 8.19% Real estate--commercial 3,585 8.53 3,631 8.47 3,750 8.58 Real estate--construction 729 8.86 726 8.78 742 8.69 Real estate--residential mortgage 8,742 7.66 8,505 7.60 8,203 7.60 Real estate--home equity credit loans 579 9.64 562 9.65 536 9.63 Consumer 2,550 9.15 2,655 9.08 2,763 9.04 Credit card 248 9.30 126 6.76 113 2.51 ------- ------- ------- Total Loans and Leases 21,585 8.22 21,813 8.20 21,673 8.21 Investments in debt and equity securities Trading 125 6.67 169 6.69 115 6.24 Taxable 8,404 6.47 8,728 6.47 8,560 6.49 Tax-exempt 434 8.38 417 8.47 411 7.94 ------- ------- ------- Total Investments in Debt and Equity Securities 8,963 6.57 9,314 6.56 9,086 6.56 Short-term investments 479 5.62 600 5.51 517 5.55 ------- ------- ------- Total Earning Assets 31,027 7.81 31,727 7.69 31,276 7.63 Non-earning assets 3,012 3,214 2,984 ------- ------- ------- Total Assets $34,039 $34,941 $34,260 ======= ======= ======= LIABILITIES Acquired Funds Deposits Non-interest bearing $ 3,746 $ 4,003 $ 3,801 Interest bearing demand 3,128 1.98 3,136 1.90 3,009 1.82 Money market accounts 3,884 4.11 3,979 4.08 3,960 4.06 Savings 1,647 2.50 1,762 2.62 1,774 2.72 Consumer time certificates under $100,000 9,836 5.60 9,685 5.57 9,420 5.53 Other time 196 5.93 196 5.50 174 5.20 ------- ------- ------- Total Core Deposits 22,437 4.41 22,761 4.36 22,138 4.33 Time certificates $100,000 and over 1,908 5.62 1,928 5.62 1,837 5.65 Foreign 541 5.63 441 5.60 397 5.61 ------- ------- ------- Total Purchased Deposits 2,449 5.64 2,369 5.63 2,234 5.65 ------- ------- ------- Total Deposits 24,886 4.55 25,130 4.50 24,372 4.47 Short-term borrowings 3,876 5.40 3,570 5.31 2,860 5.32 Bank notes 152 6.13 25 5.82 25 5.85 Long-term debt 1,823 6.23 2,911 5.87 3,641 5.69 ------- ------- ------- Total Acquired Funds 30,737 4.82 31,636 4.77 30,898 4.75 Other liabilities 436 424 383 SHAREHOLDERS' EQUITY 2,866 2,881 2,979 ------- ------- ------- Total Liabilities and Shareholders' Equity $34,039 $34,941 $34,260 ======= ======= ======= SIGNIFICANT RATIOS Net interest rate spread 2.99% 2.92% 2.88% Net interest rate margin 3.62 3.53 3.51 Taxable-equivalent basis. Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET (CONTINUED) ($ IN MILLIONS) 1997 1998 NINE MONTHS NINE MONTHS -------------------- -------------------- VOLUME RATE VOLUME RATE ------ -------- ------ -------- ASSETS Earning Assets Loans and leases, net of unearned income Commercial $ 4,796 8.59% $ 5,443 8.34% Real estate--commercial 3,470 8.66 3,656 8.53 Real estate--construction 636 8.88 732 8.78 Real estate--residential mortgage 6,108 7.89 8,481 7.62 Real estate--home equity credit loans 485 9.69 559 9.64 Consumer 2,374 9.12 2,657 9.09 Credit card 753 13.16 162 7.08 ------- ------- Total Loans and Leases 18,622 8.65 21,690 8.21 Investments in debt and equity securities Trading 88 6.72 136 6.56 Taxable 5,857 6.35 8,565 6.48 Tax-exempt 473 8.14 421 8.27 ------- ------- Total Investments in Debt and Equity Securities 6,418 6.49 9,122 6.56 Short-term investments 438 5.90 532 5.56 ------- ------- Total Earning Assets 25,478 8.08 31,344 7.71 Non-earning assets 2,271 3,070 ------- ------- Total Assets $27,749 $34,414 ======= ======= LIABILITIES Acquired Funds Deposits Non-interest bearing $ 3,334 $ 3,850 Interest bearing demand 2,914 2.04 3,091 1.90 Money market accounts 3,323 4.02 3,941 4.08 Savings 1,434 2.36 1,729 2.62 Consumer time certificates under $100,000 8,185 5.52 9,645 5.57 Other time 204 4.56 188 5.55 ------- ------- Total Core Deposits 19,394 4.29 22,444 4.37 Time certificates $100,000 and over 1,611 5.61 1,891 5.63 Foreign 448 5.63 459 5.62 ------- ------- Total Purchased Deposits 2,059 5.63 2,350 5.64 ------- ------- Total Deposits 21,453 4.44 24,794 4.51 Short-term borrowings 2,662 5.36 3,432 5.35 Bank notes 175 5.92 67 6.05 Long-term debt 709 6.77 2,798 5.87 ------- ------- Total Acquired Funds 24,999 4.65 31,091 4.78 Other liabilities 364 414 SHAREHOLDERS' EQUITY 2,386 2,909 ------- ------- Total Liabilities and Shareholders' Equity $27,749 $34,414 ======= ======= SIGNIFICANT RATIOS Net interest rate spread 3.43% 2.93% Net interest rate margin 4.13 3.56 Taxable-equivalent basis. Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
26 SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS 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. These forward-looking statements involve certain risks and uncertainties. For example, by accepting deposits at fixed rates, at different times and for different terms, and lending funds at fixed rates for fixed periods, a bank accepts the risk that the cost of funds may rise and the use of the funds may be at a fixed rate. Similarly, the cost of funds may fall, but a bank may have committed by virtue of the term of a deposit to pay what becomes an above-market rate. Investments may decline in value in a rising interest rate environment. Because the business of banking is highly regulated, decisions of governmental authorities, such as the rate of deposit insurance, can have a major effect on operating results. Unanticipated events associated with Year 2000 compliance, relating to required work on developments or modifications to the Corporation's computer systems and software, including work performed by suppliers or vendors or relating to the failure of third parties upon whom the Corporation relies, including customers, suppliers, governmental entities and others, to address their own Year 2000 issues, could affect Mercantile's future financial condition and operating results. Actual charges associated with completed acquisitions may prove to be greater than current estimates. In addition, management's objectives with respect to the Corporation's capital base and equity levels may not reach the targeted objectives within the targeted periods due to numerous factors, including those previously mentioned. All of these uncertainties, as well as others, are present in a banking operation and shareholders are cautioned that management's view of the future on which it prices it products, evaluates collateral, sets loan reserves and estimates costs of operation and regulation may prove to be other than as anticipated. Actual strategies and results in future periods may differ materially from those currently expected. 27 PART II--OTHER INFORMATION Item 5. Other Information. The By-Laws of Mercantile provide that shareholder proposals, including nominations of directors, which do not appear in the proxy statement may be considered at a meeting of shareholders only if they involve a matter proper for shareholder action and written notice of the proposal is received by the Secretary of Mercantile not less than 60 and not more than 90 days prior to the anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by Mercantile. Pursuant to the By-Laws of Mercantile, the date by which written notice of a proposal must be received by Mercantile to be considered at the 1999 Annual Meeting of Shareholders is February 22, 1999. Any such written notice of a shareholder proposal by a shareholder to the Secretary of Mercantile must include (a) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (b) the name and address, as they appear on Mercantile's books, of the shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (c) the class and number of shares of Mercantile which are owned beneficially and of record by the shareholder and such beneficial owner and (d) any material interest of the shareholder and such beneficial owner in such business. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1 Financial Data Schedule (September 30, 1998) 27.2 Restated Financial Data Schedule (September 30, 1997) (b) Reports on Form 8-K: Registrant filed one (1) Current Report on Form 8-K during the quarter ended September 30, 1998. In a Report dated July 16, 1998, under Item 5, Registrant disclosed that it had, effective July 1, 1998, consummated its acquisition of Firstbank of Illinois Co. ("Firstbank") through merger of Firstbank with and into a wholly owned subsidiary of Registrant, with the shareholders of Firstbank to receive an aggregate of approximately 13,786,135 shares of Registrant's common stock in exchange for their Firstbank shares. In addition, the Registrant filed a Current Report on Form 8-K dated October 7, 1998 under Item 5, which contained supplemental consolidated financial statements for the years ended December 31, 1997, 1996 and 1995. Said statements restated Registrant's historical consolidated financial statements for those years to reflect the acquisitions of Firstbank and CBT Corporation ("CBT") on July 1, 1998. The Firstbank and CBT acquisitions were accounted for under the pooling-of-interests method of accounting. Registrant also filed Unaudited Interim Consolidated Financial Statements restating the Registrant's historical consolidated financial statements for the Firstbank and CBT transactions: 1) as of and for the three month periods ended March 31, 1998 and 1997; and 2) as of June 30, 1998 and 1997, and for the three and six month periods ended June 30, 1998 and 1997. Under Item 7, Registrant filed the consent of KPMG Peat Marwick LLP to incorporation by reference of its report on the Supplemental Financial Statements into pending registration statements of the Registrant. 28 The October 7, 1998 Form 8-K included the financial statements, notes and auditor's report listed below: Independent Auditor's Report of KPMG Peat Marwick LLP dated October 7, 1998. Supplemental Consolidated Statement of Income for the years ended December 31, 1997, 1996 and 1995. Supplemental Consolidated Balance Sheet as of December 31, 1997, 1996 and 1995. Supplemental Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995. Supplemental Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995. Notes to Supplemental Consolidated Financial Statements. Supplemental Interim Consolidated Statement of Income (Unaudited) for the three months ended March 31, 1998 and 1997. Supplemental Interim Consolidated Balance (Unaudited) as of March 31, 1998 and 1997. Supplemental Interim Consolidated Statement of Changes in Shareholders' Equity (Unaudited) for the three months ended March 31, 1998 and 1997. Supplemental Interim Consolidated Statement of Cash Flows (Unaudited) for the three months ended March 31, 1998 and 1997. Supplemental Interim Consolidated Statement of Comprehensive Income (Unaudited) for the three months ended March 31, 1998 and 1997. Supplemental Interim Consolidated Statement of Income (Unaudited) for the three months and six months ended June 30, 1998 and 1997. Supplemental Interim Consolidated Balance (Unaudited) as of June 30, 1998 and 1997. Supplemental Interim Consolidated Statement of Changes in Shareholders' Equity (Unaudited) for the six months ended June 30, 1998 and 1997. Supplemental Interim Consolidated Statement of Cash Flows (Unaudited) for the six months ended June 30, 1998 and 1997. Supplemental Interim Consolidated Statement of Comprehensive Income (Unaudited) for the three months and six months ended June 30, 1998 and 1997. 29 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, 1998 /s/ JOHN W. MCCLURE ----------------------- ------------------------------------- John W. McClure Chief Financial Officer 30 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- 27.1 Financial Data Schedule (September 30, 1998) Included herein 27.2 Restated Financial Data Schedule (September 30, 1997) Included herein
31 EX-27.1 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,175,006 153,408 214,889 98,301 9,061,675 116,007 117,538 22,001,444 308,869 34,596,521 24,542,307 2,563,134 575,652 3,831,754 0 0 1,574 3,057,100 34,596,521 1,331,843 440,269 22,416 1,794,528 706,670 973,426 821,102 39,752 9,584 756,416 438,475 285,150 0 0 285,150 1.87 1.84 3.56 126,650 29,483 6,495 0 284,165 48,027 17,324 308,869 308,869 0 0 Only reported at fiscal year-end date.
EX-27.2 3 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1,169,211 313,591 192,999 137,817 7,624,053 365,195 374,419 21,182,021 286,042 33,124,668 24,654,264 3,966,386 428,337 1,201,269 0 0 1,486 2,697,926 33,124,668 1,204,182 302,823 19,597 1,526,602 601,576 754,072 772,530 78,728 5,248 768,257 230,668 141,423 0 0 141,423 1.03 1.01 0 126,554 19,625 4,868 0 257,718 87,944 17,360 286,042 286,042 0 0 Only reported at fiscal year-end date.
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