-----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, FCqjHO2JlqEI5OSk0a6E0411O8M18wRjDlqxYWEfMYYGQX2Ksjx1G7wUsjmZPTu8 vsGMcTQCZ+3zJi5py/TKSQ== 0001068800-98-000005.txt : 19981008 0001068800-98-000005.hdr.sgml : 19981008 ACCESSION NUMBER: 0001068800-98-000005 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981007 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981007 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANCORPORATION INC CENTRAL INDEX KEY: 0000064907 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 430951744 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11792 FILM NUMBER: 98722328 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 8-K 1 MERCANTILE BANCORPORATION INC. FORM 8-K 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): OCTOBER 7, 1998 MERCANTILE BANCORPORATION INC. (Exact name of registrant as specified in its charter) MISSOURI 1-11792 43-0951744 (State or other (Commission File (I.R.S. Employer jurisdiction of Number) Identification organization) Number) P.O. BOX 524 ST. LOUIS, MISSOURI 63166-0524 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 418-2525 =============================================================================== 2 ITEM 5. OTHER EVENTS Effective July 1, 1998, Mercantile Bancorporation Inc. ("Corporation") acquired Firstbank of Illinois Co. and CBT Corporation in transactions accounted for as poolings-of-interests. Audited Supplemental Consolidated Financial Statements restating the Corporation's historical consolidated financial statements as of and for the years ended December 31, 1997, 1996 and 1995 to reflect both transactions are included herein. In addition, Supplemental Interim Unaudited Consolidated Financial Statements restating the Corporation's historical consolidated financial statements as of and for the three-month and six-month periods ended March 31 and June 30, 1998 and 1997 to reflect both transactions are included herein. 3 [ MERCANTILE LOGO ] MERCANTILE BANCORPORATION INC. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 MERCANTILE BANCORPORATION INC. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 Effective July 1, 1998, Mercantile Bancorporation Inc. ("Corporation") acquired Firstbank of Illinois Co. and CBT Corporation in transactions accounted for as poolings-of-interests. The following Supplemental Consolidated Financial Statements restate the Corporation's historical consolidated financial statements as of and for the years ended December 31, 1997, 1996 and 1995 to reflect these transactions. 1 3 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (Thousands except per share data)
YEAR ENDED DECEMBER 31 1997 1996 1995 ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $1,651,816 $1,404,809 $1,371,083 Investments in debt and equity securities Trading 7,077 3,630 3,457 Taxable 406,663 315,120 296,425 Tax-exempt 25,797 28,255 31,202 ---------- ---------- ---------- Total Investments in Debt and Equity Securities 439,537 347,005 331,084 Due from banks--interest bearing 10,379 4,128 2,508 Federal funds sold and repurchase agreements 16,946 15,178 21,644 ---------- ---------- ---------- Total Interest Income 2,118,678 1,771,120 1,726,319 INTEREST EXPENSE Interest bearing deposits 816,771 681,637 651,886 Foreign deposits 26,178 10,501 13,088 Short-term borrowings 159,013 89,676 101,958 Bank notes 10,537 15,333 13,674 Long-term debt and mandatorily redeemable preferred securities 58,441 25,010 27,934 ---------- ---------- ---------- Total Interest Expense 1,070,940 822,157 808,540 ---------- ---------- ---------- NET INTEREST INCOME 1,047,738 948,963 917,779 PROVISION FOR POSSIBLE LOAN LOSSES 86,355 78,766 44,952 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 961,383 870,197 872,827 OTHER INCOME Trust 103,928 93,704 84,066 Service charges 109,058 98,908 91,951 Investment banking and brokerage 38,181 35,351 30,543 Credit card fees 21,169 28,415 20,634 Securitization revenue 18,404 16,008 23,005 Mortgage banking 26,625 13,518 13,624 Securities gains 7,649 292 4,634 Miscellaneous 89,179 81,814 71,532 ---------- ---------- ---------- Total Other Income 414,193 368,010 339,989 OTHER EXPENSE Salaries 381,942 335,803 320,687 Employee benefits 85,048 77,437 72,149 Net occupancy 61,697 55,489 53,044 Equipment 70,272 60,605 54,745 Intangible asset amortization 40,170 13,237 11,630 Loss on the sale of credit card loans 50,000 -- -- Miscellaneous 297,249 262,616 213,660 ---------- ---------- ---------- Total Other Expense 986,378 805,187 725,915 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 389,198 433,020 486,901 INCOME TAXES 142,376 148,567 168,746 ---------- ---------- ---------- NET INCOME $ 246,822 $ 284,453 $ 318,155 ========== ========== ========== PER SHARE DATA Basic earnings per share $1.76 $2.12 $2.37 Diluted earnings per share 1.73 2.09 2.33 Dividends declared 1.148 1.092 .88 Includes the following nonrecurring amounts: Provision for possible loan losses $ 20,340 $ 13,666 $-- Other income (securities losses) -- (3,114) -- Loss on the sale of credit card loans 50,000 -- -- Miscellaneous expense 121,393 63,456 -- Income tax benefit (59,356) (23,697) -- --------- -------- --- Impact on Net Income $(132,377) $(56,539) $-- ========= ======== ===
The accompanying notes to supplemental consolidated financial statements are an integral part of these statements. 2 4 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEET (Thousands)
DECEMBER 31 1997 1996 1995 ---- ---- ---- ASSETS Cash and due from banks $ 1,330,512 $ 1,448,637 $ 1,385,695 Due from banks--interest bearing 251,909 96,714 51,980 Federal funds sold and repurchase agreements 303,859 310,963 292,933 Investments in debt and equity securities Trading 70,536 31,361 67,283 Available-for-sale (Amortized cost of $8,023,157, $4,731,005 and $5,182,540, respectively) 8,059,066 4,741,677 5,223,660 Held-to-maturity (Estimated fair value of $341,954, $661,632 and $340,130, respectively) 335,279 656,721 335,141 ----------- ----------- ----------- Total Investments in Debt and Equity Securities 8,464,881 5,429,759 5,626,084 Loans held-for-sale 96,955 75,377 105,893 Loans and leases, net of unearned income 21,265,000 16,861,877 15,478,392 ----------- ----------- ----------- Total Loans and Leases 21,361,955 16,937,254 15,584,285 Reserve for possible loan losses (284,165) (257,718) (261,339) ----------- ----------- ----------- Net Loans and Leases 21,077,790 16,679,536 15,322,946 Bank premises and equipment 531,650 428,972 390,163 Intangible assets 839,285 202,071 133,845 Other assets 532,304 399,083 447,788 ----------- ----------- ----------- Total Assets $33,332,190 $24,995,735 $23,651,434 =========== =========== =========== LIABILITIES Deposits Non-interest bearing $ 3,956,138 $ 3,389,776 $ 2,925,272 Interest bearing 20,267,878 16,143,182 15,329,213 Foreign 585,439 251,887 209,170 ----------- ----------- ----------- Total Deposits 24,809,455 19,784,845 18,463,655 Federal funds purchased and repurchase agreements 2,127,443 1,861,994 1,790,937 Other short-term borrowings 1,551,097 270,680 262,972 Bank notes 175,000 175,000 250,000 Long-term Federal Home Loan Bank advances 578,484 37,085 63,379 Other long-term debt 789,687 290,590 307,230 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 -- -- Other liabilities 388,722 312,298 302,416 ----------- ----------- ----------- Total Liabilities 30,569,888 22,732,492 21,440,589 Commitments and contingent liabilities -- -- -- SHAREHOLDERS' EQUITY 1997 1996 1995 ---- ---- ---- Preferred stock--no par value Shares authorized 5,000 5,000 5,000 Shares issued and outstanding -- -- 15 -- -- 12,153 Common stock--$.01 par value at December 31, 1997, and $5.00 par value at December 31, 1996 and 1995 Shares authorized 200,000 200,000 200,000 Shares issued 148,874 136,766 136,916 1,489 683,832 684,581 Capital surplus 1,016,844 16,091 72,528 Retained earnings 1,724,752 1,638,610 1,476,841 Valuation on available-for-sale securities 25,222 8,911 25,299 Treasury stock, at cost 162 2,591 2,070 (6,005) (84,201) (60,557) ----------- ----------- ----------- Total Shareholders' Equity 2,762,302 2,263,243 2,210,845 ----------- ----------- ----------- Total Liabilities and $33,332,190 $24,995,735 $23,651,434 Shareholders' Equity =========== =========== ===========
The accompanying notes to supplemental consolidated financial statements are an integral part of these statements. 3 5 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ($ in Thousands)
COMMON STOCK ----------------------- TOTAL OUTSTANDING PREFERRED CAPITAL RETAINED TREASURY SHAREHOLDERS' SHARES DOLLARS STOCK SURPLUS EARNINGS STOCK EQUITY ----------- ------- --------- ------- ------------ -------- ------------- BALANCE AT DECEMBER 31, 1994 130,669,191 $654,048 $ 12,153 $ 31,732 $1,202,408 $ (2,954) $1,897,387 Net income 318,155 318,155 Common dividends declared: Mercantile Bancorporation Inc., $.88 per share (68,542) (68,542) Pooled companies prior to acquisition (44,645) (44,645) Preferred dividends declared (1,020) (1,020) Issuance of common stock in acquisitions of: Southwest Bancshares, Inc. 1,012,463 5,062 (1,062) 9,797 13,797 AmeriFirst Bancorporation, Inc. 992,034 4,960 3,714 3,781 12,455 Plains Spirit Financial Corporation 1,951,770 3,959 21,610 27,701 53,270 Wedge Bank 1,454,931 7,275 (776) 7,314 13,813 Issuance of common stock for: Employee incentive plans 997,123 4,951 9,281 170 14,402 Convertible notes 664,357 3,322 7,134 10,456 Net fair value adjustment on available-for-sale securities 74,892 74,892 Purchase of treasury stock (3,096,900) (85,474) (85,474) Pre-merger transactions of pooled companies and other 200,840 1,004 895 1,899 ----------- -------- -------- ---------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1995 134,845,809 684,581 12,153 72,528 1,502,140 (60,557) 2,210,845 Net income 284,453 284,453 Common dividends declared: Mercantile Bancorporation Inc., $1.092 per share (101,499) (101,499) Pooled companies prior to acquisition (33,938) (33,938) Preferred dividends declared (408) (408) Redemption of preferred stock (12,153) (531) (12,684) Issuance of common stock in acquisitions of: Today's Bancorp, Inc. 1,690,587 (2,195) 52,321 50,126 First Financial Corporation of America 388,113 (1,226) 12,954 11,728 Peoples State Bank 488,756 849 14,791 15,640 Metro Savings Bank, F.S.B. 296,853 57 14 8,983 9,054 Security Bank of Conway, F.S.B. 482,946 75 14,614 14,689 First Sterling Bancorp, Inc. 782,126 3,911 572 13,772 18,255 Issuance of common stock for: Employee incentive plans 411,775 1,638 (4,318) 2,397 (283) Convertible notes 438,002 2,190 2,681 4,871 Net fair value adjustment on available-for-sale securities (16,841) (16,841) Purchase of treasury stock (5,890,426) (186,811) (186,811) Reissuance and retirement of treasury stock (9,688) (47,478) 57,166 -- Pre-merger transactions of pooled companies and other 240,056 1,200 (5,454) 359 (59) (3,954) ----------- -------- -------- ---------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1996 134,174,597 683,832 -- 16,091 1,647,521 (84,201) 2,263,243 NET INCOME 246,822 246,822 COMMON DIVIDENDS DECLARED: MERCANTILE BANCORPORATION INC., $1.148 PER SHARE (132,535) (132,535) POOLED COMPANIES PRIOR TO ACQUISITION (28,134) (28,134) 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 899,716 322 5,846 5,512 11,680 CONVERTIBLE NOTES 79,335 80 802 882 NET FAIR VALUE ADJUSTMENT ON AVAILABLE-FOR-SALE SECURITIES 8,805 8,805 PURCHASE OF TREASURY STOCK (6,778,324) (287,288) (287,288) REISSUANCE AND RETIREMENT OF TREASURY STOCK (7,396) (42,950) 50,346 -- PRE-MERGER TRANSACTIONS OF POOLED COMPANIES AND OTHER 487,474 1,103 7,826 262 (168) 9,023 ----------- --------- --------- ---------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1997 148,712,307 $ 1,489 $ -- $1,016,844 $1,749,974 $ (6,005) $2,762,302 =========== ========= ========= ========== ========== ========= ========== Includes valuation on available-for-sale securities.
The accompanying notes to supplemental consolidated financial statements are an integral part of these statements. 4 6 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS ($ in Thousands)
YEAR ENDED DECEMBER 31 1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES Net income $ 246,822 $ 284,453 $ 318,155 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 86,355 78,766 44,952 Depreciation and amortization 62,637 52,566 49,887 Provision for deferred income tax credits (9,995) (23,318) (13,937) Net change in loans held-for-sale (21,578) 30,516 (78,469) Net change in trading securities (53,020) 32,745 (28,619) Net change in accrued interest receivable (2,780) 11,366 (11,701) Net change in accrued interest payable 36,254 (12,348) 33,395 Other, net 55,194 85,651 23,019 ----------- ----------- ----------- Net Cash Provided by Operating Activities 399,889 540,397 336,682 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (4,509,883) (2,455,696) (1,640,700) Proceeds from maturities 3,608,721 2,366,128 1,589,272 Proceeds from sales of available-for-sale securities 802,007 506,636 386,969 Net change in loans and leases (642,617) (898,355) (1,100,947) Purchases of loans and leases (442,154) (141,600) (128,361) Proceeds from sales of loans and leases 696,454 255,043 759,626 Purchases of premises and equipment (122,785) (76,386) (70,228) Proceeds from sales of premises and equipment 19,679 4,997 8,432 Proceeds from sales of foreclosed property 45,905 32,353 27,265 Cash and cash equivalents from acquisitions, net of cash paid (received) (231,537) 57,152 45,935 Sale of banking offices, net of cash paid (193,058) (12,154) 1,191 Other, net 19,118 18,391 9,249 ----------- ----------- ----------- Net Cash Used by Investing Activities (950,150) (343,491) (112,297) FINANCING ACTIVITIES Net change in consumer certificates under $100,000 (726,907) (406,202) 370,012 Net change in time certificates $100,000 and over (68,418) 74,010 226,978 Net change in other time deposits (42,798) 190,437 5,264 Net change in foreign deposits 333,552 42,717 (9,965) Net change in other deposits 156,414 460,853 (181,964) Net change in short-term borrowings 259,830 23,670 (207,163) Issuance of bank notes -- 25,000 150,000 Principal payments on bank notes -- (100,000) -- Issuance of long-term debt 980,175 2,607 20,642 Issuance of company-obligated mandatorily redeemable preferred securities 150,000 -- -- Principal payments on long-term debt (16,195) (41,081) (41,873) Cash dividends paid (160,347) (135,578) (113,819) Net proceeds from issuance of common stock from employee incentive plans and pre-merger transactions of pooled companies 13,220 (22,089) (1,926) Purchase of treasury stock (299,063) (175,036) (85,474) Redemption of preferred stock -- (12,684) -- Other, net 764 2,176 4,011 ----------- ----------- ----------- Net Cash Provided (Used) by Financing Activities 580,227 (71,200) 134,723 ----------- ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 29,966 125,706 359,108 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,856,314 1,730,608 1,371,500 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,886,280 $ 1,856,314 $ 1,730,608 =========== =========== ===========
The accompanying notes to supplemental consolidated financial statements are an integral part of these statements. 5 7 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS NOTE A ACCOUNTING POLICIES Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") and its subsidiaries follow generally accepted accounting principles and reporting practices applicable to the banking industry. The significant accounting policies are summarized below. Basis of Presentation: Consolidation: The Supplemental Consolidated Financial Statements include the accounts of Mercantile Bancorporation Inc. and its subsidiaries. Material intercompany transactions are eliminated. Restatement: Effective July 1, 1998, the Corporation acquired Firstbank of Illinois Co. ("Firstbank") and CBT Corporation ("CBT"), in transactions accounted for as poolings-of-interests. The Supplemental Consolidated Financial Statements give retroactive effect to the transactions and, as a result, the Supplemental Consolidated Statement of Income, Balance Sheet, and Statement of Cash Flows are presented as if the combining companies had been consolidated for all periods presented. (As required by generally accepted accounting principles, the Supplemental Consolidated Financial Statements become the historical consolidated financial statements upon issuance of the financial statements for the period that includes the date of the transaction.) The Supplemental Consolidated Statement of Changes in Shareholders' Equity reflects the accounts of Mercantile Bancorporation Inc. as if the common stock issued in the Firstbank and CBT acquisitions had been outstanding during all periods presented. The Supplemental Consolidated Financial Statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of the Corporation included in its 1997 Annual Report on Form 10-K. Reclassification: Certain reclassifications have been made to the 1996 and 1995 historical financial statements to conform with the 1997 presentation. New Accounting Standards: Financial Accounting Standard ("FAS") 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," requires an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The Corporation has applied the new rules prospectively to transactions beginning in the first quarter of 1997. FAS 128, "Earnings per Share," was issued in February 1997. This statement was effective in the fourth quarter of 1997 and requires additional reporting of earnings per share that 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 B to the Supplemental 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. Mercantile started reporting comprehensive income in the first quarter of 1998 as prescribed by FAS 130. 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. Use of Estimates: Management of the Corporation has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the Supplemental Consolidated Financial Statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Investments in Debt and Equity Securities: Trading securities, which include any security held primarily for near-term sale, are valued at fair value. Gains and losses on trading securities, both realized and unrealized, are recorded in investment banking and brokerage income. 6 8 Available-for-sale securities, which include any security for which the Corporation has no immediate plan to sell but which may be sold in the future, are valued at fair value. Realized gains and losses, based on the amortized cost of the specific security, are included in other income as securities gains (losses). Unrealized gains and losses are recorded, net of related income tax effects, in retained earnings. Held-to-maturity securities, which include any security for which the Corporation has the positive intent and ability to hold until maturity, are valued at historical cost adjusted for amortization of premiums and accretion of discounts computed by the level-yield method. Unrealized losses on held-to-maturity and available-for-sale securities are recognized in the Supplemental Consolidated Statement of Income only if market valuation differences are deemed to be other than temporary impairments in value. Loans Held-for-Sale: In its lending activities, the Corporation originates residential mortgage loans and student loans intended for sale in the secondary market. Loans held-for-sale are carried at the lower of cost or fair value, which is determined on an aggregate basis. Gains or losses on the sale of loans held-for-sale are determined on a specific identification method. Loans and Leases: Interest income on loans is generally accrued on a simple interest basis. Loan fees and direct costs of loan originations are deferred and amortized over the estimated life of the loans under methods approximating the interest method. The finance method is used to account for direct and leveraged equipment lease contracts. Income is recorded over the lease periods in proportion to the unrecovered investment in the leases after consideration of investment tax credits and other related income tax effects. When, in management's opinion, the collection of interest on a loan (exclusive of certain consumer and credit card loans) is unlikely, or when either principal or interest is past due over 90 days, that loan is generally placed on non-accrual status. When a loan is placed on non-accrual status, accrued interest for the current year is reversed and charged against current earnings, and accrued interest from prior years is charged against the reserve for possible loan losses. Interest payments received on non-accrual loans are applied to principal if there is doubt as to the collectibility of such principal; otherwise, these receipts are recorded as interest income. A loan remains on non-accrual status until the loan is current as to payment of both principal and interest, and/or the borrower demonstrates the ability to pay and remain current. All non-accrual and renegotiated commercial-related loans are considered impaired. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral, if the loan is collateral dependent. Reserve for Possible Loan Losses: The reserve for possible loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries. The reserve is maintained at a level considered adequate to provide for potential loan losses based on management's evaluation of current economic conditions, changes in the character and size of the portfolio, past experience, expected future losses and other pertinent factors. Mercantile charges off credit card loans after six cycles of nonpayment, or within 15 days of receipt of personal bankruptcy notice, if earlier. Foreclosed Assets: Foreclosed assets include real estate and other assets acquired through foreclosure or other proceedings and are included in other assets in the Supplemental Consolidated Balance Sheet. Foreclosed assets are valued at the lower of cost or fair value less estimated costs to sell. Losses arising at the time of transfer from loans are charged to the reserve for possible loan losses. Subsequent reductions in valuation based upon periodic appraisals are charged against current earnings. Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Provisions for depreciation are computed principally by the straight-line method and are based on estimated useful lives of the assets. The carrying values of assets sold or retired and the related accumulated depreciation are eliminated from the accounts, and the resulting gains or losses are reflected in net income. Expenditures for maintenance and repairs are expensed, while expenditures for major renewals are capitalized. Intangible Assets: Intangible assets consist primarily of goodwill and mortgage servicing assets. Goodwill, the excess of cost over the net assets acquired in business combinations accounted for as purchases, is amortized using the straight-line method over the estimated period to be benefited, most recently 15 years, but not exceeding 40 years. Mortgage servicing assets represent recorded value associated with the contractual right to service loans in return for a fee. These assets may be purchased and recorded at fair value or result from the sale of loans, where servicing is retained and recorded at an allocated carrying amount based on the relative fair value of the assets sold. This intangible is amortized using the level-yield method over the estimated lives of the 7 9 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) related loans. The carrying value of mortgage servicing assets is subject to periodic adjustment based upon changing market conditions. Income Taxes: Deferred income taxes, computed using the liability method, are provided on temporary differences between the financial reporting basis and the tax basis of the assets and liabilities of the Corporation. Treasury Stock: The purchase of the Corporation's common stock is recorded at cost. Upon subsequent reissuance, the treasury stock account is reduced by the average cost basis of such stock. Cash Equivalents: Cash and due from banks, due from banks--interest bearing, and federal funds sold and repurchase agreements are considered cash equivalents for purposes of the Supplemental Consolidated Statement of Cash Flows. Financial Instruments: Financial instruments include cash, evidence of an ownership interest in an entity or a contract that both a) imposes on the Corporation a contractual obligation, 1) to deliver a financial instrument to another party or 2) to exchange other financial instruments on potentially unfavorable terms with another party; and b) conveys to another party a contractual right, 1) to receive a financial instrument from the Corporation or 2) to exchange other financial instruments on potentially favorable terms with the Corporation. Derivative Financial Instruments: The Corporation is a party to certain financial instruments, primarily to stabilize interest rate margins and to hedge against interest rate movements. An instrument designated as a hedge of an asset or liability carried at cost is accounted for on an accrual basis, in which the interest income or interest expense of the related asset or liability is adjusted for the net amount of any interest receivable or payable generated by the hedging instrument. There is no market valuation on these interest rate contracts. If the underlying assets or liabilities hedged are no longer recorded on the Supplemental Consolidated Balance Sheet (e.g., due to sale), the remaining gain or loss related to the interest rate contract is recognized through earnings immediately. In the normal course of business, the Corporation does not maintain trading positions in interest rate derivative financial instruments. The Corporation's non-hedging transactions are entered into on behalf of customers and are simultaneously hedged by the Corporation. As a consequence, these transactions do not represent exposure to market risk. The Corporation manages the potential credit exposure through established credit approvals, risk control limits and other monitoring procedures. These contracts are recorded at their fair value with gains or losses included in the Supplemental Consolidated Statement of Income. Mercantile has entered into foreign exchange forward contracts, primarily to facilitate customers' foreign exchange requirements. The Corporation maintains a generally matched position; therefore, exchange rate and market risks are minimal. Credit risk to the Corporation could result from non-performance by a counterparty to a contract. Credit risk is managed as indicated in the previous paragraph. Unrealized gains and losses on these foreign exchange forward contracts are reflected in the Supplemental Consolidated Statement of Income. NOTE B EARNINGS PER SHARE Basic earnings per share data is calculated by dividing net income, after deducting dividends on preferred stock, by the weighted average number of common shares outstanding during the period. 8 10 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 attributable to common shareholders' equity in the diluted earnings per share computation is increased 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: - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands except per share data) BASIC Net income $246,822 $284,453 $318,155 Preferred stock dividends -- (408) (1,020) -------- -------- -------- Net Income Attributable to Common Shareholders' Equity $246,822 $284,045 $317,135 ======== ======== ======== Weighted Average Common Shares Outstanding 140,009,105 133,925,697 133,797,998 Basic Earnings per Share $1.76 $2.12 $2.37 ===== ===== ===== DILUTED Net income attributable to common shareholders' equity $246,822 $284,045 $317,135 Interest on convertible notes, net of taxes 83 120 398 -------- -------- -------- Diluted Net Income $246,905 $284,165 $317,533 ======== ======== ======== Weighted average common shares outstanding 140,009,105 133,925,697 133,797,998 Employee incentive plans 2,493,277 1,775,913 1,660,300 Convertible notes 136,605 294,419 856,356 ----------- ----------- ----------- Diluted Weighted Average Common Shares Outstanding 142,638,987 135,996,029 136,314,654 =========== =========== =========== Diluted Earnings per Share $1.73 $2.09 $2.33 ===== ===== ===== - -------------------------------------------------------------------------------
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. NOTE C ACQUISITIONS As described in Note A, effective July 1, 1998, the Corporation acquired Firstbank, a $2.3 billion-asset bank holding company headquartered in Springfield, Illinois. The consideration for this acquisition was 13,352,641 shares of Mercantile common stock. Also on July 1, 1998, Mercantile acquired $1.1 billion-asset CBT, headquartered in Paducah, Kentucky. A total of 5,123,214 shares of Mercantile common stock was exchanged in conjunction with this acquisition. The Firstbank and CBT acquisitions were accounted for as poolings-of-interests. Net income and basic earnings per share for the Corporation, Firstbank and CBT prior to this restatement were as follows: - ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands except per share data) Corporation Net income $204,593 $245,215 $280,389 Basic earnings per share 1.68 2.11 2.41 Firstbank Net income 29,644 27,873 25,742 Basic earnings per share 1.90 1.80 1.66 CBT Net income 12,585 11,365 12,024 Basic earnings per share 1.60 1.44 1.52 - -------------------------------------------------------------------------------
The Corporation recorded a one-time pre-tax expense of $73,500,000 in the third quarter of 1998 related to the mergers with Firstbank and CBT. These charges include accruals to substantially conform the accounting policies of Firstbank and CBT as well as to account for one-time expenses associated with the transactions. As a result of the acquisition by Mercantile, Firstbank's two Missouri banks were sold in September 1998 due to state restrictions on deposit concentration. An after-tax gain of $29,400,000 was recorded in connection with these divestitures. Firstbank acquired BankCentral Corporation and its wholly-owned subsidiary, Central National Bank of Mattoon on June 10, 1997. The acquisition involved an exchange of cash and Firstbank common stock totaling approximately $13,000,000, and was recorded using the purchase method of accounting. 9 11 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Listed below are the acquisitions completed by Mercantile during the years ended December 31, 1997, 1996 and 1995: - --------------------------------------------------------------------------------------------------------------------------- ($ in Thousands)
CONSIDERATION ORIGINAL ------------------- INTANGIBLE ACCOUNTING DATE ASSETS ASSET CASH GROSS SHARES METHOD ---- ------ --------- ---- ------------ ---------- ACQUISITIONS COMPLETED Roosevelt Financial Group, Inc. ("Roosevelt") July 1, 1997 $7,251,985 $ 608,076 $ 374,477 18,948,884 Purchase Mark Twain Bancshares, Inc. ("Mark Twain") April 25, 1997 3,227,972 -- 73 24,088,713 Pooling Regional Bancshares, Inc. March 5, 1997 171,979 16,217 12,300 900,625 Purchase Today's Bancorp, Inc. Nov. 7, 1996 501,418 46,854 34,912 1,690,587 Purchase First Financial Corporation of America Nov. 1, 1996 87,649 5,137 3,253 388,113 Purchase Peoples State Bank Aug. 22, 1996 95,657 7,552 -- 488,756 Purchase Metro Savings Bank, F.S.B. March 7, 1996 80,857 3,016 5 296,853 Purchase Security Bank of Conway, F.S.B. Feb. 9, 1996 102,502 6,000 1 482,946 Purchase Hawkeye Bancorporation ("Hawkeye") Jan. 2, 1996 1,978,540 -- 80 11,838,294 Pooling First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 -- 1 782,126 Pooling Southwest Bancshares, Inc. Aug. 1, 1995 187,701 -- 1 1,012,463 Pooling AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 -- 1 992,034 Pooling Plains Spirit Financial Corporation July 7, 1995 400,754 17,820 6,697 1,951,770 Purchase TCBankshares, Inc. May 1, 1995 1,422,798 -- -- 7,124,999 Pooling Central Mortgage Bancshares, Inc. May 1, 1995 654,584 -- 8 3,806,585 Pooling UNSL Financial Corp Jan. 3, 1995 508,346 -- 11 2,367,161 Pooling Wedge Bank Jan. 3, 1995 195,716 -- 1 1,454,931 Pooling The historical financial statements of the Corporation were not restated for the acquisition due to the immateriality of the acquiree's financial condition and results of operations to that of Mercantile. In addition to Mercantile common stock issued, the Corporation assumed, through an exchange, the outstanding, non-convertible preferred stock of TCBankshares, Inc. The preferred stock was redeemed in the first quarter of 1996. - -------------------------------------------------------------------------------------------------------------------------
The Roosevelt acquisition was accounted for as a purchase. The following unaudited pro forma combined consolidated financial data gives effect to the July 1, 1997 acquisition of Roosevelt as if it had been consummated on January 1, 1995. 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 $650,000,000 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. There is no estimate of potential cost savings included in the following table: - ---------------------------------------------------------------------
AS OF OR FOR THE YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands except per share data) Total assets N/A $33,025,746 $32,898,094 Net interest income $1,125,021 1,080,885 1,053,476 Other income 401,619 332,043 284,849 Net income 216,564 224,351 275,489 Basic earnings per share 1.48 1.53 1.88 - ---------------------------------------------------------------------
The Mark Twain acquisition was accounted for as a pooling-of-interests. Net income and basic earnings per share for the Corporation and Mark Twain prior to this restatement were as follows: - ---------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 (Thousands except per share data) Corporation Net income $191,947 $232,676 Basic earnings per share 2.07 2.49 Mark Twain Net income 53,268 47,713 Basic earnings per share 3.23 2.93 - ----------------------------------------------------------------
During 1997, Mercantile recorded adjustments related to the acquisitions of Roosevelt, Mark Twain and Regional Bancshares, Inc. The adjustments consisted of $20,340,000 in provision for loan losses, $121,393,000 other expense, reduced by a related tax benefit of $41,856,000, for a net income reduction of $99,877,000. Of the $121,393,000 merger-related liability established, $67,000,000 had been utilized at December 31, 1997. During 1996, adjustments were recorded by the Corporation related to companies acquired that year. These adjustments consisted of a $13,666,000 increase in provision for loan losses, $3,114,000 in losses on securities sold in portfolio restructurings, a $51,071,000 charge to other 10 12 expense and a related tax benefit of $19,362,000, resulting in an after-tax reduction to net income of $48,489,000. These accruals have been substantially exhausted. For all acquisitions accounted for as purchases, the unamortized excess of cost over the fair value of assets acquired was $777,693,000, $171,539,000 and $110,537,000 at December 31, 1997, 1996 and 1995, respectively. The Hawkeye acquisition was accounted for as a pooling-of-interests. Net income and basic earnings per share for the Corporation and Hawkeye prior to restatement were as follows: - ---------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995 (Thousands except per share data) Corporation prior to restatement Net income $216,835 Basic earnings per share 2.67 Hawkeye Net income 15,841 Basic earnings per share 1.18 - ---------------------------------------------------------------
Other Pending Bank Acquisitions: On February 2, 1998, the Corporation completed its acquisition of Horizon Bancorp, Inc. ("Horizon"), a $537 million-asset bank holding company in Arkadelphia, Arkansas. On March 2, 1998, Mercantile completed a merger with HomeCorp, Inc. ("HomeCorp"), a $335 million-asset thrift holding company based in Rockford, Illinois. In the third quarter of 1998, Mercantile consummated two acquisitions. Financial Services Corporation of the Midwest ("FSCM") is the holding company for THE Rock Island Bank, N.A., and First Financial Bancorporation ("First Financial") owns First National Bank Iowa, which operates in the Iowa City/Cedar Rapids corridor. The Horizon, HomeCorp, FSCM and First Financial acquisitions met the requirements for treatment as poolings-of-interests; however, due to the respective and cumulative immateriality of their financial condition and results of operations to that of Mercantile, the historical financial statements of the Corporation were not restated for these transactions. The Corporation recorded one-time charges related to the Horizon, HomeCorp, FSCM and First Financial acquisitions in the third quarter of 1998. These charges included accruals to substantially conform the accounting and credit policies of the acquirees as well as to account for one-time expenses associated with the transactions. The pre-tax charge recorded in the third quarter of 1998 totaled $37,000,000. NOTE D CASH FLOWS The Corporation paid interest on deposits, short-term borrowings, bank notes and long-term debt of $1,033,434,000, $834,516,000 and $771,511,000 in 1997, 1996 and 1995, respectively. The Corporation paid Federal income taxes of $159,797,000, $162,068,000 and $149,112,000 in 1997, 1996 and 1995, respectively. The following details cash and cash equivalents from acquisitions accounted for as purchases, net of cash paid: - ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Fair value of assets purchased $(8,065,744) $(1,260,315) $(977,766) Fair value of liabilities assumed 7,044,026 1,090,663 874,053 Issuance of common stock 676,433 136,124 95,490 ----------- ----------- --------- Net Cash Paid for Acquisitions (345,285) (33,528) (8,223) Cash and cash equivalents acquired 113,748 90,680 54,158 ----------- ----------- --------- Cash and Cash Equivalents from Acquisitions, Net of Cash Paid (Received) $ (231,537) $ 57,152 $ 45,935 =========== =========== ========= - ------------------------------------------------------------------------------------------
NOTE E CASH AND DUE FROM BANKS RESTRICTIONS The Corporation's subsidiary banks are required to maintain average reserve balances that place withdrawal and/or usage restrictions on cash and due from banks balances. The average amount of these restricted balances for the year ended December 31, 1997 was $186,388,000. 11 13 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) NOTE F INVESTMENTS IN DEBT AND EQUITY SECURITIES Available-for-Sale: The amortized cost, estimated fair values, and unrealized gains and losses of available-for-sale securities were as follows: - ------------------------------------------------------------------------------------------------------------
ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- (Thousands) DECEMBER 31, 1997 U.S. Government $4,998,860 $33,373 $ 7,697 $5,024,536 State and political subdivisions: Tax-exempt 359,834 8,214 243 367,805 Taxable 61,817 279 82 62,014 ---------- ------- ------- ---------- Total State and Political Subdivisions 421,651 8,493 325 429,819 Other 2,602,646 12,070 10,005 2,604,711 ---------- ------- ------- ---------- Total $8,023,157 $53,936 $18,027 $8,059,066 ========== ======= ======= ========== DECEMBER 31, 1996 U.S. Government $4,042,304 $21,839 $17,432 $4,046,711 State and political subdivisions: Tax-exempt 403,803 8,555 936 411,422 Taxable 112,158 490 469 112,179 ---------- ------- ------- ---------- Total State and Political Subdivisions 515,961 9,045 1,405 523,601 Other 172,740 460 1,835 171,365 ---------- ------- ------- ---------- Total $4,731,005 $31,344 $20,672 $4,741,677 ========== ======= ======= ========== DECEMBER 31, 1995 U.S. Government $4,447,343 $50,293 $19,190 $4,478,446 State and political subdivisions: Tax-exempt 426,720 12,191 1,089 437,822 Taxable 134,400 1,034 714 134,720 ---------- ------- ------- ---------- Total State and Political Subdivisions 561,120 13,225 1,803 572,542 Other 174,077 234 1,639 172,672 ---------- ------- ------- ---------- Total $5,182,540 $63,752 $22,632 $5,223,660 ========== ======= ======= ========== - ------------------------------------------------------------------------------------------------------------
12 14 Held-to-Maturity: The amortized cost, estimated fair values, and unrealized gains and losses of held-to-maturity securities were as follows: - ------------------------------------------------------------------------------------------------------------------
ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- (Thousands) DECEMBER 31, 1997 U.S. Government $247,705 $ 6,625 $3,938 $250,392 State and political subdivisions: Tax-exempt 80,330 3,825 8 84,147 Taxable 3,822 132 -- 3,954 -------- ------- ------ -------- Total State and Political Subdivisions 84,152 3,957 8 88,101 Other 3,422 158 119 3,461 -------- ------- ------ -------- Total $335,279 $10,740 $4,065 $341,954 ======== ======= ====== ======== DECEMBER 31, 1996 U.S. Government $558,911 $ 9,784 $7,750 $560,945 State and political subdivisions: Tax-exempt 88,287 3,294 525 91,056 Taxable 4,304 66 3 4,367 -------- ------- ------ -------- Total State and Political Subdivisions 92,591 3,360 528 95,423 Other 5,219 220 175 5,264 -------- ------- ------ -------- Total $656,721 $13,364 $8,453 $661,632 ======== ======= ====== ======== DECEMBER 31, 1995 U.S. Government $243,672 $ 1,967 $ 690 $244,949 State and political subdivisions: Tax-exempt 82,589 3,779 274 86,094 Taxable 8,194 208 1 8,401 -------- ------- ------ -------- Total State and Political Subdivisions 90,783 3,987 275 94,495 Other 686 1 1 686 -------- ------- ------ -------- Total $335,141 $ 5,955 $ 966 $340,130 ======== ======= ====== ======== - -----------------------------------------------------------------------------------------------------------------
In conjunction with the acquisition of Roosevelt, the Corporation acquired privately issued adjustable-rate mortgage-backed securities that have incurred an impairment in value which is considered other than temporary. The loan pools backing these securities have been affected by high delinquency and foreclosure rates, and higher than anticipated losses on foreclosed property sales. The net book value of these mortgage-backed securities was $84,706,000 as of December 31, 1997. In December 1995, the Corporation reclassified approximately $3.1 billion in held-to-maturity securities to the available-for-sale category. The unrealized gain on the securities transferred was approximately $31 million. The Financial Accounting Standards Board issued a Special Report titled, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers," which stated that reclassifications made no later than December 31, 1995 from the held-to-maturity category will not call into question the intent to hold other securities to maturity in the future. During the third quarter of 1996, the Corporation transferred securities from the available-for-sale classification to the held-to-maturity classification. The securities transferred had an amortized cost basis of $370,014,000 and an estimated fair value of $373,557,000 on the transfer date. The unrealized gain on the date of the transfer remained in shareholders' equity and is being amortized over the remaining life of the transferred securities. The unamortized balance as of December 31, 1997 was $1,883,000. Securities with a carrying value of $3,918,545,000 at December 31, 1997, $3,348,145,000 at December 31, 1996 and $2,835,433,000 at December 31, 1995 were pledged to secure public and trust deposits, securities sold under agreements to repurchase and for other purposes required by law. 13 15 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The following table presents proceeds from sales of securities and the components of net securities gains. The only transfer of securities from the held-to-maturity category to available-for-sale during 1995, 1996 and 1997 was the December 1995 reclassification discussed above. Held-to-maturity securities gains and losses resulted from portfolio restructurings in connection with subsidiary bank acquisitions or calls by the security issuer prior to maturity. - ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Proceeds from sales of available- for-sale securities $802,007 $506,636 $386,969 ======== ======== ======== Securities gains on: Available-for-sale securities $ 9 $ 18 $ 121 Held-to-maturity securities 8,225 4,295 5,504 -------- -------- -------- Total Securities Gains 8,234 4,313 5,625 Securities losses on: Available-for-sale securities -- -- 1 Held-to-maturity securities 585 4,021 990 -------- -------- -------- Total Securities Losses 585 4,021 991 -------- -------- -------- Net Securities Gains Before Income Taxes 7,649 292 4,634 Applicable income taxes (2,677) (102) (1,622) -------- -------- -------- Net Securities Gains $ 4,972 $ 190 $ 3,012 ======== ======== ======== - ------------------------------------------------------------------------------------------
NOTE G LOANS AND LEASES Loans and leases consisted of the following: - ---------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Commercial $ 4,990,505 $ 4,591,604 $ 4,148,279 Real estate--commercial 3,569,922 3,255,590 3,175,018 Real estate--construction 734,722 643,345 564,185 Real estate--residential mortgage 8,702,879 4,787,012 4,239,629 Real estate--home equity credit loans 588,228 439,806 416,921 Consumer 2,492,150 2,306,184 2,177,998 Credit card 283,549 913,713 862,255 ----------- ----------- ----------- Total Loans and Leases $21,361,955 $16,937,254 $15,584,285 =========== =========== =========== - ---------------------------------------------------------------------------------------------------
Changes in the reserve for possible loan losses were as follows: - --------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Beginning balance $ 257,718 $ 261,339 $274,636 Provision 86,355 78,766 44,952 Charge-offs (109,259) (114,127) (79,544) Recoveries 28,189 21,934 19,459 --------- --------- -------- Net Charge-offs (81,070) (92,193) (60,085) Acquired reserves 21,162 9,806 13,836 Transfer to Mercantile Credit Card Master Trust -- -- (12,000) --------- --------- -------- Ending Balance $ 284,165 $ 257,718 $261,339 ========= ========= ======== - --------------------------------------------------------------------------------------------
Non-performing loans consisted of the following: - ---------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Non-accrual $113,134 $81,037 $105,188 Renegotiated 4,335 5,413 3,549 -------- ------- -------- Non-performing Loans $117,469 $86,450 $108,737 ======== ======= ======== - ---------------------------------------------------------------------------------------------
Effective January 1, 1995, the Corporation adopted FAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS 118, which requires an impaired loan to be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate. By the Corporation's definition, all non-accrual and renegotiated commercial-related loans are considered impaired. The following table presents information on impaired loans: - ---------------------------------------------------------------------------------------------
AS OF OR FOR THE YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Ending impaired loans $65,188 $53,294 $81,877 Related reserve for possible loan losses 13,890 11,284 19,265 Average impaired loans 66,785 59,532 86,290 Interest income recognized on impaired loans 374 748 610 - ---------------------------------------------------------------------------------------------
Certain directors and executive officers of the Corporation were loan customers of the Corporation's banks during 1997, 1996 and 1995. Such loans were made in the ordinary course of business at normal terms, including interest rate and collateralization, and did not represent more than a normal risk. Loans to those persons, their immediate families and companies in which they were principal owners were $15,218,000, $26,570,000 and $26,198,000, at December 31, 1997, 1996 and 1995, respectively. During 1997, $34,273,000 of new loans were made to these persons, and repayments totaled $45,625,000. 14 16 NOTE H BANK PREMISES AND EQUIPMENT Bank premises and equipment were as follows: - ----------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Land $ 82,154 $ 70,021 $ 67,428 Bank premises 460,408 392,250 361,594 Leasehold improvements 45,343 50,519 46,766 Furniture and equipment 462,179 366,444 327,135 ---------- --------- --------- Total Cost 1,050,084 879,234 802,923 Accumulated depreciation (518,434) (450,262) (412,760) ---------- --------- --------- Net Carrying Value $ 531,650 $ 428,972 $ 390,163 ========== ========= ========= - ----------------------------------------------------------------------------------------------
At December 31, 1997, the Corporation had certain long-term leases, none of which were considered to be capital leases, which were principally related to the use of land, buildings and equipment. The following table summarizes the future minimum rental commitments for noncancelable operating leases which had initial or remaining noncancelable lease terms in excess of one year: - ---------------------------------------------
MINIMUM RENTAL PERIOD (Thousands) 1998 $15,396 1999 13,552 2000 10,984 2001 8,461 2002 6,572 2003 and later 26,538 ------- Total $81,503 ======= - ---------------------------------------------
Net rental expense for all operating leases was $19,706,000 in 1997, $15,232,000 in 1996 and $15,117,000 in 1995. NOTE I DEPOSITS Deposits consisted of the following: - ---------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Non-interest bearing $ 3,956,138 $ 3,389,776 $ 2,925,272 Interest bearing demand 3,086,259 2,800,964 2,769,944 Money market accounts 3,811,081 3,152,825 2,712,227 Savings 1,559,441 1,323,775 1,353,335 Consumer time certificates under $100,000 9,850,437 7,136,532 6,468,366 Other time 191,199 233,997 656,532 ----------- ----------- ----------- Total Core Deposits 22,454,555 18,037,869 16,885,676 Time certificates $100,000 and over 1,769,461 1,495,089 1,368,809 Foreign 585,439 251,887 209,170 ----------- ----------- ----------- Total Purchased Deposits 2,354,900 1,746,976 1,577,979 ----------- ----------- ----------- Total Deposits $24,809,455 $19,784,845 $18,463,655 =========== =========== =========== - ---------------------------------------------------------------------------------------------------
The scheduled maturities of Mercantile's consumer time certificates under $100,000, time certificates $100,000 and over and other time deposits were as follows: - --------------------------------------------------
SCHEDULED MATURITY AMOUNT PERIOD (Thousands) 1998 $ 7,876,241 1999 2,383,257 2000 850,543 2001 306,084 2002 264,536 2003 and later 130,436 ----------- Total $11,811,097 =========== - --------------------------------------------------
NOTE J SHORT-TERM BORROWINGS Short-term borrowings were as follows: - ------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Federal funds purchased and repurchase agreements $2,127,443 $1,861,994 $1,790,937 Short-term Federal Home Loan Bank ("FHLB") advances 1,412,701 123,094 119,815 Treasury tax and loan notes 104,535 118,886 118,642 Commercial paper 1,510 19,405 16,950 Other short-term borrowings 32,351 9,295 7,565 ---------- ---------- ---------- Total Short-term Borrowings $3,678,540 $2,132,674 $2,053,909 ========== ========== ========== - ------------------------------------------------------------------------------------------------
15 17 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The average balance of total short-term borrowings was $2,929,826,000, $1,671,352,000 and $1,829,383,000 during 1997, 1996 and 1995, respectively. The average rate on total short-term borrowings was 5.43% in 1997, 5.37% in 1996 and 5.57% in 1995. The maximum balances at month-end are listed below: - ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Federal funds purchased and repurchase agreements $2,579,789 $1,886,127 $2,022,777 Short-term FHLB advances 1,412,701 130,239 127,489 Treasury tax and loan notes 260,822 439,181 562,296 Commercial paper 24,800 21,660 31,157 Other short-term borrowings 102,833 45,142 12,699 - ------------------------------------------------------------------------------------------------
The Corporation had unused lines of credit arrangements with unaffiliated banks for support of commercial paper and for other uses totaling $100,000,000 at December 31, 1997. NOTE K LONG-TERM DEBT AND BANK NOTES Long-term Debt: Long-term debt consisted of the following: - --------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) MERCANTILE BANCORPORATION INC. (PARENT COMPANY ONLY) 7.300% subordinated notes, due 2007 $ 200,000 $ -- $ -- 6.800% senior notes, due 2001 150,000 -- -- 7.050% senior notes, due 2004 150,000 -- -- 7.625% subordinated notes, due 2002 150,000 150,000 150,000 7.000% convertible subordinated notes, due 1999 1,153 -- -- ---------- -------- -------- Total 651,153 150,000 150,000 SECOND-TIER HOLDING COMPANIES -- 2,036 18,490 BANKS AND OTHER SUBSIDIARIES FHLB advances 578,484 37,085 63,379 6.375% subordinated notes, due 2004 75,000 75,000 75,000 9.000% mortgage-backed notes, due 1999 53,450 53,450 53,450 Other 10,084 10,104 10,290 ---------- -------- -------- Total 717,018 175,639 202,119 ---------- -------- -------- Total Long-term Debt $1,368,171 $327,675 $370,609 ========== ======== ======== - --------------------------------------------------------------------------------------------
In June 1997, the Corporation issued $200,000,000 of subordinated notes with a 10-year maturity and a coupon rate of 7.300%, $150,000,000 of senior notes with a four-year maturity and a coupon rate of 6.800%, and $150,000,000 of senior notes with a seven-year maturity and a coupon rate of 7.050%. The subordinated and senior debt was primarily issued to assist in the financing of the Roosevelt acquisition. For regulatory purposes the subordinated notes qualify as Tier II capital. In June 1987, Mark Twain issued 7.000% convertible subordinated capital notes which are due in 1999. These convertible notes were transferred to Mercantile Bancorporation Inc. (Parent Company Only) during 1997. The balance of the convertible notes was $2,036,000 at December 31, 1996 and $6,911,000 at December 31, 1995. The notes are convertible into common stock at a conversion price equivalent to $11.127 per Mercantile share. Included in other long-term debt was a $10,000,000 term note to Fidelity Credit Corporation, a subsidiary of CBT. This term note was paid off and refinanced with loans from Mercantile subsidiary banks in the third quarter of 1998. FHLB advances at December 31, 1997 consisted of various debt instruments with rates varying from 5.200% to 6.850%. This debt was collateralized by certain loans and securities. During 1996, Roosevelt defeased mortgage-backed bonds totaling $19,700,000 by delivering treasury securities to the bond trustee for the periodic payment of interest and the ultimate payment of the bonds to the bondholders on the maturity date of April 15, 2018. Mercantile exercised the bonds' call provision during the second quarter of 1998. A summary of annual principal reductions of long-term debt is presented below: - --------------------------------------------------------------------------------------------------
PERIOD FHLB ADVANCES OTHER TOTAL (Thousands) 1998 $100,000 $ 45 $ 100,045 1999 256,211 54,622 310,833 2000 95,610 10,020 105,630 2001 652 150,000 150,652 2002 114,152 150,000 264,152 2003 and later 11,859 425,000 436,859 -------- -------- ---------- Total $578,484 $789,687 $1,368,171 ======== ======== ========== - --------------------------------------------------------------------------------------------------
Bank Notes: Beginning in 1994, certain subsidiary banks could offer unsecured bank notes. Note maturities can range from 30 days to 15 years from the date of issue and may be issued with fixed or floating interest rates. Each bank note issued will be an obligation solely of that issuing bank and will not be an obligation of, or otherwise guaranteed by, the other issuing banks or the Corporation. The bank notes are being offered and sold only to institutional investors, and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. The bank note program was restructured in 1998. 16 18 Bank notes are presented below with December 31, 1997 coupon rates: - -------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) MERCANTILE BANK N.A. 6.056% floating-rate bank notes, due 1998 $150,000 $150,000 $150,000 6.000% floating-rate bank notes, due 1996 -- -- 100,000 5.900% floating-rate bank notes, due 1999 25,000 25,000 -- -------- -------- -------- Total Bank Notes $175,000 $175,000 $250,000 ======== ======== ======== - -------------------------------------------------------------------------------------------
NOTE L COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE CAPITAL TRUST I In January 1997, the Corporation formed Mercantile Capital Trust I. Through this trust, the Corporation obtained $150,000,000 of floating-rate debt maturing in 2027 that, for regulatory purposes, is part of Tier I capital. 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 Mercantile Bancorporation Inc. of the trust's obligations under the preferred securities. NOTE M INCOME TAXES The Corporation's results include income tax expense as follows: - -----------------------------------------------------------------------------------------------
CURRENT DEFERRED TOTAL (Thousands) YEAR ENDED DECEMBER 31, 1997 U.S. FEDERAL $141,435 $ (9,593) $131,842 STATE AND LOCAL 10,936 (402) 10,534 -------- -------- -------- TOTAL $152,371 $ (9,995) $142,376 ======== ======== ======== YEAR ENDED DECEMBER 31, 1996 U.S. Federal $155,218 $(22,306) $132,912 State and local 16,667 (1,012) 15,655 -------- -------- -------- Total $171,885 $(23,318) $148,567 ======== ======== ======== YEAR ENDED DECEMBER 31, 1995 U.S. Federal $162,848 $(10,638) $152,210 State and local 19,835 (3,299) 16,536 -------- -------- -------- Total $182,683 $(13,937) $168,746 ======== ======== ======== - -----------------------------------------------------------------------------------------------
The tax effects of temporary differences that gave rise to the deferred tax assets and deferred tax liabilities are presented below: - ---------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Deferred tax assets Reserve for possible loan losses $ 91,027 $ 82,964 $ 88,042 Foreclosed property 839 1,448 720 Deferred compensation 5,290 5,869 5,451 Expenses not currently allowable for tax purposes 20,977 23,386 13,625 State tax liabilities -- 1,595 2,554 Retirement expenses in excess of tax deduction 15,403 11,209 8,930 Other 13,775 7,780 4,326 -------- -------- -------- Total Gross Deferred Tax Assets 147,311 134,251 123,648 Deferred tax liabilities Leasing (26,938) (29,956) (39,828) Pension settlement gain (6,079) (6,079) (6,079) Intangible assets -- (5,637) (6,466) Depreciation (6,000) (6,698) (7,010) Investments in debt and equity securities--FAS 115 (13,583) (3,413) (14,450) FHLB stock dividends (9,672) -- -- Other (10,330) (12,132) (13,834) -------- -------- -------- Total Gross Deferred Tax Liabilities (72,602) (63,915) (87,667) -------- -------- -------- Net Deferred Tax Assets $ 74,709 $ 70,336 $ 35,981 ======== ======== ======== - ---------------------------------------------------------------------------------------------
Income tax expense as reported differs from the amounts computed by applying the statutory U.S. Federal income tax rate to pretax income as follows: - ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Computed "expected" tax expense $136,219 $151,557 $170,415 Increase (reduction) in income taxes resulting from: Tax-exempt income (10,839) (11,833) (12,917) State and local income taxes, net of federal income tax benefit 6,847 10,176 10,754 Amortization of goodwill 12,216 403 403 Other, net (2,067) (1,736) 91 -------- -------- -------- Total Tax Expense $142,376 $148,567 $168,746 ======== ======== ======== - ---------------------------------------------------------------------------------------------
17 19 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) NOTE N RETIREMENT PLANS Pension Plans: The Corporation maintains both qualified and nonqualified noncontributory pension plans that cover all employees meeting certain age and service requirements. The qualified plan provides pension benefits based on the employee's length of service and the five highest consecutive years of compensation. The Corporation's funding policy is to contribute annually at least the minimum amount required by government funding standards but not more than is tax deductible. No contribution was required during 1997, 1996 or 1995. Roosevelt was a member of the Financial Institutions Retirement Fund ("Fund"). This trust provides retirement and death benefits to multiple employers. All contributions to the Fund are commingled, and all assets of the Fund are invested on a pooled basis, without allocation to the individual employers. Therefore, Roosevelt's pension plan assets and actuarial liabilities are not included in the qualified plan tables listed below. The contribution policy of Roosevelt was to fund the pension cost accrued in each year. The contribution by Roosevelt for the last half of 1997 was $159,000. The net periodic pension expense related to the qualified plan included in the Supplemental Consolidated Statement of Income is summarized as follows: - -------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Service cost--benefits earned during the period $ 11,359 $ 10,816 $ 7,584 Interest cost on projected benefit obligation 14,191 12,735 11,218 Actual (return) loss on plan assets (34,441) (17,481) (31,133) Net amortization and deferral 16,475 1,673 16,925 -------- -------- -------- Net Periodic Pension Expense $ 7,584 $ 7,743 $ 4,594 ======== ======== ======== - ------------------------------------------------------------------------------------------------
The table below sets forth the funded status and amounts recognized in the Supplemental Consolidated Balance Sheet for the qualified plan: - ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Actuarial present value of vested benefit obligation $158,411 $136,317 $121,520 ======== ======== ======== Accumulated benefit obligation $174,739 $149,422 $133,423 ======== ======== ======== Projected benefit obligation $210,027 $183,757 $166,949 Plan assets at fair value 218,155 188,853 170,446 -------- -------- -------- Projected benefit obligation in excess of plan assets (8,128) (5,096) (3,497) Unrecognized net gain (loss) (3,266) (9,038) (15,118) Unrecognized prior service cost 5,434 722 851 Unrecognized transition asset 1,054 1,885 2,715 -------- -------- -------- Accrued (Prepaid) Pension Expense $ (4,906) $(11,527) $(15,049) ======== ======== ======== - ------------------------------------------------------------------------------------------------
Assumptions used were as follows: - ------------------------------------------------------------------------------------------------
1997 1996 1995 Discount rate in determining benefit obligations 7.25% 7.50% 7.50% Rate of increase in compensation levels 5.00 5.00 5.00 Expected long-term rate on assets 9.50 9.50 9.50 - ------------------------------------------------------------------------------------------------
At December 31, 1997, approximately 65% of the plan's assets was invested in listed common stocks, 34% was invested in government and corporate bonds rated A or better, and the remaining 1% was invested in short-term cash equivalents. A nominal amount of common stock of the Corporation was held by the plan. The nonqualified plans provide pension benefits that would have been provided under the qualified plan in the absence of limits placed on qualified plan benefits by the Internal Revenue Service. The Corporation's funding policy is to fund benefits as they are paid. Contributions under the nonqualified plans were not material for the years ended December 31, 1997, 1996 and 1995. The expense related to these plans was $2,715,000 in 1997, $2,517,000 in 1996 and $2,228,000 in 1995. Other Postretirement Benefits: In addition to the pension plans described above, the Corporation provides other postretirement benefits, largely medical benefits and life insurance, to its retirees. FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires the recording of the unrecognized transition obligation for postretirement benefits other than pensions. That liability is being amortized over a 20-year period. The net periodic postretirement benefit expense included in the Supplemental Consolidated Statement of Income is summarized as follows: - ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) Service cost--benefits earned during the period $ 793 $ 820 $ 610 Interest cost on accumulated postretirement benefit obligation ("APBO") 2,790 2,748 2,716 Net amortization and deferral 1,608 1,713 1,475 ------ ------ ------ Net Periodic Postretirement Benefit Cost $5,191 $5,281 $4,801 ====== ====== ====== - ---------------------------------------------------------------------------------------------
18 20 The table below sets forth the funded status and the amount recognized in the Supplemental Consolidated Balance Sheet regarding other postretirement benefits: - -----------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) APBO Retirees $ 27,348 $ 26,736 $ 27,041 Active employees fully eligible for benefits 1,297 1,446 1,301 Other active employees 10,969 10,028 7,862 -------- -------- -------- Total 39,614 38,210 36,204 Assets at fair value -- -- -- -------- -------- -------- APBO in excess of assets 39,614 38,210 36,204 Unrecognized net gain (loss) (2,298) (1,988) (1,241) Unrecognized prior service cost (132) (140) (147) Unrecognized transition obligation (23,727) (25,308) (26,889) -------- -------- -------- Accrued Postretirement Benefit Obligation $ 13,457 $ 10,774 $ 7,927 ======== ======== ======== - -----------------------------------------------------------------------------------------------
Assumptions used were as follows: - ------------------------------------------------------------------------------------------------
1997 1996 1995 Discount rate in determining benefit obligations 7.25% 7.50% 7.50% Health care cost trend First year 8.50 9.50 10.50 Ultimate (2001 and after) 5.50 5.50 5.50 - ------------------------------------------------------------------------------------------------
An increase in the health care cost trend of 1 percent would increase the aggregate of service and interest cost components of net periodic postretirement benefit costs by $100,000 in 1997, $112,000 in 1996 and $120,000 in 1995. The APBO would increase by $1,407,000 as of December 31, 1997, $1,542,000 as of December 31, 1996 and $1,448,000 as of December 31, 1995. NOTE O SHAREHOLDERS' EQUITY Common Stock: At Mercantile's Annual Meeting on April 24, 1997, the Corporation's shareholders approved an amendment to its Restated Articles of Incorporation that reduced the par value of the Corporation's common stock from $5.00 per share to $.01 per share. The authorized common stock of the Corporation consisted of 200,000,000 shares, of which 148,712,307, 134,174,597 and 134,845,809 shares were outstanding at December 31, 1997, 1996 and 1995, respectively. The Corporation's Shareholder Investment Plan ("Plan") allows new shareholders a means to make an initial investment in Mercantile common stock or for shareholders of record to purchase additional shares. Under the Plan, participants have the option of reinvesting dividends. Preferred Stock: The authorized preferred stock of the Corporation consists of 5,000,000 shares, no par value, of which 14,806 shares were issued and outstanding at December 31, 1995. As of December 31, 1995, there were two series of non-voting preferred stock issued. Series B-1 consisted of 5,306 shares that had non-cumulative dividends as declared by Mercantile's Board of Directors. Series B-2 represented 9,500 shares with a cumulative annual dividend of $85 per share. The Series B-1 and B-2 preferred shares were redeemed by the Corporation in March 1996. At December 31, 1997, 2,000,000 shares were reserved for issuance pursuant to the Preferred Share Purchase Rights Plan. Preferred Share Purchase Rights Plan: One Preferred Share Purchase Right ("Right") was attached to each share of common stock and trades automatically with such shares. The Rights, which could have been redeemed by the Board of Directors in certain circumstances, expired by their terms on June 3, 1998, and had no voting rights. Mercantile adopted a new Shareholder Rights Plan on June 4, 1998 which has preferred share purchase rights that are substantially similar to those that expired on June 3, 1998. Under the Preferred Share Purchase Rights Plan that expired on June 3, 1998, the Rights would have become exercisable and traded separately from the common stock 10 days after a person or a group became the beneficial owner or announced an intention to commence a tender offer for 20% or more of the Corporation's outstanding common stock. When exercisable, each Right entitled the registered holder to purchase from the Corporation 1/100 of a share of Series A Junior Participating Preferred Stock for $100 per 1/100 of a preferred share. In the event a person acquired beneficial ownership of 20% or more of the Corporation's common stock, holders of Rights (other than the acquiring person or group) could have purchased, at the Rights' then current exercise price, common stock of the Corporation having a value at that time equal to twice the exercise price. In the event the Corporation merged into or otherwise transferred 50% or more of its assets or earnings power to any person after the Rights became exercisable, holders of Rights may have purchased, at the then current exercise price, common stock of the acquiring entity having a value at that time equal to twice the exercise price. Stock Options: The Corporation had stock options outstanding under various plans at December 31, 1997, including plans assumed in acquisitions. The original Mercantile plans provide for the granting to employees of the Corporation and its subsidiaries of options to purchase shares of common stock of the Corporation over periods of up to 10 years at a price not less than the market value of the shares at the date the options are granted. The plans provide for the granting of options that either qualify 19 21 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) or do not qualify as Incentive Stock Options as defined by Section 422 of the Internal Revenue Code of 1986, as amended. During 1997, the Corporation increased the number of shares available for issuance under stock incentive plans by 5,625,000 shares. As of December 31, 1997, there were 6,334,409 options available for grant. The per share price range for options exercisable was $3.61 to $45.21 as of December 31, 1997. The following table summarizes stock options outstanding as of December 31, 1997: - ---------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING -------------------------------------------------------- RANGE OF WEIGHTED AVERAGE EXERCISE REMAINING WEIGHTED AVERAGE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE - ------------ ------------ ------------------- --------------------- $ 3.61-21.57 2,437,352 3.08 yrs. $14.07 21.58-26.74 2,359,633 5.62 22.99 26.75-34.25 1,044,413 6.75 30.94 34.26-34.92 1,287,486 9.05 34.92 34.93-58.31 309,949 7.20 38.69 --------- 3.61-58.31 7,438,833 5.60 23.90 ========= - ---------------------------------------------------------------------------------------------
Changes in options outstanding were as follows: - ---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE EXERCISE SHARES PRICE ---------- ----------- BALANCE AT DECEMBER 31, 1994 6,060,565 $14.89 Granted 1,275,306 23.85 Exercised (1,039,531) 9.18 Canceled (148,834) 21.02 Assumed 147,537 10.53 ---------- BALANCE AT DECEMBER 31, 1995 6,295,043 17.36 Granted 1,066,576 28.90 Exercised (826,963) 10.74 Canceled (156,318) 24.79 Assumed 76,488 15.27 ---------- BALANCE AT DECEMBER 31, 1996 6,454,826 19.91 GRANTED 1,889,201 34.72 EXERCISED (1,407,609) 17.20 CANCELED (108,121) 27.19 ASSUMED 610,536 17.72 ---------- BALANCE AT DECEMBER 31, 1997 7,438,833 23.90 ========== - ---------------------------------------------------------------------------------------------
The numbers of shares exercisable under stock options as of December 31, 1997, 1996 and 1995 were 4,936,522, 3,436,204 and 3,229,199, respectively, with a weighted average exercise price of $19.47, $15.71 and $13.11, respectively. The fair value of the option grants, excluding options from Mark Twain for prior years, was estimated on the date of grant using an option-pricing model based upon the following assumptions: - ----------------------------------------------------------------------------------------------
1997 1996 1995 Dividend yield 2.85% 3.30% 3.30% Expected volatility 29.80 31.70 31.70 Average risk-free interest rate 6.13 5.15 7.28 Expected option life from vesting date 1.40 YRS. 1.26 yrs. 1.26 yrs. Weighted per share average fair value of stock options granted $8.26 $7.15 $6.32 - ----------------------------------------------------------------------------------------------
The fair value of Mark Twain's stock options for prior years was estimated on the date of grant using an option-pricing model based upon the following assumptions: dividend yield of 3.28%; expected volatility of 17%; average risk-free interest rate of 6%; and expected option life of 4.5 years from the vesting date. The weighted average fair value of stock options granted in 1995 and 1996 was $3.43 and $4.89, respectively. The Corporation applies Accounting Principles Board Opinion 25 in accounting for its stock option plans. The compensation cost that has been charged against income for stock-based compensation plans was $5,984,000, $4,081,000 and $3,628,000 for 1997, 1996 and 1995, respectively. Had the Corporation adopted FAS 123's optional accounting method, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts noted below: - ---------------------------------------------------------------------------------------------
AS REPORTED PRO FORMA (Thousands except per share data) YEAR ENDED DECEMBER 31, 1997 NET INCOME $246,822 $240,132 BASIC EARNINGS PER SHARE 1.76 1.72 DILUTED EARNINGS PER SHARE 1.73 1.68 YEAR ENDED DECEMBER 31, 1996 Net income $284,453 $280,514 Basic earnings per share 2.12 2.09 Diluted earnings per share 2.09 2.06 YEAR ENDED DECEMBER 31, 1995 Net income $318,155 $315,626 Basic earnings per share 2.37 2.35 Diluted earnings per share 2.33 2.31 - ---------------------------------------------------------------------------------------------
The effect of applying FAS 123 as presented above is not representative of the effects on pro forma net income for future years. Debt and Dividend Restrictions: Consolidated retained earnings at December 31, 1997 were not restricted under any agreement as to payment of dividends or reacquisition of common stock. 20 22 The primary source of funds for dividends paid by the Corporation to its shareholders is dividends received from bank subsidiaries. At December 31, 1997, approximately $230,019,000 of the equity of bank subsidiaries was available for distribution as dividends to the Parent Company without prior regulatory approval or without reducing the capital of the respective subsidiary banks below present minimum standards. An additional $263,899,000 would be available for loans to the Parent Company under Federal Reserve regulations. The remaining equity of bank subsidiaries approximating $2,090,925,000 was restricted as to transfers to the Parent Company. NOTE P REGULATORY MATTERS The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's Supplemental Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Mercantile and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of the Corporation and its subsidiary banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Mercantile and subsidiary banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Corporation and its subsidiary banks to maintain minimum amounts and ratios, as set forth in the table below, of Tier I and total capital to risk-weighted assets, and of Tier I capital to average assets, the leverage ratio. Management believes, as of December 31, 1997, the Corporation and its subsidiary banks met all their capital adequacy requirements. As of November 30, 1997, the date of the most recent notification from regulatory agencies, the subsidiary banks were categorized as well capitalized under the regulatory framework. There are no conditions or events since that notification that management believes have changed the subsidiary banks' category. The actual and required capital amounts and ratios as of December 31, 1997 and 1996 for the Corporation and Mercantile Bank N.A. are listed in the following table: - ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996 --------------------------------------------- --------------------------------------------- MINIMUM CAPITAL MINIMUM CAPITAL ACTUAL REQUIREMENTS ACTUAL REQUIREMENTS --------------------- ---------------------- --------------------- ---------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- --------- ---------- ---------- ---------- --------- ---------- ---------- ($ in Thousands) Tier I Capital (to risk-weighted assets) Corporation $2,104,078 9.40% $ 894,913 4.00% $2,049,795 11.50% $ 713,258 4.00% Mercantile Bank N.A. 1,210,872 10.86 446,178 4.00 499,602 9.51 210,225 4.00 Total Capital (to risk-weighted assets) Corporation $2,778,794 12.42 1,789,826 8.00 $2,500,154 14.02 1,426,516 8.00% Mercantile Bank N.A. 1,406,983 12.61 892,356 8.00 620,308 11.80 420,450 8.00 Leverage (to average assets) Corporation $2,104,078 6.52 1,291,055 4.00 $2,049,795 8.52 962,265 4.00% Mercantile Bank N.A. 1,210,872 7.33 660,542 4.00 499,602 6.97 286,873 4.00 - ----------------------------------------------------------------------------------------------------------------------------
NOTE Q CONCENTRATIONS OF CREDIT The Corporation's primary market area is the state of Missouri and the lower Midwest. At December 31, 1997, approximately 81% of the total loan portfolio, and 88% of the commercial and commercial real estate loan portfolio, were to borrowers within this region. The diversity of the region's economic base tends to provide a stable lending environment. Real estate constituted the only other area of significant concentration of credit risk. Real estate-related financial instruments (loans, commitments and standby letters of credit) composed 53% of all such instruments of the Corporation. However, of this total, approximately 68% was consumer-related in the form of residential real estate mortgages and home equity lines of credit. 21 23 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The Corporation is, in general, a secured lender. At December 31, 1997, approximately 94% of the loan portfolio was secured. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. NOTE R FINANCIAL INSTRUMENTS Fair Values: Fair values for financial instruments are management's estimates of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, certain financial instruments and all non-financial instruments are excluded from the fair value disclosure requirements of FAS 107, "Disclosures about Fair Value of Financial Instruments." Therefore, the fair values presented below should not be construed as the underlying value of the Corporation. The following methods and assumptions were used in estimating fair values for financial instruments. Cash and Due from Banks, Short-term Investments and Short-term Borrowings: The carrying values reported in the Supplemental Consolidated Balance Sheet approximated fair values. Investments in Debt and Equity Securities: Fair values for held-to-maturity securities were based upon quoted market prices where available. Fair values for trading and available-for-sale securities, which also were the amounts reported in the Supplemental Consolidated Balance Sheet, were based on quoted market prices where available. If quoted market prices were not available, fair values were based upon quoted market prices of comparable instruments. Loans and Leases: The fair values for most fixed-rate loans were estimated by utilizing discounted cash flow analysis, applying interest rates currently being offered for similar loans to borrowers with similar risk profiles. The discount rates used, therefore, include a credit risk premium. The fair values of variable-rate loans and all residential mortgages were estimated by utilizing the same type of discounted cash flows, but over a range of interest rate scenarios, in order to incorporate the value of the options imbedded in these assets. Loans with similar characteristics were aggregated for purposes of these calculations. Deposits: The fair values disclosed for deposits generally payable on demand (i.e., interest bearing and non-interest bearing demand, savings and money market accounts) were considered equal to their respective carrying amounts as reported in the Supplemental Consolidated Balance Sheet. Fair values for certificates of deposit and foreign deposits were estimated using a discounted cash flow calculation that applied interest rates generally offered on similar certificates to a schedule of aggregated expected monthly maturities of time deposits. The fair value estimate of the deposit portfolio has not been adjusted for any value derived from the retention of those deposits for an expected future period of time. That component, commonly referred to as core deposit premium, was estimated to be approximately $340,000,000 to $720,000,000 at December 31, 1997 and was neither considered in the fair value amounts below nor recorded as an intangible asset on the Supplemental Consolidated Balance Sheet. Bank Notes and Long-term Debt: The fair value of publicly traded debt was based upon quoted market prices, where available, or upon quoted market prices of comparable instruments. The fair values of bank notes and long-term debt were estimated using discounted cash flow analysis, based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. Off-Balance-Sheet Instruments: Fair values of foreign exchange contracts, interest rate contracts and when-issued securities were determined from quoted market prices. Fair values of commitments to extend credit, standby letters of credit and commercial letters of credit were based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standings. 22 24 The estimated fair values of the Corporation's financial instruments were as follows: - -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 ----------------------- ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE (Thousands) FINANCIAL ASSETS Cash and due from banks and short-term investments $ 1,886,280 $ 1,886,280 $ 1,856,314 $ 1,856,314 $ 1,730,608 $ 1,730,608 Trading securities 70,536 70,536 31,361 31,361 67,283 67,283 Held-to-maturity securities 335,279 341,954 656,721 661,632 335,141 340,130 Available-for-sale securities 8,059,066 8,059,066 4,741,677 4,741,677 5,223,660 5,223,660 Net loans and leases 21,077,790 21,525,593 16,679,536 17,129,917 15,322,946 15,860,339 FINANCIAL LIABILITIES Deposits 24,809,455 25,112,466 19,784,845 19,999,832 18,463,655 18,722,448 Short-term borrowings 3,678,540 3,678,540 2,132,674 2,132,674 2,053,909 2,053,909 Bank notes and long-term debt 1,693,171 1,709,813 502,675 506,954 620,609 639,823 OFF-BALANCE-SHEET Foreign exchange contracts purchased (5,880) (428) 2,389 Foreign exchange contracts sold 4,367 39 (2,022) Interest rate contracts 17,244 (143) 2,009 When-issued securities purchased (2,578) -- -- When-issued securities sold 2,509 -- -- Commitments to extend credit (37,790) (17,779) (12,729) Standby letters of credit (3,862) (2,879) (2,955) Commercial letters of credit (1,998) (5,406) (4,480) - -----------------------------------------------------------------------------------------------------------------------------
Off-Balance-Sheet Risk: The Corporation is, in the normal course of business, a party to certain off-balance-sheet financial instruments. These instruments, which include commitments to extend credit, standby letters of credit, interest rate options written, interest rate swaps and foreign exchange contracts, are used by the Corporation to meet the financing needs of its customers and to reduce its own exposure to interest rate fluctuations. They involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation. Management does not anticipate any significant losses as a result of these transactions. The notional or contract amounts of financial instruments with off- balance-sheet credit risk were as follows: - ------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Commitments to extend credit Commercial $4,175,423 $3,325,464 $2,593,784 Consumer 2,270,781 6,176,412 5,658,722 ---------- ---------- ---------- Total $6,446,204 $9,501,876 $8,252,506 ========== ========== ========== Standby letters of credit $ 442,245 $ 462,082 $ 426,575 ========== ========== ========== Interest rate contracts $1,021,563 $ 391,000 $ 192,000 ========== ========== ========== When-issued securities: Commitments to purchase $ 178,475 -- -- Commitments to sell 230,981 -- -- - ------------------------------------------------------------------------------------------------
The Corporation's maximum exposure to credit loss under commitments to extend credit and standby letters of credit is the equivalent of the contractual amount of those instruments. The same credit policies are used by the Corporation in granting commitments and conditional obligations as are used in the extension of credit. Commitments to extend credit are legally binding agreements to lend to a borrower as long as the borrower performs in accordance with the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. As 23 25 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Included in consumer commitments are the unused portions of lines of credit for credit card and home equity credit line loans. Standby letters of credit are commitments issued by the Corporation to guarantee specific performance of a customer to a third party. Collateral is required for both commitments and standby letters of credit in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. Collateral held varies but may include commercial real estate, accounts receivable, inventory or equipment. Included in interest rate contracts are interest rate swaps and floors. Derivative Financial Instruments: Held or Issued for Trading Purposes: In the normal course of business, the Corporation maintains minimal trading positions in a variety of derivative financial instruments. Most of the Corporation's trading activities are customer oriented, with trading positions established to meet the financing and foreign exchange transaction needs of customers. This activity complements the Corporation's traditional money and capital markets trading business, which also exists to meet customers' demands. Net revenue recognized on interest rate contracts and foreign exchange contracts totaled $4,615,000, $3,916,000 and $3,084,000 in 1997, 1996 and 1995, respectively. The notional amounts of interest rate options written, foreign exchange contracts purchased and foreign exchange contracts sold were as follows: - ------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) Interest rate options written $ 13,533 $ 16,456 $ 25,225 Foreign exchange contracts purchased 328,127 243,800 219,526 Foreign exchange contracts sold 291,995 193,179 172,073 - ------------------------------------------------------------------------------------------------
These transactions are generally entered into on behalf of customers and are simultaneously hedged by the Corporation. As a consequence, these matched transactions do not represent exposure to market risk. The Corporation manages the potential credit exposure through established credit approvals, risk control limits and other monitoring procedures. Credit risk to the Corporation could result from non-performance by a counterparty to a contract; however, currently that credit risk is minimal. Held or Issued for Purposes Other Than Trading: The Corporation uses off-balance-sheet derivative financial instruments such as interest rate swaps and floors to manage interest rate risk. The Corporation's exposure to interest rate risk stems from the mismatch between the sensitivity to movements in interest rates of the Corporation's assets and liabilities. The use of derivatives to manage interest rate risk is primarily for interest sensitivity adjustments. Interest rate swaps are generally used to lengthen the interest rate sensitivity of short-term assets and to shorten the repricing characteristics of longer term liabilities. Gains or losses are used to adjust the basis of the related asset or liability, and interest differentials are adjustments of the related interest income or expense. Of the commitments to extend credit discussed in the preceding paragraphs, $554,396,000, $346,850,000 and $197,186,000 were entered into with fixed rates for commercial loan customers at December 31, 1997, 1996 and 1995, respectively. Fixed-rate commitments for consumer (residential mortgage) loan customers totaled $231,204,000 at December 31, 1997, $77,727,000 at December 31, 1996 and $64,583,000 at December 31, 1995. Fixed-rate commitments to extend credit are defined as fixed-rate commercial loan commitments with remaining maturities greater than one year, fixed-rate residential mortgage loan commitments, and adjustable-rate residential mortgage loan commitments for loans with adjustment periods greater than one year. Fixed-rate mortgage loans held for resale are partially hedged with contracts for forward delivery in the secondary mortgage market. This hedging activity is designed to protect the Corporation from changes in interest rates. Gains and losses from the hedging transactions on mortgage loans held for resale are deferred and included in the cost of the loans for determining the gain or loss when the loans are sold. Forward delivery contracts outstanding totaled $85,585,000 as of December 31, 1997, $62,823,000 as of December 31, 1996 and $68,000,000 as of December 31, 1995. NOTE S CONTINGENT LIABILITIES In the ordinary course of business, there are various legal proceedings pending against the Corporation and its subsidiaries. Management, after consultation with legal counsel, is of the opinion that the ultimate resolution of these proceedings will have no material adverse effect on the consolidated financial condition or results of operations of the Corporation. NOTE T PARENT COMPANY FINANCIAL INFORMATION Following are the condensed financial statements of Mercantile Bancorporation Inc. (Parent Company Only) for the periods indicated. For the Statement of Cash Flows (Parent Company Only), cash and short-term investments were considered cash equivalents. Interest paid on commercial paper and long-term debt was $35,494,000, $12,420,000 and $12,828,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 24 26 STATEMENT OF INCOME - ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) INCOME Dividends from subsidiaries $324,884 $444,136 $215,580 Other interest and dividends 11,386 4,359 4,355 Management fees 21,404 16,987 13,637 Other 6,602 5,159 11,702 -------- -------- -------- Total Income 364,276 470,641 245,274 EXPENSE Interest on commercial paper 951 987 1,249 Interest on long-term debt and mandatorily redeemable preferred securities 38,243 11,681 11,697 Personnel expense 32,889 18,503 16,869 Intangible asset amortization 30,615 6,046 4,284 Other operating expenses 115,534 40,326 8,126 -------- -------- -------- Total Expense 218,232 77,543 42,225 -------- -------- -------- INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 146,044 393,098 203,049 Income tax benefit 48,458 16,514 2,926 -------- -------- -------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 194,502 409,612 205,975 Equity in undistributed income of subsidiaries 52,320 (125,159) 112,180 -------- -------- -------- NET INCOME $246,822 $284,453 $318,155 ======== ======== ======== - ---------------------------------------------------------------------------------------------
BALANCE SHEET - ------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 (Thousands) ASSETS Cash $ 15 $ 33 $ 21 Short-term investments 224,230 128,480 40,358 Available-for-sale securities 28,578 30,167 22,669 Investment in subsidiaries 2,685,587 2,194,274 2,250,784 Intangible assets 723,785 126,239 67,480 Loans and advances to subsidiaries 1,510 19,405 16,950 Other assets 36,929 9,316 12,203 ---------- ---------- ---------- Total Assets $3,700,634 $2,507,914 $2,410,465 ========== ========== ========== LIABILITIES Commercial paper $ 1,510 $ 19,405 $ 16,950 Long-term debt 651,153 150,000 150,000 Company-obligated mandatorily redeemable preferred securities 150,000 -- -- Other liabilities 135,669 75,266 32,670 ---------- ---------- ---------- Total Liabilities 938,332 244,671 199,620 SHAREHOLDERS' EQUITY 2,762,302 2,263,243 2,210,845 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $3,700,634 $2,507,914 $2,410,465 ========== ========== ========== - ------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS - ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995 (Thousands) OPERATING ACTIVITIES Net income $ 246,822 $ 284,453 $ 318,155 Adjustments to reconcile net income to net cash provided by operating activities Net income of subsidiaries (377,204) (318,977) (327,760) Dividends from subsidiaries 312,072 421,299 211,485 Other, net 79,097 33,386 363 --------- --------- --------- Net Cash Provided by Operating Activities 260,787 420,161 202,243 INVESTING ACTIVITIES Investments in debt and equity securities Purchases (4,554) (8,339) (9,914) Proceeds from maturities 4,100 -- 4,501 Contributions of capital to subsidiaries -- -- (70,352) Acquisitions (386,850) (33,082) (6,700) Other, net 8,846 (2,943) (3,601) --------- --------- --------- Net Cash Used by Investing Activities (378,458) (44,364) (86,066) FINANCING ACTIVITIES Cash dividends paid (132,535) (101,907) (69,562) Net issuance of common stock for employee incentive plans 11,762 (327) 6,839 Purchase of treasury stock (299,063) (175,036) (85,474) Redemption of preferred stock -- (12,684) -- Issuance of long-term debt 501,859 -- -- Issuance of mandatorily redeemable preferred securities 150,000 -- -- Principal payments on long-term debt -- -- (156) Net change in commercial paper (17,895) 2,455 (9,850) Other, net (725) (164) -- --------- --------- --------- Net Cash Provided (Used) by Financing Activities 213,403 (287,663) (158,203) --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents 95,732 88,134 (42,026) Cash and Cash Equivalents at Beginning of Year 128,513 40,379 82,405 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 224,245 $ 128,513 $ 40,379 ========= ========= ========= - ---------------------------------------------------------------------------------------------
25 27 INDEPENDENT AUDITORS' REPORT KPMG Peat Marwick LLP [logo] 10 South Broadway Suite 900 St. Louis, MO 63102-1761 Shareholders and Board of Directors Mercantile Bancorporation Inc.: We have audited the accompanying supplemental consolidated balance sheets of Mercantile Bancorporation Inc. and subsidiaries as of December 31, 1997, 1996, and 1995, and the related supplemental consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the mergers of Firstbank of Illinois Co. and CBT Corporation on July 1, 1998, which have been accounted for as poolings of interests as described in the notes to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Mercantile Bancorporation Inc. and subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercantile Bancorporation Inc. and subsidiaries as of December 31, 1997, 1996, and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. /s/ KPMG Peat Marwick LLP October 7, 1998 28 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note A to Supplemental Interim Unaudited Consolidated Financial Statements -- Basis of Presentation Effective July 1, 1998, Mercantile Bancorporation Inc. ("Corporation") acquired Firstbank of Illinois Co. ("Firstbank") and CBT Corporation ("CBT"), in transactions accounted for as poolings-of-interests. These Supplemental Interim Unaudited Consolidated Financial Statements restate the Corporation's historical interim consolidated financial statements to reflect the Firstbank and CBT transactions for the following dates: - As of or for the three months and six months ended June 30, 1998 and 1997 - As of or for the three months ended March 31, 1998 and 1997 The Supplemental Unaudited Interim Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. 29 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31 1998 1997 ---- ---- INTEREST INCOME Interest and fees on loans and leases $442,332 $365,300 Investments in debt and equity securities Trading 2,065 1,165 Taxable 135,941 76,716 Tax-exempt 6,111 6,685 -------- -------- Total Investments in Debt and Equity Securities 144,117 84,566 Due from banks--interest bearing 3,093 1,400 Federal funds sold and repurchase agreements 3,638 3,367 -------- -------- Total Interest Income 593,180 454,633 INTEREST EXPENSE Interest bearing deposits 229,803 172,591 Foreign deposits 7,617 4,717 Short-term borrowings 52,329 25,037 Bank notes 2,323 2,540 Long-term debt and mandatorily redeemable preferred securities 28,387 7,707 -------- -------- Total Interest Expense 320,459 212,592 -------- -------- NET INTEREST INCOME 272,721 242,041 PROVISION FOR POSSIBLE LOAN LOSSES 8,537 20,090 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 264,184 221,951 OTHER INCOME Trust 28,128 24,716 Service charges 28,244 25,178 Investment banking and brokerage 11,066 8,721 Mortgage banking 5,943 3,515 Gain on sale of mortgage servicing rights 23,155 -- Credit card fees 3,525 5,563 Securitization revenue 4,523 7,292 Securities gains 4,453 1,046 Miscellaneous 27,914 20,327 -------- -------- Total Other Income 136,951 96,358 OTHER EXPENSE Salaries 102,631 88,077 Employee benefits 22,547 21,896 Net occupancy 16,184 14,324 Equipment 20,858 15,409 Intangible asset amortization 14,596 4,810 Miscellaneous 43,722 42,210 -------- -------- Total Other Expense 220,538 186,726 -------- -------- INCOME BEFORE INCOME TAXES 180,597 131,583 INCOME TAXES 65,738 46,270 -------- -------- NET INCOME $114,859 $ 85,313 ======== ======== PER SHARE DATA Basic earnings per share $.76 $.64 Diluted earnings per share .75 .63 Dividends declared .31 .287
30 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED BALANCE SHEET (UNAUDITED) (THOUSANDS)
MARCH 31 MARCH 31 1998 1997 ------- ------- ASSETS Cash and due from banks $ 1,316,663 $ 1,043,305 Due from banks--interest bearing 280,676 123,209 Federal funds sold and repurchase agreements 336,417 261,622 Investments in debt and equity securities Trading 125,680 65,997 Available-for-sale (Amortized cost of $8,784,082 and $4,952,756, respectively) 8,829,585 4,942,895 Held-to-maturity (Estimated fair value of $314,356 and $621,950, respectively) 307,234 619,386 ----------- ----------- Total Investments in Debt and Equity Securities 9,262,499 5,628,278 Loans held-for-sale 249,407 70,547 Loans and leases, net of unearned income 21,513,860 17,108,201 ----------- ----------- Total Loans and Leases 21,763,267 17,178,748 Reserve for possible loan losses (293,565) (259,142) ----------- ----------- Net Loans and Leases 21,469,702 16,919,606 Bank premises and equipment 542,774 435,059 Intangible assets 823,955 219,028 Other assets 1,116,631 468,366 ----------- ----------- Total Assets $35,149,317 $25,098,473 =========== =========== LIABILITIES Deposits Non-interest bearing $ 3,834,599 $ 3,227,581 Interest bearing 20,935,126 16,319,535 Foreign 463,426 277,560 ----------- ----------- Total Deposits 25,233,151 19,824,676 Federal funds purchased and repurchase agreements 2,142,440 1,777,950 Other short-term borrowings 1,656,666 277,411 Bank notes 25,000 175,000 Long-term Federal Home Loan Bank advances 1,447,362 31,800 Other long-term debt 789,588 290,546 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 150,000 Other liabilities 861,944 368,158 ----------- ----------- Total Liabilities 32,306,151 22,895,541 Commitments and contingent liabilities -- -- MARCH 31 MARCH 31 1998 1997 -------- -------- SHAREHOLDERS' EQUITY Preferred stock--no par value Shares authorized 5,000 5,000 Shares issued and outstanding -- -- -- -- Common stock--$.01 par value at March 31, 1998 and $5.00 at March 31, 1997 Shares authorized 200,000 200,000 Shares issued 153,326 137,037 1,535 685,183 Capital surplus 1,065,295 15,107 Retained earnings 1,840,855 1,688,324 Accumulated other comprehensive income 32,740 (4,431) Treasury stock, at cost 1,845 5,066 (97,259) (181,251) ----------- ----------- Total Shareholders' Equity 2,843,166 2,202,932 ----------- ----------- Total Liabilities and Shareholders' Equity $35,149,317 $25,098,473 =========== ===========
31 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) ($ 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) $2,263,243 Net income 128,067 128,067 Common dividends declared: Mercantile Bancorporation Inc. --$.574 per share (57,738) (57,738) Pooled companies prior to acquisition (20,415) (20,415) Issuance of common stock in acquisition of 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 369,993 388 2,157 3,387 5,932 Convertible notes 73,408 22 794 816 Other comprehensive income (1,219) (1,219) Purchase of treasury stock (6,724,699) (259,050) (259,050) Reissuance and retirement of treasury stock (7,396) (42,950) 50,346 -- Pre-merger transactions of pooled companies and other 440,485 1,089 6,671 275 570 8,605 ----------- --------- ---------- ---------- --------- ---------- BALANCE AT JUNE 30, 1997 129,234,409 $ 1,360 $ 658,864 $1,696,852 $(260,135) $2,096,941 =========== ========= ========== ========== ========= ========== BALANCE AT DECEMBER 31, 1997 148,712,307 $ 1,489 $1,016,844 $1,749,974 $ (6,005) $2,762,302 Net income 222,006 222,006 Common dividends declared: Mercantile Bancorporation Inc. --$.62 per share (83,094) (83,094) Pooled companies prior to acquisition (10,464) (10,464) Issuance of common stock in acquisition of: 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 1,281,512 10 35,808 5,746 41,564 Convertible notes 13,380 1 148 149 Other comprehensive income 4,738 4,738 Purchase of treasury stock (1,778,125) (98,452) (98,452) Pre-merger transactions of pooled companies 274,551 3 4,112 4,115 ----------- --------- ---------- ---------- --------- ---------- BALANCE AT JUNE 30, 1998 151,908,355 $ 1,537 $1,074,394 $1,932,567 $ (98,354) $2,910,144 =========== ========= ========== ========== ========= ========== Includes accumulated other comprehensive income.
32 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED MARCH 31 1998 1997 ----------- ---------- OPERATING ACTIVITIES Net income $ 114,859 $ 85,313 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 8,537 20,090 Depreciation and amortization 18,287 13,743 Provision for deferred income taxes (credits) (2,305) 719 Net change in loans held-for-sale (146,378) 4,830 Net change in trading securities 13,575 (34,383) Net change in accrued interest receivable 14,722 4,523 Net change in accrued interest payable 8,449 1,961 Other, net (41,856) 15,089 ----------- ---------- Net Cash Provided by Operating Activities (12,110) 111,885 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (2,474,948) (887,648) Proceeds from maturities 1,332,649 640,207 Proceeds from sales of available-for-sale securities 606,143 177,770 Net change in loans and leases 243,072 (240,487) Purchases of loans and leases (127,651) (33,686) Proceeds from sale of mortgage servicing rights 26,330 -- Proceeds from sales of loans and leases 205,855 39,991 Purchases of premises and equipment (20,392) (16,750) Proceeds from sales of premises and equipment 3,830 1,527 Proceeds from sales of foreclosed property 9,975 7,484 Cash and cash equivalents from acquisitions, net of cash paid 34,448 (13,832) Sale of banking offices, net of cash paid (3,524) -- Other, net 5,588 (4,574) ----------- ---------- Net Cash Used by Investing Activities (158,625) (329,998) FINANCING ACTIVITIES Net change in non-interest bearing, savings, interest bearing demand and money market deposit accounts (92,349) (85,790) Net change in time certificates of deposit under $100,000 (308,440) (74,167) Net change in time certificates of deposit $100,000 and over 95,093 65,185 Net change in other time deposits 14,787 (27,024) Net change in foreign deposits (122,013) 25,673 Net change in short-term borrowings 62,724 (86,768) Issuance of bank notes -- -- Principal payments on bank notes (150,000) -- Issuance of long-term FHLB advances and other long-term debt 851,500 -- Issuance of company-obligated mandatorily redeemable preferred securities -- 150,000 Principal payments on long-term debt (5,275) (5,282) Cash dividends paid (44,580) (35,281) Proceeds from issuance of common stock from employee incentive plans 10,568 1,019 Purchase of treasury stock (93,804) (140,804) Other, net -- 3,174 ----------- ---------- Net Cash Provided by Financing Activities 218,211 (210,065) ----------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47,476 (428,178) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,886,280 1,856,314 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,933,756 $1,428,136 =========== ==========
33 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Thousands)
THREE MONTHS ENDED MARCH 31 1998 1997 ---- ---- NET INCOME $114,859 $ 85,313 Other comprehensive income, before tax Holding gains (losses) on available-for-sale securities 14,208 (20,474) Less: Reclassification adjustment for securities gains included in net income above (4,453) (1,046) -------- -------- Other Comprehensive Income, Before Tax 9,755 (21,520) Income Taxes Related to Other Comprehensive Income 3,414 (7,532) -------- -------- OTHER COMPREHENSIVE INCOME, NET OF TAX 6,341 (13,988) -------- -------- COMPREHENSIVE INCOME $121,200 $ 71,325 ======== ========
34 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 1998 1997 1998 1997 ---- ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $445,880 $376,819 $ 888,212 $742,119 Investments in debt and equity securities Trading 2,846 1,637 4,911 2,802 Taxable 141,066 78,538 277,007 155,254 Tax-exempt 5,944 6,460 12,055 13,145 -------- -------- ---------- -------- Total Investments in Debt and Equity Securities 149,856 86,635 293,973 171,201 Due from banks--interest bearing 3,483 1,969 6,576 3,369 Federal funds sold and repurchase agreements 4,868 4,134 8,506 7,501 -------- -------- ---------- -------- Total Interest Income 604,087 469,557 1,197,267 924,190 INTEREST EXPENSE Interest bearing deposits 231,026 173,344 460,829 345,935 Foreign deposits 6,241 6,722 13,858 11,439 Short-term borrowings 47,924 30,190 100,253 55,227 Bank notes 368 2,633 2,691 5,173 Long-term debt and mandatorily redeemable preferred securities 43,226 9,901 71,613 17,608 -------- -------- ---------- -------- Total Interest Expense 328,785 222,790 649,244 435,382 -------- -------- ---------- -------- NET INTEREST INCOME 275,302 246,767 548,023 488,808 PROVISION FOR POSSIBLE LOAN LOSSES 7,344 29,429 15,881 49,519 -------- -------- ---------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 267,958 217,338 532,142 439,289 OTHER INCOME Trust 28,816 25,931 56,944 50,647 Service charges 29,073 24,993 57,317 50,171 Investment banking and brokerage 9,826 8,463 20,892 17,184 Mortgage banking 8,959 3,357 14,902 6,812 Gain on sale of mortgage servicing rights -- -- 23,155 -- Credit card fees 2,558 5,528 6,083 11,091 Securitization revenue 4,520 4,725 9,043 12,017 Securities gains 2,834 2,071 7,287 3,117 Miscellaneous 28,165 21,353 56,079 41,680 -------- -------- ---------- -------- Total Other Income 114,751 96,421 251,702 192,779 OTHER EXPENSE Salaries 103,747 90,808 206,378 178,885 Employee benefits 18,032 19,899 40,579 41,795 Net occupancy 16,015 14,031 32,199 28,355 Equipment 21,255 16,602 42,113 32,011 Intangible asset amortization 14,462 5,094 29,058 9,904 Miscellaneous 51,215 95,930 94,937 138,140 -------- -------- ---------- -------- Total Other Expense 224,726 242,364 445,264 429,090 -------- -------- ---------- -------- INCOME BEFORE INCOME TAXES 157,983 71,395 338,580 202,978 INCOME TAXES 50,836 28,641 116,574 74,911 -------- -------- ---------- -------- NET INCOME $107,147 $ 42,754 $ 222,006 $128,067 ======== ======== ========== ======== PER SHARE DATA Basic earnings per share $.71 $.33 $1.47 $.97 Diluted earnings per share .69 .32 1.44 .96 Dividends declared .31 .287 .62 .574 Includes the following nonrecurring amounts: Provision for possible loan losses $ -- $ 6,540 $ -- $ 6,540 Miscellaneous expense -- 51,863 -- 51,863 Income tax benefit -- (15,977) -- (15,977) -------- -------- ---------- -------- Impact on Net Income $ -- $(42,426) $ -- $ 42,426 ======== ======== ========== ========
35 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED BALANCE SHEET (UNAUDITED) (THOUSANDS)
JUNE 30 JUNE 30 1998 1997 ------- ------- ASSETS Cash and due from banks $ 1,446,296 $ 1,169,001 Due from banks--interest bearing 233,686 190,749 Federal funds sold and repurchase agreements 261,442 412,971 Investments in debt and equity securities Trading 124,839 73,493 Available-for-sale (Amortized cost of $8,915,489 and $5,073,169, respectively) 8,959,632 5,051,225 Held-to-maturity (Estimated fair value of $256,849 and $399,092, respectively) 251,040 391,165 ----------- ----------- Total Investments in Debt and Equity Securities 9,335,511 5,515,883 Loans held-for-sale 205,236 64,183 Loans and leases, net of unearned income 21,569,778 17,366,893 ----------- ----------- Total Loans and Leases 21,775,014 17,431,076 Reserve for possible loan losses (292,795) (263,237) ----------- ----------- Net Loans and Leases 21,482,219 17,167,839 Bank premises and equipment 538,287 452,616 Intangible assets 811,070 223,886 Other assets 636,399 493,862 ----------- ----------- Total Assets $34,744,910 $25,626,807 =========== =========== LIABILITIES Deposits Non-interest bearing $ 3,900,600 $ 3,445,793 Interest bearing 20,316,577 15,731,439 Foreign 328,641 270,908 ----------- ----------- Total Deposits 24,545,818 19,448,140 Federal funds purchased and repurchase agreements 1,849,787 2,162,567 Other short-term borrowings 1,561,572 455,899 Bank notes 25,000 175,000 Long-term Federal Home Loan Bank advances 2,510,845 27,687 Other long-term debt 789,525 789,776 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 150,000 Other liabilities 402,219 320,797 ----------- ----------- Total Liabilities 31,834,766 23,529,866 Commitments and contingent liabilities -- -- JUNE 30 JUNE 30 1998 1997 ------- ------- SHAREHOLDERS' EQUITY Preferred stock--no par value Shares authorized 5,000 5,000 Shares issued and outstanding -- -- -- -- Common stock--$.01 par value Shares authorized 400,000 200,000 Shares issued 153,699 136,055 1,537 1,360 Capital surplus 1,074,394 658,864 Retained earnings 1,901,396 1,688,524 Accumulated other comprehensive income 31,171 8,328 Treasury stock, at cost 1,791 6,821 (98,354) (260,135) ----------- ----------- Total Shareholders' Equity 2,910,144 2,096,941 ----------- ----------- Total Liabilities and Shareholders' Equity $34,744,910 $25,626,807 =========== ===========
36 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) ($ 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) $2,263,243 Net income 85,313 85,313 Common dividends declared: Mercantile Bancorporation Inc. --$.287 per share (25,892) (25,892) Pooled companies prior to acquisition (9,695) (9,695) Issuance of common stock in acquisition of 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 Issuance of common stock for: Employee incentive plans 148,870 300 (632) 2,596 2,264 Convertible notes 4,216 21 26 47 Other comprehensive income (13,988) (13,988) Purchase of treasury stock (3,463,549) (129,029) (129,029) Pre-merger transactions of pooled companies and other 206,166 1,030 96 273 570 1,969 ----------- --------- ---------- ---------- --------- ---------- BALANCE AT MARCH 31, 1997 131,970,975 $ 685,183 $ 15,107 $1,683,893 $(181,251) $2,202,932 =========== ========= ========== ========== ========= ========== BALANCE AT DECEMBER 31, 1997 148,712,307 $ 1,489 $1,016,844 $1,749,974 $ (6,005) $2,762,302 Net income 114,859 114,859 Common dividends declared: Mercantile Bancorporation Inc. --$.31 per share (41,747) (41,747) Pooled companies prior to acquisition (5,239) (5,239) Issuance of common stock in acquisition of: 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 944,685 9 28,628 2,193 30,830 Convertible notes 7,722 1 86 87 Other comprehensive income 6,341 6,341 Purchase of treasury stock (1,750,000) (93,804) (93,804) Pre-merger transactions of pooled companies and other 161,545 2 2,255 2,257 ----------- --------- ---------- ---------- --------- ---------- BALANCE AT MARCH 31, 1998 151,480,989 $ 1,535 $1,065,295 $1,873,595 $ (97,259) $2,843,166 =========== ========= ========== ========== ========= ========== Includes accumulated other comprehensive income.
37 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (THOUSANDS)
SIX MONTHS ENDED JUNE 30 1998 1997 ----------- ----------- OPERATING ACTIVITIES Net income $ 222,006 $ 128,067 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 15,881 49,519 Depreciation and amortization 36,629 28,321 Provision for deferred income taxes (credits) (4,295) (4,157) Net change in loans held-for-sale (102,207) 11,194 Net change in trading securities 4,326 (42,132) Net change in accrued interest receivable 2,786 (6,527) Net change in accrued interest payable (85) 2,242 Other, net (76,174) (53,930) ----------- ----------- Net Cash Provided by Operating Activities 98,867 112,597 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (4,319,287) (1,480,424) Proceeds from maturities 2,582,417 1,175,989 Proceeds from sales of available-for-sale securities 1,122,789 405,278 Net change in loans and leases 13,408 (562,620) Purchases of loans and leases (175,230) (98,135) Proceeds from sale of mortgage servicing rights 26,330 -- Proceeds from sales of loans and leases 405,896 101,578 Purchases of premises and equipment (45,330) (47,980) Proceeds from sales of premises and equipment 13,668 2,531 Proceeds from sales of foreclosed property 21,710 21,732 Cash and cash equivalents from acquisitions, net of cash paid 34,448 17,524 Sale of banking offices, net of cash paid (3,524) -- Other, net 11,799 (11,302) ----------- ----------- Net Cash Used by Investing Activities (310,906) (475,829) FINANCING ACTIVITIES Net change in non-interest bearing, savings, interest bearing demand and money market deposit accounts (111,883) (152,393) Net change in time certificates of deposit under $100,000 (587,014) (216,787) Net change in time certificates of deposit $100,000 and over (52,152) (121,205) Net change in other time deposits (4,472) (32,785) Net change in foreign deposits (256,798) 19,021 Net change in short-term borrowings (308,528) 476,337 Issuance of bank notes -- -- Principal payments on bank notes (150,000) -- Issuance of long-term FHLB advances and other long-term debt 1,916,500 500,000 Issuance of company-obligated mandatorily redeemable preferred securities -- 150,000 Principal payments on long-term debt (6,779) (9,396) Cash dividends paid (91,212) (76,822) Proceeds from issuance of common stock from employee incentive plans 17,973 14,556 Purchase of treasury stock (98,452) (270,086) Other, net -- (801) ----------- ----------- Net Cash Provided by Financing Activities 267,183 279,639 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 55,144 (83,593) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,886,280 1,856,314 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,941,424 $ 1,772,721 =========== ===========
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES SUPPLEMENTAL INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) (Thousands)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 1998 1997 1998 1997 ---- ---- ---- ---- NET INCOME $107,147 $42,754 $222,006 $128,067 Other comprehensive income, before tax Holding gains (losses) on available-for-sale securities 368 21,716 14,576 1,242 Less: Reclassification adjustment for securities gains included in net income above (2,834) (2,071) (7,287) (3,117) -------- ------- -------- -------- Other Comprehensive Income, Before Tax (2,466) 19,645 7,289 (1,875) Income Taxes Related to Other Comprehensive Income (863) 6,876 2,551 (656) -------- ------- -------- -------- OTHER COMPREHENSIVE INCOME, NET OF TAX (1,603) 12,769 4,738 (1,219) -------- ------- -------- -------- COMPREHENSIVE INCOME $105,544 $55,523 $226,744 $126,848 ======== ======= ======== ========
39 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED: Not Applicable (b) PRO FORMA FINANCIAL INFORMATION: Not Applicable (c) EXHIBITS: 23 Consent of KPMG Peat Marwick LLP 27.1 Restated Financial Data Schedule (December 31, 1997) 27.2 Restated Financial Data Schedule (December 31, 1996) 27.3 Restated Financial Data Schedule (December 31, 1995) 27.4 Restated Financial Data Schedule (June 30, 1998) 27.5 Restated Financial Data Schedule (March 31, 1998) 27.6 Restated Financial Data Schedule (June 30, 1997) 27.7 Restated Financial Data Schedule (March 31, 1997) * * * 40 SIGNATURES 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 hereunto duly authorized. Dated: October 7, 1998 MERCANTILE BANCORPORATION INC. By: /s/ Michael T. Normile ---------------------------------------- Michael T. Normile Senior Vice President Finance and Control 41 EXHIBIT INDEX
Exhibit No. Description Location - ----------- ----------- -------- 23 Consent of KPMG Peat Marwick LLP Included herein 27.1 Restated Financial Data Schedule (December 31, 1997) Included herein 27.2 Restated Financial Data Schedule (December 31, 1996) Included herein 27.3 Restated Financial Data Schedule (December 31, 1995) Included herein 27.4 Restated Financial Data Schedule (June 30, 1998) Included herein 27.5 Restated Financial Data Schedule (March 31, 1998) Included herein 27.6 Restated Financial Data Schedule (June 30, 1997) Included herein 27.7 Restated Financial Data Schedule (March 31, 1997) Included herein
EX-23 2 CONSENT OF EXPERT 1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Mercantile Bancorporation Inc.: We consent to the incorporation by reference in the Registration Statements No. 2-78395, No. 33-15265, No. 33-33870, No. 33-35139, No. 33-43694, No. 33-48952, No. 33-57543, and No. 333-47713, each on Form S-8; and No. 33-45863, No. 33-52986, No. 33-50981, No. 33-55439, No. 33-58467, No. 33-63609, No. 333-09803, No. 333-23607, No. 333-27431, No. 333-42557, No. 333-50203, No. 333-51329, No. 333-56639, and No. 333-57345, each on Form S-4; and No. 333-37547 on Form S-3, of Mercantile Bancorporation Inc. of our report dated October 7, 1998, relating to the supplemental consolidated balance sheets of Mercantile Bancorporation Inc. and subsidiaries as of December 31, 1997, 1996, and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the Current Report on Form 8-K of Mercantile Bancorporation Inc. dated October 7, 1998. By: /s/ KPMG Peat Marwick LLP ---------------------------- KPMG Peat Marwick LLP St. Louis, Missouri October 7, 1998 EX-27.1 3 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,330,512 251,909 303,859 70,536 8,059,066 335,279 341,954 21,361,955 284,165 33,332,190 24,809,455 3,678,540 388,722 1,518,171 0 0 1,489 2,760,813 33,332,190 1,651,816 439,537 27,325 2,118,678 842,949 1,070,940 1,047,738 86,355 7,649 986,378 389,198 246,822 0 0 246,822 1.76 1.73 4.00 113,134 22,332 4,335 64,840 257,718 109,259 28,189 284,165 284,165 0 98,707
EX-27.2 4 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,448,637 96,714 310,963 31,361 4,741,677 656,721 661,632 16,937,254 257,718 24,995,735 19,784,845 2,132,674 312,298 327,675 0 0 683,832 1,579,411 24,995,735 1,404,809 347,005 19,306 1,771,120 692,138 822,157 948,963 78,766 292 805,187 433,020 284,453 0 0 284,453 2.12 2.09 4.00 81,037 37,898 5,413 38,757 261,329 114,127 21,934 257,718 257,718 0 65,138
EX-27.3 5 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1,385,695 51,980 292,933 67,283 5,223,660 335,141 340,130 15,584,285 261,339 23,651,434 18,463,655 2,053,909 302,416 370,609 0 12,153 684,581 1,514,111 23,651,434 1,371,083 331,084 24,152 1,726,319 664,974 808,540 917,779 44,952 4,634 725,915 486,901 318,155 0 0 318,155 2.37 2.33 4.42 105,188 30,947 3,549 31,733 274,636 79,544 19,459 261,339 261,339 0 66,220
EX-27.4 6 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,446,296 233,686 261,442 124,839 8,959,632 251,040 256,849 21,775,014 292,795 34,744,910 24,545,818 3,411,359 402,219 3,450,370 0 0 1,537 2,908,607 34,744,910 888,212 293,973 15,082 1,197,267 474,687 649,244 548,023 15,881 7,287 445,264 338,580 222,006 0 0 222,006 1.47 1.44 3.58 116,148 23,197 4,617 0 284,165 27,439 15,010 292,795 292,795 0 0 Only reported at fiscal year-end date.
EX-27.5 7 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1,316,663 280,676 336,417 125,680 8,829,585 307,234 314,356 21,763,267 293,565 35,149,317 25,233,151 3,799,106 861,944 2,386,950 0 0 1,535 2,841,631 35,149,317 442,332 144,117 6,731 593,180 237,420 320,459 272,721 8,537 4,453 220,538 180,597 114,859 0 0 114,859 .76 .75 3.62 123,544 29,326 5,507 0 284,165 12,772 5,815 293,565 293,565 0 0 Only reported at fiscal year-end date.
EX-27.6 8 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1,169,001 190,749 412,971 73,493 5,051,225 391,165 399,092 17,431,076 263,237 25,626,807 19,448,140 2,618,466 320,797 967,463 0 0 1,360 2,095,581 25,626,807 742,119 171,201 10,870 924,190 357,374 435,382 488,808 49,519 3,117 429,090 202,978 128,067 0 0 128,067 .97 .96 4.35 92,820 33,138 5,150 0 257,718 58,263 12,700 263,237 263,237 0 0 Only reported at fiscal year-end date.
EX-27.7 9 ARTICLE 9 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1,043,305 123,209 261,622 65,997 4,942,895 619,386 621,950 17,178,748 259,142 25,098,473 19,824,676 2,055,361 368,158 472,346 0 0 685,183 1,517,749 25,098,473 365,300 84,566 4,767 454,633 177,308 212,592 242,041 20,090 1,046 186,726 131,583 85,313 0 0 85,313 .64 .63 4.38 93,705 36,227 5,323 0 257,718 26,439 6,186 259,142 259,142 0 0 Only reported at fiscal year-end date.
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