<PAGE> 1
========================================================================
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 1-11792
MERCANTILE BANCORPORATION INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-0951744
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
P.O. BOX 524 ST. LOUIS, MISSOURI 63166-0524
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 425-2525
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
X
---- ----
YES NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $5.00 PAR VALUE, 62,649,251 SHARES OUTSTANDING AS OF THE
CLOSE OF BUSINESS ON APRIL 30, 1996.
========================================================================
<PAGE> 2
<TABLE>
INDEX
PART I-FINANCIAL INFORMATION
<CAPTION>
Page No.
--------
<S> <C>
Item 1-Financial Statements
Consolidated Statement of Income
Three months ended March 31, 1996 and 1995 3
Consolidated Balance Sheet
March 31, 1996 and 1995, and December 31, 1995 4
Consolidated Statement of Changes in Shareholders' Equity
Three months ended March 31, 1996 and 1995 5
Consolidated Statement of Cash Flows
Three months ended March 31, 1996 and 1995 6
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
<CAPTION>
PART II-OTHER INFORMATION
<S> <C>
Item 4-Submission of Matters to a Vote of Security Holders 19
Item 6-Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(THOUSANDS EXCEPT PER COMMON SHARE DATA)
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1996 1995
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $257,044 $246,749
Investments in debt and equity securities
Trading 95 163
Taxable 57,598 55,989
Tax-exempt 5,888 6,632
-------- --------
Total Investments in Debt and Equity Securities 63,581 62,784
Due from banks-interest bearing 830 344
Federal funds sold and repurchase agreements 3,785 4,319
-------- --------
Total Interest Income 325,240 314,196
INTEREST EXPENSE
Interest bearing deposits 128,885 107,381
Foreign deposits 2,501 3,196
Short-term borrowings 14,114 23,899
Bank notes 3,972 1,670
Long-term debt 6,032 6,137
-------- --------
Total Interest Expense 155,504 142,283
-------- --------
NET INTEREST INCOME 169,736 171,913
PROVISION FOR POSSIBLE LOAN LOSSES<F1> 33,168 13,990
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 136,568 157,923
OTHER INCOME
Trust 19,354 16,717
Service charges 19,272 18,500
Credit card fees 1,449 7,069
Securitization revenue 4,502 -
Mortgage banking 3,120 2,078
Investment banking and brokerage 3,143 2,304
Securities losses<F1> (2,956) (54)
Other 11,400 16,087
-------- --------
Total Other Income 59,284 62,701
OTHER EXPENSE
Salaries 62,732 57,748
Employee benefits 16,524 14,795
Net occupancy 9,742 8,896
Equipment 11,574 10,495
Other<F1> 82,198 43,992
-------- --------
Total Other Expense 182,770 135,926
-------- --------
INCOME BEFORE INCOME TAXES 13,082 84,698
INCOME TAXES<F1> 8,517 29,265
-------- --------
NET INCOME $ 4,565 $ 55,433
======== ========
PER COMMON SHARE DATA
Average shares outstanding 63,052,401 60,773,934
Net income<F2> $.07 $.91
Dividends declared .41 .33
<FN>
<F1>Includes the following nonrecurring merger-related amounts:
<S> <C> <C>
Provision for possible loan losses $ 10,851 $ -
Other income (securities losses) (3,082) -
Other expense 41,678 -
Income tax benefit (15,599) -
-------- -------
Impact on Net Income $(40,012) $ -
======== =======
<F2>Earnings per common share is calculated by dividing net income,
less dividends on preferred stock, by weighted average common
shares outstanding.
</TABLE>
3
<PAGE> 4
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS)
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1996 1995 1995
-------- ------- --------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 888,924 $ 1,112,088 $ 779,731
Due from banks-interest bearing 77,206 51,056 23,541
Federal funds sold and repurchase agreements 245,037 271,098 238,754
Investments in debt and equity securities
Trading 13,245 3,677 11,542
Available-for-sale 4,307,504 4,207,079 738,007
Held-to-maturity (Estimated fair value
of $3,495,735 at March 31, 1995) - - 3,538,579
----------- ----------- -----------
Total Investments in Debt and Equity
Securities 4,320,749 4,210,756 4,288,128
Loans held-for-sale 88,416 94,877 51,310
Loans and leases, net of unearned income 11,751,826 11,636,010 11,270,481
----------- ----------- -----------
Total Loans and Leases 11,840,242 11,730,887 11,321,791
Reserve for possible loan losses (211,608) (201,780) (217,302)
----------- ----------- -----------
Net Loans and Leases 11,628,634 11,529,107 11,104,489
Bank premises and equipment 311,894 309,070 291,474
Due from customers on acceptances 6,458 2,622 5,985
Other assets 423,424 442,244 365,147
----------- ----------- -----------
Total Assets $17,902,326 $17,928,041 $17,097,249
=========== =========== ===========
LIABILITIES
Deposits
Non-interest bearing $ 2,040,285 $ 2,075,579 $ 1,805,040
Interest bearing 11,801,245 11,429,511 10,976,881
Foreign 160,478 209,170 239,499
----------- ----------- -----------
Total Deposits 14,002,008 13,714,260 13,021,420
Federal funds purchased and repurchase agreements 1,220,321 1,552,945 1,630,361
Other short-term borrowings 220,891 210,791 193,774
Bank notes 275,000 250,000 250,000
Long-term debt 323,915 325,607 324,232
Bank acceptances outstanding 6,458 2,622 5,985
Other liabilities 245,846 232,229 215,481
----------- ----------- -----------
Total Liabilities 16,294,439 16,288,454 15,641,253
Commitments and contingent liabilities - - -
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1996 1995 1995
-------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY
Preferred stock-no par value
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding - 15 15 - 12,153 12,153
Common stock-$5.00 par value
Shares authorized 100,000 100,000 100,000
Shares issued 63,211 63,887 61,389 316,058 319,434 306,948
Capital surplus 234,689 283,288 241,901
Retained earnings 1,060,542 1,085,269 922,268
Treasury stock, at cost 87 1,380 765 (3,402) (60,557) (27,274)
----------- ----------- -----------
Total Shareholders' Equity 1,607,887 1,639,587 1,455,996
----------- ----------- -----------
Total Liabilities and Shareholders' Equity $17,902,326 $17,928,041 $17,097,249
=========== =========== ===========
</TABLE>
4
<PAGE> 5
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
<CAPTION>
COMMON STOCK
--------------------- TOTAL
OUTSTANDING PREFERRED CAPITAL RETAINED TREASURY SHAREHOLDERS'
SHARES DOLLARS STOCK SURPLUS EARNINGS STOCK EQUITY
----------- ------- --------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994, AS RESTATED 59,883,249 $299,885 $12,153 $230,940 $ 868,666 $ (2,954) $1,408,690
Net income 55,433 55,433
Common dividends declared:
Mercantile Bancorporation Inc.-$.33
per share (14,811) (14,811)
Pooled companies prior to acquisition (3,914) (3,914)
Preferred dividends declared (255) (255)
Issuance of common stock:
Acquisition of Wedge Bank 969,954 4,850 1,649 7,314 13,813
Employee incentive plans 47,634 232 82 38 352
Convertible notes 331,075 1,655 6,935 8,590
Net fair value adjustment for available-
for-sale securities 9,835 9,835
Purchase of treasury stock (672,500) (24,358) (24,358)
Pre-merger transactions of pooled companies
and other 65,007 326 2,295 2,621
---------- -------- ------- -------- ---------- -------- ----------
BALANCE AT MARCH 31, 1995 60,624,419 $306,948 $12,153 $241,901 $ 922,268 $(27,274) $1,455,996
========== ======== ======= ======== ========== ======== ==========
BALANCE AT DECEMBER 31, 1995, AS RESTATED 62,506,536 $319,434 $12,153 $283,288 $1,085,269 $(60,557) $1,639,587
Net income 4,565 4,565
Common dividends declared-$.41 per share (25,885) (25,885)
Preferred dividends declared (408) (408)
Redemption of preferred stock (12,153) (531) (12,684)
Issuance of common stock in acquisitions of:
Metro Savings Bank, F.S.B. 197,902 57 14 8,983 9,054
Security Bank of Conway, F.S.B. 321,964 75 14,614 14,689
First Sterling Bancorp, Inc. 521,417 2,607 1,876 13,772 18,255
Issuance of common stock for employee
incentive plans 103,533 486 (302) 276 460
Net fair value adjustment for available-
for-sale securities (16,254) (16,254)
Purchase of treasury stock (525,000) (23,825) (23,825)
Reissuance and retirement of treasury stock (6,458) (50,708) 57,166 --
Other (2,299) (11) 403 (59) 333
---------- -------- ------- -------- ---------- -------- ----------
BALANCE AT MARCH 31, 1996 63,124,053 $316,058 $ - $234,689 $1,060,542 $ (3,402) $1,607,887
========== ======== ======= ======== ========== ======== ==========
</TABLE>
5
<PAGE> 6
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS)
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,565 $ 55,433
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 33,168 13,990
Depreciation and amortization 10,301 8,841
Provision for deferred income taxes 8,905 (2,704)
Net change in loans held-for-sale 6,461 (29,927)
Net change in accrued interest receivable 3,354 851
Net change in accrued interest payable (10,998) 6,514
Other, net 42,194 32,693
---------- ----------
Net Cash Provided by Operating Activities 97,950 85,691
INVESTING ACTIVITIES
Investments in debt and equity securities, other than trading securities
Purchases (387,386) (276,360)
Proceeds from maturities 291,716 347,011
Proceeds from sales of available-for-sale securities 59,435 15,453
Net change in loans and leases 10,943 (265,059)
Purchases of loans and leases (16) (48,289)
Proceeds from sales of loans and leases 43,779 21,713
Purchases of premises and equipment (13,748) (14,615)
Proceeds from sales of premises and equipment 2,714 692
Proceeds from sales of foreclosed property 7,393 3,758
Cash and cash equivalents from acquisitions, net of cash paid 42,907 8,362
Other, net 145 3,898
---------- ----------
Net Cash Provided (Used) by Investing Activities 57,882 (203,436)
FINANCING ACTIVITIES
Net change in non-interest bearing, savings, interest bearing demand and
money market deposit accounts 78,400 (382,752)
Net change in time certificates of deposit under $100,000 (96,712) 131,620
Net change in time certificates of deposit $100,000 and over 63,089 117,941
Net change in other time deposits 4,589 98,228
Net change in foreign deposits (48,692) 20,364
Net change in short-term borrowings (342,320) (42,498)
Issuance of bank notes 25,000 150,000
Issuance of long-term debt 1,500 3,830
Principal payments on long-term debt (1,706) (909)
Cash dividends paid (26,293) (18,980)
Proceeds from issuance of common stock 411 352
Purchase of treasury stock (23,825) (24,358)
Redemption of preferred stock (12,684) -
Other, net 336 -
---------- ----------
Net Cash Provided (Used) by Financing Activities (378,907) 52,838
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (223,075) (64,907)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,434,242 1,106,933
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,211,167 $1,042,026
========== ==========
</TABLE>
6
<PAGE> 7
NOTE 1
The consolidated financial statements include all adjustments which
are, in the opinion of management, necessary for the fair statement of
the results of these periods and are of a normal recurring nature.
NOTE 2
Effective January 2, 1996, Mercantile Bancorporation Inc.
("Corporation" or "Mercantile") acquired Hawkeye Bancorporation
("Hawkeye"), a $2 billion-asset holding company headquartered in Des
Moines, Iowa. The Hawkeye acquisition was accounted for as a pooling-
of-interests. The historical consolidated financial statements have
been restated to reflect this transaction.
Net income and net income per common share for Mercantile and Hawkeye
prior to restatement were as follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER
COMMON SHARE DATA)
THREE MONTHS
ENDED
MARCH 31,
1995
------------
<S> <C>
MERCANTILE
Net income $49,703
Net income per common share .93
HAWKEYE
Net income 5,730
Net income per common share .43
</TABLE>
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 1
HIGHLIGHTS<F1>
<CAPTION>
FIRST QUARTER
($ IN THOUSANDS EXCEPT PER COMMON SHARE DATA) 1996 1995 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER COMMON SHARE DATA
Net income $ .07 $ .91 (92.3)%
Dividends declared .41 .33 24.2
Book value at March 31 25.47 23.82 6.9
Market price at March 31 45 3/4 36 1/2 25.3
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS AND SELECTED RATIOS
EXCLUDING NONRECURRING MERGER-RELATED EXPENSE<F2>
Net income $44,577 $55,433 (19.6)%
Net income per common share .70 .91 (23.1)
Return on assets 1.00% 1.30%
Return on equity 10.65 15.35
Efficiency ratio 59.78 56.87
Other expense to average assets 3.16 3.20
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS<F3>
Taxable-equivalent net interest income $173,657 $176,318 (1.5)%
Tax-equivalent adjustment 3,921 4,405 (11.0)
Net interest income 169,736 171,913 (1.3)
Provision for possible loan losses 33,168 13,990 -
Other income 59,284 62,701 (5.4)
Other expense 182,770 135,926 34.5
Income taxes 8,517 29,265 (70.9)
Net income 4,565 55,433 (91.8)
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS AND DATA<F3>
Return on assets .10% 1.30%
Return on equity 1.09 15.35
Efficiency ratio 78.46 56.87
Other expense to average assets 4.09 3.20
Net interest rate margin 4.23 4.48
Equity to assets 8.98 8.52
Tier I capital to risk-adjusted assets 11.90 11.79
Total capital to risk-adjusted assets 14.99 15.00
Leverage 8.28 8.08
Reserve for possible loan losses to outstanding loans 1.79 1.92
Reserve for possible loan losses to non-performing loans 259.41 548.87
Non-performing assets to outstanding loans and
foreclosed assets .77 .48
Banks 72 75
Banking offices 441 426
Full-time equivalent employees 7,798 7,649
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Total assets $17,865,247 $17,009,093 5.0%
Earning assets 16,410,663 15,740,174 4.3
Loans and leases 11,798,364 11,106,397 6.2
Deposits 13,921,394 13,238,869 5.2
Shareholders' equity 1,674,780 1,444,772 15.9
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>All previously reported financial information has been restated to
reflect the January 2, 1996 merger with Hawkeye Bancorporation,
which was accounted for as a pooling-of-interests.
<F2>Nonrecurring merger-related expense reduced net income and net
income per common share by $40,012,000 and $.63, respectively, in
the first quarter of 1996.
<F3>Includes nonrecurring merger-related expense noted in (2) above.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PERFORMANCE SUMMARY
Reported net income for Mercantile Bancorporation Inc. ("Corporation"
or "Mercantile") in the first quarter of 1996 was $4,565,000 compared
with the $55,433,000 earned in the same period a year ago. On a per
common share basis, net income was $.07 compared with the $.91 earned
in last year's first quarter. Included in first-quarter 1996 results
were nonrecurring merger-related amounts which lowered net income and
net income per common share by $40,012,000 and $.63, respectively. Net
income excluding merger-related items was $44,577,000 or $.70 per
common share.
Two additional items negatively impacted first-quarter 1996 earnings.
First, $10,000,000 was added to the provision for loan losses to
substantially cover an $11,000,000 charge-off of a non-accrual
exposure to a specialty retailer that declared bankruptcy in late
1995. After taxes, this addition to the provision reduced earnings per
common share by $.10. Second, the co-branded credit card launched in
May 1995 by SBC Communications Inc. ("SBC") and Mercantile negatively
impacted earnings per common share by approximately $.09 from original
forecasts. While market acceptance of the co-branded card has
surpassed expectations, cardholder performance, particularly in the
post-holiday period, has differed from original forecasts. Mercantile
has identified actions to ensure the card's ongoing profitability and
will be implementing some of these actions in the second quarter.
All prior year figures have been restated to include the pre-
acquisition accounts and results of operations of Hawkeye
Bancorporation ("Hawkeye"), a 23-bank holding company with assets
totaling $2 billion, headquartered in Des Moines, Iowa. Hawkeye was
merged with Mercantile on January 2, 1996 in a transaction accounted
for as a pooling-of-interests. Also effective January 2, 1996,
Mercantile completed a merger with First Sterling Bancorp, Inc.
("Sterling"), based in Sterling, Illinois. The Sterling transaction
met the requirements for treatment as a pooling-of-interests; however,
due to the immateriality of Sterling's financial condition and results
of operations to those of Mercantile, the historical financial
statements of the Corporation were not restated. On February 9, 1996,
the Corporation acquired Security Bank of Conway, F.S.B. ("Conway"),
located in Conway, Arkansas, and on March 7, 1996, acquired Metro
Savings Bank, F.S.B. ("Metro"), headquartered in Wood River, Illinois.
The Conway and Metro acquisitions were accounted for as purchases;
accordingly,
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 2
ACQUISITIONS
($ IN THOUSANDS)
<CAPTION>
CONSIDERATION
------------------ ACCOUNTING
DATE ASSETS DEPOSITS CASH SHARES METHOD
---- ------ -------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
ACQUISITIONS COMPLETED
Metro Savings Bank, F.S.B. Mar. 7, 1996 $ 80,857 73,843 $ 5 197,902 Purchase
Security Bank of Conway, F.S.B. Feb. 9, 1996 102,502 89,697 1 321,964 Purchase
Hawkeye Bancorporation Jan. 2, 1996 1,978,540 1,739,811 80 7,892,196 Pooling
First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 147,588 1 521,417 Pooling<F1>
Southwest Bancshares, Inc. Aug. 1, 1995 187,701 155,628 1 674,975 Pooling<F1>
AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 130,179 1 661,356 Pooling<F1>
Plains Spirit Financial Corporation July 7, 1995 400,754 276,887 6,697 1,301,180 Purchase
TCBankshares, Inc. May 1, 1995 1,422,798 1,217,740 - 4,749,999<F2> Pooling
Central Mortgage Bancshares, Inc. May 1, 1995 654,584 571,105 8 2,537,723 Pooling
UNSL Financial Corp Jan. 3, 1995 508,346 380,716 11 1,578,107 Pooling
Wedge Bank Jan. 3, 1995 195,716 152,865 1 969,954 Pooling<F1>
ACQUISITIONS PENDING
Peoples State Bank 3rd Qtr. 1996 96,824 74,361 - 325,843<F3> Purchase
Today's Bancorp, Inc. 4th Qtr. 1996 509,669 434,097 <F4> <F4> Purchase
<FN>
<F1>The historical financial statements of the Corporation were not
restated for the acquisition due to the immateriality of the
acquiree's financial condition and results of operations to those
of Mercantile.
<F2>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.
<F3>Estimated shares to be issued in acquisition.
<F4>The value of the consideration will total $87 million, which
includes up to 1,177,066 shares of Mercantile common stock.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
the results of operations were included in the Consolidated Financial
Statements from the acquisition date. Exhibit 2 details acquisitions
completed during 1995 and 1996 as well as two pending acquisitions.
Net interest income for the first quarter of 1996 was $169,736,000
compared with $171,913,000 in the year-earlier period, a decrease of
1.3%. The net interest rate margin of 4.23% was stable in comparison
with the fourth quarter of 1995, yet was 25 basis points lower than
the 4.48% margin of last year. Average earning assets of $16.4 billion
grew 4.3% from $15.7 billion in the first quarter of 1995, as average
loan volume increased 6.2%. This loan growth was funded largely
through an increase in average core deposits.
Other income was $59,284,000 in the first quarter of 1996, a decrease
of 5.4% from a year ago. Included in 1996's first quarter was
$3,082,000 in nonrecurring merger-related securities losses. Other
income in the first quarter of 1995 included a $5,155,000 gain on the
sale of the Corporation's interest in a joint venture that provided
the St. Louis market with ATM switching capabilities. Total non-
interest income increased by 8.4% in 1996 after excluding these items,
led by trust revenue, mortgage banking income, investment banking and
brokerage fees and letters of credit fees.
Non-interest expenses in 1996 included $41,678,000 in nonrecurring
merger-related costs. Excluding these costs, total other expense was
$141,092,000, up 3.8% from a year ago. Excluding merger costs, the
efficiency ratio was 59.78% compared with 56.87% last year, and the
other expense to average assets ratio improved to 3.16% from 3.20% in
the first quarter of 1995. On April 3, 1996, the Corporation announced
plans to reduce its bank charters during the next year by
approximately 80% through consolidations in order to achieve greater
operational efficiencies. The amount of cost savings is not known at
this time, but it is believed that fewer legal charters will lower
administrative costs, accelerate the deployment of technology and
allow staff more time to serve customers.
The provision for possible loan losses for the quarter was $33,168,000
compared with $13,990,000 in 1995. In addition to $10,851,000 in
nonrecurring merger-related provision, $10,000,000 was recorded to
offset a charge-off on a specialty retailer credit as previously
discussed. Net charge-offs for 1996 and 1995 were $25,478,000 and
$14,664,000, respectively, and on an annualized basis were .86% of
average loans this quarter compared with .53% last year. Excluding the
1996 specialty retailer charge-off discussed above, net charge-offs to
average loans for the first quarter of 1996 was .49%. At March 31,
1996, the reserve for possible loan losses was $211,608,000, and
provided coverage of 259.41% of non-performing loans compared with
245.18% at year-end 1995 and 548.87% last March 31.
Non-performing loans as of March 31, 1996 were $81,573,000 or .69% of
total loans compared with the year-end 1995 figures of $82,299,000 or
.70% and $39,591,000 or .35% at March 31, 1995. Foreclosed assets
declined to $10,102,000 compared with $12,591,000 at year's end and
$14,269,000 last March 31. The decrease in non-performing loans caused
by the charge-off discussed above was offset by increases in non-
accrual loans at the Community Banks and in the Kansas City bank, due
primarily to the reclassification of certain loans to non-accrual
status following acquisition by Mercantile.
Consolidated assets of $17.9 billion were up 4.7% from last March 31.
Core deposits declined by 7.6% to $12.8 billion, loans were up 4.6% to
$11.8 billion, and shareholders' equity of $1.6 billion was 10.4%
higher than at March 31, 1995. Tier I capital to risk-adjusted assets
improved to 11.90% compared with 11.79% last year, while Total capital
to risk-adjusted assets was 14.99%, which is the same level as last
year. Tangible equity to assets was 8.38% at this quarter's end
compared to 8.58% at year-end 1995.
The following financial commentary presents a more thorough discussion
and analysis of the results of operations and financial condition of
the Corporation for the first quarter of 1996.
NET INTEREST INCOME
Net interest income for the first quarter of 1996 was $169,736,000, a
1.3% decrease from the $171,913,000 earned last year. This was the net
result of a 25-basis-point reduction in the net interest rate margin
to 4.23% and a 4.3% growth in
10
<PAGE> 11
average earning assets. Factors contributing to the lower net interest
rate margin in 1996 included the May 1995 credit card securitization,
continued competitive pricing for both loans and deposits, the
movement of retail deposits to higher-cost certificates of deposit,
and introductory interest rates on SBC co-branded credit card
balances. Average loans grew by $691,967,000 or 6.2%, while investment
securities were relatively even with last year.
When compared with the first quarter of 1995, average commercial loans
grew by $204,252,000 or 7.3%, while average commercial real estate
mortgage and construction loans increased by $205,478,000 or 9.2%. Net
of a $225,000,000 loan sale in the fourth quarter of 1995, residential
mortgage loans on average grew by $262,564,000 or 7.4% as the mix of
production throughout 1995 moved largely to adjustable-rate loans
which were retained in the portfolio. Average credit card loans
decreased by $41,549,000 or 4.8%. Excluding the impact of the
$400,000,000 in credit card loans securitized during May 1995, credit
card loans increased on average by 41.0%. The SBC co-branded credit card
added significantly to this growth while the core MasterCard(R) and VISA(R)
portfolio declined. Other consumer loans increased on average by
$61,222,000 or 3.8% due to growth in indirect auto loans.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT 3
LOANS AND LEASES
($ IN THOUSANDS)
<CAPTION>
MARCH 31
1996 1995 CHANGE
---- ---- ------
<S> <C> <C> <C>
Commercial $ 3,028,211 $ 2,892,135 4.7%
Real estate-commercial 2,144,374 1,939,184 10.6
Real estate-construction 293,380 330,840 (11.3)
Real estate-residential 3,856,530 3,622,713 6.5
Consumer 1,688,650 1,642,721 2.8
Credit card loans issued 1,229,097 894,198 37.5
Securitized credit card loans (400,000) - -
----------- -----------
Total Loans and Leases $11,840,242 $11,321,791 4.6
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $28,903,000 or .7% decline in average investment securities came
both through maturities and sales. The majority of sales were made by
recently acquired companies, which resulted in nonrecurring securities
losses of $3,082,000. In December 1995, the Corporation redesignated
the entire investment portfolio as available-for-sale, as allowed by
the Financial Accounting Standards Board. Short-term investments are
primarily used for short-term excess liquidity or balancing the
interest rate sensitivity of the Corporation, and on average increased
by $7,425,000 or 2.4% during the first quarter of 1996.
Average core deposits increased by $493,354,000 or 4.0% in the first
quarter of 1996; Mercantile was substantially core funded at 91.36% of
total deposits and 77.51% of earning assets. Changes in average core
deposits for the past five quarters are shown in the Consolidated
Quarterly Average Balance Sheet on Page 18 of this report.
Average non-interest bearing deposits declined by $76,627,000 or 3.6%,
while average other time deposits were down by $95,781,000 or 70.9%.
The United States Government is a significant cash management customer
of Mercantile Bank of St. Louis N.A. and pays for services rendered
via compensating balances. In response to the lack of an approved
fiscal 1996 federal government budget, the Government withdrew all
balances out of the Corporation in November 1995 to help finance its
funding requirements. The withdrawal reduced anticipated average
balances during the first quarter by $400,000,000. The funds were
redeposited with Mercantile Bank of St. Louis N.A. on April 9, 1996.
Accruals were made in the first quarter of 1996 as if the funds were
on deposit in order to better match revenues with services delivered,
so there was no effect on net interest income.
Average short-term borrowings decreased by $246,127,000 in the first
quarter of 1996, due primarily to the credit card securitization and
an increase in bank note funding. All borrowings are in accordance
with current liquidity guidelines and the relative levels of short-
term borrowings are expected to be further reduced in the second
quarter of 1996 due to the return of the U.S. Government deposits.
Average shareholders' equity grew by $230,008,000 or 15.9%, due
largely to net earnings retained during 1995 and stock issued in
acquisitions accounted for as purchases and unrestated poolings-of-
interests.
11
<PAGE> 12
The factors discussed previously are consistent with Mercantile's
overall corporate policy relative to rate sensitivity and liquidity,
which is to produce the optimal yield and maturity mix consistent with
interest rate expectations and projected liquidity needs. The
Consolidated Quarterly Average Balance Sheet, with rates earned and
paid, is summarized by quarter on Page 18.
OTHER INCOME
Non-interest income decreased 5.4% during the first quarter of 1996 to
$59,284,000. Current quarter other income was negatively impacted by
securities losses of $3,082,000 realized by recently acquired banks in
routine investment portfolio restructurings. In 1995, the Corporation
recorded a gain of $5,155,000 on the sale of its interest in a joint
venture that provided the St. Louis market with ATM switching
capabilities. Excluding these items, total non-interest income was up
$4,820,000 or 8.4% from the first quarter of 1995.
Trust fees were the largest source of non-interest income in 1996, and
were $19,354,000 compared with $16,717,000 during the first quarter of
1995, an increase of 15.8%. Personal trust fees earned by Mercantile
Trust Company N.A. were the largest source of trust revenue and
increased 25.5% from last year. Trust income from Mississippi Valley
Advisors Inc., the investment management subsidiary of Mercantile,
rose by 30.7%. Mississippi Valley Advisors Inc. manages the eleven
Mercantile proprietary mutual funds-the ARCH funds. These funds had
assets of $2.3 billion at March 31, 1996 compared with $1.7 billion a
year earlier, a growth of 36.5%. Increases in the value of assets
managed as well as repricing and successful new business development
efforts largely accounted for the growth in trust fees.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT 4
OTHER INCOME
($ IN THOUSANDS)
<CAPTION>
FIRST QUARTER
1996 1995 CHANGE
---- ---- ------
<S> <C> <C> <C>
Trust $19,354 $16,717 15.8%
Service charges 19,272 18,500 4.2
Credit card fees 1,449 7,069 (79.5)
Securitization revenue 4,502 - -
Mortgage banking 3,120 2,078 50.1
Investment banking and brokerage 3,143 2,304 36.4
Letters of credit fees 2,015 1,518 32.7
Securities gains (losses) 126 (54) -
Nonrecurring merger-related securities losses (3,082) - -
Other 9,385 14,569 (35.6)
------- -------
Total Other Income $59,284 $62,701 (5.4)
======= =======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Service charges grew by 4.2%, due largely to selective fee increases
and better pricing of low-balance, high-transaction accounts.
Mortgage banking income increased by $1,042,000 or 50.1%. Servicing
revenue and gains on the sale of loans have improved over 1995 levels.
Also, $309,000 of the increase was attributable to the additional
servicing volume of Mercantile Bank, FSB, previously part of Plains
Spirit Financial Corporation, which was acquired by Mercantile on July
7, 1995 in a purchase transaction. Mortgages serviced totaled $5.4
billion at March 31, 1996.
Investment banking and brokerage fees were $3,143,000 compared with
$2,304,000 last year, an increase of 36.4%. This income is derived
from transaction fees for services performed for both individual and
corporate customers, including sales of annuities and mutual funds,
profits earned on limited trading positions and foreign exchange
revenue. Mercantile Investment Services, Inc., Mercantile's brokerage
services subsidiary, experienced strong growth in fees from sales of
investment products in the first quarter of 1996.
Credit card fee income was $1,449,000 for the first quarter of 1996, a
79.5% decrease from the 1995 level. Credit card income primarily
represents fees charged merchants for processing credit card
transactions, interchange fees received on transactions of Mercantile
cardholders and cardholders' miscellaneous fees. Miscellaneous
cardholder income increased, while interchange fees and merchant
revenue declined. Transaction-based rebates paid to SBC co-branded
cardholders are netted against credit card fee income; these rebates
totaled $6,621,000 in the first quarter of 1996 and were the primary
reason for the decline in credit card fees. Finally, certain fees
relating to the securitized loans were reclassified to securitization
revenue.
12
<PAGE> 13
Securitization revenue of $4,502,000 in the first quarter represents
amounts accruing to Mercantile on the $400,000,000 in credit card
loans securitized in the Mercantile Credit Card Master Trust during
May 1995. For securitized loans, amounts that would previously have
been reported as interest income, interest expense, credit card fees
and provision for loan losses are instead netted in non-interest
income as securitization revenue. Because credit losses are absorbed
against credit card servicing income over the life of these
transactions, such income may vary depending upon the credit
performance of the securitized loans. Mercantile acts as servicing
agent and receives loan servicing fees equal to two percent per annum
of the securitized receivables. As servicing agent, Mercantile
continues to provide customer service to collect past due accounts and
to provide other services typically performed for its customers.
Accordingly, Mercantile's relationship with its credit card customers
is not affected by the securitization.
Other miscellaneous income in 1995 included the $5,155,000 gain
previously noted as well as a $1,291,000 gain earned on the renewal of
a large leveraged lease. Also included in other income are letters of
credit fees, which improved by $497,000 or 32.7% over 1995.
OTHER EXPENSE
Expenses other than interest expense and the provision for possible
loan losses for the first quarter of 1996 totaled $182,770,000.
Included in other expense in the first quarter of 1996 was $41,678,000
in expenses associated with mergers, largely for investment banking
and other professional services, change in control and severance
payments, and obsolete equipment write-offs. Excluding nonrecurring
merger costs, total operating expenses increased by 3.8% over 1995,
yet declined to 3.16% of average assets compared with 3.20% last year.
The efficiency ratio, defined as operating expenses as a percentage of
taxable-equivalent net interest income and other income, was 59.78%
versus 56.87% last year.
Salary expense increased by 8.6% during the first quarter, reflecting
the costs of merit increases and employees added in acquisitions
accounted for as purchases or poolings without restatement. Benefit
costs were up by 11.7% due to the generally higher costs of employee
benefit programs. In 1996, the Corporation lowered the discount rate
used in pension and postretirement actuarial assumptions by one
percent, which increased pension expense by 12.9% this quarter in
comparison with the first quarter of 1995.
Occupancy and equipment costs increased by 9.9% in the first quarter,
reflecting the costs of maintaining additional offices and an ongoing
program of upgrading systems and equipment to further enhance
productivity.
Exhibit 5 details the composition of all other operating expenses. The
communications and postage expense increases in 1996 were due
primarily to the costs of servicing SBC co-branded credit card
customers. FDIC insurance decreased by 82.6% from last year. Exclusive
of insurance premiums assessed on approximately $2.1 billion in thrift
deposits insured by the SAIF fund, Mercantile affiliates paid the
minimum in FDIC insurance during the first quarter of 1996.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT 5
OTHER EXPENSE
($ IN THOUSANDS)
<CAPTION>
FIRST QUARTER
1996 1995 CHANGE
---- ---- ------
<S> <C> <C> <C>
Salaries $ 62,732 $ 57,748 8.6%
Employee benefits 16,524 14,795 11.7
-------- --------
Total Personnel Expense 79,256 72,543 9.3
Net occupancy 9,742 8,896 9.5
Equipment 11,574 10,495 10.3
Marketing/business development 2,319 2,847 (18.5)
Postage and freight 5,439 4,688 16.0
Office supplies 3,330 3,185 4.6
Communications 2,699 2,261 19.4
Legal and professional 2,785 2,686 3.7
Credit card 3,830 2,606 47.0
FDIC insurance 1,256 7,207 (82.6)
Foreclosed property expense 193 549 (64.8)
Intangible asset amortization 2,646 2,205 20.0
Nonrecurring merger-related expense 41,678 - -
Other 16,023 15,758 1.7
-------- --------
Total Other Expense $182,770 $135,926 34.5
======== ========
RATIOS EXCLUDING NONRECURRING MERGER-RELATED EXPENSE
Efficiency ratio 59.78% 56.87%
Other expense to average assets 3.16 3.20
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses was $211,608,000 or 1.79% of
loans outstanding at March 31, 1996. This compared with $201,780,000
or 1.72% at year's end and $217,302,000 or 1.92% at March 31, 1995.
The reserve coverage of non-performing loans was 259.41% compared with
245.18% at year-end and 548.87% last year.
The provision for possible loan losses for the first quarter of 1996
was $33,168,000 compared with $13,990,000 last year. The first quarter
of 1996 included a nonrecurring merger-related provision of
$10,851,000, which was recorded largely to conform the credit policies
of the recently acquired entities to those of Mercantile. An
additional $10,000,000 in provision was recorded in the first quarter
of 1996 to offset an $11,000,000 charge-off of a credit to a St.
Louis-based specialty retailer that declared bankruptcy in late 1995.
The annualized ratio of net charge-offs to average loans for the first
quarter was .86% compared with .53% last year, while the corresponding
net charge-off figures were $25,478,000 and $14,664,000, respectively.
The $11,000,000 charge-off mentioned above increased the 1996
annualized ratio of net charge-offs to average loans by 37 basis
points. Partially offsetting charge-offs in the current quarter was a
$2,154,000 recovery on a commercial real estate loan. Net credit card
charge-offs were $13,447,000 in 1996 versus $10,527,000 last year,
which represented 6.46% of average loans this quarter compared with
4.82% in 1995. Excluding credit card net charge-offs and the
$11,000,000 nonrecurring loss, net charge-offs were only $1,031,000 or
.03% of average loans for the first quarter of 1996.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT 6
RESERVE FOR POSSIBLE LOAN LOSSES
($ IN THOUSANDS)
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1996 1995
---- ----
<S> <C> <C>
BEGINNING BALANCE $201,780 $215,849
PROVISION 33,168 13,990
Charge-offs (31,721) (18,767)
Recoveries 6,243 4,103
-------- --------
NET CHARGE-OFFS (25,478) (14,664)
Acquired Reserves 2,138 2,127
-------- --------
ENDING BALANCE $211,608 $217,302
======== ========
LOANS AND LEASES
March 31 balance $11,840,242 $11,321,791
=========== ===========
Average balance $11,798,364 $11,106,397
=========== ===========
RATIOS
Reserve balance to outstanding loans 1.79% 1.92%
Reserve balance to non-performing loans 259.41 548.87
Net charge-offs to average loans .86 .53
Earnings coverage of net charge-offs 1.82x 6.73x
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mercantile evaluates the reserves of all banks on a quarterly basis to
ensure the timely charge-off of loans and to determine the adequacy of
those reserves. Management believes the consolidated reserve of 1.79%
of loans and 259.41% of non-performing loans as of March 31, 1996 was
adequate based on the risks identified at such date in the respective
portfolios.
NON-PERFORMING ASSETS
Non-performing loans (non-accrual and renegotiated loans) were
$81,573,000 or .69% of total loans at March 31, 1996, compared with
$82,299,000 or .70% at December 31, 1995 and $39,591,000 or .35% at
March 31, 1995. By the Corporation's definition, all non-accrual and
renegotiated commercial-related loans are considered impaired as
defined by FAS 114. Foreclosed assets were $10,102,000 at March 31,
1996 compared with $12,591,000 at year's end and $14,269,000 last
year. The ratio of non-performing assets to outstanding loans and
foreclosed assets was .77% at March 31, 1996 compared with .81% at
December 31, 1995 and .48% last year. Loans past due 90 days and still
accruing interest were $31,108,000 at March 31, 1996 versus
$27,242,000 at year-end and $23,401,000 at March 31, 1995.
14
<PAGE> 15
As noted in Exhibit 7, non-accrual loans decreased slightly from the
year-end level. Non-accrual loans were reduced in the first quarter of
1996 due to the $11,000,000 charge-off of the loan exposure previously
discussed. Partially offsetting this decline was an increase in the
level of non-accrual loans at the Community Banks and in the Kansas
City bank, caused primarily by the reclassification of certain loans
to non-accrual status following acquisition by Mercantile. As of March
31, 1996, Mercantile had only five non-accrual loans with balances in
excess of $1,000,000, and only one of these had a balance greater than
$5,000,000. As significant, the Corporation held one foreclosed asset
with a book value in excess of $1,000,000, and that property was
subsequently disposed of in April 1996.
All loans classified as renegotiated were paying in accordance with
their modified terms at March 31, 1996. Loans past due 90 days and
still accruing interest consisted largely of credit card loans,
consumer loans and residential real estate mortgage loans.
CAPITAL RESOURCES
Mercantile maintains a strong capital base which provides a solid
foundation for anticipated future asset growth and promotes depositor
and investor confidence. Capital management is a continuous process at
Mercantile, and is intended to ensure that adequate capital is
provided for current needs and anticipated growth. Mercantile's
capital position has enabled it to profitably expand its balance
sheet, while maintaining capital ratios stronger than those of other
quality banking organizations, and well in excess of regulatory
standards.
At March 31, 1996, shareholders' equity was $1.6 billion, an increase
of 10.4% from March 31, 1995. Net earnings retained, as well as stock
issued under various employee benefit plans and in acquisitions
accounted for as purchases or poolings-of-interests without
restatement, increased shareholders' equity. The equity to assets
ratio was 8.98% at March 31, 1996 compared with 8.52% a year earlier.
Exhibit 8 details significant capital ratios and intangible assets.
As interest rates declined during 1995, the Corporation recorded a
favorable adjustment to equity of $47,494,000 through December 31, 1995 for
the available-for-sale investment securities held. In the first quarter of
1996, the net fair value adjustment lowered equity by $16,254,000, due to
minimal interest rate increases, thus reducing the equity to assets ratio at
March 31, 1996 in comparison with year-end.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT 7
NON-PERFORMING ASSETS
($ IN THOUSANDS)
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1996 1995 1995
-------- ------- --------
<S> <C> <C> <C>
NON-ACCRUAL LOANS
Commercial $30,929 $39,222 $ 9,134
Real estate-commercial 21,584 17,953 13,744
Real estate-construction 617 342 308
Real estate-residential 20,581 17,327 8,662
Consumer 4,625 4,361 3,743
------- ------- -------
Total Non-accrual Loans 78,336 79,205 35,591
RENEGOTIATED LOANS 3,237 3,094 4,000
------- ------- -------
TOTAL NON-PERFORMING LOANS $81,573 $82,299 $39,591
======= ======= =======
FORECLOSED ASSETS
Foreclosed real estate $ 7,640 $ 9,951 $12,128
Other foreclosed assets 2,462 2,640 2,141
------- ------- -------
TOTAL FORECLOSED ASSETS $10,102 $12,591 $14,269
======= ======= =======
TOTAL NON-PERFORMING ASSETS $91,675 $94,890 $53,860
======= ======= =======
PAST-DUE LOANS
(90 DAYS OR MORE) $31,108 $27,242 $23,401
======= ======= =======
RATIOS
Non-performing loans to outstanding loans .69% .70% .35%
Non-performing assets to outstanding loans and
foreclosed assets .77 .81 .48
Non-performing assets to total assets .51 .53 .32
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT 8
RISK-BASED CAPITAL
($ IN THOUSANDS)
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1996 1995 1995
-------- ------- --------
<S> <C> <C> <C>
Capital
Tier I $ 1,471,081 $ 1,509,061 $ 1,366,968
Total 1,852,681 1,890,362 1,738,975
Risk-adjusted assets 12,360,988 12,352,966 11,596,091
Tier I capital to risk-adjusted assets 11.90% 12.22% 11.79%
Total capital to risk-adjusted assets 14.99 15.30 15.00
Leverage 8.28 8.54 8.08
Double leverage 109.25 107.93 108.82
Long-term debt to total
capitalization 16.77 16.57 18.21
Intangible assets $117,328 $110,529 $94,196
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
During the first quarter of 1996, Mercantile repurchased 525,000
shares of its common stock via a designated broker dealer at an
average cost of $45.38 per share. The stock was largely reissued in
the Conway and Metro acquisitions while some was held for reissuance
in conjunction with the 1994 Stock Incentive Plan. In conjunction with
the acquisition of TCBankshares, Inc. on May 1, 1995, the Corporation
assumed, through an exchange, 14,806 shares of preferred stock with a
book value of $12,153,000. These preferred shares were redeemed in
March 1996.
On February 8, 1996, the Board of Directors declared a quarterly cash
dividend of $.41 per common share which was paid April 1, 1996. This
represented an increase of 24.2% over the prior quarterly rate of $.33
per common share. Book value per common share was $25.47 at March 31,
1996 compared with $23.82 a year earlier, an increase of 6.9%. Public
debt ratings of the Corporation and Mercantile Bank of St. Louis N.A.
are shown in Exhibit 9.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT 9
DEBT RATINGS
<CAPTION>
THOMSON STANDARD
MOODY'S FITCH BANKWATCH & POOR'S
------- ----- --------- --------
<S> <C> <C> <C> <C>
MERCANTILE BANCORPORATION INC.
Issuer Rating B
Commercial Paper F1 TBW-1
7.625% Subordinated Notes, due 2002 Baa1 BBB + BBB
MERCANTILE BANK OF ST. LOUIS N.A.
Bank Notes A1/P-1 A
6.375% Subordinated Notes, due 2004 A3 A A- BBB +
9.000% Mortgage-backed Notes, due 1999 AAA
Certificates of Deposit TBW-1 A-/A-2
Letters of Credit TBW-1 A-/A-2
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED QUARTERLY STATEMENT OF INCOME
(THOUSANDS EXCEPT PER COMMON SHARE DATA)
<CAPTION>
1995 1996
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR.
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $246,749 $251,438 $259,097 $263,768 $257,044
Investments in debt and equity securities 62,784 62,811 64,016 62,554 63,581
Short-term investments 4,663 4,851 5,952 5,261 4,615
-------- -------- -------- -------- --------
Total Interest Income 314,196 319,100 329,065 331,583 325,240
Tax-equivalent adjustment 4,405 4,230 4,125 3,810 3,921
-------- -------- -------- -------- --------
TAXABLE-EQUIVALENT INTEREST INCOME 318,601 323,330 333,190 335,393 329,161
INTEREST EXPENSE
Deposits 110,577 121,798 130,959 132,529 131,386
Borrowed funds 31,706 31,905 32,487 28,573 24,118
-------- -------- -------- -------- --------
Total Interest Expense 142,283 153,703 163,446 161,102 155,504
-------- -------- -------- -------- --------
TAXABLE-EQUIVALENT NET INTEREST INCOME 176,318 169,627 169,744 174,291 173,657
PROVISION FOR POSSIBLE LOAN LOSSES 13,990 6,683 8,504 7,353 33,168
OTHER INCOME
Trust 16,717 17,594 17,831 18,609 19,354
Service charges 18,500 18,820 19,011 19,077 19,272
Credit card fees 7,069 4,698 3,855 4,068 1,449
Securitization revenue - 4,523 8,397 10,085 4,502
Mortgage banking 2,078 2,340 2,342 4,062 3,120
Investment banking and brokerage 2,304 2,873 3,194 2,995 3,143
Securities gains (losses) (54) 2,152 1,678 266 (2,956)
Other 16,087 11,910 15,697 14,875 11,400
-------- -------- -------- -------- --------
Total Other Income 62,701 64,910 72,005 74,037 59,284
OTHER EXPENSE
Personnel expense 72,543 71,192 75,805 79,085 79,256
Net occupancy and equipment 19,391 19,741 21,239 22,303 21,316
Other 43,992 44,355 38,862 45,240 82,198
-------- -------- -------- -------- --------
Total Other Expense 135,926 135,288 135,906 146,628 182,770
-------- -------- -------- -------- --------
TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 89,103 92,566 97,339 94,347 17,003
INCOME TAXES
Income taxes 29,265 30,449 30,450 33,945 8,517
Tax-equivalent adjustment 4,405 4,230 4,125 3,810 3,921
-------- -------- -------- -------- --------
Adjusted Income Taxes 33,670 34,679 34,575 37,755 12,438
-------- -------- -------- -------- --------
NET INCOME $ 55,433 $ 57,887 $ 62,764 $ 56,592 $ 4,565
======== ======== ======== ======== ========
NET INCOME PER COMMON SHARE $.91 $.95 $.99 $.89 $.07
SIGNIFICANT RATIOS
Return on assets 1.30% 1.35% 1.41% 1.27% .10%
Return on equity 15.35 15.64 15.75 13.91 1.09
</TABLE>
17
<PAGE> 18
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET
($ IN THOUSANDS)
<CAPTION>
1995 1996
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR.
---------------- ---------------- ---------------- ---------------- ----------------
VOLUME RATE<F*> VOLUME RATE<F*> VOLUME RATE<F*> VOLUME RATE<F*> VOLUME RATE<F*>
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans and leases, net of
unearned income
Commercial $ 2,802,058 8.67% $ 2,951,939 8.85% $ 3,027,078 8.74% $ 2,994,035 8.66% $ 3,006,310 8.38%
Real estate-commercial 1,905,988 8.75 1,938,588 9.08 2,017,018 9.04 2,070,714 8.99 2,133,882 8.69
Real estate-construction 323,263 8.62 343,408 8.75 331,093 8.99 309,843 9.27 300,847 8.99
Real estate-residential 3,570,859 7.83 3,675,443 7.98 4,062,840 8.11 4,023,306 8.15 3,833,423 8.14
Consumer 1,630,222 8.18 1,629,008 8.55 1,674,574 8.93 1,676,466 8.99 1,691,444 8.84
Credit card 874,007 16.16 729,319 15.21 715,349 11.95 788,126 13.45 832,458 12.77
----------- ----------- ----------- ----------- -----------
Total Loans and Leases 11,106,397 8.93 11,267,705 8.97 11,827,952 8.80 11,862,490 8.93 11,798,364 8.75
Investments in debt and equity
securities
Trading 12,375 5.27 6,907 6.25 4,203 5.42 7,646 5.39 7,610 4.99
Taxable 3,843,721 5.83 3,814,295 5.92 3,842,518 6.03 3,758,841 6.03 3,854,326 5.98
Tax-exempt 469,011 8.42 456,124 8.12 440,220 8.18 427,748 8.08 434,268 8.02
----------- ----------- ----------- ----------- -----------
Total Investments in Debt and
Equity Securities 4,325,107 6.11 4,277,326 6.16 4,286,941 6.25 4,194,235 6.24 4,296,204 6.19
Short-term investments 308,670 6.04 318,263 6.10 380,509 6.26 342,903 6.14 316,095 5.84
----------- ----------- ----------- ----------- -----------
Total Earning Assets 15,740,174 8.10 15,863,294 8.15 16,495,402 8.08 16,399,628 8.18 16,410,663 8.02
Non-earning Assets 1,268,919 1,351,717 1,343,947 1,374,196 1,454,584
----------- ----------- ----------- ----------- -----------
Total Assets $17,009,093 $17,215,011 $17,839,349 $17,773,824 $17,865,247
=========== =========== =========== =========== ===========
LIABILITIES
Acquired Funds
Deposits
Non-interest bearing $ 2,114,066 $ 2,280,010 $ 2,275,567 $ 2,116,886 $ 2,037,439
Interest bearing demand 2,217,850 2.08 2,123,323 2.22 2,088,349 2.24 2,133,652 2.22 2,238,451 2.19
Money market accounts 1,736,985 3.70 1,723,328 3.94 1,834,507 4.03 1,902,852 4.06 1,971,778 3.89
Savings 1,140,850 2.38 1,106,774 2.37 1,102,394 2.36 1,062,972 2.35 1,073,847 2.29
Consumer time certificates
under $100,000 4,881,040 4.94 5,011,839 5.41 5,311,979 5.64 5,307,637 5.67 5,358,411 5.59
Other time 135,037 5.51 139,721 5.69 135,658 5.76 78,808 9.80 39,256 19.88
----------- ----------- ----------- ----------- -----------
Total Core Deposits 12,225,828 3.82 12,384,995 4.16 12,748,454 4.34 12,602,807 4.37 12,719,182 4.28
Time certificates $100,000
and over 806,918 5.36 912,163 5.88 957,153 5.93 978,293 5.97 1,027,545 5.63
Foreign 206,123 6.20 207,590 6.38 206,349 6.21 223,291 6.06 174,667 5.73
----------- ----------- ----------- ----------- -----------
Total Purchased Deposits 1,013,041 5.53 1,119,753 5.97 1,163,502 5.98 1,201,584 5.99 1,202,212 5.65
----------- ----------- ----------- ----------- -----------
Total Deposits 13,238,869 3.98 13,504,748 4.34 13,911,956 4.50 13,804,391 4.54 13,921,394 4.42
Short-term borrowings 1,680,362 5.69 1,465,439 5.92 1,529,304 5.86 1,519,706 4.75 1,434,235 3.94
Bank notes 106,667 6.26 250,000 6.54 250,000 6.43 250,000 6.24 265,385 5.99
Long-term debt 327,972 7.52 321,633 7.62 341,550 7.09 338,135 7.85 325,149 7.42
----------- ----------- ----------- ----------- -----------
Total Acquired Funds 15,353,870 4.30 15,541,820 4.64 16,032,810 4.75 15,912,232 4.67 15,946,163 4.47
Other liabilities 210,451 193,131 212,413 234,157 244,304
SHAREHOLDERS' EQUITY 1,444,772 1,480,060 1,594,126 1,627,435 1,674,780
----------- ----------- ----------- ----------- -----------
Total Liabilities and
Shareholders' Equity $17,009,093 $17,215,011 $17,839,349 $17,773,824 $17,865,247
=========== =========== =========== =========== ===========
SIGNIFICANT RATIOS
Net interest rate spread 3.80% 3.51% 3.33% 3.51% 3.55%
Net interest rate margin 4.48 4.28 4.12 4.25 4.23
<FN>
<F*>Taxable-equivalent basis.
</TABLE>
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of Registrant was held on April 25,
1996. Of 63,119,043 shares issued, outstanding and eligible to be
voted at the meeting, 52,321,079 shares, constituting a quorum, were
represented in person or by proxy. Three (3) matters were submitted to
a vote of the security-holders at the meeting.
1. ELECTION OF CLASS II DIRECTORS. The first matter was the election
of three Class II director nominees to the Board of Directors, each to
continue in office until 1999. The Restated Articles of Incorporation
of the Registrant allow cumulative voting in all director elections
and all shareholders were accordingly allowed to cumulate their votes
for directors if they so desired. Upon tabulation of the votes cast,
it was determined that all three director nominees had been elected.
The voting results are set forth below:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
William A. Hall 51,824,499 506,569
Edward A. Mueller 51,802,604 506,569
Robert W. Murray 51,816,426 506,569
</TABLE>
2. ELECTION OF CLASS I DIRECTOR. The second matter was the election of
one director nominee, Robert L. Stark, to the Board of Directors in
Class I, to continue in office until 1998. Mr. Stark was previously
elected and served as a Class III director whose term would have expired as
of the 1997 annual meeting. Mr. Stark, however, stood for election at the
1996 annual meeting in Class I. Because only one director stood for election
in Class I, cumulative voting was not applicable. Upon tabulation of the
votes cast it was determined that Mr. Stark had been elected as a Class I
director. The voting results are set forth below:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Robert L. Stark 51,623,288 697,791
</TABLE>
3. ELECTION OF CLASS III DIRECTOR. The third matter was the election
of one director nominee, Patrick T. Stokes, to the Board of Directors
in Class III, to continue in office until 1997. Mr. Stokes was
previously elected and served as a Class I director. Because only one
director stood for election in Class III, cumulative voting was not
applicable. Upon tabulation of the votes cast it was determined that
Mr. Stokes had been elected as a Class III director. The voting results are
set forth below:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Patrick T. Stokes 51,644,636 676,442
</TABLE>
Because Registrant has a staggered Board, the term of office of the
following named Class I and Class III directors, who were not up for
election at the 1996 annual meeting, continued after the meeting:
Class I (to continue in office until 1998)
Thomas A. Hays Harvey Saligman
Frank Lyon, Jr. John A. Wright
Class III (to continue in office until 1997)
Harry M. Cornell, Jr. Craig D. Schnuck
Thomas H. Jacobsen
Former Class II directors Richard P. Conerly, Earl K. Dille, Charles
H. Price II and Francis A. Stroble completed their terms in 1996 and did
not stand for reelection at the 1996 annual meeting. Former Class II
director J. Cliff Eason retired from the Board effective in August of
1995 and former Class III director Bernard A. Edison retired in
October of 1995. Former Class II director William G. Heckman died on
November 26, 1995.
19
<PAGE> 20
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K dated March 11,
1996 under Item 5, which contained supplemental consolidated
financial statements for the years ended December 31, 1995, 1994
and 1993. Said statements restated Registrant's historical
consolidated financial statements for those years to reflect the
acquisition of Hawkeye on January 2, 1996. The Hawkeye acquisition
was accounted for under the pooling-of-interests method of
accounting.
In addition, under Item 7, Registrant filed the consent of KPMG
Peat Marwick LLP to incorporation by reference of its report on
the Supplemental Financial Statements into active registration
statements of the Registrant.
The March 11, 1996 Form 8-K included the financial statements,
notes and auditor's report listed below:
Independent Auditor's Report of KPMG Peat Marwick LLP dated
March 11, 1996.
Supplemental Consolidated Statement of Income for the years
ended December 31, 1995, 1994 and 1993.
Supplemental Consolidated Balance Sheet as of December 31,
1995, 1994 and 1993.
Supplemental Consolidated Statement of Changes in Shareholders'
Equity for the years ended December 31, 1995, 1994 and 1993.
Supplemental Consolidated Statement of Cash Flows for the years
ended December 31, 1995, 1994 and 1993.
Notes to Supplemental Consolidated Financial Statements.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MERCANTILE BANCORPORATION INC.
(Registrant)
Date May 9, 1996 /s/ JOHN Q. ARNOLD
--------------------------- -----------------------------------
John Q. Arnold
Chief Financial Officer
21
<PAGE> 22
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit No. Description Location
- ----------- ----------- --------
<C> <S> <C>
27 Financial Data Schedule Included herein
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 888,924
<INT-BEARING-DEPOSITS> 77,206
<FED-FUNDS-SOLD> 245,037
<TRADING-ASSETS> 13,245
<INVESTMENTS-HELD-FOR-SALE> 4,307,504
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 11,840,242
<ALLOWANCE> 211,608
<TOTAL-ASSETS> 17,902,326
<DEPOSITS> 14,002,008
<SHORT-TERM> 1,441,212
<LIABILITIES-OTHER> 252,304
<LONG-TERM> 323,915
0
0
<COMMON> 312,656
<OTHER-SE> 1,295,231
<TOTAL-LIABILITIES-AND-EQUITY> 17,902,326
<INTEREST-LOAN> 257,044
<INTEREST-INVEST> 63,581
<INTEREST-OTHER> 4,615
<INTEREST-TOTAL> 325,240
<INTEREST-DEPOSIT> 131,386
<INTEREST-EXPENSE> 155,504
<INTEREST-INCOME-NET> 169,736
<LOAN-LOSSES> 33,168
<SECURITIES-GAINS> (2,956)
<EXPENSE-OTHER> 182,770
<INCOME-PRETAX> 13,082
<INCOME-PRE-EXTRAORDINARY> 4,565
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,565
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<YIELD-ACTUAL> 4.23
<LOANS-NON> 78,336
<LOANS-PAST> 31,108
<LOANS-TROUBLED> 3,237
<LOANS-PROBLEM> 0<F1>
<ALLOWANCE-OPEN> 201,780
<CHARGE-OFFS> 31,721
<RECOVERIES> 6,243
<ALLOWANCE-CLOSE> 211,608
<ALLOWANCE-DOMESTIC> 211,608
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>Information only reported at fiscal year-end date.
</TABLE>
