<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File No. 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 63166-0524
St. Louis, Missouri (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 314-418-2525
Securities registered pursuant to
Section 12(b) of the Act: Name of exchange on which registered:
(1) Common Stock ($0.01 Par Value) (1) New York Stock Exchange
(2) Preferred Stock Purchase Rights (2) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 27, 1998:
Common Stock, $0.01 par value, $6,217,819,682
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of February 27, 1998:
Common Stock $0.01 par value, 133,748,539 shares outstanding
DOCUMENT INCORPORATED BY REFERENCE
As provided herein, portions of the documents below are incorporated
by reference:
<TABLE>
<CAPTION>
Document Part--Form 10-K
-------- ---------------
<S> <C>
Annual Report of the Registrant to its Shareholders
for the Year Ended December 31, 1997 Parts I, II, IV
Registrant's Proxy Statement for the 1998
Annual Meeting of Shareholders Part III
</TABLE>
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<PAGE> 2
PART I
ITEM 1. BUSINESS
THE COMPANY
Mercantile Bancorporation Inc. ("Mercantile" or "Corporation") is a
bank holding company which, as of February 27, 1998, owned, directly or
indirectly, all of the stock (except for directors' qualifying shares) of
Mercantile Bank National Association ("Mercantile Bank"), 18 other commercial
banks located throughout Missouri, Illinois, eastern Kansas, northern and
central Arkansas and Iowa, and other non-banking subsidiaries. At December
31, 1997, Mercantile's consolidated assets were $29,955,411,000, consolidated
loans were $19,199,917,000, consolidated deposits were $22,079,927,000 and
consolidated shareholders' equity was $2,410,169,000. At December 31, 1997,
Mercantile Bank and its consolidated subsidiaries had assets of
$15,656,220,000, loans of $9,611,551,000, deposits of $10,248,555,000 and
shareholder's equity of $1,218,129,000.
Mercantile has its principal offices at One Mercantile Center, St.
Louis, Missouri 63101 (telephone number 314-425-2525).
BUSINESS
GENERAL
Mercantile was organized on March 10, 1970, as a Missouri corporation
for the purpose of becoming a multi-bank holding company. Mercantile
commenced operations as a bank holding company in March 1971. Since then
Mercantile has acquired and organized additional financial institutions and
bank holding companies located throughout Missouri, Illinois, eastern Kansas,
northern and central Arkansas and Iowa.
FINANCIAL SUMMARY OF MERCANTILE
A financial summary of Mercantile and its consolidated subsidiaries is
detailed below:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets $29,955,411 $22,030,379 $20,883,399 $19,397,176 $18,878,410
Loans and leases 19,199,917 14,952,630 13,702,826 12,764,261 11,637,484
Investments in debt
and equity securities 7,545,558 4,745,991 4,964,237 4,895,485 5,233,759
Deposits 22,079,927 17,336,451 16,171,652 15,136,947 15,435,054
Shareholders' equity 2,410,169 1,945,651 1,915,493 1,642,739 1,510,215
</TABLE>
SUBSIDIARIES
The table setting forth the names and locations of Mercantile's
subsidiary financial institutions is included as Exhibit 21 hereto.
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SERVICES AND TRANSACTIONS WITH SUBSIDIARIES
Mercantile provides it subsidiaries with advice and specialized
services in the areas of accounting and taxation, budgeting and strategic
planning, employee benefits and human resources, insurance, operations,
marketing, credit analysis and administration, loan support and
participations, investments, auditing, trust, data processing, bank security
and banking and corporate law. A fee is charged by Mercantile for these
services. The responsibility for the management of each subsidiary remains
with its Board of Directors and with the officers elected by each Board.
Intercompany transactions between Mercantile and its subsidiaries are
subject to restrictions of existing laws and accepted principles of fair
dealing.
Mercantile had 333 full-time equivalent employees at December 31, 1997.
Mercantile uses the premises of Mercantile Bank for its offices and pays
Mercantile Bank a fee for services and facilities furnished to it.
EMPLOYEES
At December 31, 1997, Mercantile and its subsidiaries had 9,317
full-time equivalent employees. Mercantile provides a variety of employment
benefits and believes it enjoys a good relationship with its employees.
OPERATIONS
Financial Services. Through its subsidiaries, Mercantile offers
complete banking and trust services to the consumer, institutional and
agricultural segments of the market areas which it serves. Services include
commercial, real estate, installment and credit card loans, checking, savings
and time deposits, trust and other fiduciary services, and various other
customer services such as brokerage services, direct equipment lease
financing, international banking and safe deposit services.
Most subsidiary financial institutions serve only the general area in
which they are located, predominantly in the 7th, 8th and 10th Federal
Reserve Districts. Membership in Mercantile's subsidiary group provides each
subsidiary institution with a means of satisfying the credit needs of its
customers beyond its own legal lending limit.
Correspondent Banking. In addition to Mercantile's services for
individuals and corporations, its largest subsidiary bank, Mercantile Bank
National Association (St. Louis), is a correspondent bank for 353 commercial
banks located throughout the United States. Correspondent banking services
to banks in Kansas and western Missouri are provided through Mercantile Bank
(Kansas/Kansas City). In addition, Mercantile Bank of Western Missouri
provides correspondent services for banks in its area. Correspondent banking
services include the processing of checks and collection items, loan
assistance and assistance with training and operations.
Trust and Investment Advisory Services. Mercantile, through its
subsidiaries, offers clients all types of fiduciary services, ranging from
the management of funds for individuals, corporate retirement plans and
charitable foundations to the administration of estates and trusts. To
investors it offers portfolio management, advisory and custodian services.
Mercantile Trust Company National Association is a nationally-chartered bank
which provides personal trust services. Mississippi Valley Advisors, Inc., a
registered investment advisor, among other things, provides investment
advisory services for employee benefit funds, including pension and
profit-sharing plans, endowment funds and registered mutual funds. At
December 31, 1997, Mercantile subsidiaries managed investments with a market
value of approximately $20.5 billion and administered $9.4 billion additional
in non-managed assets. Certain of Mercantile's subsidiary banks provide trust
and investment services to individual customers and investment services to
corporate customers with assistance from Mercantile Bank.
Investment Activities. Mercantile Bank offers a wide range of
investment services to individuals, corporations, correspondent banks and
others. Included in those services are foreign exchange, derivative products,
money market and bond trading operations which serve banks and corporations
in the purchase and sale of various investments and/or hedging instruments.
In addition, Mercantile Bank is registered as a municipal securities dealer.
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Brokerage Services. Mercantile Investment Services, Inc. ("MISI") is a
registered broker/dealer and a member of both the National Association of
Securities Dealers, Inc. ("NASD") and the Securities Investors Protection
Corporation ("SIPC"). MISI currently offers brokerage services, including
execution of transactions involving stocks, bonds, options, mutual funds and
other securities.
International. Mercantile Bank maintains accounts at 67 foreign banks,
and 28 foreign banks maintain accounts at Mercantile Bank. In addition,
Mercantile Bank is engaged in providing its customers with international
banking services. Mercantile Bank and Mercantile Bank (Kansas/Kansas City)
offer a wide range of services to their customers involved in international
business including currency exchange and letters of credit. Mercantile Bank
maintains a Hong Kong subsidiary, Mercantile Trade Services Ltd., which
enables the bank to issue, amend and negotiate letters of credit in Hong Kong
on behalf of the bank's importing customers. Customers of other subsidiary
banks with a need for international services are referred to these banks.
Mercantile Bank also maintains a branch in the City of Georgetown in
the Grand Cayman Islands. This branch enables Mercantile Bank to participate
in the Eurodollar market for deposits and loans. At December 31, 1997, total
deposits of the foreign branch amounted to $828,154,000.
COMPETITION
Mercantile's subsidiary financial institutions are subject to intense
competition from other banks and financial institutions in their service
areas, predominantly the 7th, 8th and 10th Federal Reserve Districts. In
making loans, substantial competition is encountered from banks and other
lending institutions such as savings and loan associations, insurance
companies, finance companies, credit unions, factors, small loan companies
and pension trusts. In addition, Mercantile subsidiaries compete for retail
deposits with savings and loan associations, credit unions and money market
mutual funds. The competition provided by other financial institutions is not
limited to those institutions with offices located in the area served by the
particular subsidiary.
Many other institutions also offer some or all of the trust and
fiduciary services performed by Mercantile's subsidiaries. Mercantile Bank
competes with all local institutions and, in the field of corporate pension
trust services, competition is nationwide.
SUPERVISION AND REGULATION
General. As a bank holding company, Mercantile is subject to
regulation under the Bank Holding Company Act of 1956, as amended ("BHCA"),
and its examination and reporting requirements. Under the BHCA, a bank
holding company may not directly or indirectly acquire the ownership or
control of more than 5% of the voting shares or substantially all of the
assets of any company, including a bank or savings and loan association,
without the prior approval of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). In addition, bank holding companies are
generally prohibited under the BHCA from engaging in nonbanking activities,
subject to certain exceptions.
Mercantile and its subsidiaries are subject to supervision and
examination by applicable federal and state banking agencies. The earnings of
Mercantile's subsidiaries, and therefore the earnings of Mercantile, are
affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including the Federal Reserve Board, the Federal Deposit Insurance
Corporation ("FDIC"), the Office of the Comptroller of the Currency (the
"Comptroller"), and various state financial institution regulatory agencies.
In addition, there are numerous governmental requirements and regulations
that affect the activities of Mercantile and its subsidiaries.
Certain Transactions with Affiliates. There are various legal
restrictions on the extent to which a bank holding company and certain of its
nonbank subsidiaries can borrow or otherwise obtain credit from its bank
subsidiaries. In general, these restrictions require that any such
extensions of credit must be on non-preferential terms and secured by
designated amounts of specified collateral and be limited, as to the holding
company or any
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one of such nonbank subsidiaries, to 10% of the lending institution's capital
stock and surplus, and as to the holding company and all such nonbank
subsidiaries in the aggregate, to 20% of such capital stock and surplus.
Payment of Dividends. Mercantile is a legal entity separate and
distinct from its financial institutions and other subsidiaries. The
principal source of Mercantile's revenues is dividends from its financial
institution subsidiaries. Various federal and state statutory provisions
limit the amount of dividends an affiliate financial institution can pay to
Mercantile without regulatory approval. The approval of federal and state
bank regulatory agencies, as appropriate, is required for any dividend if the
total of all dividends declared in any calendar year would exceed the total
of the institution's net profits, as defined by regulatory agencies, for such
year combined with its retained net profits for the preceding two years. In
addition, a national bank or a state member bank may not pay a dividend in an
amount greater than its net profits then on hand. The payment of dividends by
any financial institution subsidiary also may be affected by other factors,
such as the maintenance of adequate capital.
Capital Adequacy. The Federal Reserve Board has issued standards for
measuring capital adequacy for bank holding companies. These standards are
designed to provide risk-responsive capital guidelines and to incorporate a
consistent framework for use by financial institutions operating in major
international financial markets. The banking regulators have issued standards
for banks that are similar to, but not identical with, the standards for bank
holding companies.
In general, the risk-related standards require financial institutions
and financial institution holding companies to maintain certain capital
levels based on "risk-adjusted" assets, so that categories of assets with
potentially higher credit risk will require more capital backing than
categories with lower credit risk. In addition, banks and bank holding
companies are required to maintain capital to support off-balance-sheet
activities such as loan commitments. Mercantile and each of its subsidiary
financial institutions exceed all applicable capital adequacy standards.
Support of Subsidiary Banks. Under Federal Reserve Board policy,
Mercantile is expected to act as a source of financial strength to each
subsidiary bank and to commit resources to support each of the subsidiaries
in circumstances where it might not choose to do so absent such a policy.
This support may be required at times when Mercantile may not find itself
able to provide it. In addition, any capital loans by Mercantile to any of
its subsidiaries also would be subordinate in right of payment to deposits
and certain other indebtedness of such subsidiary.
Consistent with this policy regarding bank holding companies serving as
a source of financial strength for their subsidiary banks, the Federal
Reserve Board has stated that, as a matter of prudent banking, a bank holding
company generally should not maintain a rate of cash dividends unless its net
income available to common shareholders has been sufficient to fully fund the
dividends, and the prospective rate of earnings retention appears consistent
with the bank holding company's capital needs, asset quality and overall
financial condition.
FIRREA and FDICIA. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a cross-guarantee provision that
could result in insured depository institutions owned by Mercantile being
assessed for losses incurred by the FDIC in connection with assistance
provided to, or the failure of, any other insured depository institution
owned by Mercantile. Under FIRREA, failure to meet the capital guidelines
could subject a banking institution to a variety of enforcement remedies
available to federal regulatory authorities, including the termination of
deposit insurance by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made extensive changes to the federal banking laws. FDICIA
instituted certain changes to the supervisory process, including provisions
that mandate certain regulatory agency actions against undercapitalized
institutions within specified time limits. FDICIA contains various other
provisions that may affect the operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal
banking regulators to assign each insured institution to one of five capital
categories ("well capitalized," "adequately capitalized" or one of three
"undercapitalized" categories) and to take progressively more restrictive
actions based on the capital categorization, as specified below. Under
FDICIA, capital requirements include a leverage limit, a risk-based capital
requirement
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and any other measure of capital deemed appropriate by the federal banking
regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management
fees that would cause the institution to fail to satisfy the minimum levels
for any relevant capital measure.
The FDIC and the Federal Reserve Board adopted capital-related
regulations under FDICIA. Under those regulations, a bank will be well
capitalized if it: (i) had a risk-based capital ratio of 10% or greater; (ii)
had a ratio of Tier I capital to risk-adjusted assets of 6% or greater; (iii)
had a ratio of Tier I capital to adjusted total assets of 5% or greater; and
(iv) was not subject to an order, written agreement, capital directive or
prompt corrective action directive to meet and maintain a specific capital
level for any capital measure. An association will be adequately capitalized
if it was not "well capitalized" and: (i) had a risk-based capital ratio of
8% or greater; (ii) had a ratio of Tier I capital to risk-adjusted assets of
4% or greater; and (iii) had a ratio of Tier I capital to adjusted total
assets of 4% or greater (except that certain associations rated "Composite 1"
under the federal banking agencies' CAMEL rating system may be adequately
capitalized if their ratios of core capital to adjusted total assets were 3%
or greater). All Mercantile subsidiary financial institutions as of December
31, 1997 were categorized as "well capitalized."
Banking agencies have recently adopted final regulations that mandate
that regulators take into consideration concentrations of credit risk and
risks from non-traditional activities, as well as an institution's ability to
manage those risks, when determining the adequacy of an institution's
capital. This evaluation will be made as part of the institution's regular
safety and soundness examination. Banking agencies also have recently
adopted final regulations requiring regulators to consider interest rate risk
(when the interest rate sensitivity of an institution's assets does not match
the sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, these banking agencies
intend to propose further regulations to establish an explicit risk-based
capital charge for interest rate risk.
Depositor Preference Statute. Legislation enacted in August 1993
provides a preference for deposits and certain claims for administrative
expenses and employee compensation against an insured depository institution
in the liquidation or other resolution of such an institution by any
receiver. Such obligations would be afforded priority over other general
unsecured claims against such an institution, including federal funds and
letters of credit, as well as any obligation to shareholders of such an
institution in their capacity as such.
FDIC Insurance Assessments. The subsidiary depository institutions of
Mercantile are subject to FDIC deposit insurance assessments. The FDIC has
adopted a risk-based premium schedule. Each financial institution is assigned
to one of three capital groups--well capitalized, adequately capitalized or
undercapitalized--and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state supervisors, and on the basis of
other information relevant to the institution's financial condition and the
risk posed to the applicable insurance fund. The actual assessment rate
applicable to a particular institution will, therefore, depend in part upon
the risk assessment classification so assigned to the institution by the
FDIC. See "--FIRREA and FDICIA."
Interstate Banking and Other Recent Legislation. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"),
enacted in 1994, facilitates the interstate expansion and consolidation of
banking organizations by permitting (i) bank holding companies that are
adequately capitalized and managed to acquire banks located in states outside
their home states regardless of whether such acquisitions are authorized
under the law of the host state, (ii) interstate merger of banks, except for
banks located in Montana and Texas, which states enacted legislation to "opt
out" of this authority, (iii) banks to establish new branches on an
interstate basis provided that such action is specifically authorized by the
law of the host state, (iv) foreign banks to establish, with approval of the
regulators in the United States, branches outside their home states to the
same extent that national or state banks located in the home state would be
authorized to do so, and (v) banks to receive deposits, renew time deposits,
close loans, service loans and receive payments on loans and other
obligations as agent for any bank or thrift affiliate, whether the affiliate
is located in the same state or a different state. One effect of Riegle-Neal
is to permit Mercantile to acquire banks located in any state and to permit
bank holding companies located in any state to acquire banks and bank holding
companies in Missouri.
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There also have been a number of recent legislative and regulatory
proposals designed to strengthen the federal deposit insurance system and to
improve the overall financial stability of the United States banking system,
and to provide for other changes in the bank regulatory structure, including
proposals to reduce regulatory burdens on banking organizations and to expand
the nature of products and services banks and bank holding companies may
offer. It is not possible to predict whether or in what form these proposals
may be adopted in the future, and, if adopted, what their effect will be on
Mercantile.
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STATISTICAL DISCLOSURES
The following statistical disclosures, except as noted, are included in
the Annual Report of the Registrant to its Shareholders for the year ended
December 31, 1997, and incorporated herein by reference.
<TABLE>
<CAPTION>
ANNUAL REPORT
SCHEDULE REFERENCE
-------- -------------
<S> <C>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average Balance Sheets Page 78
B. Analysis of Net Interest Earnings (included herein at page 8) N/A
C. Taxable-Equivalent Rate-Volume Analysis (included herein at page 8) N/A
II. INVESTMENT PORTFOLIO
A. Book Value by Type of Security Note F, Page 61
B. Maturity Distribution (included herein at page 9) N/A
III. LOAN PORTFOLIO
A. Types of Loans Exhibit 13, Page 39
B. Maturities and Sensitivities to Changes in Interest Rates Exhibit 13, Page 39
C. Risk Elements
1. Non-Accrual, Past Due and Restructured Loans Exhibit 16, Page 43
Exhibit 17, Page 43
Note A, Page 57
2. Potential Problem Loans Commentary, Page 44
3. Foreign Outstandings <F*>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. Reserve for Possible Loan Losses Exhibit 14, Page 40
Commentary, Page 39
Note A, Page 57
B. Allocation of the Reserve for Possible Loan Losses Exhibit 15, Page 41
V. DEPOSITS
A. Average Balances and Rates Paid by Deposit Category Page 78
B. Maturity Distribution of Certain CDs and Time Deposits Exhibit 7, Page 33
VI. RETURN ON EQUITY AND ASSETS Exhibit 4, Page 28
VII. SHORT-TERM BORROWINGS (included herein at page 10) N/A
<FN>
<F*>There were no significant interest bearing deposits with foreign banks at
December 31, 1997, 1996 or 1995.
</TABLE>
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<TABLE>
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TAXABLE-EQUIVALENT RATE-VOLUME ANALYSIS
($ in Millions)
<CAPTION>
AVERAGE VOLUME AVERAGE RATE<F1>
---------------------------- ------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans and leases<F3>
Commercial $ 4,391 $ 3,921 $ 3,721 8.44% 8.43% 8.87%
Real estate--commercial 2,916 2,780 2,588 8.72 8.69 9.05
Real estate--construction 660 520 547 8.87 9.20 10.28
Real estate--residential mortgage 6,291 3,887 3,721 7.79 8.07 7.76
Real estate--home equity credit loans 443 371 376 9.78 9.74 10.03
Consumer 1,935 1,762 1,705 8.88 8.88 8.72
Credit card 635 847 777 12.83 12.86 14.29
------- ------- -------
Total Loans and Leases 17,271 14,088 13,435 8.51 8.77 8.98
Investment in debt and equity securities
Trading 105 56 55 6.79 6.45 6.21
Taxable 5,623 4,596 4,398 6.43 6.10 6.03
Tax-exempt 375 419 451 7.98 7.96 8.26
------- ------- -------
Total 6,103 5,071 4,904 6.53 6.26 6.23
Short-term investments
Due from banks--interest bearing 178 70 42 5.43 5.86 5.96
Federal funds sold and repurchase
agreements 225 223 312 6.59 5.74 6.15
------- ------- -------
Total Short-term Investments 403 293 354 6.07 5.77 6.13
------- ------- -------
Total Interest Income<F1> $23,777 $19,452 $18,693 7.96 8.07 8.21
======= ======= =======
INTEREST EXPENSE
Interest Bearing Deposits
Interest bearing demand $ 2,572 $ 2,456 $ 2,366 2.02% 2.13% 2.19%
Money market accounts 3,185 2,672 2,409 3.96 3.84 3.94
Savings 1,240 1,123 1,172 2.37 2.30 2.40
Consumer time certificates
under $100,000 7,643 6,131 5,902 5.52 5.54 5.44
Other time 158 186 122 4.18 4.18 6.33
------- ------- -------
Total Interest Bearing
Core Deposits 14,798 12,568 11,971 4.30 4.20 4.20
Time certificates $100,000
and over 1,400 1,181 1,120 5.61 5.53 5.75
Foreign 458 184 211 5.72 5.70 6.21
------- ------- -------
Total Purchased Deposits 1,858 1,365 1,331 5.63 5.55 5.83
------- ------- -------
Total Interest Bearing Deposits 16,656 13,933 13,302 4.45 4.33 4.37
Short-term borrowings 2,748 1,520 1,704 5.44 5.36 5.54
Bank notes 175 261 215 6.02 5.88 6.37
Long-term debt<F4> 842 320 352 6.72 7.56 7.52
------- ------- -------
Total Interest Expense $20,421 $16,034 $15,573 4.69 4.52 4.59
======= ======= =======
NET INTEREST RATE SPREAD 3.27 3.55 3.62
NET INTEREST RATE MARGIN AND
NET INTEREST INCOME 3.93 4.34 4.38
<FN>
<F1> Taxable-equivalent basis. Includes tax-equivalent adjustments of $15,086,000, $16,353,000 and $17,758,000 for 1997, 1996
and 1995, respectively, based on a Federal income tax rate of 35%.
<F2> The rate-volume variance is allocated entirely to rate.
<F3> Income from loans on non-accrual status is included on a cash basis, while non-accrual loan balances are included in
average volume.
<F4> Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE-EQUIVALENT RATE-VOLUME ANALYSIS (Continued)
($ in Millions)
INCREASE (DECREASE)
-----------------------------------------------------------
INTEREST 1996 TO 1997 1995 TO 1996
-------------------------- --------------------------- ---------------------------
1997 1996 1995 RATE<F2> VOL. TOTAL RATE<F2> VOL. TOTAL
---- ---- ---- -------- ---- ----- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans and leases<F3>
Commercial $ 371 $ 331 $ 331 $ 1 $ 39 $ 40 $(17) $ 17 $ --
Real estate--commercial 254 241 234 1 12 13 (10) 17 7
Real estate--construction 59 48 56 (2) 13 11 (6) (2) (8)
Real estate--residential mortgage 490 314 288 (18) 194 176 13 13 26
Real estate--home equity credit
loans 43 36 38 -- 7 7 (1) (1) (2)
Consumer 172 156 149 -- 16 16 3 4 7
Credit card 81 109 111 (1) (27) (28) (12) 10 (2)
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Loans and Leases 1,470 1,235 1,207 (19) 254 235 (30) 58 28
Investments in debt and equity
securities
Trading 7 4 3 -- 3 3 1 -- 1
Taxable 362 280 265 19 63 82 3 12 15
Tax-exempt 30 33 38 -- (3) (3) (2) (3) (5)
------ ------ ------ ---- ---- ---- ---- ---- ----
Total 399 317 306 19 63 82 2 9 11
Short-term investments
Due from banks--interest bearing 9 4 2 (1) 6 5 -- 2 2
Federal funds sold and repurchase
agreements 15 13 19 2 -- 2 (1) (5) (6)
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Short-term Investments 24 17 21 1 6 7 (1) (3) (4)
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Interest Income<F1> $1,893 $1,569 $1,534 $ 1 $323 $324 $(29) $ 64 $ 35
====== ====== ====== ==== ==== ==== ==== ==== ====
INTEREST EXPENSE
Interest Bearing Deposits
Interest bearing demand $ 52 $ 52 $ 52 $ (2) $ 2 $ -- $ (1) $ 1 $ --
Money market accounts 126 103 95 4 19 23 (2) 10 8
Savings 29 26 28 1 2 3 (1) (1) (2)
Consumer time certificates
under $100,000 422 339 321 (1) 84 83 6 12 18
Other time 7 8 8 -- (1) (1) (4) 4 --
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Interest Bearing
Core Deposits 636 528 504 2 106 108 (2) 26 24
Time certificates $100,000
and over 78 65 64 1 12 13 (3) 4 1
Foreign 26 11 13 -- 15 15 -- (2) (2)
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Purchased Deposits 104 76 77 1 27 28 (3) 2 (1)
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Interest Bearing
Deposits 740 604 581 3 133 136 (5) 28 23
Short-term borrowings 149 82 95 2 65 67 (3) (10) (13)
Bank notes 11 15 14 -- (4) (4) (1) 2 1
Long-term debt<F4> 57 24 26 (7) 40 33 -- (2) (2)
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Interest Expense $ 957 $ 725 $ 716 $ (2) $234 $232 $ (9) $ 18 $ 9
====== ====== ====== ==== ==== ==== ==== ==== ====
NET INTEREST RATE SPREAD
NET INTEREST RATE MARGIN AND
NET INTEREST INCOME $ 936 $ 844 $ 818
====== ====== ======
<FN>
<F1> Taxable-equivalent basis. Includes tax-equivalent adjustments of $15,086,000, $16,353,000 and $17,758,000 for 1997, 1996
and 1995, respectively, based on a Federal income tax rate of 35%.
<F2> The rate-volume variance is allocated entirely to rate.
<F3> Income from loans on non-accrual status is included on a cash basis, while non-accrual loan balances are included in
average volume.
<F4> Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 10
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN DEBT AND EQUITY SECURITIES<F1>
($ in Thousands)
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
----------------------------------------- -----------------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD<F2> COST VALUE YIELD<F2>
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY
Within one year $ 406,403 $ 406,800 5.80% $ 12,309 $ 12,311 6.44%
One to five years 611,320 614,452 5.99 14,945 15,064 6.33
Five to 10 years 2,226 2,658 8.40 -- -- --
After 10 years -- -- -- -- -- --
---------- ---------- -------- --------
Total 1,019,949 1,023,910 5.92 27,254 27,375 6.38
Average Maturity 1 yr. 7 mo. 1 yr. 0 mo.
U.S. GOVERNMENT AGENCIES<F3>
Within one year 636,783 636,698 6.10 100,041 100,041 5.99
One to five years 2,176,039 2,188,995 6.40 98,849 102,663 7.46
Five to 10 years 256,623 261,603 6.98 15,682 14,113 9.62
After 10 years 124,173 125,435 6.85 4,912 5,224 8.55
---------- ---------- -------- --------
Total 3,193,618 3,212,731 6.40 219,484 222,041 6.97
Average Maturity 3 yr. 2 mo. 2 yr. 0 mo.
OBLIGATIONS OF STATE AND
POLITICAL SUBDIVISIONS
Within one year 109,327 109,848 7.06 -- -- --
One to five years 168,442 172,003 7.76 -- -- --
Five to 10 years 66,034 68,242 8.16 -- -- --
After 10 years 48,067 49,461 9.09 -- -- --
---------- ---------- -------- --------
Total 391,870 399,554 7.79 -- -- --
Average Maturity 4 yr. 1 mo.
OTHER<F3>
Within one year 123,176 123,139 7.15 -- -- --
One to five years 1,508,584 1,511,014 7.28 -- -- --
Five to 10 years 97,543 97,746 6.29 -- -- --
After 10 years 454,936 453,656 7.58 2,696 2,719 9.49
---------- ---------- -------- --------
Total 2,184,239 2,185,555 7.29 2,696 2,719 9.49
Average Maturity 6 yr. 9 mo. 21 yr. 6 mo.
TOTAL INTEREST EARNING
INVESTMENTS<F3>
Within one year 1,275,689 1,276,485 6.19 112,350 112,352 6.04
One to five years 4,464,385 4,486,464 6.69 113,794 117,727 7.31
Five to 10 years 422,426 430,249 7.01 15,682 14,113 9.62
After 10 years 627,176 628,552 7.55 7,608 7,943 8.88
---------- ---------- -------- --------
Total 6,789,676 6,821,750 6.70 249,434 252,135 6.93
Average Maturity 4 yr. 2 mo. 2 yr. 1 mo.
FEDERAL RESERVE BANK STOCK,
FEDERAL HOME LOAN BANK
STOCK AND OTHER EQUITY
INVESTMENTS 403,142 403,888 7.04 -- --
---------- ---------- -------- --------
TOTAL PORTFOLIO $7,192,818 $7,225,638 6.72 $249,434 $252,135
========== ========== ======== ========
<FN>
<F1> This exhibit excludes trading securities, which are reported at estimated fair value on the Consolidated Balance
Sheet. Trading securities totaled $70,486,000, $31,272,000 and $67,256,000 at December 31, 1997, 1996 and 1995,
respectively.
<F2> Taxable-equivalent basis.
<F3> Maturities of asset-backed obligations are based on the remaining weighted average maturities.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
($ in Thousands)
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE MATURITY AMOUNT RATE MATURITY AMOUNT RATE MATURITY
------ ---- -------- ------ ---- -------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT YEAR END
Federal funds purchased and
repurchase agreements $1,991,289 5.51% 15 days $1,781,011 5.83% 8 days $1,716,909 5.08% 15 days
Short-term FHLB advances 1,352,203 5.85 163 days 66,794 5.64 137 days 74,280 5.92 87 days
Treasury tax and loan notes 101,858 5.42 2 days 117,750 5.16 2 days 118,183 5.23 2 days
Commercial paper 1,510 5.25 15 days 19,405 5.45 17 days 16,950 5.81 17 days
Other short-term borrowings 18,962 5.79 2 days 2,304 6.62 9 days 3,145 7.57 2 days
---------- ---------- ----------
Total Short-term
Borrowings $3,465,822 5.64 72 DAYS $1,987,264 5.78 12 days $1,929,467 5.13 17 days
========== ========== ==========
Average for the Year
Federal funds purchased and
repurchase agreements $1,974,987 5.36% $1,355,976 5.34% $1,429,122 5.47%
Short-term FHLB advances 661,778 5.71 63,905 5.82 72,411 6.19
Treasury tax and loan notes 85,666 5.23 76,976 5.21 173,987 5.68
Commercial paper 17,097 5.56 18,222 5.42 24,273 6.06
Other short-term borrowings 8,637 5.80 4,723 5.86 4,356 9.20
---------- ---------- ----------
Total Short-term
Borrowings $2,748,165 5.44 $1,519,802 5.36 $1,704,149 5.54
========== ========== ==========
Maximum Month-End Balance
Federal funds purchased and
repurchase agreements $2,466,340 $1,781,011 $1,854,611
Short-term FHLB advances 1,352,203 73,939 82,452
Treasury tax and loan notes 258,122 435,780 555,761
Commercial paper 24,800 21,660 31,157
Other short-term borrowings 90,968 38,067 5,279
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
ITEM 2. PROPERTIES
Mercantile and Mercantile Bank occupy 22 stories of the Mercantile
Tower, a 35-story building owned by Mercantile Bank and located at Seventh
and Washington Streets in St. Louis, Missouri. Among the other properties
owned by Mercantile Bank are a four-story, 222,400 square-foot data processing
center located at 1005 Convention Plaza in St. Louis, Missouri, a four-story,
101,827 square-foot banking facility located at 721 Locust Street, St. Louis,
Missouri and a two-story, 34,800 square foot banking facility located at 10
North Hanley Road, Clayton Missouri.
Mercantile's subsidiaries own and lease other facilities in Missouri,
Illinois, Kansas, Iowa and Arkansas. See Note H to the Consolidated Financial
Statements included on page 63 in the Annual Report of the Registrant to its
Shareholders for the year ended December 31, 1997, which is incorporated
herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Mercantile and its subsidiaries are subject to various legal actions
and proceedings in the normal course of business, some of which involve
substantial claims for compensatory or punitive damages. Although litigation
is subject to many uncertainties and the ultimate exposure with respect to
these matters cannot be ascertained, management does not believe that the
final outcome of any known or threatened litigation will have a material
adverse effect on the financial condition of Mercantile.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
See Part III, Item 10.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information concerning the Common Stock of the Registrant, included on
page 81 in the Annual Report of the Registrant to its Shareholders for the
year ended December 31, 1997, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data, included as Exhibit 3 on page 27 in the Annual
Report of the Registrant for the year ended December 31, 1997, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations, included on pages 25 through 50 of the Annual Report of the
Registrant to its Shareholders for the year ended December 31, 1997, is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk, included as
Exhibit 6 on page 32 and under the Section entitled "Interest Rate
Sensitivity" on page 33 of the Annual Report of the Registrant to its
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
11
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, included in the Annual
Report of the Registrant to its Shareholders for the year ended December 31,
1997, are incorporated herein by reference.
<TABLE>
<CAPTION>
ANNUAL REPORT
STATEMENT REFERENCE
--------- -------------
<S> <C>
Independent Auditors' Report. Page 51
Consolidated Statement of Income - Years ended December 31,
1997, 1996 and 1995. Page 52
Consolidated Balance Sheet - December 31, 1997, 1996 and
1995. Page 53
Consolidated Statement of Changes in Shareholders' Equity -
Years ended December 31, 1997, 1996 and 1995. Page 54
Consolidated Statement of Cash Flows - Years ended
December 31, 1997, 1996 and 1995. Page 55
Notes to Consolidated Financial Statements. Pages 56-75
</TABLE>
Selected Quarterly Financial Data, included as Exhibit 20 on page 50 in
the Annual Report of the Registrant to its Shareholders for the year ended
December 31, 1997, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is contained in "Election of Directors"
and "Beneficial Ownership of Stock by Management," included in the
Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
The following is a list, as of February 27, 1998, of the names and ages
of the executive officers of Mercantile and all positions and offices with
Mercantile presently held by the person named. There is no family
relationship between any of the named persons.
12
<PAGE> 14
<TABLE>
<CAPTION>
ALL POSITIONS AND OFFICES
NAME AGE HELD WITH MERCANTILE
---- --- -------------------------
<S> <C> <C>
Thomas H. Jacobsen 58 Chairman of the Board, President and Chief Executive Officer
W. Randolph Adams 53 Senior Executive Vice President and Chief Administrative Officer
John Q. Arnold 54 Vice Chairman and Chief Financial Officer
Stanley J. Bradshaw 40 President, Mercantile Credit Corp, Inc.
John P. Dubinsky 54 Chairman, Mercantile Bank National Association
Richard C. King 53 President, Mercantile Bank National Association
John W. McClure 52 Vice Chairman, Financial Advisory Services
Jon W. Bilstrom 51 General Counsel and Secretary
Jon P. Pierce 57 Executive Vice President, Human Resources
Arthur G. Heise 49 Senior Vice President and Auditor
Michael T. Normile 48 Senior Vice President, Finance and Control
</TABLE>
The executive officers were appointed by and serve at the pleasure of
the Board of Directors of Mercantile. Messrs. Jacobsen, Adams, Arnold, King,
McClure, Bilstrom, Pierce, Heise and Normile have served as executive
officers of either Mercantile or Mercantile Bank for at least the last five
years. Mr. Bradshaw was Chairman of the Board, President and Chief Executive
Officer at Roosevelt Financial Group, Inc. and Roosevelt Bank prior to joining
Mercantile in July of 1997; and Mr. Dubinsky served as President and Chief
Executive Officer at Mark Twain Bancshares, Inc. prior to joining Mercantile in
April of 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is contained in
"Compensation of Executive Officers," included in the Registrant's Proxy
Statement for the 1998 Annual Meeting of Shareholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is contained in "Voting Securities and Principal Holders
Thereof" and "Beneficial Ownership of Stock by Management," included in the
Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders,
which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
contained in "Interest of Management and Others in Certain Transactions,"
included in the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which is incorporated herein by reference.
13
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: Incorporated herein by reference,
are Listed in Item 8 hereof.
(2) Financial Statement Schedules:
None.
(3) Exhibits: See Exhibit Index at page 17 hereof.
(b) Reports on Form 8-K
The Registrant filed one (1) Current Report on Form 8-K on
October 3, 1997. In that Report, under Item 5, Registrant disclosed
that in connection with the assimilation of Roosevelt Financial Group,
Inc. ("Roosevelt"), which was acquired by the Registrant on July 1,
1997, the Registrant would record in the third quarter of 1997 a
one-time pre-tax charge of $84,000,000, or an after tax-charge of
approximately $.44 per share (giving effect to the 3-for-2 stock split
paid in the form of a stock dividend on October 1, 1997). In that same
Current Report on Form 8-K, under Item 5, the Registrant also disclosed
that Mercantile Bank and Direct Merchants Credit Card Bank, National
Association ("Direct Merchants"), a national banking association and
wholly owned subsidiary of Metris Companies Inc., located in St. Louis
Park, Minnesota, entered into a Purchase Agreement, dated September 25,
1997, pursuant to which Direct Merchants would acquire the portion of
Mercantile Bank's credit card portfolio representing former co-branded
accounts. The acquired portfolio contained approximately 500,000
accounts and $420 million in receivables and represented 35% of
Mercantile Bank's total managed credit card receivables. The Current
Report also disclosed that in connection with the Direct Merchants
transaction, the Registrant would record a one-time pre-tax charge of
approximately $50,000,000, or an after-tax charge of $.25 per share
(giving effect to the 3-for-2 stock split paid in the form of a stock
dividend on October 1, 1997).
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 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: March 27, 1998 By: /s/ Thomas H. Jacobsen
-----------------------------------------
Thomas H. Jacobsen
Chairman of the Board, President,
Chief Executive Officer and Director
POWER OF ATTORNEY
We, the undersigned officers and directors of Mercantile Bancorporation
Inc., hereby severally and individually constitute and appoint Thomas H.
Jacobsen and John Q. Arnold, and each of them, the true and lawful attorneys
and agents of each of us to execute in the name, place and stead of each of
us (individually and in any capacity stated below) any and all amendments to
this Annual Report on Form 10-K and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with
or without the others and to have full power and authority to do and perform
in the name and on behalf of each of the undersigned every act whatsoever
necessary or advisable to be done in the premises as fully and to all intents
and purposes as any of the undersigned might or could do in person, and we
hereby ratify and confirm our signatures as they may be signed by our said
attorneys and agents or each of them to any and all such amendments and
instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas H. Jacobsen
- ---------------------------------- Chairman of the Board, President and March 27, 1998
(Thomas H. Jacobsen) Chief Executive Officer
Principal Executive Officer
/s/ John Q. Arnold
- ---------------------------------- Vice Chairman and Chief Financial March 27, 1998
(John Q. Arnold) Officer
Principal Financial Officer
/s/ Michael T. Normile
- ---------------------------------- Senior Vice President, Finance and March 27, 1998
(Michael T. Normile) Control
Principal Accounting Officer
/s/ Richard E. Beumer
- ---------------------------------- Director February 20, 1998
(Richard E. Beumer)
15
<PAGE> 17
<CAPTION>
SIGNATURE TITLE Date
--------- ----- ----
<S> <C> <C>
/s/ Harry M. Cornell, Jr.
- ---------------------------------- Director February 20, 1998
(Harry M. Cornell, Jr.)
- ---------------------------------- Director
(Dr. Henry Givens, Jr.)
/s/ William A. Hall
- ---------------------------------- Director February 20, 1998
(William A. Hall)
/s/ Thomas A. Hays
- ---------------------------------- Director February 20, 1998
(Thomas A. Hays)
/s/ Frank Lyon, Jr.
- ---------------------------------- Director February 20, 1998
(Frank Lyon, Jr.)
/s/ Robert W. Murray
- ---------------------------------- Director February 20, 1998
(Robert W. Murray)
/s/ Harvey Saligman
- ---------------------------------- Director February 20, 1998
(Harvey Saligman)
/s/ Craig D. Schnuck
- ---------------------------------- Director February 20, 1998
(Craig D. Schnuck)
- ---------------------------------- Director
(Alvin J. Siteman)
/s/ Robert L. Stark
- ---------------------------------- Director February 20, 1998
(Robert L. Stark)
/s/ Patrick T. Stokes
- ---------------------------------- Director February 20, 1998
(Patrick T. Stokes)
/s/ John A. Wright
- ---------------------------------- Director February 19, 1998
(John A. Wright)
</TABLE>
16
<PAGE> 18
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit No. Description
- ---------- -----------
<C> <S>
No. 3-1(a) Restated Articles of Incorporation of the Registrant, as amended and currently in effect, filed
as Exhibit 3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997,
are incorporated herein by reference.
No. 3-1(b) Third Amended and Restated Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant.
No. 3-2 By-Laws of the Registrant, as amended and currently in effect, filed as Exhibit 3.2 to Amendment
No. 2 to Registrant's Registration Statement No. 333-17757, are incorporated herein by
reference.
No. 4-1 Form of Indenture Regarding Subordinated Securities between the Registrant and The First
National Bank of Chicago as Trustee, filed on March 31, 1992 as Exhibit 4.1 to Registrant's
Report on Form 8-K dated September 24, 1992, is incorporated herein by reference.
No. 4-2 Rights Agreement dated as of May 23, 1988, between Registrant and Mercantile Bank National
Association, as Rights Agent (including as exhibits thereto the form of Certificate of
Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and the
form of Rights Certificate) filed as Exhibits 1 and 2 to Registrant's Registration Statement
on Form 8-A, dated May 24, 1988, is incorporated herein by reference.
No. 4-3 Form of Indenture Regarding Senior Debt Securities, filed as Exhibit 4.1 to Registrant's
Registration Statement No. 333-25775, is incorporated herein by reference.
No. 4-4 Form of Indenture Regarding Subordinated Debt Securities, filed as Exhibit 4.2 to Registrant's
Registration Statement No. 333-25775, is incorporated herein by reference.
No. 4-5 Indenture, dated February 4, 1997, First Supplemental Indenture, dated February 4, 1997, and
Supplemental Indenture of First Supplemental Indenture, dated May 22, 1997, between the Company,
as issuer, and The Chase Manhattan Bank, as Indenture Trustee, filed as Exhibits 4.5, 4.6 and
4.12, respectively, to the Company's Registration Statement on Form S-4 (No. 333-25131), are
incorporated herein by reference.
No. 10-1 The Mercantile Bancorporation Inc. 1987 Stock Option Plan, as amended, filed as Exhibit 10-3 to
Registrant's Report on Form 10-K for the year ended December 31, 1989 (Commission File No.
1-11792), is incorporated herein by reference.<F*>
No. 10-2 The Mercantile Bancorporation Inc. Amended and Restated Executive Incentive Compensation Plan,
filed as Annex H to Registrant's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, is incorporated herein by reference.<F*>
No. 10-3 The Mercantile Bancorporation Inc. Employee Stock Purchase Plan, filed as Exhibit 10-7 to
Registrant's Report on Form 10-K for the year ended December 31, 1989 (Commission File No.
1-11792), is incorporated herein by reference.<F*>
No. 10-4 The Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-7 to
Registrant's Report on Form 10-K for the year ended December 31, 1990 (Commission File No.
1-11792), is incorporated herein by reference.<F*>
17
<PAGE> 19
<CAPTION>
Exhibit No. Description
- ---------- -----------
<C> <S>
No. 10-5 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed
as Exhibit 10-6 to Registrant's Report on Form 10-K for the year ended December 31, 1994, is
incorporated herein by reference.<F*>
No. 10-6 The Mercantile Bancorporation Inc. Amended and Restated Stock Incentive Plan, filed as Annex G
to Registrant's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders, is
incorporated herein by reference.<F*>
No. 10-7 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan for Non-Employee Directors, filed
as Appendix E to Registrant's definitive Proxy Statement for the 1994 Annual Meeting of
Shareholders, is incorporated herein by reference.<F*>
No. 10-8 The Mercantile Bancorporation Inc. Amended and Restated Voluntary Deferred Compensation Plan,
filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-8 (File No. 333-47713),
is incorporated herein by reference.<F*>
No. 10-9 Employment Agreement for Thomas H. Jacobsen, as amended and restated.<F*>
No. 10-10 Form of Change of Control Employment Agreement for John W. McClure, W. Randolph Adams, John Q.
Arnold and Certain Other Executive Officers, filed as Exhibit 10-10 to Registrant's Report on
Form 10-K for the year ended December 31, 1989 (Commission File No. 1-11792), is incorporated
herein by reference.<F*>
No. 10-11 Mercantile Bancorporation Inc. Supplemental Retirement Plan, filed as Exhibit 10-12 to
Registrant's Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by
reference.<F*>
No. 10-12 Mercantile Bancorporation Inc. Voluntary Deferred Compensation Plan for Non-Employee Affiliate
Directors and Advisory Directors, filed as Exhibit 10.3 to Registrant's Registration statement
on Form S-8 (File No. 333-47713), is incorporated herein by reference.<F*>
No. 10-13 Mercantile Bancorporation Inc. Amended and Restated Stock Incentive Plan for Non-Employee
Directors, filed as Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (File No.
333-47713), is incorporated herein by reference.<F*>
No. 10-14 Agreement and Plan of Reorganization, dated October 27, 1996, by and among Mercantile
Bancorporation Inc., Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 2.1 to
Registrant's Report on Form 8-K filed on November 6, 1996, is incorporated herein by reference.
No. 10-15 Amendment to Agreement and Plan of Reorganization, dated January 24, 1997, by and among
Registrant, Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 10-16 to Amendment
No. 2 to Registrant's Registration Statement No. 333-17757, is incorporated herein by reference.
No. 10-16 Stock Option Agreement, dated October 27, 1996, by and between Mercantile Bancorporation Inc.,
as grantee, and Mark Twain Bancshares, Inc., as issuer, filed as Exhibit 2.2 to Registrant's
Report on Form 8-K filed on November 6, 1996, is incorporated herein by reference.
No. 10-17 Agreement and Plan of Reorganization, dated December 22, 1996, by and between Mercantile
Bancorporation Inc. and Roosevelt Financial Group, Inc., filed as Exhibit 2.1 to Registrant's
Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference.
18
<PAGE> 20
<CAPTION>
Exhibit No. Description
- ---------- -----------
<C> <S>
No. 10-18 Stock Option Agreement, dated December 22, 1996, by and between Mercantile Bancorporation Inc.,
as grantee, and Roosevelt Financial Group, Inc., as issuer, filed as Exhibit 2.1 to Registrant's
Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference.
No. 10-19 Employment Agreement for Alvin J. Siteman, dated November 18, 1996, filed as Exhibit 10.3 to
Registrant's Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by
reference.<F*>
No. 10-20 Employment Agreement for John P. Dubinsky, dated October 27, 1996, filed as Exhibit 10.4 to
Registrant's Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by
reference.<F*>
No. 10-21 Employment Agreement for Stanley J. Bradshaw, dated December 22, 1996, filed as Exhibit 10 to
Registrant's Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by
reference.<F*>
No. 13 Annual Report of the Registrant to its Shareholders for the year ended December 31, 1997.
No. 21 Subsidiaries of the Registrant as of February 27, 1998.
No. 23 Consent of KPMG Peat Marwick LLP.
No. 24 Power of Attorney (on signature page).
No. 27 Financial Data Schedule.
<FN>
- -----------
<F*>Management contract or compensatory plan or arrangement.
</TABLE>
19
<PAGE> 1
THIRD AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
MERCANTILE BANCORPORATION INC.
I, Michael T. Normile, Senior Vice President, Finance and Control of
Mercantile Bancorporation Inc., a corporation organized and existing under
the General and Business Corporations Law of the State of Missouri ("MBI"),
in accordance with the provisions of Section 351.180.7 thereof, DO HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Articles of Incorporation, as amended, of MBI and Section 1 of the
Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock, adopted by the Board on May 23, 1988, the said
Board of Directors on February 19, 1997, adopted a resolution increasing the
number of authorized Series A Junior Participating Preferred Shares from
1,000,000 to 2,000,000, and approving the form of this Third Amended and
Restated Certificate of Designation; and
That, as amended and restated, the designation and amount of Series A
Junior Participating Preferred Shares, the powers, preferences, and relative,
participating, optional and other special rights of said shares, and the
qualifications, limitations, or restrictions thereof, shall be as follows:
Section 1. Designation and Amount. There shall be a series of the
----------------------
voting preferred stock of the Company which shall be designated as the
"Series A Junior Participating Preferred Stock," no par value, and the number
of shares constituting such series shall be 2,000,000. Such number of shares
may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series A
Junior Participating Preferred Stock to a number less than that of the shares
then outstanding plus the number of shares issuable upon exercise of
outstanding rights, options or warrants or upon conversion of outstanding
securities issued by the Company.
Section 2. Dividends and Distributions.
---------------------------
(a) Subject to the rights of the holders of any shares of any
series of preferred stock of the Company ranking prior and superior to
the Series A Junior Participating Preferred Stock with respect to
dividends, the holders of shares of Series A Junior Participating
Preferred Stock, in preference to the holders of shares of Common
Stock, $0.01 par value (the "Common Stock"), of MBI and of any other
junior stock, shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of
January, April, July and October in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing
on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Junior Participating
Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1 or (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share
amount of all cash dividends and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Junior Participating
Preferred Stock. In the event MBI shall at any time after May 23,
1988 (the "Rights Declaration Date") declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which
holders of shares of Series A
<PAGE> 2
Junior Participating Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(b) MBI shall declare a dividend or distribution on the Series A
Preferred Stock as provided in paragraph (a) of this Section
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have
been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1 per share on the Series A
Junior Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock
from the Quarterly Dividend Payment Date next preceding the date of
issue of such shares, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for
the determination of holders of shares of Series A Junior
Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from
such Quarterly Dividend Payment Date. Accrued but unpaid dividends
shall not bear interest. Dividends paid on the shares of Series A
Junior Participating Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A
Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be
not more than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
-------------
Participating Preferred Stock shall have the following voting rights:
(a) Each share of Series A Junior Participating Preferred Stock
shall entitle the holder thereof to one vote on all matters submitted
to a vote of the stockholders of the Company.
(b) Except as otherwise provided herein, in MBI's Articles of
Incorporation or by law, the holders of shares of Series A Junior
Participating Preferred Stock, the holders of shares of Common Stock,
and the holders of shares of any other capital stock of MBI having
general voting rights, shall vote together as one class on all matters
submitted to a vote of stockholders of MBI.
(c) Except as otherwise set forth herein or in MBI's Articles of
Incorporation, and except as otherwise provided by law, holders of
Series A Junior Participating Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set
forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
--------------------
(a) Whenever dividends or distributions payable on the Series A
Junior Participating Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in
full, MBI shall not:
2
<PAGE> 3
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire
for consideration any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to
the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Junior Participating Preferred
Stock, except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled;
(iii) except as permitted in Section 4(a)(iv) below, redeem
or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A
Junior Participating Preferred Stock, provided that MBI may at
any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of MBI
ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Junior Participating
Preferred Stock; and
(iv) purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock, or any
shares of stock ranking on a parity with the Series A Junior
Participating Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) MBI shall not permit any subsidiary of MBI to purchase or
otherwise acquire for consideration any shares of stock of MBI unless
MBI could, under paragraph (a) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior
-----------------
Participating Preferred Stock purchased or otherwise acquired by MBI in any
manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. MBI shall cause all such shares upon their cancellation
to be authorized but unissued shares of Preferred Stock which may be reissued
as part of a new series of Preferred Stock, subject to the conditions and
restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of MBI, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Junior
Participating Preferred Stock unless, prior thereto, the holders of
shares of Series A Junior Participating Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the
date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation
Preference, no additional distributions shall be made to the holders
of shares of Series A Junior Participating Preferred Stock, unless,
prior thereto, the holders of shares of Common Stock shall have
received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference
by (ii) 100 (as appropriately adjusted as set forth in subparagraph C
below to reflect such events as stock dividends, and subdivisions,
combinations and consolidations with respect to the Common Stock)
(such number in clause (ii) being referred to as the "Adjustment
Number"). Following the payment of the full amount of the
3
<PAGE> 4
Series A Liquidation Preference and the Common Adjustment in respect of
all outstanding shares of Series A Junior Participating Preferred Stock
shall receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment Number to 1
with respect to such Series A Junior Participating Preferred Stock and
Common Stock, on a per share basis, respectively.
(b) In the event there are not sufficient assets available to
permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if
any, which rank on a parity with the Series A Junior Participating
Preferred Stock, then such remaining assets shall be distributed
ratably to the holders of such parity shares in proportion to their
respective liquidation preferences. In the event there are not
sufficient assets available to permit payment in full of the Common
Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(c) In the event MBI shall at any time after the Rights Declaration
Date declare or pay any dividend on Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock)
into a greater or lesser number of shares of Common Stock, then in
each such case the Adjustment Number in effect immediately prior to
such event shall be adjusted by multiplying such Adjustment Number by
a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that are outstanding
immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case MBI shall enter into
---------------------------
any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares
of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the
provision for adjustment hereinafter set forth) equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is exchanged or changed. In the event MBI shall at any time
after the Rights Declaration Date declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case
the amount set forth in the preceding sentence with respect to the exchange
or change of shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
Section 8. Redemption. The shares of Series A Junior Participating
----------
Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred
-------
Stock shall rank junior to all other series of MBI's Preferred Stock as to
the payment of dividends and the distribution of assets, unless the terms of
any such series shall provide otherwise.
Section 10. Fractional Shares. Series A Junior Participating
-----------------
Preferred Stock may be issued in fractions of a share which shall entitle the
holder, in proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series A Junior Participating
Preferred Stock.
4
<PAGE> 5
IN WITNESS WHEREOF, I have executed and subscribed this Certificate
and do affirm and acknowledge the foregoing as true under the penalties of
perjury this 14th day of May, 1997.
/s/ Michael T. Normile
---------------------------------------
Michael T. Normile
Senior Vice President,
Finance and Control
Mercantile Bancorporation Inc.
STATE OF MISSOURI )
) ss
CITY OF ST. LOUIS )
On this 14th day of May, 1997, before me, a Notary Public in and for the
State of Missouri, personally appeared Michael T. Normile, Senior Vice
President, Finance and Control of Mercantile Bancorporation Inc., known to me
to be the person who executed the foregoing Certificate of Designation and
acknowledged to me that he executed the same pursuant to authority given by the
Board of Directors of such corporation as their free and voluntary act, and as
the free and voluntary act and deed of such corporation, for the uses and
purposes therein set forth.
/s/ Harlon Keel
---------------------------------------
Notary Public
My Commission expires:
1/29/2000
- -------------------------------------
0692Q.HDK
5
<PAGE> 1
=============================================================
MERCANTILE
BANK
[LOGO]
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
BETWEEN
MERCANTILE BANCORPORATION INC.
AND
THOMAS H. JACOBSEN
DATED: FEBRUARY 18, 1998
=============================================================
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<C> <S> <C>
1. Definitions ............................................................................... 1
Change of Control
Employment Period
Good Cause Event
Internal Revenue Code
Permanent Disability
Permitted Executive Resignation
Permitted Mercantile Termination
Subsidiary
Termination Payment Period
2. Employment and Duties ......................................................................... 4
3. Compensation ................................................................................ 4
4. Term ......................................................................................... 6
5. Permitted Mercantile Termination ............................................................. 6
6. Termination of Benefits....................................................................... 6
7. Compensation in Event of Death or Permanent Disability ...................................... 13
8. Non-Competition Agreement ................................................................... 14
9. Remedies...................................................................................... 14
10. Non-Waiver of Rights.......................................................................... 14
11. Invalidity of Provisions...................................................................... 14
12. Assignment.................................................................................... 14
13. Governing Law................................................................................. 15
14. Amendments.................................................................................... 15
15. Notices....................................................................................... 15
</TABLE>
<PAGE> 3
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT
("Agreement") is made and entered into as of the 18th day of February, 1998,
by and between Mercantile Bancorporation Inc. ("Mercantile"), a Missouri
corporation, and Thomas H. Jacobsen ("Executive").
WITNESSETH THAT:
WHEREAS, the Executive and Mercantile are parties to Employment
Agreement dated as of February 23, 1989, and amended as of March 16, 1990,
May 14, 1990, and July 31, 1994 (collectively, the "Prior Agreement");
WHEREAS, Executive possesses executive skills and experience
which Mercantile believes are of substantial value and importance to the
success of Mercantile's business operations;
WHEREAS, Mercantile wishes to derive continued benefits from the
services of Executive in connection with the conduct of its business; and
WHEREAS, Mercantile and Executive desire to amend and restate
the Prior Agreement in accordance with the terms hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements hereinafter set forth, the Prior Agreement is
hereby amended and restated in its entirety to recite as follows:
1. DEFINITIONS. The following terms, as used herein, shall
-----------
have the following meanings:
"CHANGE OF CONTROL" means:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13(d)(3) promulgated under
the Exchange Act) of 20 percent or more of either (i) the then outstanding
shares of common stock of Mercantile (the "Outstanding Mercantile Common
Stock") or (ii) the combined voting power of the then outstanding voting
securities of Mercantile entitled to vote generally in the election of
directors (the "Outstanding Mercantile Voting Securities"); provided,
however, that the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from Mercantile (excluding an
acquisition by virtue of the exercise of a conversion privilege), (ii) any
acquisition by Mercantile, (iii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by Mercantile or any corporation
controlled by Mercantile, or (iv) any acquisition by any corporation pursuant
to a reorganization, merger or
<PAGE> 4
consolidation, if, following such reorganization, merger or consolidation,
the conditions described in clauses (i), (ii) or (iii) in subsection (c) of
this definition are satisfied; or
(b) Individuals who, as of the date thereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by Mercantile's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption
of office occurs as a result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board; or
(c) Approval by the shareholders of Mercantile of a
reorganization, merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation, (i) more than 50 percent of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the Outstanding
Mercantile Common Stock and Outstanding Mercantile Voting Securities
immediately prior to such reorganization, merger or consolidation in
substantially the same proportions as their ownership, immediately prior to
such reorganization, merger or consolidation, of the Outstanding Mercantile
Common Stock and Outstanding Mercantile Voting Securities, as the case may
be, (ii) no Person (excluding Mercantile, any employee benefit plan (or
related trust) of Mercantile or such corporation resulting from such
reorganization, merger or consolidation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly
or indirectly, 20 percent or more of the Outstanding Mercantile Common Stock
or Outstanding Mercantile Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 20 percent or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the
then outstanding voting securities of such corporation, entitled to vote
generally in the election of directors, and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the Incumbent Board
at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the shareholders of Mercantile of (i) a
complete liquidation or dissolution of Mercantile or (ii) the sale or other
disposition of all or substantially all of the assets of Mercantile, other
than to a corporation, with respect to which following such sale or other
disposition, (A) more than 50 percent of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of
the then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is
2
<PAGE> 5
then beneficially owned, directly or indirectly, by all or substantially all
of the individuals and entities who were the beneficial owners, respectively,
of the Outstanding Mercantile Common Stock and Outstanding Mercantile Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to
such sale or other disposition, of the Outstanding Mercantile Common Stock
and Outstanding Mercantile Voting Securities, as the case may be, (B) no
Person (excluding Mercantile and any employee benefit plan (or related trust)
of Mercantile or such corporation and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or indirectly,
20 percent or more of the Outstanding Mercantile Common Stock or Outstanding
Mercantile Voting Securities, as the case may be) beneficially owns, directly
or indirectly, 20 percent or more of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of
the then outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (C) at least a majority of the
members of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition of assets of
Mercantile.
"EMPLOYMENT PERIOD" means the period set forth in Section 4
hereof.
"GOOD CAUSE EVENT" means (a) an act or acts of personal
dishonesty taken by Executive and intended to result in substantial personal
enrichment of Executive at the expense of Mercantile, (b) repeated violations
by Executive of Executive's obligations under this Agreement which are
demonstrably willful and deliberate on Executive's part and which are not
remedied in a reasonable period of time after receipt of written notice from
Mercantile, or (c) the conviction of Executive of a felony involving moral
turpitude.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code
of 1986, as amended. Where any provision of the Internal Revenue Code is
specifically referred to, such reference shall be deemed to include any
successor or similar provision.
"PERMANENT DISABILITY" shall mean the total inability of
Executive because of bodily injury or disease to carry out his duties as
provided in Section 2 hereof for a period of six consecutive months.
"PERMITTED EXECUTIVE RESIGNATION" shall mean any resignation
by Executive which shall occur within 13 months after a Change of Control.
"PERMITTED MERCANTILE TERMINATION" means a termination of
this Agreement pursuant to or as permitted by the terms of Section 5 hereof.
"SUBSIDIARY" means a corporation the majority of voting stock of
which is owned by Mercantile, any Subsidiary of Mercantile or both.
3
<PAGE> 6
"TERMINATION PAYMENT PERIOD" shall be the period from any
termination of Executive's employment for any reason other than Permitted
Mercantile Termination to the expiration of the Employment Period.
2. EMPLOYMENT AND DUTIES. Mercantile hereby employs
----------------------
Executive, and Executive agrees to serve Mercantile and its Subsidiaries, for
and during the Employment Period as Chairman of the Board, President and
Chief Executive Officer of Mercantile and its Subsidiary, Mercantile Bank
National Association. During the Employment Period, Executive shall serve
Mercantile and its Subsidiaries in such positions or in an executive position
or positions of equivalent or greater responsibility and duties to which
Executive may be appointed or elected, and Executive agrees to perform such
duties consistent with such executive positions as may be assigned to him by
the Board of Directors of Mercantile and shall devote substantially his full
business time, attention and efforts to the business and affairs of
Mercantile and its Subsidiaries. Executive shall not be required to serve in
any position which requires Executive to change his residence from the
greater metropolitan St. Louis, Missouri, area.
3. COMPENSATION. (a) As compensation for services
-------------
rendered hereunder by Executive, Mercantile will, during the Employment Period,
pay or cause to be paid to Executive, and Executive agrees to accept, a base
salary at an annual rate not less than $850,000 per annum in respect of
Mercantile's 1998 fiscal year and in respect of each fiscal year thereafter at
an annual rate not less than the annual base salary paid to Executive during the
immediately preceding fiscal year of Mercantile (the "Annual Base Salary").
Payment of the Annual Base Salary shall be made in regular installments in
accordance with Mercantile's usual paying practices but no less frequently
than monthly. During the Employment Period, Executive's Annual Base Salary
rate shall be reviewed by the Compensation and Management Development
Committee of the Board of Directors of Mercantile (the "Committee") not less
often than once a year and increased by an amount commensurate with
performance and competitive pay practices. After a Change of Control,
Executive's Annual Base Salary shall be increased at any time or from time to
time as shall be substantially consistent with increases in base salary
generally awarded in the ordinary course of business to the other most senior
executive officers of Mercantile. In addition, Executive shall be entitled to
annual incentive compensation (the "Annual Bonus") during the Employment
Period on terms to be established and approved by the Board of Directors of
Mercantile or the Committee (which would target an Annual Bonus and stretch
opportunity of not less than 150% of Executive's Annual Base Salary if the
Committee determines that Mercantile's financial results meet or exceed
stated objectives), it being understood and agreed that in no event shall
such Annual Bonus after a Change of Control be less than the average Annual
Bonus (annualized for any fiscal year in which Executive has been employed by
Mercantile for less than twelve full months) paid or payable, including by
reason of any deferral, to Executive by Mercantile in respect of the three
most recent full fiscal years immediately preceding the fiscal year in which
the Change of Control occurs (the "Recent Average Bonus").
(b) During the Employment Period, Executive shall also (i)
be eligible to participate in all qualified and supplemental retirement,
short and long-term disability,
4
<PAGE> 7
medical, dental, basic and supplemental life insurance, profit sharing, employee
stock ownership, incentive compensation, deferred compensation, savings, stock
option, restricted stock, stock appreciation and similar type plans generally
available, from time to time, to the most senior executive officers of
Mercantile, and (ii) shall receive customary employee "fringe" benefits provided
by Mercantile to its most senior executive officers, including vacation,
automobile, lunch and country club dues and assessments and the like, in each
case on at least as favorable a basis to Executive as are generally available to
the most senior executive officers of Mercantile, but in no event on a basis
less favorable than that provided to Executive as of the date hereof. Medical,
dental and disability insurance coverages shall be provided from the inception
of the Employment Period without exception for any pre-existing condition.
(c) In the event of the Permanent Disability of Executive
during the Employment Period, Mercantile shall pay to Executive for the
balance of the Employment Period the excess, if any, of Executive's annual
salary rate then in effect over any payments made to Executive during the
balance of the Employment Period pursuant to Section 7 of this Agreement.
(d) Mercantile will reimburse Executive for the reasonable
out-of-pocket legal expenses incurred by Executive in connection with this
Agreement.
(e) In addition to Annual Base Salary and Annual Bonus
payable as provided in Section 3(a) hereof, if Executive remains employed
with Mercantile or its affiliate companies through the first anniversary of a
Change of Control or his employment is terminated other than as a result of a
Permitted Mercantile Termination, Mercantile shall pay to Executive a special
bonus (the "Special Bonus") in cash equal to the sum of (A) Executive's
Annual Base Salary and the greater of (i) the Annual Bonus paid or payable,
including by reason of any deferral, to Executive for the most recently
completed fiscal year during the Employment Period, if any, and (ii) the
Recent Average Bonus (such greater amount shall be hereinafter referred to as
the "Highest Annual Bonus"). The Special Bonus shall be paid no later than 30
days following the first anniversary of the Change of Control.
(f) Except under the circumstances described in Section
6(d), the following provisions shall apply for the purposes of determining
retirement benefits payable to Executive: (i) the provisions of the
Mercantile Supplemental Retirement Plan as in effect on December 31, 1997,
including the provisions of the Mercantile Retirement Plan in effect as of
December 31, 1997, and incorporated therein (the "SERP"), shall continue to
apply to Executive; and (ii) Executive shall receive credit for one year of
Benefit Service (as defined in the Mercantile Retirement Plan and Trust as in
effect on December 31, 1997 (the "Retirement Plan")) for the calendar year
1989, plus one and two tenths of a year of Benefit Service for each year of
employment with Mercantile from 1990 through 1999, inclusive, such credit to
be in addition to any years of Benefit Service which the Executive may earn
under the terms of the Retirement Plan. For this purpose, Executive shall be
deemed to have one year of employment with Mercantile for each calendar year
in which the Executive performs at least 1,000 Hours of Service (as defined
in the Retirement Plan). The maximum
5
<PAGE> 8
aggregate years of Benefit Service which may be credited under the SERP,
including service credited pursuant to the provisions of this Section 3(f),
shall be 28 years, assuming Executive performs at least 1,000 Hours of
Service in each calendar year through and including 2004. After determining a
benefit under the SERP taking account of the additional Benefit Service
described in the immediately preceding sentences, such benefit shall be
reduced by a percentage of the benefit receivable by the Executive or the
Executive's beneficiary under the retirement plans of Barnett Banks, Inc. (as
assumed by NationsBank Corporation), such percentage to be determined from
the following table based upon the years of Benefit Service which Executive
has under the Retirement Plan at the time of determination:
<TABLE>
<CAPTION>
Years of Benefit Service Offset Percentage
------------------------ -----------------
<S> <C>
0 0.0
1 10.0
2 20.0
3 30.0
4 40.0
5 50.0
6 60.0
7 53.3
8 46.7
9 40.0
10 33.3
11 26.7
12 20.0
13 13.3
14 6.7
15 0.0
</TABLE>
4. TERM. Unless sooner terminated as a result of a
-----
Permitted Mercantile Termination or Permitted Executive Resignation, the term of
employment hereunder shall be the period commencing on March 27, 1989, and
terminating on October 31, 2004.
5. PERMITTED MERCANTILE TERMINATION. The Employment
---------------------------------
Period and all obligations of Mercantile pursuant hereto, except those
provided for in Section 7 hereof and except for accrued and unpaid benefits,
shall be terminated upon the death of Executive or any resignation by
Executive other than a Permitted Executive Resignation. The Employment Period
and all obligations of Mercantile pursuant thereto, except those provided for
in Sections 3(c) and 7 hereof, and except for accrued and unpaid benefits,
may be terminated by Mercantile in the event of the Permanent Disability of
Executive or the occurrence of a Good Cause Event.
6. TERMINATION BENEFITS. (a) In the event that
---------------------
Mercantile shall terminate the employment of Executive prior to a Change of
Control during the Employment Period as a result of (x) Executive's failure to
substantially meet stated performance standards, goals or
6
<PAGE> 9
objectives (other than as a result of incapacity due to physical or mental
conditions) or (y) the maintenance by Executive of his principal residence in
a State in which Mercantile does not conduct a substantial portion of its
business and where no sound business reason exists to support the maintenance
of Executive's residence thereat (in each case, a "Performance Event"):
(i) Mercantile will continue the life insurance and
comprehensive group medical and dental benefits provided Executive and his
dependents pursuant to this Agreement for the succeeding thirty-six (36)
month period or, if less, during the Termination Payment Period (or until
Executive secures alternative employment providing comparable coverage, if
sooner) at the level then in effect, or will provide Executive with a cash
payment in the amount necessary for Executive to purchase equivalent
insurance; and
(ii) Mercantile will pay to Executive a lump sum in
cash within 30 days after the date of such termination in an amount equal to
the sum of (1) Executive's Annual Base Salary through the date of termination
to the extent not theretofore paid, and (2) the product of (x) the greater of
(i) the Annual Bonus paid or payable, including by reason of any deferral, to
Executive by Mercantile for the fiscal year immediately preceding the fiscal
year in which Executive's employment is terminated hereunder and (ii) the
average annualized Annual Bonus paid or payable, including by reason of any
deferral, to Executive by Mercantile in respect of the three most recent full
fiscal years immediately preceding the fiscal year in which Executive's
employment is terminated hereunder, excluding therefrom, in each case, as
applicable, that portion thereof, if any, attributable to Executive's stretch
opportunity, and (y) a fraction, the numerator of which is the number of days
in the current fiscal year through the date of termination, and the
denominator of which is 365, and (3) any compensation previously deferred by
Executive (together with any accrued interest or earnings thereon) and any
accrued vacation pay, in each case to the extent not theretofore paid (the
sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
(iii) Mercantile will pay to Executive each month
for each of the next succeeding thirty-six (36) months or, if less, each month
during the Termination Payment Period, an amount equal to the sum of
one-twelfth of Executive's Annual Base Salary at the rate in effect at the
date of termination, plus one-twelfth of the Annual Bonus amount computed in
accordance with Section 6(a)(ii)(x) above, but excluding that portion
thereof, if any, attributable to Executive's stretch opportunity.
(b) In the event that Mercantile shall terminate the
employment of Executive or materially breach this Agreement in any other way
prior to a Change of Control during the Employment Period, other than a
Permitted Mercantile Termination or other than as a result of a Performance
Event:
(i) Mercantile will continue the life insurance and
comprehensive group medical and dental benefits provided Executive and his
dependents pursuant to this Agreement for the Termination Payment Period (or
until Executive secures alternative employment
7
<PAGE> 10
providing comparable coverage, if sooner) at the level then in effect, or
will provide Executive with a cash payment in the amount necessary for
Executive to purchase equivalent insurance; and
(ii) Mercantile will pay to Executive a lump sum in
cash within 30 days after the date of termination an amount equal to the
Accrued Obligations; and
(iii) Mercantile will pay to Executive each month
during the Termination Payment Period an amount equal to the sum of
one-twelfth of Executive's Annual Base Salary at the rate in effect at the
date of termination, plus one-twelfth of an amount equal to the greater of
(1) the Annual Bonus paid or payable, including by reason of any deferral, to
Executive by Mercantile for the fiscal year immediately preceding the fiscal
year in which Executive's employment is terminated hereunder and (2) the
average annualized Annual Bonus paid or payable, including by reason or any
deferral, to Executive by Mercantile in respect of the three most recent full
fiscal years immediately preceding the fiscal year in which Executive's
employment is terminated hereunder.
(c) In the event that Mercantile shall terminate the
employment of Executive, other than a Permitted Mercantile Termination, or
materially breach this Agreement in any other way either following a Change
of Control, or prior to a Change of Control if it is reasonably demonstrated
by Executive that such termination or breach was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control
or otherwise arose in connection with or in anticipation of a Change of
Control, or in the event of a Permitted Executive Resignation following a
Change of Control:
(i) Mercantile will pay to Executive a lump sum in
cash within 30 days after the date of termination the amount equal to the sum
of (1) Executive's Annual Base Salary through the date of termination to the
extent not theretofore paid, and (2) the product of (x) the Highest Annual
Bonus and (y) a fraction, the numerator of which is the number of days in the
current fiscal year through the date of termination, and the denominator of
which is 365, and (3) the Special Bonus, if due to Executive pursuant to
Section 3(e), to the extent not theretofore paid, and (4) any compensation
previously deferred by Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the extent
not theretofore paid; and
(ii) Mercantile will pay to Executive a lump sum in
cash within 30 days after the date of termination the amount (such amount
shall be hereinafter referred to as the "Severance Amount") equal to the
greater of (1) the product of (x) the number of months remaining in the
Employment Period on the date of termination, divided by twelve, and (y) the
sum of (i) Executive's then effective Annual Base Salary and (ii) the Highest
Annual Bonus; provided, however, that if the Special Bonus has not been paid
to Executive, such lump sum amount shall be increased by the amount of the
Special Bonus unless the termination of Executive's employment results from a
Permitted Executive Resignation within 12 months of a Change of Control and
(2) the product of (x) two, and (y) the sum of (1) Executive's then effective
Annual Base Salary and (2) the Highest Annual Bonus, plus the
8
<PAGE> 11
amount of the Special Bonus unless the termination of Executive's employment
results from a Permitted Executive Resignation within 12 months of a Change
of Control; and, provided further, that the lump sum amount due Executive
hereunder shall be reduced by the present value (determined as provided in
Section 280G(d)(4) of the Internal Revenue Code) of any other amount of
severance relating to salary or bonus continuation paid to Executive as a
result of the termination of the employment of Executive pursuant to any
severance plan, policy or arrangement of Mercantile as a result of the
termination of employment of Executive; and
(iii) for the remainder of the Employment Period, or
such longer period as any plan, program, practice or policy may provide,
Mercantile will continue benefits to Executive and/or Executive's family at
least equal to those which would have been provided to them in accordance
with the plans, programs, practices and policies described in Section 3(b)
(other than qualified and supplemental retirement plans, programs, practices
and policies which are specifically provided for in Sections 6(d)(i) and
6(d)(ii) hereof) as if Executive's employment had not been terminated in
accordance with the most favorable plans, practices, programs or policies of
Mercantile and its affiliated companies as those provided generally to the
other most senior executive officers and their families during the 90-day
period immediately preceding the Change of Control or, if more favorable to
Executive, as those provided generally at any time after the Change of
Control to the other most senior executive officers of Mercantile and its
affiliated companies and their families; provided, however, that if Executive
becomes reemployed with another employer and is eligible to receive medical
or other welfare benefits under another employer provided plan, the medical
and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility
(such continuation of such benefits for the applicable period herein set
forth shall be hereinafter referred to as "Welfare Benefit Continuation").
For purposes of determining eligibility of Executive for retiree benefits
pursuant to such plans, practices, programs and policies, Executive shall be
considered to have remained employed until the end of the Employment Period
and to have retired on the last day of such period; and
(iv) to the extent not theretofore paid or provided,
Mercantile will timely pay or provide to Executive and/or Executive's family
any other amounts or benefits required to be paid or provided or which
Executive and/or Executive's family is eligible to receive pursuant to this
Agreement and under any plan, program, policy or practice or contract or
agreement of Mercantile and its affiliated companies as those provided
generally to the other most senior executive officers and their families
during the 90-day period immediately preceding the Change of Control or, if
more favorable to Executive, as those provided generally after the Change of
Control to the other most senior executive officers of Mercantile and its
affiliated companies and their families (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(d) In addition to the benefits and payments provided in
paragraphs 6(a), 6(b) or 6(c) hereof, Executive will have the following
additional rights upon the occurrence of any of the events described in
paragraphs 6(a), 6(b) or 6(c) hereof:
9
<PAGE> 12
(i) Executive will be entitled to his accrued
benefits under Mercantile's Horizon Investment and Savings Plan and
Supplemental Savings Plan in accordance with the terms of such plans;
(ii) Executive shall receive credit for twenty-eight
(28) years of Benefit Service (as defined in the Retirement Plan), regardless
of the number of years of Benefit Service which he may otherwise have accrued
under the terms of the Retirement Plan or the SERP. The benefit calculated
under the SERP shall be based upon the assumption that Executive remained
employed until October 31, 2004, and received for each calendar year,
beginning with the calendar year in which the termination occurs,
compensation in an amount equal to the Annual Base Salary and Highest Annual
Bonus of Executive in effect during the year in which the termination occurs
(determined as if no Change of Control occurred and Executive had remained
employed by Mercantile for such year in its entirety). The benefit payable
under the SERP shall be offset only by benefits (or the present value of
benefits) payable under the Retirement Plan (the amount of such benefit shall
be hereinafter referred to as the "Supplemental Retirement Amount"). The
benefit calculated under the SERP and the aforesaid offset thereto shall be
actuarially computed on the basis of the actuarial assumptions utilized with
respect to the Retirement Plan and the SERP during the 90-day period
immediately preceding the date of termination of Executive's employment
pursuant to paragraphs 6(a), 6(b) or 6(c) hereof.
Mercantile will pay to Executive the Supplemental
Retirement Amount in a lump sum cash payment within thirty (30) days after
termination of employment or, at the written election of Executive received
not later than December 1st of the year immediately preceding the date of
termination of employment, in a manner as follows:
(1) in two (2) equal installments, commencing
on or before the thirtieth day following termination and ending on the first
anniversary date thereof; or
(2) in equal annual installments over such
number of years (not less than three and not more than ten), commencing on or
before the thirtieth day following termination and continuing thereafter on
each anniversary date thereof for the period designated by Executive; or
(3) in equal monthly installments over such
number of months (not less than twelve (12) and not more than one hundred
twenty (120)), commencing on or before the thirtieth day following
termination and continuing on the same day of each month thereafter for the
period designated by Executive.
(iii) To the extent not otherwise provided for under
the terms of Mercantile's stock options and shares of restricted stock and
other stock-based grants (including, without limitation, restricted
performance units) awarded to Executive, all such stock options shall become
fully exercisable as of the date of termination and, except for "incentive
stock options" within the meaning of Section 422A of the Internal Revenue
Code granted prior to the date hereof, shall remain fully exercisable for six
months following the
10
<PAGE> 13
date of termination and all restrictions on such restricted stock and other
stock-based grants shall lapse upon the date of termination. Incentive stock
options awarded to Executive shall be exercisable in accordance with the
terms of the agreement applicable to such options.
(e) (i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by Mercantile to or for the benefit of Executive (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional
payments required under this Section 6(e) (a "Payment")) would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code or any
interest or penalties are incurred by Executive with respect to such excise
tax (such excise tax, together with any interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then Executive
shall be entitled to receive an additional payment (a "Gross-Up Payment") in
an amount such that after payment by Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed
upon the Payments.
(ii) Subject to the provisions of Section 6(e)(iii),
all determinations required to be made under this Section 6(e), including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the accounting firm then serving as
Mercantile's independent auditors (the "Accounting Firm") which shall provide
detailed supporting calculations both to Mercantile and Executive within 15
business days of the receipt of notice from Executive that there has been a
Payment, or such earlier time as is requested by Mercantile. In the event
that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change of Control, Executive shall
appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Mercantile. Any Gross-Up Payment, as
determined pursuant to this Section 6(d), shall be paid by Mercantile to
Executive within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion that
failure to report the Excise Tax on the Executive's applicable Federal income
tax return would not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon
Mercantile and Executive. As a result of the uncertainty in the application
of Section 4999 of the Internal Revenue Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by Mercantile should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that Mercantile exhausts its remedies pursuant to
Section 6(e)(iii) and Executive thereafter is required to make a payment of
any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and
11
<PAGE> 14
any such Underpayment shall be promptly paid by Mercantile to and for the
benefit of Executive, together with any interest and/or penalties that may be
due as a result thereof.
(iii) Executive shall notify Mercantile in writing
of any claim by the Internal Revenue Service that, if successful, would require
the payment by Mercantile of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten business days after
Executive is informed in writing of such claim and shall apprise Mercantile
of the nature of such claim and the date on which such claim is required to
be paid. Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which Executive gives such notice to
Mercantile (or such shorter period ending on the date that such payment of
taxes with respect to such claim is due). If Mercantile notifies Executive in
writing prior to the expiration of such period that it desires to contest
such claim, Executive shall:
(1) give Mercantile any information reasonably
requested by Mercantile relating to such claim;
(2) take such action in connection with
contesting such claim as Mercantile shall reasonably request in writing from
time to time, including without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by Mercantile;
(3) cooperate with Mercantile in good faith in
order effectively to contest such claim; and
(4) permit Mercantile to participate in any
proceedings relating to such claim;
provided, however, that Mercantile shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with resect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 6(e)(iii), Mercantile shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with
the taxing authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as
Mercantile shall determine; provided, however, that if Mercantile directs
Executive to pay such claim and sue for a refund, Mercantile shall advance
the amount of such payment to Executive, on an interest-free basis, and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise
Tax or income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income
with respect to such advance;
12
<PAGE> 15
and, further provided, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, Mercantile's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(iv) If, after the receipt by Executive of an amount
advanced by Mercantile pursuant to Section 6(e)(iii), Executive becomes
entitled to receive any refund with respect to such claim, Executive shall
(subject to Mercantile's complying with the requirements of Section 6(e)(iii)
promptly pay to Mercantile the amount of such refund (together with any
interest paid or created thereon after taxes applicable thereto). If, after
the receipt by Executive of an amount advanced by Mercantile pursuant to
Section 6(e)(iii), a determination is made that Executive shall not be
entitled to any refund with respect to such claim and Mercantile does not
notify Executive in writing of its intent to contest such denial of refund
prior to the expiration of 30 days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
(f) The payments provided for in this Section 6 are in
addition to all benefits or amounts payable under other agreements between
Executive and Mercantile and other plans or programs in effect at the time of
termination of Executive's employment hereunder to which Executive is then
entitled as an employee of Mercantile and its Subsidiaries. Executive shall
not be required to mitigate the amount of any payment provided for in this
Section 6 by seeking employment or otherwise.
7. COMPENSATION IN EVENT OF DEATH OR PERMANENT DISABILITY.
-------------------------------------------------------
(a) In the event that the Employment Period is terminated prior to a Change of
Control because of death or the Permanent Disability of Executive, Executive or
Executive's estate and beneficiaries shall be entitled to all payments and
benefits in accordance with the regular policies of Mercantile in force at such
time for such events with respect to its most senior executive officers but not
less than that provided under the regular policies of Mercantile with respect
thereto in force on the date hereof.
(b) In the event that the Employment Period is terminated
after a Change of Control because of death or the Permanent Disability of
Executive, Executive or Executive's estate and beneficiaries shall be
entitled to (i) payment of Accrued Obligations (which shall be paid in a lump
sum in cash within 30 days of the date of termination) and payment of or
provision for the Welfare Benefit Continuation and Other Benefits (excluding
in each case, Death Benefits or Disability Benefits (as defined below)) and
(ii) payment of an amount (in a lump sum in cash within 30 days of the date
of termination) equal to the greater of (A) the sum of the Severance Amount
and the Supplemental Retirement Amount and (B) the present value (determined
as provided in Section 280G(d)(4) of the Internal Revenue Code) of any cash
amount to be received by Executive or Executive's family as a death or
disability benefit pursuant to the terms of any plan, policy or arrangement
of Mercantile and its affiliated
13
<PAGE> 16
companies, but not including any proceeds of any life or disability insurance
covering Executive to the extent paid for directly or on a contributory basis
by Executive (which shall be paid in any event as an Other Benefit) (the
benefits included in this clause (B) shall be referred to as the "Death
Benefits" or the "Disability Benefits" as the case may be).
8. NON-COMPETITION AGREEMENT. Executive agrees that,
--------------------------
during the actual term of Executive's employment hereunder and for a period
of one (1) year following the date on which Executive's employment hereunder
is actually terminated, Executive will not, without the written consent of
Mercantile, engage in any business of, or enter the employ of, or have any
interest in, directly or indirectly, any other person, firm, corporation or
other entity engaged in commercial banking with an office or facility in
either the State of Missouri or Illinois (other than in the Chicago
metropolitan area), provided, however, that Executive may engage in
commercial banking with any entity so long as its principal office and
Executive's office and domicile are not located in either the State of
Missouri or Illinois (other than in the Chicago metropolitan area). Nothing
herein shall restrict Executive from owning 2% or less of the outstanding
securities of any corporation or other entity whose securities are listed on
any national securities exchange or traded over-the-counter, if Executive has
no other connection or relationship with the issuer of such securities.
9. REMEDIES. Executive acknowledges that damages at law
---------
will not adequately compensate Mercantile for any breach by Executive of the
provisions of Section 8 hereof and that Mercantile shall be entitled to
equitable remedies (including, but not limited to, injunctive relief) in case
of any breach, or to prevent a breach, by Executive of the provisions of
Section 9 of this Agreement.
10. NON-WAIVER OF RIGHTS. The failure of any party to
---------------------
enforce at any time any of the provisions of this Agreement or to require at
any time performance by the other party of any of the provisions hereof shall
in no way be construed to be a waiver of such provisions or to affect either
the validity of this Agreement, or any part hereof, or the right of either
party thereafter to enforce each and every provision in accordance with the
terms of this Agreement.
11. INVALIDITY OF PROVISIONS. The invalidity or
-------------------------
unenforceability of any particular provision of this Agreement shall not
affect the other provisions hereof, and this Agreement shall be construed in
all respects as if such invalid or unenforceable provisions were omitted.
12. ASSIGNMENT. This Agreement shall be freely assignable
-----------
by Mercantile and shall inure to the benefit of, and be binding upon Mercantile,
its successors and assigns; but, being a contract for personal services,
neither this Agreement nor any rights hereunder shall be assigned by
Executive.
Mercantile will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Mercantile to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that Mercantile would be required to perform it if no such
succession had
14
<PAGE> 17
taken place. As used in this Agreement, Mercantile shall mean Mercantile as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
13. GOVERNING LAW. This Agreement shall be interpreted in
--------------
accordance with and governed by the laws of the State of Missouri.
14. AMENDMENTS. No modification, amendment or waiver of any
-----------
of the provisions of this Agreement shall be effective unless in writing
specifically referring hereto and signed by the parties hereto.
15. NOTICES. Any notice to be given by either party
--------
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or mailed, certified or registered mail, postage prepaid, as follows:
To Mercantile: Mercantile Bancorporation Inc.
P. O. Box 524
St. Louis, Missouri 63166
and to Executive at his address as it appears on the payroll records of
Mercantile, or to such other address as may have been furnished by either
party to the other party by written notice.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above written in the
City of St. Louis, State of Missouri.
MERCANTILE BANCORPORATION INC.
By: /s/ Jon P. Pierce
--------------------------------
Jon P. Pierce
Executive Vice President -
Human Resources
EXECUTIVE
/s/ Thomas H. Jacobsen
------------------------------------
Thomas H. Jacobsen
15
<PAGE> 1
MERCANTILE [LOGO]
<PAGE> 2
MERCANTILE BANCORPORATION INC. 1997 ANNUAL REPORT
MERCANTILE [LOGO] BUILDING
MARKET
LEADERSHIP
<PAGE> 3
PROFILE
Mercantile Bancorporation Inc. is a $30 billion multi-bank holding company
headquartered in St. Louis. The largest financial services organization in
Missouri and the St. Louis metropolitan area, Mercantile's presence extends to
six states: Missouri, Iowa, Illinois, Kansas, Arkansas and, most recently,
Kentucky.
Mercantile is one of the Midwest's leading providers of commercial and
retail banking services. Mercantile's non-banking subsidiaries offer
brokerage services, asset-based lending, investment advisory services,
leasing services and credit life and other products as agent.
<TABLE>
<CAPTION>
CONTENTS
<C> <S>
1 Financial Highlights
2 Letter to Our Shareholders
6 Building Market Leadership
22 Our Marketplace
24 Financial Contents
80 Directors and Executive Officers
81 Investor Information
</TABLE>
<PAGE> 4
<TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<CAPTION>
(Dollars in thousands except per share data) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTED CASH BASED EARNINGS<F1>, <F2>
Net income $ 373,305 $ 312,468
Diluted earnings per share 3.00 2.65
Return on tangible assets 1.46% 1.49%
Return on tangible equity 22.89 17.69
Efficiency ratio 52.15 54.28
- --------------------------------------------------------------------------------
OPERATING RESULTS AND SELECTED RATIOS
EXCLUDING NONRECURRING EXPENSE<F1>
Adjusted net income $ 336,970 $ 301,754
Adjusted basic earnings per share 2.76 2.60
Adjusted diluted earnings per share 2.71 2.56
Return on assets 1.30% 1.43%
Return on equity 15.73 15.94
Efficiency ratio 55.04 55.30
Other expense to average assets 2.78 3.11
- --------------------------------------------------------------------------------
ENDING BALANCES
Total assets $29,955,411 $22,030,379
Earning assets 27,278,437 20,060,572
Loans and leases 19,199,917 14,952,630
Deposits 22,079,927 17,336,451
Shareholders' equity 2,410,169 1,945,651
- --------------------------------------------------------------------------------
PER SHARE DATA
Dividends declared $ 1.148 $ 1.092
Book value at December 31 18.47 16.74
Market price at December 31 61-1/2 34-1/4
================================================================================
<FN>
<F1> Nonrecurring expense reduced net income in the years ended
December 31, 1997 and 1996 by $132,377,000 and $56,539,000,
respectively.
<F2> Cash based earnings represents net income excluding intangible asset
amortization.
</TABLE>
ORIGINALLY
REPORTED ASSETS
[CHART]
This bar chart depicts originally reported total assets as of December 31,
1992, 1993, 1994, 1995, 1996 and 1997. Dollars in billions are noted on the
chart for each year-end as follows: 1992 is $9.5 billion, 1993 is $10.5 billion,
1994 is $12.2 billion, 1995 is $15.9 billion, 1996 is $19.0 billion, and
1997 is $30.0 billion.
DIVIDENDS
[CHART]
There is a bar chart which presents dividends per share of $.62 in 1992,
$.66 in 1993, $.748 in 1994, $.88 in 1995, $1.092 in 1996, and $1.148 in 1997.
ADJUSTED CASH BASED
EARNINGS PER SHARE<F*>
[CHART]
A bar chart is presented with adjusted cash based diluted earnings per share
for the last six years. The per share amounts listed are $1.69 in 1992, $2.01 in
1993, $2.26 in 1994, $2.45 in 1995, $2.65 in 1996, and $3.00 in 1997.
[FN]
<F*>1992, 1993, 1994, 1996 and 1997
amounts are adjusted to reflect the
impact of certain nonrecurring and
merger-related expenses.
TOTAL RETURN<F*>
[CHART]
This is a line chart that compares the total return during the years 1992
through 1997 for Mercantile Bancorporation Inc. common stock with the S&P 500.
Total return is a measurement of dividends reinvested. This chart indicates
that total return in 1997 was $443 for Mercantile Bancorporation Inc. compared
with $270 for the S&P 500.
[FN]
<F*>Based on $100 original investment
on 12/31/91.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 1
<PAGE> 5
Letter to Our Shareholders
1997 / A Watershed Year
We grew from $19 billion to $30 billion
in assets, establishing ourselves
as the number-one banking organization in Missouri.
[PHOTO OF THOMAS H. JACOBSEN]
Thomas H. Jacobsen
Chairman of the Board,
President and Chief Executive Officer
Nineteen ninety-seven was a watershed year for Mercantile Bancorporation.
The company's asset base expanded by an impressive 58 percent, and earnings
were strong for the eighth consecutive year. By successfully completing $11
billion (assets) in mergers with Missouri-based Mark Twain Bancshares, Inc. and
Roosevelt Financial Group, Inc., as well as Illinois-based Regional Bancshares,
Inc., we have become the largest banking organization in the state of Missouri.
We increased our presence in Arkansas when we acquired Horizon Bancorp, Inc.,
and will build upon market leadership in northern Illinois with the announced
acquisition of HomeCorp, Inc.
With combined assets of $30 billion, Mercantile is now strategically
positioned as number one, two or three in deposits in more than two-thirds of
the markets we serve, with more than five million customer accounts.
FINANCIAL PERFORMANCE
Financial performance continued to be strong in 1997. Once again Mercantile
posted growth in year-over-year earnings, excluding special charges related
to acquisitions and the divestiture of the former co-branded segment of our
credit card portfolio. Adjusted 1997 earnings were $336,970,000, up 11.7 percent
from $301,754,000 a year ago, or $2.71 per share, a 5.9 percent increase over
the previous year. On a cash basis, earnings per share were up 13.2 percent
versus last year. Cash based earnings (earnings before amortization of goodwill
and other intangibles) have become increasingly important to the company. This
determines Mercantile's long-term ability to pay dividends, support growth and
repurchase stock.
2 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 6
All per share amounts reflect the three-for-two stock split announced
on July 16, 1997, and distributed on October 1, 1997, an indication of our
continued strong market performance. We increased dividends in February 1998
for the seventh consecutive year, to $1.24 per share of common stock, an
increase of 8 percent.
Total consolidated return to shareholders over the past six years was
443 percent, on a compounded growth rate basis. Total return is based on the
sum of the stock price change and dividends over 12 months, divided by the
stock price at the beginning of the period. Mercantile's 1997 total return to
shareholders outperformed the S&P 500 by more than 38 percent and ranks in the
top 10 in the KBW 50 Index. The KBW 50 is comprised of the nation's larger
banking companies, including all money-center and most major regional banks.
GROWTH THROUGH ACQUISITION
In 1997, we created unprecedented market dominance in Missouri and grew our
presence in out-of-state markets with several key acquisitions.
Completion of the merger in April 1997 with Mark Twain Bancshares,
Inc., a $3.2 billion asset holding company, strengthens our position in
Missouri's three largest markets - St. Louis, Kansas City and Springfield -
and significantly enhances our middle-market lending and retail banking
capabilities.
In July 1997, we completed our acquisition of Roosevelt Financial
Group, Inc. With assets of $7.3 billion, the Roosevelt acquisition is the
largest in Mercantile Bancorporation history. Roosevelt's banking systems
were converted to Mercantile's in fourth quarter 1997, more than six months
ahead of schedule. The speed at which we accomplished this conversion is an
excellent example of our skill at integrating new acquisitions. The
combination of Mercantile and Roosevelt makes us the number-one mortgage
provider in Missouri and one of the strongest in the region.
Mercantile's merger with Illinois-based Regional Bancshares, completed
in March 1997, boosts our already dominant presence in the greater St. Louis
metropolitan area. The acquisition of the $544 million asset Horizon Bancorp,
Inc., completed in February 1998, strengthens our position in the Little Rock
area and increases Mercantile's Arkansas assets to more than $1.8 billion. The
addition of HomeCorp, Inc., a $332 million thrift holding company for
HomeBanc, will significantly enhance Mercantile's presence in the
northwestern Illinois market.
In the first quarter of 1998, we also announced two additional mergers:
one that will expand our presence and another that will achieve Mercantile
market dominance in Illinois. The first merger, with CBT Corporation, will
establish our presence in western Kentucky. CBT is a $1 billion multi-bank
holding company based in Paducah, Kentucky. The second merger, with $2.2
billion Firstbank of Illinois Co., will raise our market position to number
one in outstate Illinois (those markets outside of metropolitan Chicago).
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 3
<PAGE> 7
ONGOING IMPROVEMENTS IN PROFITABILITY
Concurrent with our growth, Mercantile improved profitability and efficiency
by consolidating charters, exiting underperforming businesses and moving
toward greater standardization of products and procedures.
The number of legal bank charters in the Mercantile system, 75 as of
two years ago, was reduced to 17 by year-end. Charter consolidation means
convenience for customers because it allows them to bank at more Mercantile
locations. Consolidation also strengthens us financially by creating
significant economies of scale. Most important, we reduced the number of
charters without compromising the local bank autonomy so central to the
Mercantile management philosophy. We are right on track to reach our goal of
one charter in the next few years.
Using our SVA (Shareholder Value Added) analysis, we exited several
low-return businesses in the last few years - co-branded credit card,
merchant credit card and Mercantile's corporate trust - and identified other
such businesses for divestiture in 1998.
At the same time, Mercantile is continuing the drive to standardize
products and procedures and consolidate various functions across the system,
such as certificate of deposit processing, wire transfer and financial
management. Our overall objective is to maximize economies of scale
and streamline operations to leverage our strengths as a significantly larger
organization - with broader markets and product offerings - in 1998 and
beyond.
A COMMUNITY-BASED STRATEGY FOR
MARKET POWER AND EARNINGS GROWTH
Our business is serving communities. A local president and board of directors
know what their communities need. Mercantile's decentralized model gives
local management maximum decision-making power to make loans, determine
pricing and tailor product mix to meet those needs.
Reflecting the Mercantile emphasis on building strong customer
relationships, we announced a new organizational structure in fourth quarter
1997. As part of this new structure, a Financial Advisory Services group was
formed, bringing trust, private banking, investment management and retirement
services into one business unit. The group will deliver a mix of products and
services designed to meet the investment management needs of both retail and
corporate customers.
Mercantile created the Consumer Products group to bolster retail
banking growth across our six-state region. The group is responsible for
developing new products and programs to build retail business and grow
revenues profitably. In another move, we merged our Capital Markets group
with Corporate Banking. This complements a broad range of services that
includes corporate finance, specialized industries and Mercantile Business
Credit, Inc.
BOARD OF DIRECTORS
In 1997, we welcomed two new directors after we consummated the Mark Twain
and Roosevelt acquisitions. Former Mark Twain Bancshares, Inc. Chairman Alvin
J. Siteman joined the Mercantile board
4 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 8
and became Chairman of Mercantile Bank of St. Louis. Richard E. Beumer was
elected to the board after the Roosevelt Financial Group, Inc. merger. Mr.
Beumer is Chairman and Chief Executive Officer of Sverdrup Corporation, St.
Louis, and was a Director of Roosevelt. On February 18, 1998, Dr. Henry
Givens, Jr. became the newest member of our board of directors. Dr. Givens is
President of Harris-Stowe State College.
Edward E. Mueller resigned from the board after a productive tenure. He
was President and Chief Executive Officer of Southwestern Bell Telephone
company in St. Louis. Mr. Mueller was appointed President, Network Services at
Pacific Bell in California.
GOING FORWARD
Looking to the future, we are confident earnings growth will continue through
acquisition synergies, improved performance in Arkansas and St. Louis banking
operations and careful balance sheet management.
A major focus at Mercantile will be to unify the cultures of our banks.
Our franchise covers a large and diverse six-state area. We are working to
incorporate our acquirees' strengths, standardize products and procedures and
maintain a consistent risk management approach across the system. As we
succeed in creating a unified banking organization, we are confident
we will see both greater productivity and significant growth in revenue
coming from existing operations.
Preparations for the year 2000 and resolving the issues it raises are
proceeding according to plan. As of year-end, we have approximately 47 percent
of business and system applications in compliance and ready for testing, with
the remainder to be completed in 1998.
Going forward, we are committed to delivering shareholder value by
increasing profitability and achieving strong year-over-year earnings per
share growth. In fact, we believe shareholders will see accelerating earnings
momentum as our emphasis on customer relationships, marketing and leveraging
high-performing businesses generates results. At the same time, Mercantile
will concentrate on building franchise value by maintaining a superior credit
culture while pursuing highly selective acquisitions. The result? An
excellent outlook for total return to shareholders.
We'd like to thank our directors for lending their experience and
wisdom to help move us forward. Thanks also to our shareholders for their
support - we are very focused on the journey ahead and confident of our
prospects for future success.
And heartfelt thanks are due to our employees. You are the real key to
realizing the Mercantile vision: to become the leading relationship bank in
every market we serve. Keep up the great work.
/s/ Thomas H. Jacobsen
Thomas H. Jacobsen
Chairman of the Board,
President and Chief Executive Officer
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 5
<PAGE> 9
[PHOTO OF PETER BENOIST]
"As the largest banking
organization in
St. Louis, we can
leverage our leadership
position and name
recognition to attract
new customers - and
expand what we do
for existing ones."
- - Peter Benoist
Senior Executive Vice
President and Chief
Operating Officer
Mercantile Bank of St. Louis
BUILDING MARKET LEADERSHIP
MARKET STRENGTH:
FOUNDATION FOR GROWTH
Market leadership is a key strategic objective at Mercantile. With a
growing six-state franchise, we have created one of the strongest financial
service organizations in the Midwest.
Six states. One bank. One vision. Across the diversity of our markets - from
urban centers to rural communities, from boardrooms to family rooms -
Mercantile's single focus is building relationships. In every state we serve,
Mercantile's unique strengths and competitive advantages form a solid
foundation for continued growth.
STRENGTH IN MISSOURI AND KANSAS
Mercantile is the largest banking organization in the state of Missouri. Our
most dominant position is in the greater St. Louis area, where we are number
one with a 28 percent share of the market. Mercantile is a leader on the
commercial and corporate banking landscape, serving many of the nation's
largest companies headquartered in the city, including Anheuser-Busch and
Monsanto. Mercantile is also a leading middle-market lender in St. Louis. In
this highly competitive marketplace, we are increasingly providing a range of
solutions beyond lending, aimed at helping middle-market companies improve
liquidity, profit and growth. In retail banking, Mercantile is the area's top
residential mortgage lender with a 14.5 percent market share, nearly
two-and-one-half times larger than the nearest competitor. And with 81
locations, we are one of the most convenient financial institutions in
St. Louis.
The Roosevelt and Mark Twain acquisitions launched Mercantile from a
number-four to a number-two position in Missouri's second-largest market,
Kansas City. Besides improving customer convenience, our enhanced Kansas City
visibility helps build market share as more potential customers become
familiar with the Mercantile name. Mercantile is particularly strong in real
estate lending, providing financing to residential developers and builders.
Elsewhere in the state, customers know Mercantile. We are number one in
numerous Missouri communities, including St. Joseph, Springfield and Joplin.
6 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 10
[PHOTO OF DOWNTOWN ST. LOUIS]
St. Louis is the largest center of commerce in the lower Midwest, with
diversity, stability and strength. Mercantile dominates the city's thriving
retail and commercial banking landscape.
<PAGE> 11
Kansas City has
something for
everyone - friendly
community
atmosphere with
big-city amenities.
Mercantile is a
retail and commer-
cial banking leader
in this market.
[PHOTO OF KANSAS CITY AT NIGHT]
<PAGE> 12
Immediately to the west, our presence in Kansas is concentrated mainly
in Topeka, Lawrence and the Kansas side of the Kansas City metropolitan area.
Mercantile is particularly dominant in Lawrence - more than 70 percent of
banking customers in this market have done business with a Mercantile bank.
[PHOTO OF CYNTHIA HARRIS]
"Mercantile offers
products to fit
every need. We're
a large bank with
a hometown feel.
That plays well here
in Kansas City."
- - Cynthia Harris
Vice President, Regional
Retail Administration
Mercantile Bank -
Kansas City
GROWING IN ILLINOIS, IOWA, ARKANSAS
AND KENTUCKY
In Illinois, our presence is growing rapidly. Acquisitions in the last year
have more than doubled our size, creating a solid franchise across the
northwestern, central and southern parts of the state. With the announced
mergers with Rockford-based HomeCorp and Springfield's Firstbank of Illinois,
Mercantile will gain the number-one position in the state outside of
metropolitan Chicago.
In Iowa, Mercantile holds an overall number-three market position. We
have an excellent indirect lending business in the state, with Mercantile's
largest portfolio outside of St. Louis and Kansas City. Mercantile is also a
leader with specialized expertise in agricultural and mid-sized commercial
lending, particularly in western Iowa. Des Moines is the base of operations
for Mercantile's commercial equipment leasing activities.
In Arkansas, Mercantile is strongest in the center of the state with a
19 percent share in the markets we serve. With an overall number-three
position, we see potential for further growth in Arkansas through
acquisitions such as Horizon Bancorp.
In Kentucky, Mercantile's announced merger with CBT Corporation will
complement our presence in southern Illinois and southeastern Missouri. A $1
billion multi-bank holding company, CBT is a leader in Paducah and other
markets in the western part of the state (Paducah is actually closer to St.
Louis than it is to Louisville).
UNIFYING THE MERCANTILE CULTURE
Across our diverse six-state marketplace, Mercantile is building one bank
with one vision - moving toward a single charter while we create a shared
focus on becoming the best relationship bank in our markets. With so many
acquisitions in recent years, we are merging the best of each organization
around a strong, shared credit philosophy and providing the resources, products
and services to strengthen the partnership between Mercantile and its customers.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 9
<PAGE> 13
[PHOTO OF ALAN LEIMKUEHLER]
"At our mortgage
servicing center,
we help strengthen
customer relationships
with highly efficient
performance, deliv-
ered with a friendly
attitude."
- - Alan Leimkuehler
Vice President and Manager
Residential Loan Servicing
BUILDING MARKET LEADERSHIP
BUILDING A BETTER BANK
We're creating a unified, more customer-focused company. We've refined our
organization to leverage Mercantile's new size and power to build stronger
customer relationships.
In 1997, Mercantile made several key organizational improvements to manage
a larger franchise and reflect our relationship-oriented approach.
RETAIL BANKING
We created the Consumer Products group to centralize product development and
coordinate retail banking initiatives. The group will use Mercantile's Data
Warehouse capability to better understand customer needs and tailor product
and service offerings to meet them.
Mergers in 1997 dramatically strengthened our retail banking
capabilities, particularly in originating and servicing residential
mortgages. With nearly $2 billion in annual originations, Mercantile
increased its standing among the largest servicers and originators of
mortgages in the country.
A key strategy for the Consumer Products group will be to develop
programs that broaden the customer relationship. One example is a highly
successful cross-selling program in St. Louis that offers new mortgage
customers a more favorable rate if they bank with Mercantile beyond the
mortgage loan. This naturally builds retail relationships - a win/win
situation for Mercantile and customers alike.
FINANCIAL ADVISORY SERVICES GROUP
The Financial Advisory Services group enhances our ability to meet the asset
management needs of affluent customers with a more relationship-oriented
approach. This group provides unified management of all services relating to
high-net-worth individuals - investments, private banking and trust services
- - to maximize quality and customer convenience.
Mercantile's Financial Advisory Services group is particularly strong
in the private banking and trust areas, with many solid, longstanding
relationships. Earnings from private banking have grown more than
25 percent over the past two years, and our trust business is one of the most
profitable in the company.
10 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 14
[PHOTO OF RESIDENTIAL NEIGHBORHOOD]
For most retail
banking customers,
a home is their
largest and most
important invest-
ment. Mercantile
is building on
mortgage relation-
ships to meet a
wide variety of
needs beyond the
home loan.
<PAGE> 15
[PHOTO OF A FIELD]
Industry focus is a
Mercantile strength.
Agribusiness -
middle-market
companies that
distribute, produce
or process agricul-
tural products -
is a high-growth
area for us in the
Midwest.
<PAGE> 16
With its broad approach to asset management, the Financial Advisory
Services group is strategically important in several ways. First, it forms a
more effective gateway to building strong relationships with affluent
customers. Second, in consolidating management, it maximizes synergies and
economies of scale to enhance competitiveness. And third, it facilitates
cross-selling efforts aimed at upper management and executives of
Mercantile's commercial and corporate customers.
CORPORATE BANKING
Mercantile's Corporate Banking services have always been among the most
extensive and respected in the industry. The group brings lending power and
experience to a broad range of large-transaction financing specialties -
asset-based, factoring, structured, mezzanine, syndications and more.
To improve customer service and eliminate product overlap on the
non-credit side, we merged Capital Markets into Corporate Banking.
Mercantile's Capital Markets group is one of the few in the nation offering
savings accounts, money market accounts and certificates of deposit, as well
as bonds and other instruments, in foreign currencies. In addition to capital
markets, Corporate Banking's non-credit services include cash management and
trade finance.
The Corporate Banking group also provides specialized, industry-focused
banking expertise for customers in agribusiness, not-for-profit, health care,
government and several other high-growth areas. In government services,
Mercantile is a market leader providing electronic transaction processing for
federal and state agencies. For example Mercantile, in joint venture with
another institution, is one of just two providers in the nation processing
the federal government's EFTPS (Electronic Funds Transfer Payment System)
transactions. With EFTPS, we use sophisticated proprietary technology to help
the IRS collect business taxes electronically. As the government moves
aggressively to make more and more transactions electronic, Mercantile is
strongly positioned to leverage EFTPS technology to expand our business.
[PHOTO OF KEN FEASTER]
"We succeed by taking
the time to under-
stand our customers'
business - learning
the nuances that
make a difference
to them."
- - Ken Feaster
Vice President
Agribusiness Group
BUILDING STRONGER RELATIONSHIPS
Our refined organization improves efficiencies, consolidates management
and enables us to leverage our collective expertise to deliver the highest
quality products and services. It supports our efforts to build stronger
relationships with our customers.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 13
<PAGE> 17
[PHOTO OF ED CHENEY]
"We're able to provide
the full gamut of
financial solutions
to businesses of all
sizes, with a team
of highly responsive,
locally based banking
professionals."
- - Ed Cheney
Vice President and Manager
Large Corporate Group
BUILDING MARKET LEADERSHIP
TAKING CARE OF OUR CUSTOMERS
Mercantile is focused on partnership with our customers - blending large-bank
strength with local service to provide what they want and need.
The key to Mercantile's competitive advantage is combining the strength of a
$30 billion institution with the personal service of a local bank. We called
it Mercantile's "Power of Partnership" in an ongoing advertising campaign
launched in third quarter 1997 to build awareness of the unique Mercantile
banking philosophy. Mercantile's "Power of Partnership" expresses our
commitment to the customers and communities we serve, and highlights our
strong emphasis on relationship banking.
Our approach is based on a very simple question - what do customers
want from their bank? Customers want a broad array of product choices at the
best possible price, delivered with maximum convenience - a combination most
often found at large financial institutions. And they want the kind of
personal service and recognition they get at a community bank. Mercantile
delivers both.
LARGE-BANK RESOURCES
As one of the dominant financial institutions in the lower Midwest,
Mercantile delivers big-bank advantages to both retail and business
customers. We have the broad array of products and services, lending power
and specialized expertise found only at a large bank. The Mercantile name is
widely known and respected. And with more than 500 locations across a
six-state area, we offer convenience that simply can't be found at smaller
banks.
These are claims most of the 30 largest banks in the United States can
make. What many big banks cannot match is the way Mercantile delivers
products and services to its customers.
Large-bank services are often managed by product line, delivered
independently by different bank officers. At Mercantile, our approach makes
it easier for customers to coordinate all facets of their finances.
14 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 18
[PHOTO OF BIG RIVER ZINC PLANT]
With big-bank
lending power
and product mix,
Mercantile can
provide almost any-
thing a company
like Big River Zinc
needs - with a
dedication to the
relationship that's
second to none.
<PAGE> 19
[PHOTO OF GALENA, ILLINOIS]
To compete in
towns like Galena,
Illinois, Mercantile
combines high-
quality financial
services with
employees who are
firmly rooted in
the community.
<PAGE> 20
Most of our commercial and corporate customers have a Mercantile "relationship
manager" who is personally responsible for anticipating and meeting their
needs. For each customer, the relationship manager works with a Mercantile
account team that consists of a second bank officer or associate and an
administrative assistant. All team members are actively involved in the
account, providing customers maximum accessibility, responsiveness and
continuity. The relationship manager and the account team act as the liaison
between the customer and Mercantile Bancorporation's considerable resources,
positioning us as an effective one-stop financial partner.
LOCAL-BANK SERVICE
Mercantile's decentralized community bank operating model solidifies
relationships by providing a high degree of local decision-making in serving
customers. All Mercantile banks, including those in the larger urban markets
of St. Louis and Kansas City, are run by local presidents and local boards
of directors. Each bank is responsible for setting and maintaining its own
expense budget, approving loans, establishing pricing and determining what
products and services best fit its marketplace. Our local boards include the
most respected members of the community - a cross section of leaders from
business, government and other organizations who know what their constituents
need and want. Mercantile's local management approach gives customers a
banker who knows them, cares about them and has the power to make decisions
to serve them. This is our most profound competitive advantage.
[PHOTO OF KIM COOK]
"I was born and raised
here. In a small town,
it's not just service -
it's attitude. Customers
want to feel they're
important as people.
Along with banking
excellence, that's
what we offer."
- - Kim Cook
Personal Banker
Mercantile Bank - Galena
THE RIGHT MIX TO COMPETE
With its emphasis on local management and autonomy, Mercantile's operating
model makes us more competitive in every market, from an Iowa town of 1,500
people to downtown St. Louis. Smaller, community-based banks have difficulty
matching our range and lending power. Larger banks may have comparable
product breadth and expertise, but few have the Mercantile advantages of
management rooted in the community or flexibility on product mix and pricing.
Simply put, we are organized to succeed. Mercantile is focused in every
way on encouraging customers to take full advantage of our financial
expertise and product breadth. We are putting Mercantile's "Power of
Partnership" to work, building strong, long-term customer relationships.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 17
<PAGE> 21
BUILDING MARKET LEADERSHIP
[PHOTO OF BOB LEE]
"Mercantile people
are 'plugged in' to
the communities
where they live and
work - doing what-
ever they can to
make a difference."
- - Bob Lee
Vice President
Community Development
BUILDING OUR COMMUNITIES
Mercantile believes helping our communities is good business. We have
a long tradition of actively investing our financial and human resources in
support of worthy causes.
Since our founding in the 1850s, Mercantile has contributed to our
communities' quality of life through philanthropy, community reinvestment and
volunteerism.
We help fund numerous programs in the areas of education, health and
social services, civic projects and the arts. To name just one, Mercantile
combines extraordinary employee giving with a corporate gift to support the
United Way - more than $2 million each year. Commitment to the United Way is
a big part of the Mercantile culture, extending beyond financial support.
Mercantile employees give generously of their time to the United Way as
volunteers, board and panel members.
In urban and rural markets alike, Mercantile also helps build
communities through aggressive reinvestment programs. For instance,
Mercantile's "Project Open Doors" represents a commitment to lend up to $1
billion over the next several years to finance low- and moderate-income home
purchases across the St. Louis metropolitan area. In another example,
Mercantile Bank of Western Iowa-Jasper County was recognized in 1997 by the
U.S. Department of Agriculture as one of the state's top lenders in the
Guaranteed Rural Housing Program.
Across the entire organization, Mercantile bankers are active in their
communities, serving on city councils, school boards and chambers of
commerce. Increasingly, Mercantile bankers are getting involved in community
development corporations (CDCs), using low-cost loans and other investment
programs to provide incentives for businesses to locate or expand in their
markets. CDCs help keep our communities vital, with growing deposit bases and
loan demand.
Of course, community involvement is good business. But to the thousands
of Mercantile people who volunteer their time, ideas and energy to help worthy
causes in their cities and towns, it transcends business. Mercantile
volunteers lend more than credence to our community-oriented
philosophy - they give it heart and soul.
18 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 22
[PHOTO OF TUTOR WITH TWO STUDENTS]
From serving on
charity boards to
tutoring in schools,
Mercantile employees
strive to help their
communities grow.
<PAGE> 23
[PHOTO OF WORKER WITH IMAGING SYSTEM]
Advanced imaging
technology helps
Mercantile provide
consistent, cost-
effective lock box
services to the IRS.
This technology
can help govern-
ment and business
further streamline
their operations
in the future.
<PAGE> 24
[PHOTO OF VICKI BURKE]
"We focus on building
long-term partnerships
with our customers,
working with them
to develop creative
solutions that work.
This will be the key
to our success in
the future."
- - Vicki Burke
Vice President
Government Services
BUILDING MARKET LEADERSHIP
MOVING CONFIDENTLY
INTO THE FUTURE
We're looking ahead with a sense of excitement, anticipating and moving to
fulfill our customers' changing needs. We are well positioned for strong
earnings growth now, and in the future.
In today's rapidly changing banking environment, we see tremendous
opportunity to build the Mercantile franchise.
On the retail banking side, customer interest in electronic banking is
growing. We're developing technology-based delivery systems such as intelligent
ATMs, online banking and more. In more traditional areas, we are aggressively
building our trust, investment and mortgage businesses, encouraging customers to
take full advantage of Mercantile's "Power of Partnership."
For business customers, technologies such as those developed for the
federal government's EFTPS program (described on page 13 of this report) and
other government services strongly position us to serve the private sector as
demand for paperless banking services grows. Alliances with other financial
service providers are creating opportunities for growth, such as the one we
formed in first quarter 1998 with Edward Jones to test market small business
loans through their national brokerage network.
In the future, we'll continue to strive for the number-one, -two or
- -three position in each market we serve. We'll work to expand our
middle-market lending and commercial banking businesses while vigorously
maintaining our superior credit culture. We'll further enhance efficiency and
customer convenience by consolidating to a single charter in the next few
years. And we will continue to pursue mergers and acquisitions to build
Mercantile's presence and market strength.
With more than 30 acquisitions in the past seven years, Mercantile has
brought together a highly diverse pool of banking talent that gives us
tremendous confidence as we look to the future. People are the foundation of
relationship banking. Mercantile people give us what it takes to become the best
relationship bank in our markets.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 21
<PAGE> 25
[MAP OF MISSOURI, KANSAS, ILLINOIS, IOWA, ARKANSAS AND KENTUCKY WITH
EXISTING LOCATIONS AND NEW ACQUISITIONS IDENTIFIED]
22 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 26
Mercantile provides
services through an
extensive network
of more than 500
banking locations
throughout the
Midwest.
OUR MARKETPLACE
<TABLE>
<CAPTION>
<S> <C>
MISSOURI Locations<F*>
St. Louis 81
Pike County 2
Franklin County 5
Boone County 5
East Central
Missouri 2
Lake of the Ozarks 6
Phelps County 4
Warrensburg 6
West Central
Missouri 5
Jefferson City 1
Salem 2
St. Joseph 7
Memphis 1
Missouri Valley 2
North Central
Missouri 9
Northwest 5
Plattsburg 4
Trenton 3
Poplar Bluff 7
Cape Girardeau 4
Doniphan 2
The Mineral Area 4
Perryville 1
Ste. Genevieve 1
Sikeston 3
Stoddard/Bollinger
Counties 5
Springfield 25
Lebanon 5
Monett 5
Willow Springs 1
Wright County 1
Joplin 17
Nevada 3
Kansas City 36
KANSAS
Kansas City 22
Lawrence 17
Topeka 15
ILLINOIS Locations<F*>
Alton/Illinois 27
Stephenson County 4
Winnebago County 6
Whiteside County 5
Mt. Vernon 5
Carlyle 2
Centralia 3
Flora 2
IOWA
Waterloo 6
Cedar Rapids 7
Clinton 5
Henry County 3
Maquoketa 4
Tipton 1
Vinton 3
Washington 2
Dubuque 5
Galena 3
Davenport 6
Jasper County 5
Ankeny 2
Boone 3
Centerville 3
Chariton 2
Clay County 1
Humboldt 4
Lyon County 2
Marshalltown 4
Mount Ayr 4
Onawa 1
Osceola County 1
Pella 2
Polk County 9
The Bluffs 13
ARKANSAS
Central Arkansas 20
Conway County 5
Crawford County 4
Heber Springs 3
North Central
Arkansas 4
Faulkner County 2
NEW ACQUISITIONS
Arkansas Locations<F*>
Hot Springs County 5
Clark County 6
Garland County 7
Grant County 3
Saline County 1
Illinois
Stephenson County 2
Winnebago County 6
Lee County 3
Madison County 13
St. Clair County 6
McClean County 5
Sangamon County 21
Morgan County 8
Christian County 4
Monroe County 1
Hamilton County 1
Williamson County 2
Union County 1
Jefferson County 1
Franklin County 2
Macoupin County 2
Cole County 5
Jackson County 1
Montgomery County 1
Missouri
St. Louis County 4
St. Charles County 2
Kentucky
Marshall County 4
McCracken County 11
Graves County 5
Christian County 3
Calloway County 2
<FN>
Listing is by bank name except for New Acquisitions, which is by county.
<F*>Locations include free-standing ATMs.
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 23
<PAGE> 27
FINANCIAL CONTENTS
Financial Commentary
25 Performance Summary
28 Net Interest Income
29 Liquidity
30 Interest Rate Sensitivity
33 Deposits
34 Short-Term Borrowings
and Short-Term Investments
34 Capital Resources
37 Investments in Debt and Equity Securities
38 Loans
39 Risk Management and the
Reserve for Possible Loan Losses
42 Non-Performing Assets
44 Off-Balance-Sheet Risk
44 Other Income
46 Other Expense
48 Income Taxes
49 Fourth Quarter Results
51 Management Report on
Consolidated Financial Statements
Audited Financial Statements
51 Independent Auditors' Report
52 Mercantile Bancorporation Inc.
and Subsidiaries Consolidated
Financial Statements
56 Notes to Consolidated Financial Statements
76 Six Year Consolidated Financial Statements
24 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 28
FINANCIAL COMMENTARY
PERFORMANCE SUMMARY
To facilitate comparison of the fundamental financial performance of
Mercantile Bancorporation Inc. ("Mercantile" or "Corporation"), certain
one-time charges should be excluded from the results of operations for 1997
and 1996. The Corporation recorded one-time acquisition costs in 1997 for
Roosevelt Financial Group, Inc. ("Roosevelt"), Mark Twain Bancshares, Inc.
("Mark Twain") and Regional Bancshares, Inc. These charges include accruals
to substantially conform the accounting and credit policies of the acquirees
to those of Mercantile, as well as to account for the one-time expenses
associated with those in-market transactions. Last year, similar expenses
were recorded for the seven 1996 acquisitions listed in Note C to the
Consolidated Financial Statements.
After eliminating nonrecurring expense previously detailed, adjusted
net income for 1997 was $336,970,000, an 11.7% increase over the adjusted
$301,754,000 earned a year ago. Adjusted basic earnings per share was $2.76,
an improvement of 6.2% from the $2.60 earned last year. Diluted earnings per
share on an adjusted basis was $2.71 in 1997, 5.9% higher than the $2.56
reported in 1996. Adjusted return on assets was 1.30% in 1997 compared with
1.43% in 1996, while adjusted return on average equity for the year was
15.73% versus 15.94% last year.
Including one-time charges, reported net income for Mercantile for 1997
was $204,593,000 as compared with the $245,215,000 earned a year ago and
$280,389,000 in 1995. The corresponding basic earnings per share in 1997 was
$1.68 compared with $2.11 and $2.41 in the prior years. Diluted earnings per
share calculated as required by the newly issued Financial Accounting
Standard ("FAS") 128 was $1.65 in 1997 versus $2.08 in 1996 and $2.37 in
1995.
Building shareholder value through strategic deployment of capital is
increasingly critical in today's competitive environment. The Corporation
identifies lower performing units for corrective action or redeployment of
resources. In 1996, that focus resulted in the sale of Mercantile's credit
card merchant processing business and its trust indenture and agency business
along with certain non-strategic branches. In 1997, the Corporation sold
$405,000,000 of its former co-branded credit card receivables at a discount.
This sale was announced on September 25, 1997 and closed on October 17, 1997.
The pre-tax operating loss on this product was $16,400,000 for the first nine
months of 1997.
Additionally, a final nonrecurring expense was recorded in the third
quarter of 1996 when legislation was enacted to recapitalize the Savings
Association Insurance Fund ("SAIF"), which called for a one-time assessment of
65.7 basis points per $100 in thrift deposits held as of March 31, 1995. The
assessment, recorded as a nonrecurring expense, totaled $12,385,000. Exhibit 1
presents adjusted results for 1997 and 1996, which represent reported net
income as adjusted for one-time acquisition costs in both years, the 1997
credit card sale loss and the 1996 SAIF assessment.
<TABLE>
Exhibit 1
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
ADJUSTED RESULTS Year Ended December 31, 1997
--------------------------------------------------------
Diluted
Earnings per Return
(Dollars in thousands except per share data) Net Income Share on Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reported $204,593 $1.65 .79%
Acquisition expenses 99,877 .80 .38
Loss on the sale of
credit card loans 32,500 .26 .13
- ---------------------------------------------------------------------------------------------------------------------
Adjusted $336,970 $2.71 1.30%
=====================================================================================================================
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------------------
<S> <C> <C> <C>
Reported $245,215 $2.08 1.16%
Acquisition expenses 48,489 .41 .23
Special SAIF assessment 8,050 .07 .04
- ---------------------------------------------------------------------------------------------------------------------
Adjusted $301,754 $2.56 1.43%
=====================================================================================================================
</TABLE>
Mercantile's acquisition of St. Louis-based Roosevelt closed on
July 1, 1997. The Roosevelt transaction was accounted for as a purchase;
thus, historical financial statements were not restated and its results of
operations are included with Mercantile's from July 1, 1997 forward. On
November 14, 1997, the assets and liabilities of Roosevelt Bank were merged
into nine Mercantile subsidiary banks based on geographic area.
All prior year figures have been restated to include the
pre-acquisition accounts and results of operations of Mark Twain, which was
merged with Mercantile on April 25, 1997 in a transaction accounted for as a
pooling-of-interests. The Mark Twain earnings per share dilution was
estimated to have been $.03 in the first half of 1997.
On July 16, 1997, the Board of Directors declared a three-for-two stock
split, in the form of a dividend, which was distributed on October 1, 1997. All
per share amounts in this Financial Commentary have also been restated to
reflect this stock split.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 25
<PAGE> 29
It is important to recognize cash based earnings, which excludes
intangible asset amortization, because it is more indicative of cash flows,
and thus, the Corporation's ability to support growth and pay dividends.
Goodwill of $608,076,000 was added to the Corporation's balance sheet in
conjunction with the purchase of Roosevelt. In 1997, cash based adjusted
diluted earnings per share was $3.00, up 13.2% from the $2.65 earned in 1996.
See Exhibit 2 for other cash based performance ratios and the related
favorable comparisons to 1996.
<TABLE>
Exhibit 2
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
CASH BASED EARNINGS
------------------------------------------------
(Dollars in thousands except per share data) 1997 1996 Change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adjusted net income $336,970 $301,754 11.7%
Add back:
Goodwill amortization 32,864 8,265 -
Other intangible asset
amortization 5,137 3,761 36.6
- --------------------------------------------------------------------------------------------------------------
Total Intangible
Asset Amortization 38,001 12,026 -
Less tax effect (1,666) (1,312) 27.0
- --------------------------------------------------------------------------------------------------------------
Cash Based Adjusted
Net Income $373,305 $312,468 19.5
==============================================================================================================
Cash based adjusted basic
earnings per share $3.06 $2.69 13.8%
Cash based adjusted diluted
earnings per share 3.00 2.65 13.2
CASH BASED ADJUSTED
PERFORMANCE RATIOS
Return on tangible assets 1.46% 1.49%
Return on tangible equity 22.89 17.69
Efficiency ratio 52.15 54.28
Other expense to average
tangible assets 2.69 3.07
- --------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996, seven transactions were completed that added $3.0 billion in
assets. In 1995, seven other transactions were closed that added $3.5 billion
in assets. Note C to the Consolidated Financial Statements details
acquisition activity for the past three years as well as four announced and
pending transactions. By December 31, 1997, Mercantile was operating from 17
bank charters and more than 500 banking locations in five states with plans
to consolidate to one charter over the next few years. As recently as
December 31, 1995, Mercantile had 75 bank charters. After all announced
acquisitions are closed and integrated, Mercantile will operate approximately
625 banking locations in its six-state trade area.
Net interest income increased 11.2% to $920,504,000 during 1997. The
acquisition of Roosevelt and the diminution of the credit card portfolio both
had significant impact on the Corporation's mix of earning assets and costing
sources of funds. The net interest rate margin in the third quarter of 1997,
the first quarter that included Roosevelt, declined to 3.71% from historical
levels in the 4.30% range. The year-to-date margin was 3.93% in 1997 compared
with 4.34% in 1996 and 4.38% in 1995. Average earning assets for 1997 of
$23.8 billion were 22.2% higher than last year following growth of 4.1%
in 1996. The Roosevelt acquisition added approximately $3.3 billion to
average earning assets.
For the year ended December 31, 1997, other income was $378,684,000, an
improvement of $41,204,000 or 12.2% from last year following growth of 8.3%
in 1996. Fee growth in core businesses and the impact of service charges and
mortgage banking revenue largely accounted for the increase.
Non-interest expenses were up 24.5% from a year ago and totaled
$894,780,000 compared with $718,668,000 last year. Other expense in 1997
included $121,393,000 in nonrecurring merger-related costs and the
$50,000,000 loss on the sale of former co-branded credit card loans. Other
expense in 1996 included $51,071,000 in acquisition costs and the one-time
SAIF assessment of $12,385,000 discussed earlier. Excluding these
nonrecurring costs, operating expenses grew by 10.4%. On this adjusted basis,
the year-to-date efficiency ratio was 55.04% compared with 55.30% last year,
and the other expense to average assets ratio improved to 2.78% in 1997 from
3.11% in 1996. The Corporation exceeded the $20,000,000 announced 1997
synergies on the Mark Twain and Roosevelt integrations.
The provision for possible loan losses in 1997 was $79,309,000 compared
with $73,015,000 the prior year and $41,533,000 in 1995. Nonrecurring
merger-related provision totaled $20,340,000 in 1997 and $13,666,000 in the
prior year; 1996 also included $10,000,000 recorded to offset a charge-off on
a specialty retailer credit. Net charge-offs for the year were $74,930,000
and represented .43% of average loans in 1997 compared with $84,737,000 and
.60% last year. Excluding credit card, net losses were only .14% of average
loans in 1997. At December 31, 1997, the reserve for possible loan losses was
$254,983,000 and provided coverage of 249.51% of non-performing loans (i.e.,
non-accrual and renegotiated loans) compared with 318.99% last year.
26 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 30
<TABLE>
Exhibit 3
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SELECTED FINANCIAL DATA
--------------------------
Growth Rates
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 One Year Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Basic earnings per share $ 1.68 $ 2.11 $ 2.41 $ 2.06 $ 1.81 $ 1.55 (20.4)% 1.6%
Diluted Earnings per share 1.65 2.08 2.37 2.02 1.77 1.51 (20.7) 1.8
Dividends declared 1.148 1.092 .88 .748 .66 .62 5.1 13.1
Book value at year-end 18.47 16.74 16.29 14.48 13.41 12.11 10.3 8.8
Market price at year-end 61-1/2 34-1/4 30-11/16 20-13/16 20-1/16 21-7/16 79.6 23.5
OPERATING RESULTS (Thousands)
Taxable-equivalent net interest
income $935,590 $844,306 $818,448 $808,348 $779,809 $705,614 10.8% 5.8%
Tax-equivalent adjustment 15,086 16,353 17,758 17,962 18,598 17,891 (7.7) (3.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 920,504 827,953 800,690 790,386 761,211 687,723 11.2 6.0
Provision for possible loan
losses 79,309 73,015 41,533 48,791 70,584 88,238 8.6 (2.1)
Other income 378,684 337,480 311,649 272,368 290,380 264,534 12.2 7.4
Other expense 894,780 718,668 640,519 645,011 666,067 616,159 24.5 7.7
Income taxes 120,506 128,535 149,898 135,896 114,768 83,773 (6.2) 7.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $204,593 $245,215 $280,389 $233,056 $200,172 $164,087 (16.6) 4.5
====================================================================================================================================
ENDING BALANCE SHEET (Millions)
Total assets $ 29,955 $ 22,030 $ 20,883 $ 19,397 $ 18,878 $ 18,398 36.0% 10.2%
Earnings assets 27,278 20,061 18,997 17,904 17,390 16,846 36.0 10.1
Loans and leases 19,200 14,953 13,703 12,764 11,637 11,183 28.4 11.4
Investments in debt and
equity securities 7,546 4,746 4,964 4,895 5,234 5,148 59.0 7.9
Deposits 22,080 17,336 16,172 15,137 15,435 15,295 27.4 7.6
Long-term debt<F*> 1,469 305 344 351 340 365 - 32.1
Shareholders' equity 2,410 1,946 1,915 1,643 1,510 1,322 23.9 12.8
Reserve for possible loan losses 255 230 232 245 233 224 10.7 2.6
AVERAGE BALANCE SHEET (Millions)
Total assets $ 25,997 $ 21,066 $ 20,213 $ 19,027 $ 18,571 $ 17,630 23.4% 8.1%
Earning assets 23,777 19,452 18,693 17,543 17,042 16,166 22.2 8.0
Loans and leases 17,271 14,089 13,435 11,978 11,342 11,038 22.6 9.4
Investments in debt and
equity securities 6,103 5,071 4,904 5,186 5,200 4,578 20.3 5.9
Deposits 19,735 16,790 15,900 15,465 15,516 14,836 17.5 5.9
Long-term debt<F*> 842 320 352 357 339 303 - 22.7
Sharehodlers' equity 2,142 1,893 1,793 1,590 1,423 1,232 13.1 11.7
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F*>Includes company-obligated mandatorily redeemable securities of
Mercantile Capital Trust I.
</TABLE>
Non-performing loans and foreclosed assets as of December 31, 1997 were
$119,565,000 or .62% of total loans and foreclosed assets compared with
$88,990,000 or .59% last year. An increase of approximately $20,392,000 in
non-performing loans was attributable to Roosevelt. Additionally, there were
investment securities, primarily acquired with the Roosevelt transaction,
which incurred a change in value that is considered an "other than temporary"
impairment. These securities totaled $85,887,000 at December 31, 1997 and are
discussed in detail on page 42 of this report. Foreclosed assets were
$17,373,000 compared with $16,771,000 at December 31, 1996.
Consolidated assets of $30.0 billion at December 31, 1997 were up 36.0%
from last December 31. Core deposits increased by 26.2% to $20.0 billion,
loans were $19.2 billion, up 28.4% from last year, and shareholders' equity
of $2.4 billion was 23.9% higher than at December 31, 1996. All measures of
capital adequacy remained above regulatory requirements. Tier I capital to
risk-adjusted assets was 8.84% while Total capital to risk-adjusted assets at
December 31, 1997 was 12.05%. The ratio of tangible equity to tangible assets
was 5.50% at December 31, 1997.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 27
<PAGE> 31
<TABLE>
Exhibit 4
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SELECTED RATIOS
----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Return on assets .79% 1.16% 1.39% 1.22% 1.08% .93%
Return on equity 9.55 12.95 15.64 14.66 14.06 13.32
Efficiency ratio 68.08 60.81 56.68 59.68 62.24 63.51
Other expense to average assets 3.44 3.41 3.17 3.39 3.59 3.49
Dividend yield 1.87 3.19 2.87 3.59 3.29 2.89
Dividend payout<F*> 69.58 52.50 37.13 37.03 37.29 41.06
Tangible equity to tangible assets 5.50 8.05 8.66 7.97 7.43 6.62
Equity to assets 8.05 8.83 9.17 8.47 8.00 7.19
Tier I capital to risk-adjusted assets 8.84 11.00 12.06 11.74 11.25 10.22
Total capital to risk-adjusted assets 12.05 13.68 14.89 14.73 14.40 13.14
Leverage 6.15 8.12 8.57 8.12 7.44 6.68
Loans to deposits (Average) 87.52 83.91 84.50 77.46 73.10 74.40
Reserve for possible loan losses to outstanding loans 1.33 1.54 1.70 1.92 2.00 2.00
Reserve for possible loan losses to non-performing loans 249.51 318.99 241.79 552.34 289.13 155.54
Non-performing loans to outstanding loans .53 .48 .70 .35 .69 1.29
Non-performing assets to total assets .69 .41 .56 .37 .72 1.22
Net interest rate margin 3.93 4.34 4.38 4.61 4.58 4.36
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F*>Based upon diluted earnings per share.
</TABLE>
At the Board of Directors meeting on February 18, 1998, the quarterly
dividend was increased by 8.0% to $.31 from $.287 per common share.
At December 31, 1997, Mercantile's assets are distributed as follows:
St. Louis metropolitan area $15.7 billion (one charter), outstate Missouri
$5.5 billion (ten charters), metropolitan Kansas City $3.7 billion (one
charter), Iowa $2.8 billion (two charters), Arkansas $1.3 billion (one
charter) and Illinois $800 million (two charters).
The Corporation has announced four acquisitions that are expected to
close in 1998. The acquisition of Horizon Bancorp, Inc. of Arkadelphia,
Arkansas, closed on February 2, 1998, and the merger with HomeCorp, Inc. of
Rockford, Illinois, is expected to close in the first quarter of 1998. CBT
Corporation of Paducah, Kentucky, gives Mercantile entrance into a sixth
state, and it should close in the second quarter of 1998. On February 2,
1998, the Corporation announced plans to merge with Firstbank of Illinois
Co., headquartered in Springfield, Illinois. With this acquisition,
Mercantile is expected to be the largest banking group in Illinois outside
the Chicago area. All four transactions are to be accounted for as
poolings-of-interests and are not expected to have a material impact on
Mercantile's current capital, liquidity or results of operations.
The following financial commentary presents a more thorough discussion
and analysis of the results of operations and financial condition of the
Corporation for the year ended December 31, 1997. It should be read in
conjunction with the accompanying audited Consolidated Financial Statements
and related notes. Financial highlights for the past six years are presented
in Exhibits 3 and 4.
NET INTEREST INCOME
Net interest income, the difference between total interest income on earning
assets and total interest expense, the cost of funds supporting those assets,
is Mercantile's primary source of earnings. Representing the Corporation's
gross profit from lending, investing, deposit gathering and borrowing
activities, net interest income is affected by these variables: the volume,
yield and mix of earning assets and interest bearing liabilities, the level
of non-performing assets, the level of non-interest bearing liabilities and
the interest rate environment. The net interest rate margin is net interest
income on a fully taxable-equivalent basis as a percentage of average earning
assets.
In 1997, net interest income was $920,504,000, an increase of
$92,551,000 or 11.2% from the $827,953,000 earned in 1996, which was up 3.4%
over 1995 results. The volume of average earning assets grew by 22.2%
28 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 32
in 1997, and the net interest rate margin was 3.93% compared with 4.34% in
1996 and 4.38% in 1995. The acquisition of Roosevelt caused a significant
shift in the mix of earning assets and funding sources. This shift and the
cost of the debt issued to acquire Roosevelt caused an estimated
60-basis-point decline in the net interest rate margin during the second half
of 1997.
Average earning assets in 1997 grew by $4.3 billion or 22.2% when
compared with 1996, and average loans grew by 22.6%. This growth was funded
by an increase of $2.5 billion or 15.9% in average core deposits, a
$492,880,000 increase in purchased deposits, a $1.2 billion increase in
short-term borrowed funds and $650,000,000 of long-term debt issued in 1997.
The net result of these funding changes lowered the rate margin when compared
to prior years as core deposits (the lowest costing source of funds) declined
as a percentage of earning assets while more costly purchased deposits and
short-term borrowings increased.
Lower yielding residential real estate mortgage loans as a percentage
of earning assets increased from 21.18% in the second quarter of 1997
(pre-Roosevelt) to 30.46% in the fourth quarter of 1997; likewise, the ratio
of higher costing consumer time certificates under $100,000 to total core
deposits increased from 38.76% to 44.92%. Since the Roosevelt acquisition
closed on July 1, 1997, the comparison of these ratios will continue to
change and will have an impact on the net interest rate margin when compared
to prior periods as the interest spreads between these dominant uses and
sources of Roosevelt funds are much narrower than typical bank products.
The decline in the net interest rate margin in 1997 from 1996 and 1995
levels was also attributable to continued competitive pricing for both loans
and deposits, the opportunity to sell certain investment securities at gains,
the interest expense incurred on recent debt issues, the continued movement
of retail deposits from savings and transaction accounts to either retail
certificates of deposit or mutual funds, a greater dependence on wholesale
funding than in 1996 and higher levels of non-performing assets.
Additionally, the fourth quarter of 1997 did not have the high yielding
co-branded card that was sold on September 25, 1997. The net interest rate
margin for the fourth quarter of 1997 declined to 3.58% from 3.71% in the
third quarter. The absence of those high yielding card balances, which totaled
$405,000,000, is estimated to have caused approximately 10 basis points of
the 13-basis-point decline between the third and fourth quarters of 1997.
Partially offsetting these negative factors during 1997 were increases in
average net demand deposits (non-interest bearing demand deposits less cash
and due from banks) of $200,332,000 or 11.0%, a $248,793,000 or 13.1% growth
in average shareholders' equity and a 27-basis-point improvement in the yield
of the investment portfolio, largely attributable to Roosevelt's higher
yielding securities.
Subsequent discussions on liquidity and interest rate sensitivity,
deposits, securities and loans further detail the changes in net interest
income and the net interest rate margin for the years 1997, 1996 and 1995.
LIQUIDITY
The Corporation's Asset/Liability Management Committee ("ALCO") formulates
guidelines and monitors the composition of assets and liabilities. Three
subcommittees also provide guidance and develop strategies for ALCO's
consideration. The objectives are to meet earnings goals by producing the
optimal yield and maturity mix consistent with pre-established guidelines for
interest rate and liquidity plus capital constraints. Key to these goals is
liquidity management, which ensures Mercantile has ready access to sufficient
funds at reasonable rates to meet both existing commitments and future
financial obligations. Liquidity management also is necessary to withstand
fluctuations in deposit levels and to provide for customers' credit needs in
a timely and cost-effective manner. Liquidity management is viewed from a
long-term and short-term perspective, as well as from a liability and asset
perspective. Management monitors liquidity through a periodic review of
maturity profiles, yield and rate behaviors, and loan and deposit forecasts
to minimize funding risks.
Long-term liquidity is a function of a strong capital position and a
large core deposit base. Growth and stability of both of these components
form the foundation for Mercantile's long-term liquidity strength. Short-term
liquidity needs arise from the continuous fluctuations in the flow of funds
on both sides of the balance sheet and to a lesser extent from seasonal and
cyclical customer demands.
The acquisition of Mark Twain in the second quarter of 1997 did not
have a significant impact on the liquidity profile and funding needs of the
Corporation, as its balance sheet profile was similar to that of Mercantile.
The July 1, 1997 acquisition of Roosevelt modified the liquidity profile as:
1) $650,000,000 of term debt was obtained in the capital markets largely to
fund the transaction; 2) significant Federal Home Loan Bank ("FHLB")
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 29
<PAGE> 33
borrowings were assumed; 3) a liquid and largely unpledged investment
portfolio was acquired; 4) the significant mortgage assets that were acquired
are expected to generate a large cash flow over time and in the short term
could be used to secure additional FHLB borrowings; and 5) significant core
deposits and customer relationships came with the transaction.
The most important source of liquidity for Mercantile continues to be
liability liquidity, which is the ability to raise new funds and renew
maturing liabilities in a variety of markets. The most critical factor in
assuring liability liquidity is the maintenance of confidence in Mercantile
by suppliers of funds. The Corporation has a current liability position in
line with established strategic objectives. Certain of these objectives
emphasize significant core deposit funding of subsidiary banks, corporate and
subsidiary performance goals, and capital positions that exceed regulatory
guidelines. Mercantile's extensive retail network continues to provide the
necessary core deposits to meet desired liquidity levels.
Examples of the Corporation's liability liquidity include: 1) FHLB
borrowing availability of $6.0 billion, of which only $1.9 billion was
utilized at December 31, 1997; 2) an expanded bank note program that will be
developed in 1998; 3) the $30 billion-asset size of Mercantile allows for
greater diversification of funding sources where higher limits of funds can
be obtained from large providers; and 4) $100,000,000 in lines of credit
available to the Parent Company. These programs provide the Corporation with
significant access to funds at a wide range of maturities.
Asset liquidity is typically provided through the maturities of various
assets, the net cash flow of fee-based businesses, the ability to convert
loans and maturing investments into cash (such as through securitizations),
the availability of proceeds from the sale of investment securities
classified as available-for-sale and the utilization of securities as
collateral in repurchase agreements. Unpledged investment securities totaled
$4.0 billion at December 31, 1997 compared with $1.7 billion last year-end.
The September 25, 1997 sale of the $405,000,000 in former co-branded
credit card loans provided significant liquidity to Mercantile Bank N.A. and
as such was used to pay down market borrowings and add to the investment
portfolio. The $400,000,000 securitization of a portion of Mercantile's core
MasterCard(R) and VISA(R) credit card loans in May 1995 provides another example
of asset liquidity.
The reputation of Mercantile Bank N.A., as well as its financial
strength and numerous long-term customer relationships, enables it to raise
funds as needed in various markets. Historically, these funds have been
purchased locally, nationally and internationally in the federal funds market
and via large certificates of deposit and eurodollar transactions,
capitalizing on relationships maintained with investment banks, money center
banks and money market funds.
At December 31, 1997, the Parent Company held $252,823,000 in cash,
liquid money market investments and available-for-sale securities, and
expectations are to increase from that level in 1998. The Parent Company's
routine cash requirements consist primarily of operating expenses, dividends
to shareholders, principal and interest payments on debt and funds used in
acquisitions. Operating expenses are funded by subsidiary bank management
fees, while shareholder dividends and debt service are satisfied by quarterly
subsidiary bank dividends. The Parent Company also borrows funds in the
commercial paper market, which are in turn lent to subsidiaries, and it also
has access to long-term capital markets. Maintaining favorable debt ratings
is critical to liquidity, as these ratings affect the availability and cost
of funds to the Corporation. These public ratings are indicated in Exhibit 9
on page 35.
Net cash provided by operating activities for the Corporation in 1997
was $342,546,000. Net income of $204,593,000, adjusted for non-cash charges,
largely accounted for the net cash provided by operating activities. Net cash
used by investing activities was $668,573,000 in 1997. The largest component
of cash used by investing activities was the purchase of investment
securities, which totaled $3.3 billion. Net cash provided by financing
activities in 1997 was $372,712,000. The increase in the Corporation's
short-term borrowings, as well as the issuance of capital trust securities
and long-term debt, was a major source of net cash from financing activities
during 1997.
INTEREST RATE SENSITIVITY
Interest sensitivity is related to liquidity, as each is affected by maturing
assets and sources of funds. Interest sensitivity, however, also takes into
consideration those assets and liabilities with interest rates that are
subject to change prior to maturity. The objective and primary focus of
interest sensitivity management is to optimize earnings
30 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 34
<TABLE>
Exhibit 5
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTEREST RATE SENSITIVITY December 31, 1997
----------------------------------------------------------------------------------
Total
Variable 1-3 4-6 7-12 1 Year Over
(Dollars in millions) Rate Months Months Months or Less 1 Year Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans and leases<F1> $ 2,852 $ 3,869 $ 1,568 $ 2,834 $11,123 $ 8,077 $19,200
Investments in debt and equity securities 70 1,984 677 932 3,663 3,883 7,546
Short-term investments 293 215 24 - 532 - 532
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 3,215 $ 6,068 $ 2,269 $ 3,766 $15,318 $11,960 $27,278
====================================================================================================================================
ACQUIRED FUNDS
Interest bearing core deposits<F2> $ 4,566 $ 1,773 $ 1,593 $ 2,407 $10,339 $ 6,102 $16,441
Purchased deposits 304 779 354 297 1,734 319 2,053
Short-term borrowings 1,559 1,722 151 34 3,466 - 3,466
Bank notes - 175 - - 175 - 175
Long-term debt<F3> - 579 - - 579 890 1,469
Net effect of credit card securitization - 176 - - 176 (176) -
Interest rate swaps - 720 - (130) 590 (590) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Acquired Funds 6,429 5,924 2,098 2,608 17,059 6,545 23,604
Non-interest bearing deposits<F2> 1,062 - - - 1,062 2,524 3,586
- ------------------------------------------------------------------------------------------------------------------------------------
Total Acquired Funds $ 7,491 $ 5,924 $ 2,098 $ 2,608 $18,121 $ 9,069 $27,190
====================================================================================================================================
GAP ANALYSIS
Interest sensitivity gap $(4,276) $ 144 $ 171 $ 1,158 $(2,803)
====================================================================================================================================
Cumulative interest sensitivity gap $(4,276) $(4,132) $(3,961) $(2,803)
====================================================================================================================================
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities .43 .69 .74 .85
====================================================================================================================================
<FN>
<F1> Non-accrual loans are reported in the "Over 1 Year" category.
<F2> Mercantile's experience with interest bearing demand, money market
accounts, savings and non-interest bearing deposits has been that,
although these deposits are subject to immediate withdrawal or repricing,
a portion of the balances has remained relatively constant in periods of
both rising and falling rates. Therefore, a portion of these deposits is
included in the "Over 1 Year" category. If these deposits were all
included in the "Total 1 Year or Less" category, the cumulative ratio of
interest-sensitive liabilities would be .65.
<F3> Includes company-obligated mandatorily redeemable securities of Mercantile
Capital Trust I.
</TABLE>
results, while managing, within internal policy constraints, interest rate
risk. Mercantile's policy on rate sensitivity is to manage exposure to
potential risks associated with changing interest rates by maintaining a
balance sheet posture in which annual net interest income and the market
value of portfolio equity are not significantly impacted by unexpected
changes in interest rates. The total absence of risk, as well as excessive
risk, will result in less than acceptable returns; therefore, Mercantile
manages its interest sensitivity risk between those two extremes.
Interest rate risk at a given point in time can be represented by an
interest rate sensitivity position ("gap"). Exhibit 5 presents a summary
balance sheet at December 31, 1997 with an interest rate gap analysis that
shows the difference between the amount of assets and liabilities maturing or
subject to repricing in given time periods. The cumulative gap represents the
net position of assets and liabilities subject to repricing over specified
time periods. A static gap report is one measure of the risk inherent in the
existing balance sheet structure as it relates to potential changes in net
interest income, and it indicates that the Corporation maintained a
relatively balanced position at December 31, 1997.
Because the static gap portrayal does not capture many of the factors
that determine interest rate risk, Mercantile places more emphasis on the use
of sophisticated simulation models to estimate changes in net interest income
and the market value of portfolio equity. These models encompass the entire
range of assets, liabilities and off-balance-sheet investments, and they
capture multiple aspects of interest rate risk, including rate-driven
customer behavior such as the prepayment of mortgages. The Corporation uses
this information to adjust its strategies to protect the net interest margin
and market value against significant interest rate fluctuations. Uniform
sensitivity reports and guidelines are used by all subsidiary banks.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 31
<PAGE> 35
<TABLE>
Exhibit 6
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MARKET RISK DISCLOSURE December 31, 1997
---------------------------------------------------------------------------------------------
Book or Notional Value Fair Value
---------------------------------------------------------------------------------------------
More than More than More than More than
Within 1 Year to 2 Years to 3 Years to 4 Years to Over
(Dollars in millions) 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans and leases:<F*>
Fixed interest rate $ 1,614 $1,316 $1,437 $1,235 $1,310 $ 2,038 $ 8,950 $ 9,314
Average interest rate 8.39% 8.63% 8.75% 8.68% 8.68% 8.11% 8.50%
Variable/adjustable interest rate $ 2,353 $ 776 $ 748 $ 668 $ 864 $ 4,841 $10,250 $10,075
Average interest rate 9.29% 8.37% 8.26% 8.26% 9.87% 7.71% 8.38%
Investments in debt and equity securities:
Fixed interest rate $ 1,221 $ 666 $ 589 $ 461 $ 268 $ 2,197 $ 5,402 $ 5,404
Average interest rate 6.29% 6.31% 6.28% 6.27% 6.57% 6.49% 6.38%
Variable/adjustable interest rate $ 23 $ 17 $ 18 $ 5 $ 18 $ 2,063 $ 2,144 $ 2,144
Average interest rate 5.25% 4.60% 5.01% 3.42% 5.86% 7.64% 7.55%
Short-term investments $ 532 $ - $ - $ - $ - $ - $ 532 $ 532
Average interest rate 6.04% 6.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 5,743 $2,775 $2,792 $2,369 $2,460 $11,139 $27,278 $27,469
====================================================================================================================================
ACQUIRED FUNDS
Deposits:
Transaction deposits $ 6,160 $ 979 $ 979 $ 520 $ 521 $ 1,315 $10,474 $10,469
Average interest rate 2.41% 2.27% 2.27% 1.78% 1.78% 1.19% 2.17%
Time deposits $ 8,147 $2,072 $ 773 $ 257 $ 233 $ 124 $11,606 $11,915
Average interest rate 4.97% 5.81% 6.14% 5.86% 6.10% 6.32% 5.58%
Borrowed funds:
Fixed interest rate $ 2,178 $ 62 $ 3 $ 150 $ 259 $ 429 $ 3,081 $ 3,090
Average interest rate 5.51% 8.60% 5.89% 6.80% 6.68% 7.04% 5.95%
Variable interest rate $ 1,519 $ 275 $ 76 $ 1 $ 4 $ 154 $ 2,029 $ 2,037
Average interest rate 5.88% 5.89% 5.90% 5.87% 5.26% 6.58% 5.93%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Acquired Funds $18,004 $3,388 $1,831 $ 928 $1,017 $ 2,022 $27,190 $27,511
====================================================================================================================================
RATE-SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS
Pay variable/receive fixed interest
rate exchange agreements: $ 130 $ - $ 85 $ 205 $ - $ 300 $ 720 $ 11
Average rate paid 6.90% 8.50% 6.29% 6.38% 6.70%
Average rate received 7.22% 8.17% 6.85% 7.17% 7.20%
Interest rate floor agreements: $ 240 $ - $ - $ - $ - $ - $ 240 $ 2
Average strike rate 7.56% 7.56%
Forward rate assumption 6.35% 6.35%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F*>The book value of loans represents loans before deducting the reserve for
possible loan losses. The fair value of loans was estimated by utilizing
cash flow analysis discounted at rates that include a credit risk premium.
</TABLE>
Current model projections indicate that annual net interest income would
change by less than 2% should rates rise or fall within 100 basis points from
their current level. The year-end 1997 gap report shows a negative cumulative
interest sensitivity gap position, i.e., liability sensitive for all periods
less than one year. A negative interest sensitivity gap position would indicate
that net interest income would generally be enhanced in a declining rate
environment, and if rates rose, net interest income would be somewhat
negatively impacted. The Corporation's simulation models confirm those trends
and point to a concern that if the yield curve remains flat in 1998, net
interest income will be negatively impacted. However, in the short term if the
prime rate were to drop immediately and funding costs did not adjust as
quickly, net interest income would decline. The Corporation believes it is
appropriately positioned for subsequent rate movements in the current economic
environment; however, the potential for large paydowns of mortgage-backed
securities and the refinancing of mortgage loans held in
32 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 36
the loan portfolio does present risk to the current level of net interest
income, because if the yield curve remains flat, profitable reinvestment
opportunities of the cash flows generated by these paydowns will not exist and
balance sheet leverage may be lessened.
Exhibit 6 provides additional information about the Corporation's
financial instruments and derivatives that are sensitive to changes in
interest rates. For loans and leases, investment securities and liabilities
with contractual maturities, the table presents principal cash flows and
weighted average interest rates by contractual maturities as well as the
Corporation's historical experience of the impact of interest rate
fluctuations on the prepayment of loans and mortgage-backed securities. For
transaction deposits, while such amounts are subject to immediate withdrawal
or repricing, a portion of the balances has remained constant during periods
of rising and falling interest rates. Therefore, a portion of these amounts
has been allocated to periods outside of one year based on Mercantile's
assessment of the most likely withdrawal behavior. For interest rate swap and
floor agreements, the table presents notional amounts and applicable weighted
average interest rates by contractual maturity dates. Forward rates are based
on the implied forward rates on the reporting dates.
DEPOSITS
Deposits are the Corporation's primary source for the funding of its earning
assets and are acquired from a broad base of local markets, including both
individual and corporate customers. Total deposits at December 31, 1997 were
$22.1 billion, a 27.4% increase from the $17.3 billion of a year ago, which
was up $1.2 billion or 7.2% from December 31, 1995. Deposits of approximately
$5.3 billion ($2.7 billion on average) were added in the Roosevelt
acquisition. On average, total deposits grew by $2.9 billion or 17.5%, and
most of that growth was likewise due to the deposits assumed in the Roosevelt
acquisition. Exhibit 8 details the components of the Corporation's deposit
mix for the past five years.
Core deposits remain Mercantile's largest, most reliable and most
important funding source. Core deposits include both interest bearing and
non-interest bearing demand deposits, money market and savings deposits,
consumer certificates of deposit under $100,000 and other time deposits.
Average core deposits grew by 15.9% in 1997 and represented 75.18% of earning
assets compared with 79.29% last year. The Roosevelt acquisition added an
estimated $5.0 billion to core deposits in 1997 ($2.5 billion on average),
partially offset by the sale of approximately $166,000,000 in deposits in
conjunction with the federally mandated divestiture of certain branch
offices. Mercantile has experienced anticipated deposit run-off for Roosevelt
customers since the transaction was announced in December 1996. Deposit
run-off was less than 3% from July through mid-November 1997. After splitting
Roosevelt into nine Mercantile banks in November 1997 and selling
unprofitable branches, deposit run-off has increased but is still within
original expectations.
Average non-interest bearing deposits increased by $221,580,000 or 7.8%
from 1996. Roosevelt added $206,000,000 ($103,000,000 on average) to
non-interest bearing accounts, and a large part of the remaining growth came
from the U.S. Government, a significant cash management customer of
Mercantile Bank N.A. that pays for services rendered via compensating
balances. These average balances have increased from $373,000,000 in 1995 to
$637,386,000 in 1996 and finally to $675,793,000 in 1997. Cash and due from
banks volume is directly related to non-interest bearing deposit volume. It
increased by only $21,248,000 or 2.1%. Successful efforts in managing float
and minimizing reserve requirements resulted in an increase in average net
non-interest bearing funds of $200,332,000 for 1997.
<TABLE>
Exhibit 7
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
MATURITY OF DOMESTIC Year Ended December 31, 1997
TIME DEPOSITS $100,000 --------------------------------------------------------
AND OVER Certificates Other Time
(Thousands) of Deposit Deposits Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 502,995 $ 75,846 $ 578,841
Over three through six months 348,945 4,217 353,162
Over six through 12 months 296,558 20,454 317,012
Over 12 months 318,539 534 319,073
- -----------------------------------------------------------------------------------------------------------------
Total $1,467,037 $101,051 $1,568,088
=================================================================================================================
</TABLE>
Average interest bearing demand, savings, money market accounts and
consumer time certificates under $100,000 increased by 4.7%, 10.4%, 19.2% and
24.7%, respectively, largely due to Roosevelt as previously stated. Roosevelt
had a greater percentage of consumer time certificates in its total core
deposits, and as a result, Mercantile's average of consumer time certificates
to total core deposits increased to 42.76% from 39.75% in 1996.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 33
<PAGE> 37
<TABLE>
Exhibit 8
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DEPOSITS December 31
----------------------------------------------------------------------
(Thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest bearing $ 3,586,011 $ 3,003,972 $ 2,594,734 $ 2,442,126 $ 2,545,934
Interest bearing demand 2,693,207 2,562,065 2,420,273 2,467,329 2,499,950
Money market accounts 3,502,517 2,791,848 2,500,400 2,370,133 2,627,093
Savings 1,331,953 1,090,563 1,115,692 1,202,063 1,310,296
Consumer time certificates under $100,000 8,777,375 6,195,651 6,130,094 5,493,523 5,508,681
Other time 136,388 231,268 38,742 38,717 35,438
- -------------------------------------------------------------------------------------------------------------------------
Total Core Deposits 20,027,451 15,875,367 14,799,935 14,013,891 14,527,392
Time certificates $100,000 and over 1,467,037 1,209,197 1,162,547 903,921 881,577
Foreign 585,439 251,887 209,170 219,135 26,085
- -------------------------------------------------------------------------------------------------------------------------
Total Purchased Deposits 2,052,476 1,461,084 1,371,717 1,123,056 907,662
- -------------------------------------------------------------------------------------------------------------------------
Total Deposits $22,079,927 $17,336,451 $16,171,652 $15,136,947 $15,435,054
=========================================================================================================================
</TABLE>
Certificates of deposit greater than $100,000 and foreign branch
deposits increased on average by 36.1% to $1.9 billion. Most of the large
domestic deposits were gathered from the local retail, commercial and
institutional customer base, which provides a natural access to purchased
funds and, accordingly, tend to be less volatile than other categories of
purchased funds. Exhibit 7 portrays the maturities of domestic time deposits
$100,000 and over.
SHORT-TERM BORROWINGS AND
SHORT-TERM INVESTMENTS
Short-term borrowings are an alternative to other funding sources, such as
large certificates of deposit and eurodollar deposits, and consist primarily
of federal funds purchased, treasury tax and loan note option accounts,
securities sold under agreements to repurchase, short-term FHLB advances and
commercial paper. These sources of funding are utilized primarily by
Mercantile Bank N.A., and volumes are monitored by the ALCO. Mercantile Bank
N.A. purchases excess funds from correspondent banks and borrows on a
short-term basis from commercial customers. Accordingly, some of Mercantile's
short-term borrowings can be considered a stable source of funds, similar to
core deposits. Depending on funding requirements and liquidity strategies
employed by the ALCO, these funds are either used internally or redeployed as
short-term investments.
Average short-term borrowings nearly doubled in 1997 to $2.7 billion,
due largely to the addition of Roosevelt's short-term FHLB advances and an
increase in federal funds purchased at Mercantile Bank N.A. Roosevelt's
short-term FHLB advances and an increase in federal funds purchased at
Mercantile Bank N.A. Roosevelt used FHLB advances to fund a significant part
of its investment portfolio. These average short-term advances increased from
$73,000,000 in the second quarter of 1997 to $1.3 billion as a result of
Roosevelt's funding strategy. Mercantile's reliance on other short-term
borrowings also increased as funding was needed to replace core deposit run-off
and to fund earning asset growth. Roosevelt's short-term borrowings increased
the year-to-date average by approximately $600,000,000. Bank note borrowings
were stable at $175,000,000 throughout the year.
Short-term investments include due from banks - interest bearing,
federal funds sold and securities purchased under agreements to resell.
Short-term investments averaged $402,913,000 in 1997, an increase of
$110,520,000 or 37.8%.
CAPITAL RESOURCES
Mercantile maintains a capital base that provides a foundation for
anticipated future asset growth and promotes depositor and investor
confidence. Capital management is a continuous process at Mercantile and is
focused on ensuring that adequate capital is available for both current needs
and anticipated growth. This strategy has enabled the Corporation to
profitably expand its balance sheet while maintaining capital ratios that
exceed minimum capital requirements.
At December 31, 1997, shareholders' equity was $2.4 billion, an increase
of 23.9% from a year ago. The increase from last year was primarily derived
from retained earnings, the Roosevelt and Regional Bancshares, Inc.
acquisitions, and a favorable FAS 115 adjustment, partially offset by
dividends, share repurchases and the one-time charges previously discussed.
34 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 38
<TABLE>
Exhibit 9
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DEBT RATINGS December 31, 1997
-------------------------------------------------------------------
Thomson Standard
Moody's Fitch BankWatch & Poor's
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MERCANTILE BANCORPORATION INC.
Issuer rating B
Commercial paper F1 TBW-1
6.800% senior notes, due 2001 A2 BBB+
7.050% senior notes, due 2004 A2 BBB+
7.625% subordinated notes, due 2002 A3 BBB+ BBB
7.300% subordinated notes, due 2007 A3 BBB
Floating rate capital trust pass-through securities SM a2 BBB-
MERCANTILE BANK N.A.
Bank notes (long-term/short-term) A1/P-1 A A-/A-2
6.375% subordinated notes, due 2004 A2 A A- BBB+
9.000% mortgage-backed notes, due 1999 Aaa
Certificates of deposit (long-term/short-term) TBW-1 A-/A-2
Letters of credit TBW-1 A-/A-2
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Exhibit 10
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTANGIBLE ASSETS December 31
---------------------------------------------------------------------------
(Thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Goodwill $748,612 $157,789 $ 95,631 $ 82,770 $ 87,054
Core deposit premium 6,559 10,008 13,645 15,242 19,713
Mortgage servicing assets 50,653 5,922 5,163 - 4,069
Other 1,842 12,462 2,671 6,454 5,457
- ----------------------------------------------------------------------------------------------------------------------------
Total $807,666 $186,181 $117,110 $104,466 $116,293
============================================================================================================================
</TABLE>
During 1997, the Corporation repurchased 6.8 million shares of its
common stock via designated broker-dealers at an average cost of $42.38 per
share. These repurchases occurred largely through accelerated stock
repurchase programs. A small portion of that stock was held for
reissuance in conjunction with the 1994 Stock Incentive Plan, while the
remainder was reissued in the Roosevelt transaction in July 1997. The
Corporation has no current authorization to repurchase shares in the open
market other than those to be repurchased for the 1994 Stock Incentive Plan
or for the Mercantile Bancorporation Inc. Shareholder Investment Plan, which
began functioning in the fourth quarter of 1997. With the announcement of the
CBT Corporation acquisition on January 12, 1998, Mercantile is also
authorized to repurchase up to 530,000 shares prior to its closing in the
second quarter of 1998. Additionally, the Corporation may repurchase up to
10% of the total shares to be issued in the acquisition of Firstbank of
Illinois Co. Mercantile had only 16,773 tainted shares at December 31, 1997,
and they were reissued in the Horizon Bancorp, Inc. acquisition in February
1998.
On July 16, 1997, the Board of Directors declared a three-for-two stock
split, in the form of a dividend, which was distributed on October 1, 1997.
Cash dividends totaling $1.148 per common share were declared and paid during
1997, a 5.1% increase from last year's total of $1.092. In addition, on
February 18, 1998, the quarterly dividend payable April 1, 1998 was increased
by 8.0% to $.31 per common share. This was the seventh consecutive year of
dividend increases, and the five-year compound growth rate for dividends per
share from 1993 to 1998 is 13.4%. Book value per share at December 31, 1997
was $18.47 compared with $16.74 at the prior year-end, an increase of 10.3%.
At the April 1997 meeting, the Corporation's shareholders approved lowering
the par value of common stock to $.01 from $5.00 per share. Such action can
save certain fees and taxes that are based on the stated capital of the
Corporation. Additional data relating to Mercantile's common stock and
dividends are included in the Investor Information summary on page 81.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 35
<PAGE> 39
<TABLE>
Exhibit 11
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
REGULATORY CAPITAL December 31
---------------------------------------------------------------------------------
(Thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C <C> <C> <C> <C>
Tier I capital $ 1,785,007 $ 1,749,466 $ 1,772,417 $ 1,578,698 $ 1,403,097
Tier II capital 647,367 426,246 416,294 402,835 392,323
- ----------------------------------------------------------------------------------------------------------------------------
Total Risk-based Capital $ 2,432,374 $ 2,175,712 $ 2,188,711 $ 1,981,533 $ 1,795,420
============================================================================================================================
Risk-adjusted assets $20,186,778 $15,905,622 $14,702,734 $13,448,900 $12,469,424
============================================================================================================================
Quarterly average tangible assets $29,010,389 $21,549,738 $20,670,794 $19,442,097 $18,852,028
============================================================================================================================
</TABLE>
<TABLE>
Exhibit 12
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CAPITAL RATIOS December 31
----------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets 8.84% 11.00% 12.06% 11.74% 11.25%
Total capital to risk-adjusted assets 12.05 13.68 14.89 14.73 14.40
Leverage 6.15 8.12 8.57 8.12 7.44
Equity to assets
Consolidated 8.05 8.83 9.17 8.47 8.00
Combined bank subsidiaries 7.64 7.98 8.82 8.38 8.27
Tangible equity to tangible assets 5.50 8.05 8.66 7.97 7.43
Double leverage 127.88 104.57 107.08 107.24 109.60
Long-term debt to total capitalization 37.87 13.55 15.23 17.59 18.39
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In order to finance a part of the Roosevelt acquisition, the
Corporation formed Mercantile Capital Trust I on January 29, 1997. Through
this trust, Mercantile obtained $150,000,000 of floating-rate debt that, for
regulatory purposes, is considered part of Tier I capital. Senior and
subordinated debt securities in the amount of $500,000,000 were issued in
June 1997 for the same purpose. By December 31, 1997, the ratio of long-term
debt to total capitalization increased to 37.87% from 13.55% last year-end,
reflecting the impact of the debt issued earlier in the year to finance the
Roosevelt acquisition. No significant amount of debt other than FHLB advances
is scheduled to mature before 1999, and the maturities of debt are laddered
to mature between then and 2007. Public debt ratings of the Corporation and
Mercantile Bank N.A. are shown in Exhibit 9.
The Parent Company's double leverage ratio, which measures the extent
to which the equity capital of its subsidiaries is supported by Parent
Company debt rather than equity, was 127.88% at December 31, 1997 compared
with 104.57% last year. Intangible assets, which consisted largely of
goodwill, totaled $807,666,000 at December 31, 1997 compared with $186,181,000
a year ago and $117,110,000 at December 31, 1995. The Roosevelt purchase
acquisition initially increased goodwill by $608,076,000. Exhibit 10 details
the composition of intangible assets for the past five years.
The tangible equity to tangible assets ratio declined to 5.50% at
December 31, 1997 from 8.05% a year ago, reflecting the impact of the
Roosevelt goodwill and nonrecurring expense adjustments. It is the plan
of the Corporation to raise that ratio to exceed 6.00% in 1998 largely via
retained earnings. Exhibits 11 and 12 detail significant capital information
for the past five years.
As long-term interest rates declined during 1997, the Corporation
recorded a favorable adjustment to equity of $7,137,000 on available-for-sale
investment securities. As of December 31, 1997, the balance of the valuation
on available-for-sale securities totaled $23,215,000. In 1996, the net fair
value adjustment lowered equity by $17,217,000, due largely to an increase in
longer-term interest rates.
Due to the strength of the capital base at the 17 individual bank
subsidiaries, approximately $119,596,000 was available at December 31, 1997
for distribution through dividends to the Parent Company without prior
regulatory approval and without reducing the capital of
36 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 40
the respective subsidiary banks below present minimum standards. An additional
$241,254,000 would be available in the form of loans to the Parent Company
under current regulations.
Management has established financial objectives designed to monitor
future capital needs. Mercantile's dividend policy is influenced by the
belief that most shareholders are interested in long-term performance as well
as current yield. The current dividend payout level is considered reasonable
given the Corporation's present cash flow position, level of earnings and the
strength of its subsidiary banks' capital. Future dividends will be
determined based on Mercantile's results of operations, growth expectations,
financial condition, regulatory constraints and other factors deemed relevant
by the Board of Directors.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Corporation's investment portfolio serves four important functions.
First, it is a vehicle for adjusting balance sheet rate sensitivity and
protecting against the impact of changes in interest rate movements by
managing the purchases and maturities of securities; second, it is a means for
the investment of excess funds depending on loan demand; third, the
available-for-sale securities provide potential immediate liquidity; and
fourth, it serves as collateral for certain borrowings. The investment
portfolio is structured to maximize the return on invested funds within
acceptable interest rate risk guidelines and to meet pledging requirements
while giving consideration to loan demand, credit risk, future liquidity
needs, balance sheet strategies and the outlook for trends in interest rates.
Securities are the largest category of earning assets after loans.
During 1997, average securities represented 25.67% of earning assets compared
with 26.07% in 1996 and 26.24% for 1995. Investment securities totaled $7.5
billion at December 31, 1997 compared with $4.7 billion at December 31, 1996,
an increase of 59.0%. The Roosevelt acquisition increased investment
securities by approximately $2.7 billion on July 1, 1997. The portfolio also
grew in the fourth quarter of 1997 as some of the proceeds from the credit
card sale were reinvested.
At December 31, 1997, trading securities totaled $70,486,000, the
available-for-sale portfolio was $7.2 billion and held-to-maturity securities
were $249,434,000. The held-to-maturity and available-for-sale portfolio as
of December 31, 1997 consisted of 59.97% in U.S. and other government agency
securities (including 29.42% in mortgage-related issues), 5.35% in state and
municipal securities, and 34.68% of other miscellaneous securities. The
comparable distribution at December 31, 1996 was 85.49%, 33.19%, 11.04% and
3.47%, respectively.
The change in the mix of the investment portfolio from the prior year
was primarily attributable to the Roosevelt acquisition. Roosevelt owned a
higher concentration of government and privately issued mortgage-backed
securities and collateralized mortgage obligations. The privately issued
collateralized mortgage obligations are included in miscellaneous securities.
Roosevelt owned $84,706,000 of these securities which are considered impaired
on December 31, 1997. The following section on non-performing assets
addresses the credit risk issues associated with these securities. Also
included in miscellaneous securities is $123,000,000 transferred from the
credit card loan portfolio in accordance with FAS 125. Concentration
guidelines for all types of securities are in place and are monitored by the
ALCO. Note F to the Consolidated Financial Statements details the components
of the investment portfolio for the past three years.
The average maturity of the overall portfolio increased to four years
and one month at the end of 1997 versus two years and two months at year-end
1996. The lengthened average maturity was primarily due to the addition of
mortgage-backed securities with the Roosevelt acquisition. The overall
tax-equivalent yield of the portfolio increased during 1997 to 6.53% from
6.26% in 1996 due to the lengthening of duration and the change in mix.
Mercantile established real estate investment trusts and investment
subsidiaries in 1996 and 1997 and has placed certain real estate mortgage
loans and investment securities in those entities. Such entities aid in the
management of those assets.
Mercantile's commitment to its expanding region continued to be
reflected by the holdings of securities of Missouri, Arkansas, Illinois,
Kansas and Iowa and their local governmental units, although securities of
many other states were also held in the portfolio. At December 31, 1997,
investments in securities of those five states and their political
subdivisions amounted to approximately 62.72% of total tax-exempt securities.
However, securities of any one single political subdivision in any of these
states did not exceed .12% of shareholders' equity at December 31, 1997.
Outside of those five states, securities of no single issuer exceeded .31% of
shareholders' equity.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 37
<PAGE> 41
Approximately 60% of the state and municipal securities held at
December 31, 1997 were rated A or higher by Moody's Investors Service. Of the
remaining securities, most were non-rated bonds due to the smaller size of
the issues and the expense associated with obtaining a rating. These bonds
generally represent local issues purchased by subsidiary banks, which are
evaluated internally for creditworthiness on an ongoing basis, similar to
loans.
Approximately 94% of the non-U.S. Government guaranteed collateralized
mortgage obligations held at December 31, 1997 were rated A or higher by
Moody's Investors Service. Those not rated A are primarily the "impaired
securities" discussed later in the Non-performing Assets section of this
commentary.
LOANS
Loans are the primary earning asset of the Corporation and were $19.2 billion
at December 31, 1997, up $4.2 billion or 28.4% from year-end 1996. This
growth follows a 9.1% increase in 1996 over 1995. Affecting loan growth
figures from year to year was approximately $4.3 billion of loans acquired in
the Roosevelt and Regional Bancshares, Inc. 1997 purchase transactions as
well as the sale of $405,000,000 in co-branded credit card loans and the
managed decline of an additional $224,000,000 in credit card loans. The
internal loan growth rate for 1997 was approximately $710,000,000 or 4.7%.
The vast majority of the Corporation's loans are extended in its natural
trade area, which includes five states.
At December 31, 1997, the loan portfolio was 42.73% commercial-related
and 57.27% consumer-related, compared with 50.68% and 49.32%, respectively,
at December 31, 1996. Over 90% of the Roosevelt loan portfolio that
Mercantile assumed on July 1, 1997 was residential real estate loans, thereby
accounting for most of the shift. This, coupled with the decline in credit
card loans and the integration of the Mark Twain franchise and its expertise
and emphasis on middle-market commercial lending, has lowered the overall
risk profile of the loan portfolio and further diversified the exposure to
economic downturns that may occur in different segments of the economy or
different industries. Note Q to the Consolidated Financial Statement provides
more details on concentrations of credit and the overall loan portfolio.
The 1997 average loan to deposit ratio for the Corporation was 87.52%
compared with 83.91% and 84.50% in 1996 and 1995, respectively. Exhibit 13
portrays the composition of the loan portfolio for the past five years.
During 1997, commercial loans averaged $4.4 billion, which represented
a growth rate of 12.0% following growth of 5.4% in 1996. Commercial loan
growth occurred on a system-wide basis and was greater in the first half of
the year. Expertise in certain specialized industries, as well as experienced
lenders in middle-market and agriculture, coupled with a strong regional
economy accounted for the growth. The Corporation does not engage in lending
to emerging markets, including those in Latin America and in the Asian
Pacific Region.
Average commercial real estate mortgage and construction loans of $3.6
billion in 1997 increased by 8.3% following a 5.3% growth rate in 1996.
Roosevelt commercial real estate loans accounted for nearly one-third of the
growth. Commercial mortgage and construction loans held by Mercantile Bank
N.A. represented 34.15% of the portfolio, with the rest relating largely to
smaller, owner-occupied projects in Missouri, Illinois, Arkansas, Kansas and
Iowa originated by the Corporation's other banks. These loans are generally
secured by the underlying property at a 75% to 80% loan-to-appraisal value
and are typically supported by guarantees from the project developers.
Additional collateral may be taken as deemed necessary.
For 1997, average residential real estate mortgage loan volume grew by
$2.4 billion or 61.9% following 4.4% growth in 1996 and during 1997
represented 36.42% of the total loan portfolio. The Roosevelt purchase
acquisition added approximately $3.9 billion to the Corporation's
residential real estate mortgage loan portfolio on July 1, 1997. This factor,
as well as continued customer preference for adjustable-rate mortgages that
Mercantile generally retained on the balance sheet, accounted for the
increase. Mercantile has a mortgage pipeline consisting primarily of
fixed-rate loans to be sold. The average balance for 1997 was $32,015,000,
and it is generally 75% hedged to mitigate interest rate risk. In addition,
in November 1997 the Corporation announced a $1 billion, 10-year commitment
to affordable housing in the St. Louis area, and it is hoped that effort will
add to 1998 volume. Home equity credit loans increased on average by
$71,479,000 to $442,798,000 during the year ended December 31, 1997.
Average credit card loans were down $211,595,000 or 25.0% in 1997. Of
more significance was the $628,516,000 or 69.0% decline from December 31, 1996
to year-end 1997. The largest part of the decline was
38 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 42
<TABLE>
Exhibit 13
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LOAN AND LEASE PORTFOLIO MATURITIES<F*>
---------------------------------------------------------------------------------------
1 to 5 Years Over 5 Years December 31
--------------------------------------------------------------------------------------------------
Under Fixed Floating Fixed Floating
(Millions) 1 Year Rate Rate Rate Rate 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,786 $1,219 $ 822 $ 464 $ 226 $ 4,517 $ 4,186 $ 3,758 $ 3,545 $ 3,230
Real estate - commercial 744 1,178 492 259 281 2,954 2,823 2,776 2,351 2,193
Real estate - construction 374 150 132 56 22 734 570 502 545 525
Real estate -
residential mortgage 304 474 233 1,733 5,457 8,201 4,239 3,717 3,401 3,191
Real estate -
home equity credit loans 52 5 3 5 441 506 383 375 385 377
Consumer 248 1,453 77 199 29 2,006 1,841 1,716 1,671 1,344
Credit card - 282 - - - 282 911 859 866 777
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases $3,508 $4,761 $1,759 $2,716 $6,456 $19,200 $14,953 $13,703 $12,764 $11,637
====================================================================================================================================
<FN>
<F*>Non-accrual loans are reported at contractual maturities and rates.
</TABLE>
due to the sale of $405,000,000 in co-branded cards on September 25, 1997.
Prior to that date, the Corporation had managed to a $224,000,000 decline due
to more aggressive risk-based pricing of both the core portfolio and the
MercRewards cards, as well as transferring $123,000,000 of loans to the
investment portfolio. Partially offsetting the sale, the managed decline and
the transfer was the addition of $112,000,000 in Roosevelt credit card loans
on July 1, 1997. Those cards have recently been reissued utilizing Mercantile
pricing. In May 1995, Mercantile formed a master trust and securitized
$400,000,000 of its core MasterCard(R) and VISA(R) credit card loans. Those
loans are still serviced by the Corporation, and the accounting for such is
discussed in the Other Income discussion on page 46.
Other consumer loans on average were $1.9 billion, an increase of
$173,699,000 or 9.9%. Roosevelt and Regional Bancshares, Inc. accounted for
approximately one-third of that increase, and the remainder was due to growth
in indirect auto loans for which the spreads widened in 1997. Mercantile does
not engage in subprime consumer lending in its own portfolio.
The overall tax-equivalent yield of the loan portfolio decreased by 26
basis points to 8.51% in 1997 compared with 8.77% in 1996. Competitive
pricing for loans as well as the managed decline in credit card loans, the
highest yielding loan type, and the large volume increase in lower yielding
residential real estate mortgage loans, accounted for the decrease in yield.
As shown in Exhibit 13, which portrays the maturity and interest sensitivity
of the portfolio, 61.06% of loans were priced at floating rates or mature
within one year.
RISK MANAGEMENT AND THE
RESERVE FOR POSSIBLE LOAN LOSSES
The underlying objectives of Mercantile's credit management are to identify
and manage credit exposure and to support the growth of a profitable and high
quality loan portfolio. At Mercantile, these functions are performed
centrally by corporate Credit Administration, which provides management with
information on risk levels, trends, delinquencies, portfolio concentrations
and internal ratings. Credit Administration includes corporate Credit Policy,
approval of large credits and corporate Credit Review. At Mercantile Bank
N.A., Credit Administration also provides special asset teams that
concentrate on identified problem loans and workout situations when
necessary, as well as the management of foreclosed property. Mercantile
utilizes a lender-initiated system of rating credits that is subsequently
tested by Credit Review, external auditors and bank regulators. Adversely
rated credits are included on a watch list and are reviewed at the bank level
and centrally on at least a quarterly basis.
The reserve for possible loan losses represents the aggregate reserves
of the Corporation's banking subsidiaries, and at December 31, 1997 was
$254,983,000 compared with $230,372,000 at the end of 1996. The year-end 1997
ratio of the reserve for possible loan losses to outstanding loans was 1.33%
compared with 1.54% at December 31, 1996. The reserve as a percentage of
non-performing loans was 249.51% compared with 318.99% last year. The 1997
levels were reasonable considering that the risk profile had been lessened
due to a reduced level of credit card loans outstanding, which declined by
$628,516,000 from last year-end, as well as growth in lower risk residential
real
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 39
<PAGE> 43
<TABLE>
Exhibit 14
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RESERVE FOR POSSIBLE LOAN LOSSES Year Ended December 31
-----------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE $ 230,372 $ 232,288 $ 244,743 $ 232,958 $ 224,098
PROVISION 79,309 73,015 41,533 48,791 70,584
CHARGE-OFFS
Commercial 15,501 20,313 9,264 9,540 22,666
Real estate - commercial 4,784 2,987 7,573 7,928 33,054
Real estate - construction 306 440 258 2,191 649
Real estate - residential mortgage 1,982 1,953 2,353 4,982 2,479
Real estate - home equity credit loans 57 113 342 330 116
Consumer 18,036 12,672 11,001 6,517 6,486
Credit card 60,642 66,111 42,650 41,363 31,021
- ----------------------------------------------------------------------------------------------------------------------------
Total Charge-offs 101,308 104,589 73,441 72,851 96,471
- ----------------------------------------------------------------------------------------------------------------------------
RECOVERIES
Commercial 8,031 4,405 4,112 10,563 15,211
Real estate - commercial 3,118 4,471 3,900 16,251 4,893
Real estate - construction 84 482 151 251 823
Real estate - residential mortgage 784 687 999 820 525
Real estate - home equity credit loans 1 4 59 53 89
Consumer 5,473 3,851 3,012 2,962 3,177
Credit card 8,887 5,952 5,390 4,498 3,467
- ----------------------------------------------------------------------------------------------------------------------------
Total Recoveries 26,378 19,852 17,623 35,398 28,185
- ----------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS 74,930 84,737 55,818 37,453 68,286
Acquired reserves 20,232 9,806 13,830 447 6,562
Transfer to Mercantile Credit Card Master Trust - - (12,000) - -
- ----------------------------------------------------------------------------------------------------------------------------
Ending Balance $ 254,983 $ 230,372 $ 232,288 $ 244,743 $ 232,958
- ----------------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES
December 31 balance $19,199,917 $14,952,630 $13,702,826 $12,764,261 $11,637,484
============================================================================================================================
Average balance $17,270,780 $14,088,673 $13,435,431 $11,978,211 $11,341,508
============================================================================================================================
RATIOS
Reserve balance to outstanding loans 1.33% 1.54% 1.70% 1.92% 2.00%
Reserve balance to non-performing loans 249.51 318.99 241.79 552.34 289.13
Net charge-offs to average loans .43 .60 .42 .31 .60
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
estate mortgage loans, which composed 42.71% of the Corporation's loan
portfolio at December 31, 1997. The loss experience on these loans has
averaged only .03% for the past two years. If residential mortgages and its
allocated reserve are excluded, the reserve represents 2.12% of outstanding
loans at December 31, 1997.
The provision for loan losses is the cost of providing a reserve for
anticipated future loan losses. In any accounting period, the amount of
provision is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management's assessments of loan quality, general economic factors and
collateral values. The 1997 provision was $79,309,000 compared with
$73,015,000 last year. In 1997 and 1996, a nonrecurring merger-related
provision of $20,340,000 and $13,666,000, respectively, was recorded largely
to conform the credit policies of recently acquired entities to those of
Mercantile. The year 1996 also included $10,000,000 in provision recorded in
connection with an $11,000,000 charge-off of a credit to a St. Louis-based
specialty retailer that declared bankruptcy in late 1995.
The ratio of net charge-offs to average loans for 1997 improved to .43%
compared with .60% in 1996. The corresponding net charge-off figures were
$74,930,000 and $84,737,000, respectively. Exhibit 14 provides charge-offs
and recoveries by loan type for the past five years.
40 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 44
<TABLE>
Exhibit 15
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES
-----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Allocated Total Allocated Total Allocated Total Allocated Total Allocated Total
(Dollars in thousands) Reserves Loans Reserves Loans Reserves Loans Reserves Loans Reserves Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
Commercial $ 71,010 23.53 $ 31,400 28.00 $ 59,227 27.43 $ 48,160 27.78 $ 43,704 27.75
Real estate -
commercial 31,986 15.38 50,427 18.88 57,337 20.26 46,915 18.42 51,801 18.85
Real estate -
construction 7,387 3.82 8,389 3.81 7,138 3.66 6,314 4.27 5,100 4.51
Real estate -
residential
mortgage 21,481 42.71 14,903 28.35 13,431 27.12 10,608 26.64 6,635 27.42
Real estate -
home equity
credit loans 1,504 2.64 3,705 2.56 2,067 2.74 2,155 3.02 2,262 3.24
Consumer 15,799 10.45 12,544 12.31 12,258 12.52 14,133 13.09 10,994 11.55
Credit card 18,665 1.47 57,666 6.09 27,333 6.27 36,827 6.78 31,285 6.68
Unallocated 87,151 N/A 51,338 N/A 53,497 N/A 79,631 N/A 81,177 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Total $254,983 100.00 $230,372 100.00 $232,288 100.00 $244,743 100.00 $232,958 100.00
====================================================================================================================================
</TABLE>
Excluding securitized credit cards, net credit card charge-offs were
$51,755,000 in 1997 versus $60,159,000 last year and represented 8.15% of
average credit card loans compared with 7.10% in 1996. Approximately 38% of
the 1997 credit card losses were the result of bankruptcy claims. On the
managed portfolio, the ratio of net charge-offs to average loans was 7.59% in
1997 versus 7.78% in 1996. By credit policy, losses are taken on credit card
loans after six cycles of nonpayment, or within 15 days of receipt of
personal bankruptcy notice, if earlier. The former co-branded credit card
loans had net charge-offs of $34,446,000 in 1997, including $2,105,000 in
recoveries received in the fourth quarter of 1997 after the sale, compared
with $34,205,000 in 1996. These losses, as well as the related net interest
income, fees and operating expenses, were not included in the results of
operations starting October 1, 1997. The Roosevelt credit card loans averaged
approximately $108,000,000 in the last half of 1997, and credit losses were
incurred at a 9.52% rate. Excluding those related to credit card loans, net
charge-offs were $23,175,000 or .14% of average loans for 1997 compared with
$24,578,000 and .19% in 1996.
The Corporation evaluates the loan portfolios and reserves of all banks
on a quarterly basis to ensure the timely charge-off of loans and the
adequacy of those reserves. This review is performed by each bank
preliminarily and is validated by both corporate Credit Review and the Chief
Credit Officer. Factors considered in determining reserve adequacy include:
volumes and trends in delinquencies and non-performing loans; specific loan
ratings and outstandings; historical and projected loss experience based on
volumes and types of loans; the results of independent internal loan ratings
or external credit reviews; industrial or geographical concentrations;
national, regional and/or specific industry economic conditions;
off-balance-sheet risk; and other subjective factors.
Every significant problem credit is reviewed initially by the
respective division, and a secondary review is performed quarterly to confirm
the risk rating, proper accounting and adequacy of both strategy and the loan
loss reserve. In addition to specific allocations, reserve allocations are
made based on percentage guidelines for all individually rated loans, whether
criticized by examiners or not. Additionally, allocations are made for
unrated loans, such as residential mortgage, credit card and other consumer
loans, based on historical loss experience adjusted for portfolio activity
and current economic trends. These allocated reserves are further
supplemented by unallocated reserves based on judgments regarding risk of
error, local economic conditions and any other relevant factors.
In Exhibit 15, the Corporation has estimated an allocation of the
reserve for possible loan losses to the various loan categories.
Consideration for making such allocations is consistent with the factors
discussed above, and all of those factors are subject to change; thus, the
allocation is not necessarily indicative of the loan categories in which
future losses will occur. The total reserve is available to absorb losses
from any portion of the loan portfolio. Management believes the December 31,
1997 consolidated reserve of 1.33% of total loans outstanding and
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 41
<PAGE> 45
249.51% of non-performing loans was adequate based on the risks identified at
such date in the loan portfolio and is not aware of any significant risks in
the loan portfolio due to concentrations within any particular industry.
The Corporation has no direct credit exposure to the Asian Pacific
Region and an insignificant exposure via its letters of credit business. No
Asian Pacific Region bonds are held in the trading or the investment
portfolios, and all foreign exchange transactions are done through a
correspondent bank headquartered in the United States. There are no
derivative transactions with any counterparty banks in Asia.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, renegotiated loans,
foreclosed property and investment securities with an impairment in value
that is considered other than temporary. A summary of these assets for the
past five years is presented in Exhibit 16. At year-end 1997, non-performing
loans (i.e., non-accrual and renegotiated) were $102,192,000 and represented
.53% of total loans. Foreclosed assets at December 31, 1997 were $17,373,000;
the ratio of non-performing loans and foreclosed assets to total loans plus
foreclosed assets was .62% at December 31, 1997. Both ratios are up slightly
from last year.
As noted in Exhibit 16, non-accrual loans increased by $30,955,000 from
last year-end. This was caused primarily by the addition of $20,392,000 from
the Roosevelt acquisition. The Roosevelt non-accrual loans are primarily
secured by residential real estate and historical losses are low. Non-accrual
loans are those for which, in the opinion of management, the timely or
ultimate collection of principal and/or interest is unlikely or problematic.
Note A to the Consolidated Financial Statements further details the
Corporation's policy on accounting for non-accrual loans. At December 31,
1997, the Corporation had only four non-accrual loans with balances exceeding
$2,000,000; the largest was less than $8,000,000, and the four had an average
balance of $4,500,000.
Renegotiated loans are those for which the terms have been restructured
beyond those available in the market, in order to aid the borrower by
providing a reduction or deferral of interest and/or principal.
Renegotiations usually result from a deterioration in the financial condition
of the borrower. Renegotiated loans were $4,278,000 compared with $5,260,000
at year-end 1996. All loans classified as renegotiated were paying in
accordance with the modified terms at December 31, 1997.
Loans past due 90 days or more and still accruing interest declined to
$20,295,000 from $33,960,000 at December 31, 1996. This classification
consists largely of credit card loans, residential real estate mortgage loans
and other consumer loans. Past due co-branded credit card loans that were
sold in the third quarter of 1997 totaled $15,422,000 as of June 30, 1997,
largely accounting for the decline in past due loans by their absence. The
Roosevelt acquisition added approximately $1,500,000 to the total.
Foreclosed assets were $17,373,000 at December 31, 1997 compared with
the prior year-end level of $16,771,000. Acquisitions added approximately
$9,000,000 to the Corporation's foreclosed asset totals. Foreclosed assets
consisted primarily of real estate and were recorded at the lower of cost or
fair value less estimated costs to sell. At year-end 1997, the carrying value
of all properties were less than appraised value and the Corporation had only
two foreclosed assets with a book value exceeding $1,000,000 and a cumulative
book value less than $3,000,000.
Roosevelt owned pools of privately issued adjustable-rate
mortgage-backed securities where the majority of the underlying collateral
was California residential real estate. The loan pools backing these
securities have been affected by high delinquency and foreclosure rates and
higher than anticipated losses on foreclosed property sales. As a result,
these securities are no longer investment grade and Roosevelt recorded an
"other than temporary" write-down of $27,100,000 on these securities during
1995. The current net book value of $30,355,000 is net of that 1995
write-down.
A second group of privately issued mortgage-backed securities was added
to impaired investment securities in the fourth quarter of 1997. The
Corporation has received less than full principal and interest payments on
these securities. The net book value of these securities was $54,351,000
after consideration of an acquisition-related write-down, and was also
included as an impaired investment security. Detailed credit due diligence
has been performed on the entire mortgage-backed security portfolio and no
further impairments existed at December 31, 1997. The current yield on the
net book value of all impaired securities is 9.71%.
42 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 46
<TABLE>
Exhibit 16
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NON-PERFORMING ASSETS December 31
-----------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS
Commercial $ 32,360 $21,577 $ 46,657 $ 9,813 $ 19,865
Real estate - commercial 15,895 15,739 18,595 14,382 29,521
Real estate - construction 1,948 1,346 4,573 567 1,549
Real estate - residential mortgage 40,860 23,272 18,415 10,035 12,333
Real estate - home equity credit loans 228 14 - 47 126
Consumer 6,623 5,011 4,628 2,619 2,532
- --------------------------------------------------------------------------------------------------------------------------
Total Non-accrual Loans 97,914 66,959 92,868 37,463 65,926
Renegotiated loans 4,278 5,260 3,203 6,847 14,647
- --------------------------------------------------------------------------------------------------------------------------
Total Non-performing Loans 102,192 72,219 96,071 44,310 80,573
==========================================================================================================================
FORECLOSED ASSETS
Foreclosed real estate 14,881 13,942 16,050 23,308 52,283
Other foreclosed assets 2,492 2,829 2,640 2,313 1,199
- --------------------------------------------------------------------------------------------------------------------------
Total Foreclosed Assets 17,373 16,771 18,690 25,621 53,482
==========================================================================================================================
Total Non-performing Loans and Foreclosed Assets 119,565 88,990 114,761 69,931 134,055
==========================================================================================================================
Impaired investment securities 85,887 1,240 1,240 1,240 1,240
- --------------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets<F1> $205,452 $90,230 $116,001 $71,171 $135,295
==========================================================================================================================
PAST DUE LOANS (90 DAYS OR MORE)<F2>
Commercial $ 4,846 $ 2,406 $ 1,052 $ 555 $ 160
Real estate - commercial 296 643 1,063 2,706 3,269
Real estate - construction - 147 414 3 -
Real estate - residential mortgage 3,187 3,432 4,871 5,553 1,963
Real estate - home equity credit loans 1,856 237 249 511 103
Consumer 4,699 5,487 2,738 1,347 968
Credit card 5,411 21,608 17,383 13,209 11,883
- --------------------------------------------------------------------------------------------------------------------------
Total Past-due Loans<F1> $ 20,295 $33,960 $ 27,770 $23,884 $ 18,346
==========================================================================================================================
RATIOS<F2>
Non-performing loans to outstanding loans .53% .48% .70% .35% .69%
Non-performing loans and foreclosed assets
to outstanding loans and foreclosed assets .62 .59 .84 .55 1.15
Non-performing assets to total assets .69 .41 .56 .37 .72
- --------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Excludes $37,677,000 of insured FHA and government-guaranteed VA loans
that were acquired primarily in the Roosevelt transaction and are
contractually past due more than 90 days. Since these loans are fully
insured or guaranteed for the payment of both principal and interest by
the U.S. Government, the Corporation does not consider these loans to be
non-performing assets, consistent with Roosevelt's past disclosure for
these loans.
<F2> Past-due loans 90 days or more are not included in non-performing assets
totals or ratios.
</TABLE>
<TABLE>
Exhibit 17
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTEREST NOT RECORDED ON NON-PERFORMING LOANS
-----------------------------------------------------------
(Thousands except per share data) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest not accrued $3,334 $4,486 $4,668 $3,900 $5,923
Less cash-basis income (165) (605) (320) (408) (359)
- --------------------------------------------------------------------------------------------------------------------------
Effect on Income Before Income Taxes $3,169 $3,881 $4,348 $3,492 $5,564
==========================================================================================================================
Effect on Net Income $2,060 $2,523 $2,826 $2,270 $3,617
==========================================================================================================================
Effect on Diluted Earnings per Share $ .02 $ .02 $ .02 $ .02 $ .03
==========================================================================================================================
Interest Collected Applied to Principal $ 619 $ 930 $1,242 $ 851 $2,984
==========================================================================================================================
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 43
<PAGE> 47
"Potential problem loans" at December 31, 1997 amounted to $60,640,000.
These are defined as loans and commitments not included in any of the two
basic non-performing loan categories discussed above or 90 days past due and
still accruing interest but for which management, through normal internal
credit review procedures, has developed information regarding possible credit
problems that could cause the borrowers future difficulties in complying with
present loan repayment terms. There were no loans classified for regulatory
purposes as loss, doubtful or substandard that were not included above or
that caused management to have serious doubts as to the ability of such
borrowers to comply with repayment terms. In addition, there were no material
commitments to lend additional funds to borrowers whose loans were classified
as non-performing.
OFF-BALANCE-SHEET RISK
In the normal course of business, there are various commitments and
contingent liabilities outstanding that are properly not recorded on the
balance sheet, such as letters of credit, commitments under operating leases,
commitments to extend credit and interest rate swaps, caps and floors. Many
of these arrangements are complementary to the loans, investments and deposits
that are accounted for on the balance sheet. The Corporation's activities in
foreign exchange and interest rate contracts continue to be minimal but up
from prior years. Mercantile offers these products as a financial
intermediary, and at present it makes very limited use of financial
derivatives to manage its own interest rate exposure. There were $85,585,000
in forward delivery contracts outstanding at December 31, 1997 that served as
hedges to the fixed-rate production in the residential loan pipeline.
In June 1997 (prior to the closing date of the acquisition), Roosevelt
unwound all but $225,000,000 of its notional value of interest rate caps,
interest rate floors and collars as hedges for its deposits and investment
portfolio. Six months earlier, Roosevelt had $3.9 billion in notional value
for derivatives. An additional $500,000,000 of swaps were contracted for in
June 1997 as converters of the newly issued senior and subordinated
fixed-rate debt to floating-rate equivalents.
Standby letters of credit and similar arrangements issued primarily to
support corporate obligations commit Mercantile to make payments on behalf of
customers contingent upon the occurrence of future specified events. Standbys
outstanding were primarily related to customer obligations, such as
industrial revenue financings, as well as other financial and
performance-related obligations. At December 31, 1997, the Corporation's
commitments under standbys aggregated $423,660,000, with $206,058,000 expiring
within one year, $118,479,000 expiring within one to five years and
$99,123,000 expiring after five years.
At year-end 1997, Mercantile subsidiary banks had outstanding unused
loan commitments of $6.1 billion, including $1.2 billion in credit card lines
and $623,838,000 in home equity credit lines. The remaining commitments were
largely to commercial customers in Mercantile's primary service area.
Management does not anticipate any losses that would materially affect
the financial condition or results of operations of the Corporation as a
result of such commitments and contingent liabilities. Note R to the
Consolidated Financial Statements provides further discussion pertaining to
these off-balance-sheet activities and provides information as to the
estimated fair values of all financial instruments, including
off-balance-sheet instruments.
OTHER INCOME
Non-interest income increased 12.2% during 1997 to $378,684,000. This follows
growth of 8.3% in 1996. Excluding non-interest income from the Roosevelt
purchase transaction and 1996 nonrecurring securities losses of $3,114,000,
other income grew by approximately 4%. Fee income earned from other 1996 and
1997 acquisitions accounted for as purchases was not material.
In addition to other income from Roosevelt and merger-related
securities losses, the second quarter of 1996 was favorably influenced by a
$10,000,000 gain on the sale of the Corporation's merchant processing
business. The last three quarters of 1996 each included $4,000,000 in
reimbursements for co-branded credit card start-up costs, while pre-tax gains
on the sale of leveraged leases of $3,542,000 were also included in the third
quarter 1996 results. The fourth quarter of 1996 included a $6,750,000 gain on
the sale of the Corporation's indenture trust and agency business.
44 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 48
<TABLE>
Exhibit 18
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OTHER INCOME
--------------------------------------------------
(Dollars in thousands) 1997 1996 Change 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust $ 96,055 $ 86,616 10.9% $ 77,115
Service charges 98,733 88,916 11.0 82,459
Investment banking and brokerage 35,070 32,244 8.8 28,445
Credit card fees 20,480 27,962 (26.8) 20,366
Securitization revenue 18,404 16,008 15.0 23,005
Mortgage banking 23,672 10,707 - 11,063
Letters of credit fees 5,814 8,462 (31.3) 7,243
Securities gains 6,985 3,031 - 4,338
Nonrecurring merger-related securities losses - (3,114) - -
Miscellaneous 73,471 66,648 10.2 57,615
- ------------------------------------------------------------------------------------------------------------------------
Total Other Income $378,684 $337,480 12.2 $311,649
========================================================================================================================
</TABLE>
In the first quarter of 1997, a $2,300,000 gain was recognized on the
sale of Mark Twain's merchant credit card processing business and a
$2,200,000 gain was realized under FAS 125 for investor certificate loans
that were sold and transferred to the investment portfolio. In the fourth
quarter of 1997, a $3,277,000 gain on the sale of mortgage servicing rights
was realized. Additionally, securities gains of $6,985,000 were recorded in
1997. Excluding these items as well, non-interest income grew by $64,854,000
or 21.7% in 1997. Roosevelt accounted for approximately one-third of this
growth with the mortgage banking and service charge income it added.
In 1997, trust fees were $96,055,000 compared with $86,616,000 during
1996, an increase of 10.9% following growth of 12.3% in 1996. Personal trust
fees earned by Mercantile Trust Company N.A. were the largest source of trust
revenue and increased 21.1% from last year. Income from Mississippi Valley
Advisors Inc., the investment management subsidiary of Mercantile, rose by
29.7%. Mississippi Valley Advisors Inc. manages 17 proprietary mutual funds -
the ARCH funds, which had assets of $3.9 billion at December 31, 1997, an
increase of 36.3% over last year-end. Increases in the value of assets
managed and successful new business development efforts largely accounted for
the 1997 growth in trust fees. The net proceeds from the sale of Mercantile's
indenture trust and agency business in the fourth quarter of 1996
at a gain of $6,750,000 are reflected in miscellaneous income. Indenture
trust and agency fee business totaled $3,381,000 in 1996 prior to sale.
Excluding it, trust fees are up 15.4% in 1997.
At December 31, 1997, the Corporation held $20.5 billion in assets under
investment management and $9.4 billion additional assets under custodial
relationships, increases of 6.4% and 3.7%, respectively, from year-end 1996.
Service charge income of $98,733,000 was up $9,817,000 or 11.0% in 1997
following growth of 7.8% in 1996. Roosevelt added approximately $13,500,000
to the Corporation's deposit service charges during the last half of 1997,
thereby accounting for the 1997 growth.
Mortgage banking income increased by $12,965,000, more than double
either 1996 or 1995 fees. Mortgages serviced totaled $12.5 billion at
December 31, 1997 compared with $5.9 billion at December 31, 1996. Roosevelt
added $8.4 billion to servicing volume, which increased servicing fees by
approximately $5,600,000 in the second half of 1997. Total originated and
purchased mortgage servicing assets on the balance sheet at year-end 1997
were $50,653,000. The associated risk for impairment was not considered to be
material, although the current rate environment could accelerate refinancing
activity and cause quicker amortization. The Corporation sold $1.9 billion in
loan servicing in January 1998, which will reduce originated mortgage
servicing assets by approximately $3,200,000 and result in an estimated gain
of $23,000,000. This sale is consistent with the Corporation's goals to
"right size" the servicing portfolio as servicing operations are consolidated
in Nevada, Missouri, during 1998, although servicing may be purchased in the
future if financial terms are deemed favorable. The sale will
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 45
<PAGE> 49
lower the prepayment risk associated with the servicing portfolio, and the
gain is expected to fund the Corporation's systems cost to become Year 2000
compliant by the end of 1998.
Investment banking and brokerage fees were $35,070,000 compared with
$32,244,000 last year, an increase of 8.8%. 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. Foreign exchange
revenue increased by $1,200,000 due to better cross-selling of this service.
There was a substantial decline in commission income earned on fixed income
securities in 1997, due mainly to the yield curve. If approximately
$3,600,000 in revenue attributable to Roosevelt for the last six months of
1997 is excluded, investment banking and brokerage revenue was down $774,000
or 2.4% for 1997.
For the year ended December 31, 1997, credit card income was
$20,480,000 or 26.8% lower than the comparable 1996 period and even with 1995
reported results. Credit card income primarily represents interchange fees
received on transactions of Mercantile cardholders and cardholders'
miscellaneous fees. The right to fee income related to Mercantile's merchant
processing business was sold late in the second quarter of 1996. The
comparable Mark Twain operation was sold in the first quarter of 1997.
Transaction-based rebates paid to co-branded and MercRewards VISA(R)
cardholders were netted against credit card fee income; these rebates totaled
$3,381,000 in 1997 versus $22,388,000 in 1996. By terms of its sale agreement,
Mercantile was reimbursed in the fourth quarter of 1997 for its cost to service
the co-branded cards that were sold effective September 25, 1997. These fees
were netted against the operating expenses.
Securitization revenue in 1997 was $18,404,000 compared with
$16,008,000 last year and $23,005,000 in 1995, and represents amounts
accruing to Mercantile on the $400,000,000 in credit card loans securitized
in the 1995 Mercantile Credit Card Master Trust as well as amounts recognized
under FAS 125 for investor certificate loans that were sold and reclassified
to the investment portfolio. No former co-branded loans were included in the
trust. For securitized loans, amounts that would otherwise have been reported
as interest income, interest expense, credit card fees and provision for loan
losses are instead netted in non-interest income as securitization revenue.
Because credit losses are absorbed against credit card servicing income over
the life of these transactions, such income may vary depending upon the
credit performance of the securitized loans. Mercantile acts as servicing
agent and receives loan servicing fees equal to 2% 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.
Letters of credit fees declined by 31.3% in 1997 following 16.8% growth
last year. The loss of a large customer as well as more selective servicing
of the retail industry contributed to the 1997 decline of import letters of
credit fees.
Miscellaneous income of $73,471,000 was 10.2% higher than in 1996.
Excluding the one-time gains from both years previously mentioned,
year-to-date miscellaneous income increased by 41.7% over 1996. Significant
revenue items in 1997 included a $9,800,000 growth in cash management fees,
$1,300,000 of loan syndication fees and growth in debit card and ATM fees.
Securities gains of $6,985,000 were realized on the sale of
available-for-sale investment securities during 1997 compared with $3,031,000
in gains last year, after excluding the $3,114,000 in 1996 securities losses
incurred by newly acquired banks in portfolio restructurings.
In the first quarter of 1998, the Corporation believes it will complete
the sales of its document custody business at a slight loss and the former
Mark Twain trustee and indenture business at an estimated $2,000,000 gain.
OTHER EXPENSE
Expenses other than interest expense and the provision for possible loan
losses for 1997 were $894,780,000, an increase of 24.5% from 1996, which was
up 12.2% from 1995. Included in 1997 was $121,393,000 in expenses, largely
associated with the Mark Twain and Roosevelt mergers, for: 1) investment
banking and other professional services; 2) change in control and severance
payments; 3) contract penalties; 4) a loss incurred on the sale of
unnecessary Roosevelt interest rate floors; 5) write-downs of duplicative
branches and equipment held for sale to
46 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 50
fair market value; 6) transition and duplicative costs related to systems,
etc.; and 7) other adjustments to conform accounting policies to those of
Mercantile. In 1996, nonrecurring merger-related expense of a similar nature
totaled $51,071,000. In addition, a special SAIF assessment of $12,385,000 was
also recorded.
On September 25, 1997, the Corporation announced the sale of its former
co-branded credit card loans. The terms of the sale contract resulted in a
pre-tax loss of $50,000,000, which represented the discount on the loan
balances, a write-off of an intangible asset associated with the cards,
investment banking fees and accruals for severance and other expenses.
Adjusted other expense, which excludes the nonrecurring merger-related
costs, the co-branded credit card loss and the September 1996 special SAIF
assessment, was $723,387,000 for 1997 compared with $655,212,000 in 1996, an
increase of $68,175,000 or 10.4%. Adjusted other expense as a percentage of
average assets improved to 2.78% versus 3.11% in 1996. The efficiency ratio,
defined as adjusted operating expenses as a percentage of taxable-equivalent
net interest income and other income, was 55.04% compared with 55.30% last
year. Operating expense from the Roosevelt acquisition and from other 1996
and 1997 acquisitions accounted for as purchases increased the Corporation's
expenses by approximately $50,000,000. If such expenses from acquired
entities are excluded from the adjusted total, non-interest expense for 1997
was approximately 2.8% higher than last year, and the increase in customers
and transactions accounted for most of the increase.
Personnel expense increased by $49,153,000 or 13.4% during 1997 as
salaries rose by $42,971,000 or 14.5% and employee benefit costs grew by
$6,182,000 or 9.0%. Roosevelt salaries for the last six months of 1997 were
estimated to be $12,500,000. Temporary help salaries, largely via contract
programmers working on the Year 2000 effort, were $7,282,000. Incentive
compensation increased by $8,752,000 from last year as Mercantile
continues to move toward more performance-based compensation. Expense of
$5,100,000 was incurred on compensation plans indexed to the market value of
Mercantile common stock, which increased by 79.6% in 1997. The remaining
increase was due to merit increases and the 1997 salaries incurred in other
acquisitions.
Employee benefit costs grew at a lower rate than salaries and are
indicative of the Corporation's efforts in controlling benefit costs,
especially medical expenses. In 1997, Mercantile lowered the discount rate
used in pension and postretirement actuarial assumptions by .25%
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 47
<PAGE> 51
<TABLE>
Exhibit 19
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OTHER EXPENSE
----------------------------------------------------
(Dollars in thousands) 1997 1996 Change 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries $339,683 $296,712 14.5% $282,433
Employee benefits 75,199 69,017 9.0 63,723
- ---------------------------------------------------------------------------------------------------------------------------
Total Personnel Expense 414,882 365,729 13.4 346,156
Net occupancy 55,040 49,428 11.4 47,383
Equipment 63,718 54,287 17.4 48,513
Postage and freight 24,616 24,326 1.2 21,598
Marketing/business development 16,837 12,663 33.0 16,541
Office supplies 13,962 13,393 4.2 13,734
Communications 14,894 12,547 18.7 12,097
Legal and professional 11,904 12,192 (2.4) 14,765
Credit card 11,260 15,890 (29.1) 12,081
FDIC insurance 3,334 15,869 (79.0) 20,263
Foreclosed property expense (recoveries) (5,201) (899) - 2,747
Intangible asset amortization 38,001 12,026 - 10,194
Miscellaneous 60,140 67,761 (11.2) 74,447
- ---------------------------------------------------------------------------------------------------------------------------
Total Before Nonrecurring Expense 723,387 655,212 10.4 640,519
Nonrecurring merger-related expense 121,393 51,071 - -
Loss on the sale of credit card loans 50,000 - - -
Nonrecurring FDIC insurance - 12,385 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Expense $894,780 $718,668 24.5% $640,519
===========================================================================================================================
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 47
<PAGE> 52
to 7.25%, reflecting the reduction in long-term interest rates at the end of
1997. This will have an immaterial yet unfavorable impact on 1998 pension
costs.
Occupancy and equipment costs grew by 14.5% during 1997, reflecting the
addition of Roosevelt's expenses, the costs of maintaining 55 additional
offices in 1997 and a consistent program of investing in new technology to
improve customer service and enhance employee efficiency. Examples include a
new deposit accounting system and a new mortgage origination system as well as
a new debit card product, data warehouse and ATM surcharging capabilities.
Total capital expenditures were $113,920,000, $67,837,000 and $62,828,000 in
1997, 1996 and 1995, respectively.
The major components of all other operating expenses for the past three
years are shown in Exhibit 19. Marketing and business development expense in
1997 was $16,837,000, which is $4,174,000 or 33.0% more than in the same
period of 1996. In the third quarter of 1997, Mercantile initiated a
corporate-wide image advertising program that will run into 1998. Credit card
fees declined by $4,630,000 or 29.1%, due primarily to the absence of the
costs associated with the merchant processing businesses and the co-branded
credit cards that were sold. The reduced rate of growth in postage and office
supplies was also due to the absence of those business lines. Net recoveries
related to foreclosed property were $5,201,000 in 1997 compared with
recoveries of $899,000 in 1996. Also during the second half of 1997, there was
a reduction of miscellaneous expense of $11,835,000 realized by gains on the
sales of selected non-strategic Mercantile offices. The comparable gains
in 1996 and 1995 were $2,965,000 and $1,785,000, respectively. The
miscellaneous expense reduction on branch sale gains excludes those Roosevelt
office sales necessitated by anti-trust laws, which reduced the goodwill
amount associated with the Roosevelt acquisition.
Intangible asset amortization was $38,001,000 in 1997 versus $12,026,000
in 1996. The increase was caused by additional amortization on goodwill
recorded in 1996 and 1997 purchase acquisitions that are being amortized using
the straight-line method over 15 years. The Roosevelt purchase acquisition
increased goodwill by $608,076,000.
In 1996, Mercantile organized a formal program to address the
implications of the Year 2000. Mercantile has completed the assessment,
analysis and planning phases and is well into the execution phase of the
project. It is the goal of the program to have all mission critical systems
2000 compliant by January 1, 1999.
Year-to-date total expense in 1997 of $9,415,000 was incurred to ensure
that systems are ready for the date transition, and it is expected that the
Corporation will expend between $15,000,000 and $20,000,000 in 1998 to
substantially complete this project. Thus a total budget of $30,000,000 is
currently the best total cost estimate, and the previously mentioned gain on
the sale of mortgage servicing in the first quarter of 1998 will be used
to fund the 1998 expense. All such costs are expensed as incurred, and
approximately 47% of business and system applications are in compliance and
ready for testing at December 31, 1997. Mercantile believes that the largest
risk associated with this effort is vendor compliance. All vendors have been
contacted and all critical vendor application systems are promised to be
delivered in time to meet the date goal of January 1, 1999.
INCOME TAXES
Mercantile records a provision for income taxes currently payable and for
income taxes payable in the future that arise due to temporary differences in
the recognition of certain items for financial statement and income tax
purposes. For the year ended December 31, 1997, the Corporation recorded
income tax expense of $120,506,000 compared with $128,535,000 in 1996 and
$149,898,000 in 1995. The effective tax rate for 1997 was 37.07% compared with
34.39% last year and 34.84% in 1995. Income tax benefits relating to
nonrecurring charges totaled $59,356,000 in 1997 and $23,697,000 in the prior
year, resulting in year-to-date adjusted income tax expense for 1997 of
$179,862,000 versus $152,232,000 in 1996.
The Corporation's year-to-date adjusted effective tax rate increased
from 33.53% in 1996 to 34.80% in 1997. This higher effective tax rate was
primarily caused by nondeductible goodwill amortization from the Roosevelt
acquisition and a lower level of tax-exempt income, partially offset by a
reduction in state and local taxes resulting from the benefits of captive
real estate investment
48 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 53
trusts and mergers, the realization of state and federal tax credits and
benefits recorded due to the resolution of certain tax uncertainties.
A three-year summary of significant income tax data is presented in Note M
to the Consolidated Financial Statements, which provides an analysis of deferred
income taxes as well as a reconciliation between the amount of taxes computed
using the statutory rate and the amount actually recorded. As disclosed,
Mercantile had a net deferred tax asset of $70,007,000 at December 31, 1997. Due
to the significant amount of taxes paid for the past three years and the
forecasted taxes payable for 1998, no valuation reserve for the deferred tax
asset is deemed necessary. The Corporation currently has no operating loss
carryforwards, and federal returns have been examined through 1994 by the
Internal Revenue Service.
FOURTH QUARTER RESULTS
Mercantile earned $94,763,000 in the fourth quarter of 1997, a 17.1% increase
from the $80,927,000 earned in the same period last year. Basic earnings per
share increased to $.73 from $.70 the prior year. Diluted earnings per share
was $.71 in the fourth quarter of 1997 versus $.69 in 1996. The fourth quarter
of 1996 included nonrecurring after-tax merger-related costs related to
acquisitions that reduced both basic and diluted earnings per share by $.07.
One-time favorable items in the fourth quarter of 1996 included the
final $4,000,000 co-branded credit card start-up cost reimbursement and the
$6,750,000 indenture trust and agency sale gain. One-time favorable items in
the current quarter include a $6,041,000 gain on the sale of a building in
St. Louis county that housed the staff of the credit card and mortgage
operations of the Corporation, a $3,277,000 gain on the sale of mortgage
servicing and $2,383,000 in gains on the sale of the two non-strategic branch
locations. These favorable items were partially offset by $3,773,000 of costs
incurred on the Year 2000 effort, advertising costs incurred in Mercantile's
"Power of Partnership" campaign and $2,000,000 of expense incurred on
compensation plans that are indexed to the price of the Corporation's stock.
Additionally, the Corporation's earnings were positively impacted in both
periods by a lower effective tax rate due to the consolidation of bank
charters, the creation of special purpose subsidiaries and the resolution of
certain tax uncertainties. Exhibit 20 presents condensed quarterly financial
data for the last two years.
Net interest income improved by 12.9% to $240,846,000 as the volume of
average earning assets increased by 36.7%, due primarily to acquisitions. The
net interest rate margin declined to 3.58% from 4.36% last year, which was
caused largely by the Roosevelt acquisition as previously discussed. Average
loan volume was up $4.6 billion or 31.2%. The commentary on Net Interest
Income on page 28 provides more details on the dynamics of net interest income
and the net interest rate margin.
The provision for possible loan losses for the fourth quarter was
$5,693,000 compared with $15,100,000 the prior year, which included
nonrecurring merger-related provision of $2,815,000. Net charge-offs declined
to $7,971,000 or .17% of average loans for the quarter compared with the
year-earlier $24,981,000 or .68%. The lower provision and charge-offs in 1997
were due largely to the 67.4% decline in average credit card loans and a
$3,600,000 recovery received on a commercial real estate loan.
Other income grew by $4,006,000 or 4.2% from the fourth quarter of
1996. Strong results in the trust business as well as the favorable impact of
the Roosevelt acquisition on deposit service charges and mortgage banking
fees were partially offset by declines in credit card fees, securitization
revenue, securities gains, letters of credit fees and the one-time gains
noted above. A detailed explanation of the year-over-year increase in other
income is included on page 44.
Other operating expenses of $192,376,000 were up $15,669,000 or 8.9%
from a year ago, which included $9,393,000 of nonrecurring merger-related
charges. Excluding these charges, operating expenses grew by 15.0% due to the
impact of the Roosevelt transaction and the Year 2000 costs, partially offset
by the recoveries discussed above.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 49
<PAGE> 54
<TABLE>
Exhibit 20
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
QUARTERLY FINANCIAL SUMMARY
--------------------------------------------------------------------------------------------------
1996 1997
--------------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Basic earnings per share $ .14 $ .67 $ .61 $ .70 $ .65 $ .29 $ .02 $ .73
Diluted earnings per share .14 .66 .60 .69 .64 .28 .02 .71
Dividends declared .273 .273 .273 .273 .287 .287 .287 .287
Book value at period-end 15.99 16.08 16.05 16.74 16.50 15.85 18.07 18.47
Market price at period-end 30-1/2 29-11/16 34-11/16 34-1/4 35-5/16 40-1/2 50-3/4 61-1/2
OPERATING RESULTS (Thousands)
Taxable-equivalent net
interest income $204,717 $211,619 $210,640 $217,330 $215,818 $219,577 $255,875 $244,320
Tax-equivalent adjustment 4,179 4,061 4,023 4,090 3,857 4,014 3,741 3,474
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 200,538 207,558 206,617 213,240 211,961 215,563 252,134 240,846
Provision for possible loan losses 34,149 11,152 12,614 15,100 18,443 27,695 27,478 5,693
Other income 69,795 87,716 84,554 95,415 88,100 87,927 103,236 99,421
Other expense 203,696 162,845 175,420 176,707 165,595 220,475 316,334 192,376
Income taxes 15,403 43,216 33,995 35,921 41,028 23,141 8,902 47,435
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 17,085 $ 78,061 $ 69,142 $ 80,927 $ 74,995 $ 32,179 $ 2,656 $ 94,763
====================================================================================================================================
AVERAGE BALANCE SHEET (Millions)
Total assets $ 20,803 $ 21,107 $ 20,953 $ 21,397 $ 21,761 $ 22,369 $ 29,934 $ 29,794
Earning assets 19,174 19,384 19,411 19,837 20,073 20,477 27,328 27,113
Loans and leases 13,787 13,860 14,077 14,625 14,992 15,289 19,550 19,181
Deposits 16,280 17,102 16,840 16,935 17,151 17,461 22,271 21,975
Shareholders' equity 1,954 1,884 1,837 1,898 1,920 1,821 2,427 2,392
SELECTED RATIOS
Return on assets .33% 1.48% 1.32% 1.51% 1.38% .58% .04% 1.27%
Return on equity 3.49 16.57 15.06 17.05 15.63 7.07 .44 15.85
Efficiency ratio 74.20 54.40 59.43 56.50 54.49 71.70 88.09 55.97
Other expense to average assets 3.91 3.09 3.35 3.30 3.04 3.94 4.23 2.58
Tangible equity to tangible assets 8.45 8.45 8.03 8.05 7.70 7.00 5.26 5.50
Equity to assets 8.99 8.99 8.58 8.83 8.52 7.80 7.85 8.05
Tier I capital to risk-adjusted
assets 11.89 11.81 11.12 11.00 11.29 10.38 8.66 8.84
Total capital to risk-adjusted
assets 14.70 14.60 13.87 13.68 13.92 14.19 12.06 12.05
Leverage 8.37 8.30 8.03 8.12 8.48 7.80 5.88 6.15
Loans to deposits (Average) 84.69 81.04 83.59 86.36 87.41 87.56 87.78 87.29
Reserve for possible loan losses
to outstanding loans 1.75 1.70 1.64 1.54 1.52 1.52 1.35 1.33
Reserve for possible loan losses
to non-performing loans 271.46 327.33 356.05 318.99 273.18 285.57 221.85 249.51
Non-performing loans
to outstanding loans .65 .52 .46 .48 .57 .53 .61 .53
Net interest rate margin 4.28 4.39 4.32 4.36 4.36 4.30 3.71 3.58
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 55
MANAGEMENT REPORT ON
CONSOLIDATED FINANCIAL
STATEMENTS
The management of Mercantile Bancorporation Inc. is responsible for the
preparation and the integrity and objectivity of the accompanying financial
statements. The financial statements necessarily include amounts that are
based on management's best estimates and judgments. Future economic
conditions and events, and the economic prospects of the Corporation's
borrowers, create the possibility that such estimates and judgments may be
subject to review and revision.
The Corporation maintains an accounting system and related internal
controls that have been deemed sufficient to provide reasonable assurance
that the financial records are reliable for preparing the financial
statements and maintaining accountability for assets. The concept of
reasonable assurance is based upon the recognition that the cost of a system
of internal controls must be related to the benefits derived, and that the
balancing of those factors requires estimates and judgments. The system of
internal controls includes written policies and procedures, proper delegation
of authority, and segregation of duties. In addition, written Standards of
Conduct adopted by the Corporation help to ensure the highest standards of
ethical conduct by all employees. Management continually monitors compliance
with the system of internal controls, primarily through an extensive program
of internal audits. The system of internal controls and compliance therewith
are considered by independent auditors, in accordance with generally accepted
auditing standards, to the extent necessary to render an opinion on the
financial statements, and by regulatory examiners.
The financial statements were audited by KPMG Peat Marwick LLP,
independent auditors, in accordance with generally accepted auditing
standards. Their independent professional opinion on the Corporation's
financial statements is presented herein.
/s/ Thomas H. Jacobsen /s/ John Q. Arnold
Thomas H. Jacobsen John Q. Arnold
Chairman of the Board, Vice Chairman and
President and Chief Executive Chief Financial Officer
Officer
INDEPENDENT
AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
MERCANTILE BANCORPORATION INC:
We have audited the accompanying 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. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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.
In our opinion, the 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.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
January 21, 1998
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 51
<PAGE> 56
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME Year Ended December 31
--------------------------------------------------------
(Thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $1,464,844 $1,229,656 $1,201,046
Investments in debt and equity securities
Trading 7,069 3,597 3,434
Taxable 361,598 280,174 264,857
Tax-exempt 20,212 22,571 25,141
- ------------------------------------------------------------------------------------------------------------------------
Total Investments in Debt and Equity Securities 388,879 306,342 293,432
Due from banks - interest bearing 9,683 4,107 2,487
Federal funds sold and repurchase agreements 14,788 12,758 19,191
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Income 1,878,194 1,552,863 1,516,156
INTEREST EXPENSE
Interest bearing deposits 714,880 593,488 567,781
Foreign deposits 26,178 10,501 13,088
Short-term borrowings 149,545 81,399 94,457
Bank notes 10,537 15,333 13,674
Long-term debt and mandatorily redeemable preferred securities 56,550 24,189 26,466
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 957,690 724,910 715,466
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income 920,504 827,953 800,690
PROVISION FOR POSSIBLE LOAN LOSSES<F*> 79,309 73,015 41,533
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 841,195 754,938 759,157
OTHER INCOME
Trust 96,055 86,616 77,115
Service charges 98,733 88,916 82,459
Investment banking and brokerage 35,070 32,244 28,445
Credit card fees 20,480 27,962 20,366
Securitization revenue 18,404 16,008 23,005
Mortgage banking 23,672 10,707 11,063
Securities gains (losses)<F*> 6,985 (83) 4,338
Miscellaneous 79,285 75,110 64,858
- ------------------------------------------------------------------------------------------------------------------------
Total Other Income 378,684 337,480 311,649
OTHER EXPENSE
Salaries 339,683 296,712 282,433
Employee benefits 75,199 69,017 63,723
Net occupancy 55,040 49,428 47,383
Equipment 63,718 54,287 48,513
Intangible asset amortization 38,001 12,026 10,194
Loss on the sale of credit card loans<F*> 50,000 - -
Miscellaneous<F*> 273,139 237,198 188,273
- ------------------------------------------------------------------------------------------------------------------------
Total Other Expense 894,780 718,668 640,519
- ------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 325,099 373,750 430,287
INCOME TAXES<F*> 120,506 128,535 149,898
- ------------------------------------------------------------------------------------------------------------------------
Net Income<F*> $ 204,593 $ 245,215 $ 280,389
========================================================================================================================
PER SHARE DATA
Basic earnings per share $ 1.68 $ 2.11 $ 2.41
Diluted earnings per share 1.65 2.08 2.37
Dividends declared 1.148 1.092 .88
- ------------------------------------------------------------------------------------------------------------------------
<FN>
<F*>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 consolidated financial statements are an integral
part of these statements.
</TABLE>
52 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 57
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED BALANCE SHEET December 31
-------------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,171,727 $ 1,296,053 $ 1,268,295
Due from banks - interest bearing 240,578 96,453 51,056
Federal funds sold and repurchase agreements 292,384 265,498 278,998
Investments in debt and equity securities
Trading 70,486 31,272 67,256
Available-for-sale (Amortized cost of
$7,192,818, $4,139,525 and $4,611,711,
respectively) 7,225,638 4,149,674 4,652,887
Held-to-maturity (Estimated fair value of
$252,135, $567,152 and $245,355,
respectively) 249,434 565,045 244,094
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Debt and Equity
Securities 7,545,558 4,745,991 4,964,237
Loans held-for-sale 85,790 66,373 94,877
Loans and leases, net of unearned income 19,114,127 14,886,257 13,607,949
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 19,199,917 14,952,630 13,702,826
Reserve for possible loan losses (254,983) (230,372) (232,288)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Loans and Leases 18,944,934 14,722,258 13,470,538
Bank premises and equipment 464,683 367,311 329,834
Intangible assets 807,666 186,181 117,110
Other assets 487,881 350,634 403,331
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $29,955,411 $22,030,379 $20,883,399
====================================================================================================================================
LIABILITIES
Deposits
Non-interest bearing $ 3,586,011 $ 3,003,972 $ 2,594,734
Interest bearing 17,908,477 14,080,592 13,367,748
Foreign 585,439 251,887 209,170
- ------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 22,079,927 17,336,451 16,171,652
Federal funds purchased and repurchase
agreements 1,991,289 1,781,011 1,716,909
Other short-term borrowings 1,474,533 206,253 212,558
Bank notes 175,000 175,000 250,000
Long-term debt 1,319,153 304,831 344,097
Company-obligated mandatorily redeemable
preferred securities of Mercantile Capital
Trust I 150,000 - -
Other liabilities 355,340 281,182 272,690
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 27,545,242 20,084,728 18,967,906
Commitments and contingent liabilities - - -
----------------------------------
1997 1996 1995
SHAREHOLDERS' EQUITY ----------------------------------
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 130,670 118,821 118,886 1,307 594,107 594,430
Capital surplus 940,197 34,956 88,284
Retained earnings 1,451,455 1,392,218 1,255,848
Valuation on available-
for-sale securities 23,215 8,571 25,335
Treasury stock, at cost 162 2,591 2,070 (6,005) (84,201) (60,557)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,410,169 1,945,651 1,915,493
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $29,955,411 $22,030,379 $20,883,399
====================================================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 53
<PAGE> 58
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------
Common Stock
-------------------------
Total
Outstanding Preferred Capital Retained Treasury Shareholders'
(Dollars in thousands) Shares Dollars Stock Surplus Earnings<F*> Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 112,639,878 $ 563,901 $ 12,153 $ 46,083 $1,023,556 $ (2,954) $1,642,739
Net income 280,389 280,389
Common dividends declared:
Mercantile Bancorporation Inc., $.88
per share (68,542) (68,542)
Pooled companies prior to acquisition (32,235) (32,235)
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 58,143 58,143
Purchase of treasury stock (3,096,900) (85,474) (85,474)
Pre-merger transactions of
pooled companies and other 199,972 1,000 2,300 3,300
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 116,815,628 594,430 12,153 88,284 1,281,183 (60,557) 1,915,493
Net income 245,215 245,215
Common dividends declared:
Mercantile Bancorporation Inc.,
$1.092 per share (101,499) (101,499)
Pooled companies prior to acquisition (20,099) (20,099)
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 (17,217) (17,217)
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 325,344 1,626 (2,345) 359 (59) (419)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 116,229,704 594,107 - 34,956 1,400,789 (84,201) 1,945,651
Net income 204,593 204,593
Common dividends declared:
Mercantile Bancorporation Inc.,
$1.148 per share (132,535) (132,535)
Pooled company prior to acquisition (12,812) (12,812)
Issuance of common stock in acquisitions of:
Roosevelt Financial Group, Inc. 18,948,884 123 353,128 6,872 280,981 641,104
Regional Bancshares, Inc. 900,625 (474) 361 28,813 28,700
Change in par value of common stock from
$5.00 per share to $.01 per share (587,001) 587,001 -
Issuance of common stock for:
Employee incentive plans 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 7,137 7,137
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 company and other 228,150 1,072 1,888 265 (168) 3,057
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 130,508,090 $ 1,307 $ - $940,197 $1,474,670 $ (6,005) $2,410,169
====================================================================================================================================
<FN>
<F*>Includes valuation on available-for-sale securities.
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
54 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 59
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31
-------------------------------------------
(Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 204,593 $ 245,215 $ 280,389
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for possible loan losses 79,309 73,015 41,533
Depreciation and amortization 55,528 45,579 43,238
Provision for deferred income tax credits (9,776) (23,948) (14,571)
Net change in loans held-for-sale (19,417) 28,504 (73,494)
Net change in trading securities (53,059) 32,807 (30,670)
Net change in accrued interest receivable (2,312) 11,285 (9,687)
Net change in accrued interest payable 34,219 (12,941) 30,273
Other, net 53,461 87,969 21,800
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 342,546 487,485 288,811
INVESTING ACTIVITIES
Investments in debt and equity securities, other than trading securities
Purchases (3,282,184) (1,651,663) (1,323,080)
Proceeds from maturities 2,675,999 1,786,199 1,384,546
Proceeds from sales of available-for-sale securities 708,503 305,961 237,086
Net change in loans and leases (527,541) (786,454) (1,014,059)
Purchases of loans and leases (442,154) (141,600) (128,361)
Proceeds from sales of loans and leases 694,557 255,043 759,626
Purchases of premises and equipment (113,920) (67,837) (62,828)
Proceeds from sales of premises and equipment 19,351 4,928 8,279
Proceeds from sales of foreclosed property 44,564 31,212 25,656
Cash and cash equivalents from acquisitions, net of cash paid (received) (273,175) 57,152 45,935
Sale of banking offices, net of cash paid (193,058) (12,154) 1,191
Other, net 20,485 19,167 8,637
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (668,573) (200,046) (57,372)
FINANCING ACTIVITIES
Net change in consumer certificates under $100,000 (744,726) (395,839) 269,543
Net change in time certificates $100,000 and over (84,950) (5,620) 204,535
Net change in other time deposits (94,880) 192,526 446
Net change in foreign deposits 333,552 42,717 (9,965)
Net change in other deposits 107,484 371,640 (141,670)
Net change in short-term borrowings 193,591 2,702 (154,084)
Issuance of bank notes - 25,000 150,000
Principal payments on bank notes - (100,000) -
Issuance of long-term debt 954,000 2,607 14,676
Issuance of company-obligated mandatorily
redeemable preferred securities 150,000 - -
Principal payments on long-term debt (11,594) (37,413) (31,320)
Cash dividends paid (145,347) (122,006) (101,797)
Net proceeds from issuance of common stock from employee
incentive plans and pre-merger transactions of pooled companies 13,881 (18,554) (525)
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 372,712 (227,784) 118,376
- --------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 46,685 59,655 349,815
Cash and Cash Equivalents at Beginning of Year 1,658,004 1,598,349 1,248,534
- --------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 1,704,689 $ 1,658,004 $ 1,598,349
==========================================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 55
<PAGE> 60
NOTES TO 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 Consolidated Financial Statements include the accounts of
Mercantile Bancorporation Inc. and its subsidiaries. Material intercompany
transactions are eliminated.
Restatement: Effective April 25, 1997, the Corporation acquired Mark
Twain Bancshares, Inc. ("Mark Twain") in a transaction accounted for as a
pooling-of-interests. Accordingly, prior period financial statements have been
restated as if the combining entities had been consolidated for all periods
presented.
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 Consolidated Financial
Statements.
FAS 130, "Reporting Comprehensive Income," was issued in June 1997.
Comprehensive income is defined as net income plus certain items that are
recorded directly to shareholders' equity, such as unrealized gains and
losses on available-for-sale securities. Components of the Corporation's
comprehensive income will be included in a financial statement that has the
same prominence as other financial statements starting in the first quarter of
1998. FAS 130's disclosure requirements will have no impact on Mercantile's
financial condition or results of operations.
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.
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 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.
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
Consolidated Statement of Income only if market valuation differences are
deemed to be other than temporary impairments in value.
56 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 61
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
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 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.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 57
<PAGE> 62
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 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
Consolidated Balance Sheet (e.g., due to sale), the remaining gain or loss
related to the 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
Consolidated Statement of Income.
Mercantile has entered into foreign exchange forward contracts,
primarily to facilitate customers' foreign exchange requirements. The
Corporation maintains a generally matched position; therefore, exchange rate
and market risks are minimal. Credit risk to the Corporation could result
from non-performance by a counterparty to a contract. Credit risk is managed
as indicated in the previous paragraph. Unrealized gains and losses on these
foreign exchange forward contracts are reflected in the Consolidated
Statement of Income.
NOTE B - 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.
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 as prescribed by FAS 128
are as follows:
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31
(Thousands except ---------------------------------------------------------
per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
Net income $204,593 $245,215 $280,389
Preferred stock
dividends - (408) (1,020)
- -------------------------------------------------------------------------------------------------------------------------
Net income
attributable
to common
shareholders' equity $204,593 $244,807 $279,369
=========================================================================================================================
Weighted average
common shares
outstanding 121,933,113 115,938,311 115,754,877
=========================================================================================================================
Basic Earnings
per Share $ 1.68 $ 2.11 $ 2.41
=========================================================================================================================
DILUTED
Net income
attributable
to common
shareholders' equity $204,593 $244,807 $279,369
Interest on convertible
notes, net of taxes 83 120 398
- -------------------------------------------------------------------------------------------------------------------------
Diluted Net Income $204,676 $244,927 $279,767
=========================================================================================================================
Weighted average
common shares
outstanding 121,933,113 115,938,311 115,754,877
Employee
incentive plans 2,268,696 1,557,043 1,447,980
Convertible notes 136,605 294,419 856,356
- -------------------------------------------------------------------------------------------------------------------------
Diluted Weighted
Average Common
Shares Outstanding 124,338,414 117,789,773 118,059,213
=========================================================================================================================
Diluted Earnings
per Share $ 1.65 $ 2.08 $ 2.37
=========================================================================================================================
</TABLE>
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.
58 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 63
NOTE C - ACQUISITIONS
Listed below are the acquisitions completed by Mercantile during the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Original Consideration
Intangible ----------------------- Accounting
(Dollars in thousands) Date Assets Asset Cash Gross Shares Method
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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<F1>
Southwest Bancshares, Inc. Aug. 1, 1995 187,701 - 1 1,012,463 Pooling<F1>
AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 - 1 992,034 Pooling<F1>
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<F2> 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<F1>
- ------------------------------------------------------------------------------------------------------------------------------------
<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 that 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.
</TABLE>
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:
<TABLE>
- ------------------------------------------------------------------------------------------------------
<CAPTION>
As of or for the Year Ended December 31
--------------------------------------------------
(Thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets N/A $30,060,390 $30,130,059
Net interest income $997,787 959,875 936,387
Other income 366,110 301,513 256,509
Net income 174,355 185,113 237,723
Basic earnings per share 1.36 1.44 1.85
- ------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
---------------------------------------
(Thousands except per share data) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
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 has 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 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.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 59
<PAGE> 64
For all acquisitions accounted for as purchases, the unamortized excess
of cost over the fair value of assets acquired was $748,612,000, $157,789,000
and $95,631,000 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:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
-------------------
(Thousands except per share data) 1995
- -------------------------------------------------------------------------------
<S> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
Pending Acquisitions at December 31, 1997
Mercantile has entered into four merger agreements that had not closed by
year-end. On February 2, 1998, the Corporation completed its acquisition of
Horizon Bancorp, Inc. ("Horizon"), a $544 million-asset bank holding company
in Arkadelphia, Arkansas. On October 28, 1997, Mercantile announced that a
merger agreement had been signed with HomeCorp, Inc. ("HomeCorp"), a $332
million-asset thrift holding company based in Rockford, Illinois. The
HomeCorp acquisition is expected to close in the first quarter of 1998. The
Horizon and HomeCorp acquisitions meet the requirements for treatment as
poolings-of-interests; however, due to the immateriality of their financial
condition and results of operations to that of Mercantile, the historical
financial statements of the Corporation will not be restated for the Horizon
and HomeCorp transactions.
The Corporation announced on January 12, 1998 that it had entered into
an agreement to acquire CBT Corporation ("CBT") of Paducah, Kentucky, a bank
holding company with assets totaling $1 billion. Additionally, on February 2,
1998, Mercantile announced plans to merge with Firstbank of Illinois Co.
("Firstbank"), a $2.2 billion-asset bank holding company headquartered in
Springfield, Illinois. The CBT and Firstbank acquisitions are expected to
close in mid-1998 and will be accounted for under the pooling-of-interests
method.
The Corporation expects to record one-time charges related to the
Horizon, HomeCorp, CBT and Firstbank acquisitions. These charges include
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 preliminary estimate of the pre-tax charge is between
$10,000,000 and $15,000,000 for both Horizon and HomeCorp, $20,000,000 for
CBT and $40,000,000 for Firstbank. The ultimate amount of one-time expenses
may vary significantly from those included in the estimates above due to
final decisions affecting branch closings and severance.
Unaudited pro forma combined consolidated financial data including the
Corporation, CBT and Firstbank for 1997, 1996 and 1995 is listed below:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
As of or for the Year Ended December 31
------------------------------------------------------
(Thousands except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $32,922,869 $24,603,300 $23,258,599
Net interest income 1,045,131 944,321 913,137
Other income 413,123 368,010 339,989
Net income 244,112 281,742 315,184
Basic earnings per share 1.77 2.13 2.38
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE D - CASH FLOWS
The Corporation paid interest on deposits, short-term borrowings, bank notes
and long-term debt of $923,471,000, $737,862,000 and $681,559,000 in 1997,
1996 and 1995, respectively. The Corporation paid Federal income taxes of
$139,906,000, $142,404,000 and $132,347,000 in 1997, 1996 and 1995,
respectively.
The following details cash and cash equivalents from acquisitions
accounted for as purchases, net of cash paid:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
--------------------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of
assets purchased $(7,947,633) $(1,260,315) $(977,766)
Fair value of
liabilities assumed 6,891,052 1,090,663 874,053
Issuance of common stock 669,804 136,124 95,490
- ------------------------------------------------------------------------------------------------------------------
Net Cash Paid
for Acquisitions (386,777) (33,528) (8,223)
Cash and cash
equivalents acquired 113,602 90,680 54,158
- ------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
from Acquisitions,
Net of Cash Paid
(Received) $ (273,175) $ 57,152 $ 45,935
==================================================================================================================
</TABLE>
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 $170,075,000.
60 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 65
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:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Government $4,213,567 $30,166 $ 7,092 $4,236,641
State and political subdivisions:
Tax-exempt 330,395 7,690 203 337,882
Taxable 61,475 279 82 61,672
- -----------------------------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 391,870 7,969 285 399,554
Other 2,587,381 12,067 10,005 2,589,443
- -----------------------------------------------------------------------------------------------------------------------------
Total $7,192,818 $50,202 $17,382 $7,225,638
=============================================================================================================================
DECEMBER 31, 1996
U.S. Government $3,469,884 $19,900 $15,789 $3,473,995
State and political subdivisions:
Tax-exempt 396,544 8,285 896 403,933
Taxable 112,158 490 469 112,179
- -----------------------------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 508,702 8,775 1,365 516,112
Other 160,939 457 1,829 159,567
- -----------------------------------------------------------------------------------------------------------------------------
Total $4,139,525 $29,132 $18,983 $4,149,674
=============================================================================================================================
DECEMBER 31, 1995
U.S. Government $3,917,631 $48,574 $16,955 $3,949,250
State and political subdivisions:
Tax-exempt 417,133 11,545 1,042 427,636
Taxable 134,400 1,034 714 134,720
- -----------------------------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 551,533 12,579 1,756 562,356
Other 142,547 211 1,477 141,281
- -----------------------------------------------------------------------------------------------------------------------------
Total $4,611,711 $61,364 $20,188 $4,652,887
=============================================================================================================================
</TABLE>
Held-to-Maturity
The amortized cost, estimated fair values, and unrealized gains and losses of
held-to-maturity securities were as follows:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Government $246,738 $ 6,616 $3,938 $249,416
Other 2,696 142 119 2,719
- -----------------------------------------------------------------------------------------------------------------------------
Total $249,434 $ 6,758 $4,057 $252,135
=============================================================================================================================
DECEMBER 31, 1996
U.S. Government $556,696 $ 9,770 $7,748 $558,718
State and political subdivisions - tax-exempt 4,180 85 15 4,250
Other 4,169 190 175 4,184
- -----------------------------------------------------------------------------------------------------------------------------
Total $565,045 $10,045 $7,938 $567,152
=============================================================================================================================
DECEMBER 31, 1995
U.S. Government $241,339 $ 1,940 $ 682 $242,597
State and political subdivisions - tax-exempt 2,269 14 12 2,271
Other 486 1 - 487
- -----------------------------------------------------------------------------------------------------------------------------
Total $244,094 $ 1,955 $ 694 $245,355
=============================================================================================================================
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 61
<PAGE> 66
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 $3,427,860,000 at December 31,
1997, $2,979,248,000 at December 31, 1996 and $2,502,207,000 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.
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.
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
-----------------------------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales of
available-for-sale securities $708,503 $305,961 $237,086
===================================================================================================================
Securities gains on:
Available-for-sale securities $ 7,391 $ 3,077 $ 4,519
Held-to-maturity securities - 14 111
- -------------------------------------------------------------------------------------------------------------------
Total Securities Gains 7,391 3,091 4,630
- -------------------------------------------------------------------------------------------------------------------
Securities losses on:
Available-for-sale securities 406 3,174 291
Held-to-maturity securities - - 1
- -------------------------------------------------------------------------------------------------------------------
Total Securities Losses 406 3,174 292
- -------------------------------------------------------------------------------------------------------------------
Net Securities Gains
(Losses) Before Income
(Taxes) Benefit 6,985 (83) 4,338
Applicable income
(taxes) benefit (2,445) 29 (1,518)
- -------------------------------------------------------------------------------------------------------------------
Net Securities Gains
(Losses) $ 4,540 $ (54) $ 2,820
===================================================================================================================
</TABLE>
NOTE G - LOANS AND LEASES
Loans and leases consisted of the following:
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
--------------------------------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 4,516,960 $ 4,185,755 $ 3,757,802
Real estate - commercial 2,953,729 2,822,580 2,775,992
Real estate - construction 733,949 570,074 501,840
Real estate - residential
mortgage 8,201,059 4,238,999 3,716,643
Real estate - home equity
credit loans 506,433 383,301 375,800
Consumer 2,005,657 1,841,275 1,715,550
Credit card 282,130 910,646 859,199
- -------------------------------------------------------------------------------------------------------------------
Total Loans and Leases $19,199,917 $14,952,630 $13,702,826
===================================================================================================================
</TABLE>
62 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 67
Changes in the reserve for possible loan losses were
as follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
------------------------------------------------------
(Thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 230,372 $ 232,288 $244,743
Provision 79,309 73,015 41,533
Charge-offs (101,308) (104,589) (73,441)
Recoveries 26,378 19,852 17,623
- ------------------------------------------------------------------------------------------------------------------
Net Charge-offs (74,930) (84,737) (55,818)
Acquired reserves 20,232 9,806 13,830
Transfer to Mercantile
Credit Card Master Trust - - (12,000)
- ------------------------------------------------------------------------------------------------------------------
Ending Balance $ 254,983 $ 230,372 $232,288
==================================================================================================================
</TABLE>
Non-performing loans consisted of the following:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
----------------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual $ 97,914 $66,959 $92,868
Renegotiated 4,278 5,260 3,203
- ------------------------------------------------------------------------------------------------------------------
Non-performing Loans $102,192 $72,219 $96,071
==================================================================================================================
</TABLE>
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:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
As of or for the Year Ended December 31
--------------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ending impaired loans $52,462 $41,713 $40,222
Related reserve for possible
loan losses 10,227 8,870 16,795
Average impaired loans 53,827 45,558 45,410
Interest income recognized
on impaired loans 105 452 312
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
NOTE H - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were as follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
------------------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 70,274 $ 59,502 $ 57,631
Bank premises 383,535 322,630 295,129
Leasehold improvements 44,864 50,300 46,572
Furniture and equipment 404,607 314,473 278,723
- ------------------------------------------------------------------------------------------------------------------
Total Cost 903,280 746,905 678,055
Accumulated depreciation (438,597) (379,594) (348,221)
- ------------------------------------------------------------------------------------------------------------------
Net Carrying Value $ 464,683 $ 367,311 $ 329,834
==================================================================================================================
</TABLE>
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:
<TABLE>
- --------------------------------------------------------------------
<CAPTION>
------------------
Minimum
Rental
Period (Thousands)
- --------------------------------------------------------------------
<S> <C>
1998 $14,399
1999 12,755
2000 10,412
2001 8,017
2002 6,380
2003 and later 24,562
- --------------------------------------------------------------------
Total $76,525
====================================================================
</TABLE>
Net rental expense for all operating leases was $19,366,000 in 1997,
$15,184,000 in 1996 and $15,010,000 in 1995.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 63
<PAGE> 68
NOTE I - DEPOSITS
Deposits consisted of the following:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
-------------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing $ 3,586,011 $ 3,003,972 $ 2,594,734
Interest bearing demand 2,693,207 2,562,065 2,420,273
Money market accounts 3,502,517 2,791,848 2,500,400
Savings 1,331,953 1,090,563 1,115,692
Consumer time certificates
under $100,000 8,777,375 6,195,651 6,130,094
Other time 136,388 231,268 38,742
- -----------------------------------------------------------------------------------------------------------------
Total Core Deposits 20,027,451 15,875,367 14,799,935
Time certificates $100,000
and over 1,467,037 1,209,197 1,162,547
Foreign 585,439 251,887 209,170
- -----------------------------------------------------------------------------------------------------------------
Total Purchased
Deposits 2,052,476 1,461,084 1,371,717
- -----------------------------------------------------------------------------------------------------------------
Total Deposits $22,079,927 $17,336,451 $16,171,652
=================================================================================================================
</TABLE>
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:
<TABLE>
- -----------------------------------------------------------------
<CAPTION>
-----------------
Scheduled
Maturity
Amount
Period (Thousands)
- -----------------------------------------------------------------
<S> <C>
1998 $ 6,921,221
1999 2,072,140
2000 772,933
2001 257,254
2002 232,865
2003 and later 124,387
- -----------------------------------------------------------------
Total $10,380,800
=================================================================
</TABLE>
NOTE J - SHORT-TERM BORROWINGS
Short-term borrowings were as follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
--------------------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and
repurchase agreements $1,991,289 $1,781,011 $1,716,909
Short-term Federal Home
Loan Bank ("FHLB")
advances 1,352,203 66,794 74,280
Treasury tax and loan notes 101,858 117,750 118,183
Commercial paper 1,510 19,405 16,950
Other short-term borrowings 18,962 2,304 3,145
- ------------------------------------------------------------------------------------------------------------------
Total Short-term
Borrowings $3,465,822 $1,987,264 $1,929,467
==================================================================================================================
</TABLE>
The average balance of total short-term borrowings was $2,748,165,000,
$1,519,802,000 and $1,704,149,000 during 1997, 1996 and 1995, respectively.
The average rate on total short-term borrowings was 5.44% in 1997, 5.36% in
1996 and 5.54% in 1995.
The maximum balances at month-end are listed below:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
-----------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and
repurchase agreements $2,466,340 $1,781,011 $1,854,611
Short-term FHLB advances 1,352,203 73,939 82,452
Treasury tax and loan notes 258,122 435,780 555,761
Commercial paper 24,800 21,660 31,157
Other short-term borrowings 90,968 38,067 5,279
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
------------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 539,491 24,267 47,021
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 59 78 136
- -----------------------------------------------------------------------------------------------------------------
Total 668,000 152,795 175,607
- -----------------------------------------------------------------------------------------------------------------
Total Long-term Debt $1,319,153 $304,831 $344,097
=================================================================================================================
</TABLE>
64 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 69
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.
FHLB advances at December 31, 1997 consisted of various debt
instruments with rates varying from 5.260% to 6.390%. 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 anticipates
exercising the bonds' call provision during 1998.
A summary of annual principal reductions of long-term debt is presented
below:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
(Thousands) -------------------------------------------------------
Period FHLB Advances Other Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $100,000 $ 20 $ 100,020
1999 250,208 54,622 304,830
2000 78,610 20 78,630
2001 652 150,000 150,652
2002 104,152 150,000 254,152
2003 and later 5,869 425,000 430,869
- -----------------------------------------------------------------------------------------------------------------
Total $539,491 $779,662 $1,319,153
=================================================================================================================
</TABLE>
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. It is anticipated that the bank note
program will be restructured in 1998.
Bank notes are presented below with December 31, 1997 coupon rates:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
--------------------------------------------------
(Thousands) 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=================================================================================================================
</TABLE>
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 wholly owned subsidiary of the Corporation;
its sole assets are the $150,000,000 in mandatorily redeemable preferred
securities, and considered together, the back-up undertakings constitute a
full and unconditional guarantee by Mercantile Bancorporation Inc. of the
trust's obligations under the preferred securities.
NOTE M - INCOME TAXES
The Corporation's results include income tax expense as follows:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------
(Thousands) Current Deferred Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997
U.S. Federal $120,188 $(9,374) $110,814
State and local 10,094 (402) 9,692
- -----------------------------------------------------------------------------------------------------------------
Total $130,282 $(9,776) $120,506
=================================================================================================================
YEAR ENDED
DECEMBER 31, 1996
U.S. Federal $136,751 $(22,936) $113,815
State and local 15,732 (1,012) 14,720
- -----------------------------------------------------------------------------------------------------------------
Total $152,483 $(23,948) $128,535
=================================================================================================================
YEAR ENDED
DECEMBER 31, 1995
U.S. Federal $145,976 $(11,272) $134,704
State and local 18,493 (3,299) 15,194
- -----------------------------------------------------------------------------------------------------------------
Total $164,469 $(14,571) $149,898
=================================================================================================================
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 65
<PAGE> 70
The tax effects of temporary differences that gave rise to the deferred
tax assets and deferred tax liabilities are presented below:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
------------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Reserve for possible
loan losses $ 80,456 $ 73,097 $ 78,177
Foreclosed property 839 1,448 720
Deferred compensation 5,290 5,869 5,451
Expenses not currently
allowable for tax purposes 19,654 22,327 12,732
State tax liabilities - 1,595 2,554
Retirement expenses in
excess of tax deduction 15,403 11,209 8,930
Other 12,902 7,154 3,496
- -----------------------------------------------------------------------------------------------------------------
Total Gross Deferred
Tax Assets 134,544 122,699 112,060
DEFERRED TAX LIABILITIES
Leasing (26,938) (29,956) (39,828)
Pension settlement gain (6,079) (6,005) (6,079)
Intangible assets - (5,637) (6,466)
Depreciation (467) (1,718) (2,281)
Investments in debt and
equity securities - FAS 115 (12,502) (3,231) (14,577)
FHLB stock dividends (9,672) - -
Other (8,879) (11,257) (13,228)
- -----------------------------------------------------------------------------------------------------------------
Total Gross Deferred
Tax Liabilities (64,537) (57,804) (82,459)
- -----------------------------------------------------------------------------------------------------------------
Net Deferred Tax Assets $ 70,007 $ 64,895 $ 29,601
=================================================================================================================
</TABLE>
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:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
------------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $113,785 $130,813 $150,600
Increase (reduction) in
income taxes resulting
from:
Tax-exempt income (8,900) (9,856) (10,783)
State and local income
taxes, net of federal
income tax benefit 6,300 9,568 9,882
Amortization of goodwill 11,720 - -
Other, net (2,399) (1,990) 199
- -----------------------------------------------------------------------------------------------------------------
Total Tax Expense $120,506 $128,535 $149,898
=================================================================================================================
</TABLE>
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 Consolidated Statement of Income is summarized as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
----------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 10,446 $ 9,849 $ 6,922
Interest cost on projected
benefit obligation 12,884 11,515 10,223
Actual (return) loss on
plan assets (30,743) (15,928) (28,628)
Net amortization and deferral 14,166 1,401 15,547
- -----------------------------------------------------------------------------------------------------------------
Net Periodic Pension
Expense $ 6,753 $ 6,837 $ 4,064
=================================================================================================================
</TABLE>
66 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 71
The table below sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet for the qualified plan:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
----------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of
vested benefit obligation $144,099 $123,641 $109,550
=================================================================================================================
Accumulated benefit
obligation $159,977 $136,399 $121,169
=================================================================================================================
Projected benefit obligation $190,976 $167,082 $150,929
Plan assets at fair value 197,449 171,879 154,890
- -----------------------------------------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets (6,473) (4,797) (3,961)
Unrecognized net loss (5,666) (10,196) (15,311)
Unrecognized prior
service cost 5,893 1,228 1,405
Unrecognized net asset 721 1,532 2,342
- -----------------------------------------------------------------------------------------------------------------
Prepaid Pension Expense $ (5,525) $(12,233) $(15,525)
=================================================================================================================
</TABLE>
Assumptions used were as follows:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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 Consolidated Statement of Income is summarized as
follows:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
----------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=================================================================================================================
</TABLE>
The table below sets forth the funded status and the amount recognized
in the Consolidated Balance Sheet regarding other postretirement benefits:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
---------------------------------------------------
(Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=================================================================================================================
</TABLE>
Assumptions used were as follows:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 67
<PAGE> 72
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 130,508,090, 116,229,704 and
116,815,628 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") is attached to each share of
common stock and trades automatically with such shares. The Rights, which can
be redeemed by the Board of Directors in certain circumstances and expire by
their terms on June 3, 1998, have no voting rights.
The Rights become exercisable and will trade separately from the common
stock 10 days after a person or a group either becomes the beneficial owner
or announces an intention to commence a tender offer for 20% or more
of the Corporation's outstanding common stock. When exercisable, each Right
entitles 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 acquires beneficial ownership of 20% or more of
the Corporation's common stock, holders of Rights (other than the acquiring
person or group) may purchase, 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 merges into or otherwise
transfers 50% or more of its assets or earnings power to any person after the
Rights become exercisable, holders of Rights may purchase, 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 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 5,794,169 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:
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Options Outstanding
---------------------------------------------------------------
Weighted Average
Range of Remaining Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3.61 - 21.57 2,021,600 2.69 yrs. $13.63
21.58 - 26.74 2,232,115 5.52 22.92
26.75 - 34.25 885,773 6.48 31.37
34.26 - 34.92 1,287,486 9.05 34.92
34.93 - 58.31 123,673 6.67 42.33
- ---------------------------------------------------------------------------------------------
3.61 - 58.31 6,550,647 5.49 23.92
=============================================================================================
</TABLE>
68 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 73
Changes in options outstanding were as follows:
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
Weighted
Average
Exercise
Shares Price
- ------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994 5,397,903 $14.83
Granted 972,479 22.59
Exercised (959,621) 9.00
Canceled (107,993) 20.88
Assumed 147,537 10.53
- ------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 5,450,305 16.96
Granted 924,324 29.16
Exercised (743,345) 10.43
Canceled (129,342) 25.22
Assumed 76,488 15.27
- ------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 5,578,430 19.64
Granted 1,749,704 35.12
Exercised (1,297,476) 17.48
Canceled (90,547) 27.20
Assumed 610,536 17.72
- ------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 6,550,647 23.92
==========================================================================================
</TABLE>
The numbers of shares exercisable under stock options as of December 31,
1997, 1996 and 1995 were 4,237,572, 2,998,013 and 2,726,730, respectively,
with a weighted average exercise price of $19.84, $15.87 and $13.02,
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:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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 basic earnings per share would have been reduced to the pro
forma amounts noted below:
<TABLE>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------
(Thousands except per share data) As Reported Pro Forma
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net income $204,593 $198,706
Basic earnings per share 1.68 1.63
Diluted earnings per share 1.65 1.60
YEAR ENDED DECEMBER 31, 1996
Net income 245,215 242,030
Basic earnings per share 2.11 2.09
Diluted earnings per share 2.08 2.06
YEAR ENDED DECEMBER 31, 1995
Net income 280,389 278,373
Basic earnings per share 2.41 2.40
Diluted earnings per share 2.37 2.35
- --------------------------------------------------------------------------------------------------------
</TABLE>
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.
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 $119,596,000 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 $241,254,000
would be available for loans to the Parent Company under Federal Reserve
regulations. The remaining equity of bank subsidiaries approximating
$1,916,304,000 was restricted as to transfers to the Parent Company.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 69
<PAGE> 74
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 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 meet 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:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------------------------------------------------------------------
Minimum Capital Minimum Capital
Actual Requirements Actual Requirements
----------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS)
Corporation $1,785,007 8.84% $ 807,471 4.00% $1,749,466 11.00% $ 636,225 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 2,432,374 12.05 1,614,942 8.00 2,175,712 13.68 1,272,450 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 1,785,007 6.15 1,160,416 4.00 1,749,466 8.12 861,990 4.00
Mercantile Bank N.A. 1,210,872 7.33 660,542 4.00 499,602 6.97 286,873 4.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 86% 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 69% was
consumer-related in the form of residential real estate mortgages and home
equity lines of credit.
70 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 75
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 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 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 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
$310,000,000 to $640,000,000 at December 31, 1997 and was neither considered
in the fair value amounts below nor recorded as an intangible asset on the
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.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 71
<PAGE> 76
The estimated fair values of the Corporation's financial instruments
were as follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
-----------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
(Thousands) Value Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks and
short-term investments $ 1,704,689 $ 1,704,689 $ 1,658,004 $ 1,658,004 $ 1,598,349 $ 1,598,349
Trading securities 70,486 70,486 31,272 31,272 67,256 67,256
Held-to-maturity securities 249,434 252,135 565,045 567,152 244,094 245,355
Available-for-sale securities 7,225,638 7,225,638 4,149,674 4,149,674 4,652,887 4,652,887
Net loans and leases 18,944,934 19,389,177 14,722,258 15,158,912 13,470,538 13,990,522
FINANCIAL LIABILITIES
Deposits 22,079,927 22,383,896 17,336,451 17,549,176 16,171,652 16,426,177
Short-term borrowings 3,465,822 3,465,822 1,987,264 1,987,264 1,929,467 1,929,467
Bank notes and long-term debt 1,644,153 1,660,926 479,831 484,283 594,097 613,277
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 (2,465) - -
When-issued securities sold 2,509 - -
Commitments to extend credit (35,420) (16,423) (12,349)
Standby letters of credit (3,700) (2,758) (2,842)
Commercial letters of credit (1,826) (5,102) (4,268)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
--------------------------------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to
extend credit
Commercial $3,909,558 $3,087,583 $2,392,878
Consumer 2,195,987 6,126,854 5,613,283
- -------------------------------------------------------------------------------------------------------------------
Total $6,105,545 $9,214,437 $8,006,161
===================================================================================================================
Standby letters of credit $ 423,660 $ 444,347 $ 410,201
===================================================================================================================
Interest rate contracts $1,021,563 $ 391,000 $ 192,000
===================================================================================================================
When-issued securities:
Commitments to purchase $ 214,475 $ - $ -
Commitments to sell 230,981 - -
===================================================================================================================
</TABLE>
72 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 77
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 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:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31
------------------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
These transactions are generally entered into on behalf
of customers and are subsequently matched off by the Corporation. As a
consequence, these matched transactions do not represent exposure to market
risk. The Corporation manages the potential credit exposure through
established credit approvals, risk control limits and other monitoring
procedures. 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, $489,363,000, $303,729,000 and $129,627,000 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 $225,462,000 at December 31, 1997,
$77,312,000 at
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 73
<PAGE> 78
December 31, 1996 and $64,224,000 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.
<TABLE>
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME
<CAPTION>
December 31
--------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 redeem-
able 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 10,091 (164,397) 74,414
- ------------------------------------------------------------------------------------------------------------
Net Income $204,593 $245,215 $280,389
============================================================================================================
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------
BALANCE SHEET
<CAPTION>
December 31
----------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 2,333,454 1,876,682 1,955,432
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 $3,348,501 $2,190,322 $2,115,113
============================================================================================================
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 2,410,169 1,945,651 1,915,493
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $3,348,501 $2,190,322 $2,115,113
============================================================================================================
</TABLE>
74 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 79
<TABLE>
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
<CAPTION>
Year Ended December 31
---------------------------------------------
(Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 204,593 $ 245,215 $ 280,389
Adjustments to reconcile net income to
net cash provided by operating activities
Net income of subsidiaries (334,975) (279,739) (289,994)
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
============================================================================================================
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 75
<PAGE> 80
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
SIX YEAR CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
(Thousands except per share data) 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases $1,464,844 $1,229,656
Investments in debt and
equity securities
Trading 7,069 3,597
Taxable 361,598 280,174
Tax-exempt 20,212 22,571
- ---------------------------------------------------------------
Total Investments in Debt
and Equity Securities 388,879 306,342
Due from banks - interest bearing 9,683 4,107
Federal funds sold and
repurchase agreements 14,788 12,758
- ---------------------------------------------------------------
Total Interest Income 1,878,194 1,552,863
Tax-equivalent adjustment<F*> 15,086 16,353
- ---------------------------------------------------------------
Taxable-equivalent Interest
Income 1,893,280 1,569,216
INTEREST EXPENSE
Deposits 741,058 603,989
Borrowed funds 216,632 120,921
- ---------------------------------------------------------------
Total Interest Expense 957,690 724,910
- ---------------------------------------------------------------
Taxable-equivalent Net
Interest Income 935,590 844,306
PROVISION FOR POSSIBLE LOAN LOSSES 79,309 73,015
OTHER INCOME
Trust 96,055 86,616
Service charges 98,733 88,916
Investment banking and brokerage 35,070 32,244
Credit card fees 20,480 27,962
Securitization revenue 18,404 16,008
Securities gains (losses) 6,985 (83)
Other 102,957 85,817
- ---------------------------------------------------------------
Total Other Income 378,684 337,480
OTHER EXPENSE
Salaries 339,683 296,712
Employee benefits 75,199 69,017
Net occupancy 55,040 49,428
Equipment 63,718 54,287
Other 361,140 249,224
- ---------------------------------------------------------------
Total Other Expense 894,780 718,668
- ---------------------------------------------------------------
Taxable-equivalent Income
Before Income Taxes 340,185 390,103
INCOME TAXES
Income taxes 120,506 128,535
Tax-equivalent adjustment<F*> 15,086 16,353
- ---------------------------------------------------------------
Adjusted Income Taxes 135,592 144,888
- ---------------------------------------------------------------
Net Income $ 204,593 $ 245,215
===============================================================
PER COMMON SHARE DATA
Basic earnings per share $ 1.68 $ 2.11
Diluted earnings per share 1.65 2.08
Dividends declared 1.148 1.092
- ---------------------------------------------------------------
TAX-EQUIVALENT ADJUSTMENT<F*>
Loans $ 5,130 $ 5,348
Investments in debt and equity
securities 9,956 11,005
- ---------------------------------------------------------------
Total Tax-equivalent Adjustment $ 15,086 $ 16,353
===============================================================
<FN>
<F*>Taxable-equivalent basis.
<CAPTION>
76 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 81
- -----------------------------------------------------------------------------------------------------------------
SIX YEAR CONSOLIDATED STATEMENT OF INCOME (continued)
Growth Rates
--------------
(Thousands except per share data) 1995 1994 1993 1992 1 Year 5 Years
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases $1,201,046 $ 999,069 $ 937,198 $ 966,668 19.1% 8.7%
Investments in debt and
equity securities
Trading 3,434 4,724 3,684 2,142 96.5 27.0
Taxable 264,857 264,649 285,668 299,178 29.1 3.9
Tax-exempt 25,141 26,537 26,113 25,376 (10.5) (4.5)
- -----------------------------------------------------------------------------------------------------------------
Total Investments in Debt
and Equity Securities 293,432 295,910 315,465 326,696 26.9 3.6
Due from banks - interest bearing 2,487 2,862 3,521 8,755 - 2.0
Federal funds sold and
repurchase agreements 19,191 14,087 13,496 14,441 15.9 .5
- -----------------------------------------------------------------------------------------------------------------
Total Interest Income 1,516,156 1,311,928 1,269,680 1,316,560 21.0 7.4
Tax-equivalent adjustment<F*> 17,758 17,962 18,598 17,891 (7.7) (3.4)
- -----------------------------------------------------------------------------------------------------------------
Taxable-equivalent Interest
Income 1,533,914 1,329,890 1,288,278 1,334,451 20.7 7.3
INTEREST EXPENSE
Deposits 580,869 436,510 451,616 567,519 22.7 5.5
Borrowed funds 134,597 85,032 56,853 61,318 79.2 28.7
- -----------------------------------------------------------------------------------------------------------------
Total Interest Expense 715,466 521,542 508,469 628,837 32.1 8.8
- -----------------------------------------------------------------------------------------------------------------
Taxable-equivalent Net
Interest Income 818,448 808,348 779,809 705,614 10.8 5.8
PROVISION FOR POSSIBLE LOAN LOSSES 41,533 48,791 70,584 88,238 8.6 (2.1)
OTHER INCOME
Trust 77,115 71,972 72,212 66,792 10.9 7.5
Service charges 82,459 80,057 79,346 74,401 11.0 5.8
Investment banking and brokerage 28,445 29,225 30,479 27,405 8.8 5.1
Credit card fees 20,366 27,352 26,289 22,778 (26.8) (2.1)
Securitization revenue 23,005 - - - 15.0 -
Securities gains (losses) 4,338 2,888 6,172 7,799 - (2.2)
Other 75,921 60,874 75,882 65,359 20.0 9.5
- -----------------------------------------------------------------------------------------------------------------
Total Other Income 311,649 272,368 290,380 264,534 12.2 7.4
OTHER EXPENSE
Salaries 282,433 274,492 264,068 240,078 14.5 7.2
Employee benefits 63,723 61,934 60,054 48,466 9.0 9.2
Net occupancy 47,383 45,960 46,519 40,637 11.4 6.3
Equipment 48,513 45,795 45,544 40,323 17.4 9.6
Other 198,467 216,830 249,882 246,655 44.9 7.9
- -----------------------------------------------------------------------------------------------------------------
Total Other Expense 640,519 645,011 666,067 616,159 24.5 7.7
- -----------------------------------------------------------------------------------------------------------------
Taxable-equivalent Income
Before Income Taxes 448,045 386,914 333,538 265,751 (12.8) 5.1
INCOME TAXES
Income taxes 149,898 135,896 114,768 83,773 (6.2) 7.5
Tax-equivalent adjustment<F*> 17,758 17,962 18,598 17,891 (7.7) (3.4)
- -----------------------------------------------------------------------------------------------------------------
Adjusted Income Taxes 167,656 153,858 133,366 101,664 (6.4) 5.9
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 280,389 $ 233,056 $ 200,172 $ 164,087 (16.6) 4.5
=================================================================================================================
PER COMMON SHARE DATA
Basic earnings per share $ 2.41 $ 2.06 $ 1.81 $ 1.55 (20.4) 1.6
Diluted earnings per share 2.37 2.02 1.77 1.51 (20.7) 1.8
Dividends declared .88 .748 .66 .62 5.1 13.1
- -----------------------------------------------------------------------------------------------------------------
TAX-EQUIVALENT ADJUSTMENT<F*>
Loans $ 5,460 $ 5,142 $ 5,721 $ 6,410 (4.1) 4.4
Investments in debt and equity
securities 12,298 12,820 12,877 11,481 (9.5) (2.8)
- -----------------------------------------------------------------------------------------------------------------
Total Tax-equivalent Adjustment $ 17,758 $ 17,962 $ 18,598 $ 17,891 (7.7) (3.4)
=================================================================================================================
<FN>
<F*>Taxable-equivalent basis.
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 77
<PAGE> 82
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
SIX YEAR CONSOLIDATED AVERAGE BALANCE SHEET
<CAPTION>
------------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------------------------------------------------------------------------
(Dollars in thousands) Volume Rate<F1> Volume Rate<F1> Volume Rate<F1> Volume Rate<F1>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Loans and leases
Commercial $ 4,390,736 8.44% $ 3,921,460 8.43% $ 3,721,016 8.87% $ 3,431,751 7.62%
Real estate - commercial 2,915,796 8.72 2,780,289 8.69 2,587,760 9.05 2,299,867 8.19
Real estate - construction 659,784 8.87 520,365 9.20 547,330 10.28 523,382 8.26
Real estate - residential mortgage 6,290,864 7.79 3,886,542 8.07 3,721,598 7.76 3,070,803 7.61
Real estate - home equity credit
loans 442,798 9.78 371,319 9.74 376,274 10.03 382,834 8.26
Consumer 1,935,465 8.88 1,761,766 8.88 1,704,786 8.72 1,506,898 8.23
Credit card 635,337 12.83 846,932 12.86 776,667 14.29 762,676 15.99
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 17,270,780 8.51 14,088,673 8.77 13,435,431 8.98 11,978,211 8.38
Investments in debt and equity
securities
Trading 104,834 6.79 56,447 6.45 55,319 6.21 75,413 6.31
Taxable 5,623,189 6.43 4,596,295 6.10 4,397,596 6.03 4,633,155 5.72
Tax-exempt 375,135 7.98 418,536 7.96 451,300 8.26 477,211 8.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Debt and
Equity Securities 6,103,158 6.53 5,071,278 6.26 4,904,215 6.23 5,185,779 5.95
Short-term investments
Due from banks - interest bearing 178,374 5.43 70,101 5.86 41,751 5.96 66,454 4.31
Federal funds sold and repurchase
agreements 224,539 6.59 222,292 5.74 311,854 6.15 312,539 4.51
- ------------------------------------------------------------------------------------------------------------------------------------
Total Short-term Investments 402,913 6.07 292,393 5.77 353,605 6.13 378,993 4.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 23,776,851 7.96 19,452,344 8.07 18,693,251 8.21 17,542,983 7.58
Non-earning assets
Cash and due from banks 1,051,920 1,030,672 986,978 980,640
Bank premises and equipment 414,605 344,318 324,285 309,292
Other assets 993,312 469,800 448,234 433,441
Reserve for possible loan losses (239,314) (231,512) (239,944) (239,008)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $25,997,374 $21,065,622 $20,212,804 $19,027,348
====================================================================================================================================
LIABILITIES
Acquired funds
Deposits
Non-interest bearing $ 3,078,081 $ 2,856,501 $ 2,597,947 $ 2,639,023
Interest bearing demand 2,572,279 2.02 2,455,836 2.13 2,366,024 2.19 2,522,701 1.88
Money market accounts 3,184,747 3.96 2,671,505 3.84 2,409,136 3.94 2,558,245 3.02
Savings 1,239,645 2.37 1,122,764 2 30 1,172,337 2.40 1,272,745 2.34
Consumer time certificates
under $100,000 7,643,773 5.52 6,131,281 5.54 5,901,786 5.44 5,415,178 4.39
Other time 157,703 4.18 186,274 4.18 122,187 6.33 39,822 3.26
- ------------------------------------------------------------------------------------------------------------------------------------
Total Core Deposits 17,876,228 4.30 15,424,161 4.20 14,569,417 4.20 14,447,714 3.33
Time certificates $100,000
and over 1,400,529 5.61 1,181,278 5.53 1,119,836 5.75 907,823 4.13
Foreign 457,811 5.72 184,182 5.70 210,873 6.21 108,986 4.95
- ------------------------------------------------------------------------------------------------------------------------------------
Total Purchased Deposits 1,858,340 5.63 1,365,460 5.55 1,330,709 5.83 1,016,809 4.22
- ------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 19,734,568 4.45 16,789,621 4.33 15,900,126 4.37 15,464,523 3.40
Short-term borrowings 2,748,165 5.44 1,519,802 5.36 1,704,149 5.54 1,373,793 4.19
Bank notes 175,000 6.02 260,587 5.88 214,658 6.37 12,603 6.19
Long-term debt<F2> 841,919 6.72 320,060 7.56 351,708 7.52 357,421 7.45
- ------------------------------------------------------------------------------------------------------------------------------------
Total Acquired Funds 23,499,652 4.69 18,890,070 4.52 18,170,641 4.59 17,208,340 3.58
Other liabilities 355,620 282,243 249,476 229,169
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 23,855,272 19,172,313 18,420,117 17,437,509
SHAREHOLDERS' EQUITY 2,142,102 1,893,309 1,792,687 1,589,839
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $25,997,374 $21,065,622 $20,212,804 $19,027,348
====================================================================================================================================
<FN>
<F1> Taxable-equivalent basis.
<F2> Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
78 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 83
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX YEAR CONSOLIDATED AVERAGE BALANCE SHEET (continued)
-------------------------------------------------------------------
1993 1992 Growth Rates
-------------------------------------------------------------------
(Dollars in thousands) Volume Rate<F1> Volume Rate<F1> 1 Year 5 Years
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Loans and leases
Commercial $ 3,185,403 7.10% $ 3,084,725 7.54% 12.0% 7.3%
Real estate - commercial 2,153,963 8.16 2,128,392 8.61 4.9 6.5
Real estate - construction 487,477 8.75 476,753 9.12 26.8 6.7
Real estate - residential mortgage 3,157,242 7.74 3,186,371 8.74 61.9 14.6
Real estate - home equity credit
loans 387,245 7.10 394,030 7.10 19.3 2.4
Consumer 1,291,944 9.02 1,231,640 9.78 9.9 9.5
Credit card 678,234 16.23 536,058 16.23 (25.0) 3.5
- --------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 11,341,508 8.31 11,037,969 8.82 22.6 9.4
Investments in debt and equity
securities
Trading 60,299 6.22 35,885 6.16 85.7 23.9
Taxable 4,685,722 6.10 4,172,204 7.18 22.3 6.2
Tax-exempt 454,271 8.50 369,852 9.85 (10.4) .3
- --------------------------------------------------------------------------------------------------------------------------
Total Investments in Debt and
Equity Securities 5,200,292 6.31 4,577,941 7.39 20.3 5.9
Short-term investments
Due from banks - interest bearing 102,105 3.45 203,488 4.30 - (2.6)
Federal funds sold and repurchase
agreements 397,630 3.39 346,745 4.16 1.0 (8.3)
- --------------------------------------------------------------------------------------------------------------------------
Total Short-term Investments 499,735 3.41 550,233 4.22 37.8 (6.0)
- --------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 17,041,535 7.56 16,166,143 8.25 22.2 8.0
Non-earning assets
Cash and due from banks 966,335 870,875 2.1 3.8
Bank premises and equipment 301,345 278,556 20.4 8.3
Other assets 484,911 530,658 - 13.4
Reserve for possible loan losses (222,902) (215,844) 3.4 2.1
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $18,571,224 $17,630,388 23.4 8.1
==========================================================================================================================
LIABILITIES
Acquired funds
Deposits
Non-interest bearing $ 2,661,016 $ 2,243,141 7.8 6.5
Interest bearing demand 2,323,738 2.14 1,966,848 2.97 4.7 5.5
Money market accounts 2,619,315 2.77 2,484,894 3.43 19.2 5.1
Savings 1,241,722 2.57 1,061,606 3.73 10.4 3.1
Consumer time certificates
under $100,000 5,670,567 4.59 6,036,797 5.63 24.7 4.8
Other time 83,373 2.73 108,937 3.86 (15.3) 7.7
- --------------------------------------------------------------------------------------------------------------------------
Total Core Deposits 14,599,731 3.49 13,902,223 4.52 15.9 5.2
Time certificates $100,000
and over 885,263 3.75 910,330 4.30 18.6 9.0
Foreign 31,093 4.38 23,433 3.71 - 81.2
- --------------------------------------------------------------------------------------------------------------------------
Total Purchased Deposits 916,356 3.77 933,763 4.29 36.1 14.8
- --------------------------------------------------------------------------------------------------------------------------
Total Deposits 15,516,087 3.51 14,835,986 4.51 17.5 5.9
Short-term borrowings 1,037,043 2.96 996,598 3.71 80.8 22.5
Bank notes - - - - (32.8) -
Long-term debt<F2> 339,027 7.72 303,045 8.03 - 22.7
- --------------------------------------------------------------------------------------------------------------------------
Total Acquired Funds 16,892,157 3.57 16,135,629 4.53 24.4 7.8
Other liabilities 255,636 263,252 26.0 6.2
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 17,147,793 16,398,881 24.4 7.8
SHAREHOLDERS' EQUITY 1,423,431 1,231,507 13.1 11.7
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $18,571,224 $17,630,388 23.4 8.1
==========================================================================================================================
<FN>
<F1> Taxable-equivalent basis.
<F2> Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 79
<PAGE> 84
DIRECTORS
Richard E. Beumer <F1>
Chairman and CEO
Sverdrup Corporation
Harry M. Cornell, Jr. <F3>, <F4>, <F5>
Chairman and
Chief Executive Officer
Leggett & Platt, Inc.
Earl K. Dille <F6>
Retired President
Union Electric Company
Bernard A. Edison <F6>
Former President
Edison Brothers Stores, Inc.
Dr. Henry Givens, Jr. <F2>
President
Harris-Stowe State College
William A. Hall <F1>
Assistant to the Chairman
Hallmark Cards, Inc.
Thomas A. Hays <F3>, <F4>, <F5>
Retired Deputy Chairman
The May Department
Stores Company
Thomas H. Jacobsen <F4>, <F5>
Chairman of the Board,
President and
Chief Executive Officer
Mercantile
Bancorporation Inc.
Frank Lyon, Jr. <F3>
Private Investor
James B. Malloy <F6>
Chairman
Smurfit Packaging Corporation
Robert W. Murray <F2>
Chairman
Mercantile Bank of
Western Iowa - Polk County
Hon. Charles H. Price II <F6>
Former Ambassador to
the Court of St. James's
Harvey Saligman <F3>
General Partner
Cynwyd Investments
Craig D. Schnuck <F2>
Chairman and
Chief Executive Officer
Schnuck Markets, Inc.
Alvin J. Siteman <F2>
Chairman
Mercantile Bank of St. Louis
Robert L. Stark <F2>
Consultant
Patrick T. Stokes <F2>, <F4>
President
Anheuser-Busch, Inc.
Francis A. Stroble <F6>
Retired Chief
Financial Officer
Monsanto Company
Joseph G. Werner <F6>
President
Werner Investments
John A. Wright <F1>, <F4>
President and
Chief Executive Officer
Woodridge Resources Corporation
[FN]
<F1> Member of Audit Committee
<F2> Member of Business Policy Committee
<F3> Member of Compensation and Management Development Committee
<F4> Member of Executive Committee
<F5> Member of Nominating and Board Affairs Committee
<F6> Advisory Director
EXECUTIVE OFFICERS
Thomas H. Jacobsen
Chairman of the Board,
President and
Chief Executive Officer
W. Randolph Adams
Senior Executive
Vice President and
Chief Administrative Officer
John Q. Arnold
Vice Chairman and
Chief Financial Officer
Jon W. Bilstrom
General Counsel
and Secretary
Stanley J. Bradshaw
President
Mercantile Credit Corp., Inc.
John P. Dubinsky
Chairman
Mercantile Bank
National Association
Richard C. King
President
Mercantile Bank
National Association
John W. McClure
Vice Chairman
Financial Advisory Services
Jon P. Pierce
Executive Vice President
Human Resources
80 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
<PAGE> 85
INVESTOR INFORMATION
NEW YORK STOCK EXCHANGE: MTL
In newspaper stock tables generally MercBc or MercBcpMO
SHAREHOLDER ASSISTANCE
Please direct inquiries related to shareholder records, change
of name, address or ownership of stock, and lost or stolen
certificates to the transfer agent and registrar:
Mailing address: Street address:
Harris Trust and Savings Bank Harris Trust and Savings Bank
P.O. Box A-3504 311 W. Monroe Street
Chicago, IL 60690-3504 11th Floor
Chicago, IL 60690-3504
Telephone: 1-800-720-0417
TDD: 312-461-5633 E-Mail: [email protected]
Internet: www.harrisbank.com
ELIMINATION OF DUPLICATE REPORTS
If you receive duplicate mailings at one address, you may have multiple
shareholder accounts. To consolidate your multiple accounts into a single,
more convenient account, please contact the transfer agent at the address
listed above. Our agent also can eliminate duplicate mailings if more than
one member of your household is receiving shareholder materials.
SHAREHOLDER INVESTMENT PLAN
Mercantile Bancorporation's Shareholder Investment Plan offers new investors
a convenient means to make an initial investment in Mercantile Common Stock
and allows existing holders of Mercantile Common Stock an economical way to
purchase additional shares. All participants may invest up to $10,000 per
month to purchase shares under the Plan. The dividends on shares of Common
Stock registered in the name of the participant can be received by check,
direct deposit, or reinvested in additional shares of Mercantile Common
Stock. For a Plan Prospectus, shareholders should call Mercantile's transfer
agent at 1-800-720-0417, and new investors should call Mercantile's transfer
agent at 1-800-286-9178.
DIVIDEND DIRECT DEPOSIT
Dividends may be deposited into common shareholders' savings
or checking accounts at any bank that is a member of the National Automated
Clearing House (ACH) system. Please contact Mercantile's transfer agent to
enroll, or for additional information.
<TABLE>
- ----------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCK INFORMATION
----------------------------------- ----------------------------------------
1997 1996
- ---------------------------------------------------- ----------------------------------------
Market Price Market Price
------------------------- Dividend ------------------------- Dividend
High Low Declared High Low Declared
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $39-11/16 $33-5/16 $ .287 $31 $27-11/16 $ .273
2nd Quarter 41-11/16 35 .287 31-15/16 29 .273
3rd Quarter 53-1/2 40-1/2 .287 35-1/4 28-15/16 .273
4th Quarter 61-5/8 45-1/2 .287 36 32-11/16 .273
- ----------------------------------------------------------------------------------------------
$1.148 $1.092
- ----------------------------------------------------------------------------------------------
</TABLE>
DIVIDEND PAYMENTS
Subject to approval by the Board of Directors of Mercantile Bancorporation
Inc., dividends are customarily paid on Mercantile's common stock on or about
April 1, July 1, October 1 and January 1.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m., Thursday,
April 23, 1998, at the Cervantes Convention Center at America's Center, 701
Convention Plaza, St. Louis, MO 63101, Lecture Hall. Entrance on Washington
Avenue at Eighth Street. A notice of the Annual Meeting and proxy materials are
being mailed to Shareholders.
FINANCIAL INFORMATION
For additional copies of the Annual Report, Form 10-K or Proxy Statement and
other financial information, call Mercantile's Investor Relations Hotline at
314-418-1359.
To receive timely access to financial information at no charge, via fax,
telephone Mercantile's News on Call service. Simply dial the number listed
below and follow the voice instructions. Information is available immediately
after an annoucement has been released.
News on Call: 1-800-758-5804 Ext. 107087 or via the Internet:
www.prnewswire.com/cnoc
Mercantile's press releases, stock price quotes, employment opportunities
and other company information can be accessed on its Web site at
www.mercantile.com.
CORPORATE INFORMATION
Mercantile Bancorporation Inc.
P.O. Box 524
St. Louis, MO 63166-0524
314-418-2525
Investor Contact: Mary Granberg 314-418-8237
Shareholder Contact: Mary Lehman 314-418-2298
Media Contact: Nadine Z. Genet 314-418-8174
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
SELECTED DATA
-------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Market price $61-1/2 $34-1/4
Dividend yield 1.87% 3.19%
Book value per common share $18.47 $16.74
Average diluted common
shares outstanding 124,338,414 117,789,773
Year-end common shares
outstanding 130,508,090 116,229,704
Shareholders of record 21,771 17,283
Average daily volume 243,335 174,306
- --------------------------------------------------------------------------------
</TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 81
<PAGE> 86
MERCANTILE BANCORPORATION INC.
P.O. Box 524
St. Louis, MO 63166-0524
<PAGE> 1
<TABLE>
EXHIBIT NO. 21
MERCANTILE BANCORPORATION INC.
SUBSIDIARIES
AS OF FEBRUARY 27, 1998
<CAPTION>
STATE OR
SUBSIDIARY JURISDICTION
---------- ------------
<S> <C>
Ameribanc, Inc.
Mercantile Bank of Northern Missouri Missouri
Mercantile Bank of Trenton Missouri
Mercantile Bank of Northwest Missouri Missouri
Mercantile Bank National Association United States
Mercantile Bank Community Development Corp., Inc. Missouri
Mercantile Business Credit, Inc. Missouri
Mercantile Subsidiary #1 Inc. Missouri
Mississippi Valley Advisors Inc. Missouri
Mercantile Investment Services, Inc. Missouri
Mercantile Properties, Inc. Missouri
Mark Twain Brokerage Services Missouri
Mercantile Community Development Corp. Missouri
Sangamon Investment Company Missouri
Mercantile Insurance Services, Inc. Missouri
Infinet Securities, Inc. Missouri
Mark Twain St. Louis Investment Company Missouri
Metropolitan Savings Service Corporation Missouri
Lending Express, L.P. Missouri
Mercantile Center Associates Missouri
Mercantile Center Redevelopment Corp. Missouri
Mercantile Bank International Missouri
Mercantile Trade Services Limited Missouri
Manley Investment Company Missouri
Mercantile Mortgage Investment Company, Inc. Missouri
Roosevelt Texas Holdings, Inc. Missouri
American Property and Casualty Company Missouri
Caltrop Corporation Missouri
Lakewood Oaks Golf Club, Ltd. Missouri
Fortune Homes, Inc. Missouri
Mercantile Mortgage Financial Company Missouri
Mercantile Mortgage Realty L.L.C. Illinois
Mercantile Bank of Kansas City Missouri
Mercantile Bank of Missouri Valley Missouri
Mercantile Trust Company National Association United States
Mercantile Bank of Memphis Missouri
Mercantile Bank of South Central Missouri Missouri
So Mo Investment Company, Inc. Missouri
South Central Investments Inc. Illinois
South Central Financial L.L.C. Illinois
Mercantile Bank of Southeast Missouri Missouri
Southeast Investments Inc. Illinois
Southeast Financial L.L.C. Illinois
Mercantile Bank of Northern Illinois Illinois
<PAGE> 2
<CAPTION>
STATE OR
SUBSIDIARY JURISDICTION
---------- ------------
<S> <C>
Today's Mortgage Source, Inc. Illinois
Today's Financial Services Company Illinois
Mercantile Bank of Southern Illinois Illinois
Mercantile Bank of Central Missouri Missouri
Central Investments Inc. Illinois
Central Financial L.L.C. Illinois
Financial Ideas, Inc. Missouri
Mercantile Bank of Western Missouri Missouri
West Mo Investments Inc. Illinois
Western Financial L.L.C. Illinois
Mercantile Bank of St. Joseph Missouri
Northern Investments Inc. Illinois
Northern Financial L.L.C. Illinois
Mercantile Bank Kansas
Mercantile Financial of Kansas, Inc. Kansas
Mark Twain Real Estate Redevelopment Corp. I Missouri
Kansas Trust Company Kansas
Mark Twain Kansas City Bank Community Development Corp. Kansas
Mercantile Bank of Arkansas National Association United States
Mercantile Financial of Little Rock, Inc. Illinois
Mercantile Financial of Little Rock, L.L.C. Illinois
Mercantile Bank of Western Iowa Iowa
Western Iowa Realty Company, Inc. Iowa
Mercantile Guaranteed Loans Iowa
Mercantile Leasing Corporation Iowa
Mercantile Bank of Eastern Iowa Iowa
Waterloo Realty Company, Inc. Iowa
Horizon Bank Arkansas
Horizon Mortgage Company, Inc. Arkansas
London I, Inc. Arkansas
Hughes Villas Limited Partnership Arkansas
Horizon Financial Services, Inc. Arkansas
MidAmerican Insurance Agency, Inc. Kansas
F & H Realty Corp. Missouri
Mississippi Valley Life Insurance Company Arizona
Alton Downtown Parking, Inc. Illinois
D.D. Development of Sterling Limited Partnership Illinois
Mercantile Service Corp. Iowa
Roosevelt Financial Services, Inc. Missouri
Tarquad Corporation Missouri
Mark Twain Properties, Inc. Missouri
Mark Twain Community Development Corp. Missouri
Mark Twain Investment Advisory Company Missouri
Franklin Finance Company Delaware
Supplemental Monetary Transfer System Missouri
Mercantile Capital Trust I Missouri
</TABLE>
<PAGE> 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, and No. 333-42557,
each on Form S-4; and No. 333-37547 on Form S-3, of Mercantile Bancorporation
Inc. of our report dated January 21, 1998, relating to the 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 Annual Report on Form 10-K of Mercantile Bancorporation Inc.
for the fiscal year ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,171,727
<INT-BEARING-DEPOSITS> 240,578
<FED-FUNDS-SOLD> 292,384
<TRADING-ASSETS> 70,486
<INVESTMENTS-HELD-FOR-SALE> 7,225,638
<INVESTMENTS-CARRYING> 249,434
<INVESTMENTS-MARKET> 252,135
<LOANS> 19,199,917
<ALLOWANCE> 254,983
<TOTAL-ASSETS> 29,955,411
<DEPOSITS> 22,079,927
<SHORT-TERM> 3,465,822
<LIABILITIES-OTHER> 355,340
<LONG-TERM> 1,469,153
0
0
<COMMON> 1,307
<OTHER-SE> 2,408,862
<TOTAL-LIABILITIES-AND-EQUITY> 29,955,411
<INTEREST-LOAN> 1,464,844
<INTEREST-INVEST> 388,879
<INTEREST-OTHER> 24,471
<INTEREST-TOTAL> 1,878,194
<INTEREST-DEPOSIT> 741,058
<INTEREST-EXPENSE> 957,690
<INTEREST-INCOME-NET> 920,504
<LOAN-LOSSES> 79,309
<SECURITIES-GAINS> 6,985
<EXPENSE-OTHER> 894,780
<INCOME-PRETAX> 325,099
<INCOME-PRE-EXTRAORDINARY> 204,593
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,593
<EPS-PRIMARY> 1.68<F1>
<EPS-DILUTED> 1.65<F1>
<YIELD-ACTUAL> 3.93
<LOANS-NON> 97,914
<LOANS-PAST> 20,295
<LOANS-TROUBLED> 4,278
<LOANS-PROBLEM> 60,640
<ALLOWANCE-OPEN> 230,372
<CHARGE-OFFS> 101,308
<RECOVERIES> 26,378
<ALLOWANCE-CLOSE> 254,983
<ALLOWANCE-DOMESTIC> 254,983
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 87,151
<FN>
<F1> Effective October 1, 1997, the Corporation effected a three-for-two
stock split of its common stock. Prior financial data schedules filed by the
Corporation have not been restated to give effect to such stock split.
</TABLE>
