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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 1-11792
MERCANTILE BANCORPORATION INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MISSOURI 43-0951744
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
P.O. BOX 524 ST. LOUIS, MISSOURI 63166-0524
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 425-2525
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
X
--------- ---------
YES NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE, 157,351,861 SHARES OUTSTANDING AS OF THE CLOSE OF
BUSINESS ON OCTOBER 30, 1998.
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<PAGE>
<PAGE>
<TABLE>
INDEX
PART I--FINANCIAL INFORMATION
<CAPTION>
PAGE NO.
--------
<S> <C>
Item 1--Financial Statements
Consolidated Statement of Income
Three months and nine months ended September 30, 1998 and 1997 3
Consolidated Balance Sheet
September 30, 1998 and 1997, and December 31, 1997 4
Consolidated Statement of Changes in Shareholders' Equity
Nine months ended September 30, 1998 and 1997 5
Consolidated Statement of Cash Flows
Nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2-- Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3-- Quantitative and Qualitative Disclosures Regarding Market Risk
There have been no material changes from the information provided
in the December 31, 1997 Form 10-K.
PART II--OTHER INFORMATION
Item 5--Other Information 28
Item 6--Exhibits and Reports on Form 8-K 28
Signature 30
Exhibit Index 31
</TABLE>
2
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $443,631 $462,063 $1,331,843 $1,204,182
Investments in debt and equity securities
Trading 1,819 1,641 6,730 4,443
Taxable 138,986 123,657 415,993 278,911
Tax-exempt 5,491 6,324 17,546 19,469
-------- -------- ---------- ----------
Total Investments in Debt and Equity Securities 146,296 131,622 440,269 302,823
Due from banks--interest bearing 3,285 3,192 9,861 6,561
Federal funds sold and repurchase agreements 4,049 5,535 12,555 13,036
-------- -------- ---------- ----------
Total Interest Income 597,261 602,412 1,794,528 1,526,602
INTEREST EXPENSE
Interest bearing deposits 226,286 236,494 687,115 582,429
Foreign deposits 5,697 7,708 19,555 19,147
Short-term borrowings 38,864 53,001 139,117 108,228
Bank notes 374 2,687 3,065 7,860
Long-term debt and mandatorily redeemable preferred securities 52,961 18,800 124,574 36,408
-------- -------- ---------- ----------
Total Interest Expense 324,182 318,690 973,426 754,072
-------- -------- ---------- ----------
NET INTEREST INCOME 273,079 283,722 821,102 772,530
PROVISION FOR POSSIBLE LOAN LOSSES<F*> 23,871 29,209 39,752 78,728
-------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 249,208 254,513 781,350 693,802
OTHER INCOME
Trust 27,442 26,888 84,386 77,535
Service charges 30,498 29,770 87,815 79,941
Investment banking and brokerage 9,760 10,837 30,652 28,021
Mortgage banking 6,149 7,819 21,051 14,691
Gain on sale of mortgage servicing rights -- -- 23,155 --
Credit card fees 3,045 5,836 9,128 16,927
Securitization revenue 5,775 3,357 14,818 15,374
Securities gains<F*> 2,297 2,131 9,584 5,248
Gain on sale of subsidiaries<F*> 48,051 -- 48,051 --
Miscellaneous 28,822 25,706 84,901 67,386
-------- -------- ---------- ----------
Total Other Income 161,839 112,344 413,541 305,123
OTHER EXPENSE
Salaries 106,007 101,728 312,385 280,613
Employee benefits 18,148 22,800 58,727 64,595
Net occupancy 17,448 17,018 49,647 45,373
Equipment 21,160 18,307 63,273 50,318
Intangible asset amortization 14,311 15,276 43,369 25,180
Loss on sale of credit card loans<F*> -- 50,000 -- 50,000
Miscellaneous<F*> 134,078 114,038 229,015 252,178
-------- -------- ---------- ----------
Total Other Expense 311,152 339,167 756,416 768,257
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 99,895 27,690 438,475 230,668
INCOME TAXES<F*> 36,751 14,334 153,325 89,245
-------- -------- ---------- ----------
NET INCOME<F*> $ 63,144 $ 13,356 $ 285,150 $ 141,423
======== ======== ========== ==========
PER SHARE DATA
Basic earnings per share $.41 $.09 $1.87 $1.03
Diluted earnings per share .41 .09 1.84 1.01
Dividends declared .31 .287 .93 .861
<FN>
<F*>Includes the following nonrecurring amounts:
Provision for possible loan losses $ 19,600 $ 13,800 $ 19,600 $ 20,340
Securities losses 1,649 -- 1,649 --
Gain on sale of subsidiaries (48,051) -- (48,051) --
Loss on sale of credit card loans -- 50,000 -- 50,000
Miscellaneous expense 89,192 69,530 89,192 121,393
Income tax benefit (15,028) (43,379) (15,028) (59,356)
-------- -------- ---------- ----------
Reduction of Net Income $ 47,362 $ 89,951 $ 47,362 $ 132,377
======== ======== ========== ==========
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS)
<CAPTION>
SEPT. 30 SEPT. 30
1998 DEC. 31 1997
(UNAUDITED) 1997 (UNAUDITED)
----------- ------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,175,006 $ 1,330,512 $ 1,169,211
Due from banks--interest bearing 153,408 251,909 313,591
Federal funds sold and repurchase
agreements 214,889 303,859 192,999
Investments in debt and equity
securities
Trading 98,301 70,536 137,817
Available-for-sale (Amortized cost
of $8,956,729, $8,023,157 and
$7,585,601, respectively) 9,061,675 8,059,066 7,624,053
Held-to-maturity (Estimated fair
value of $117,538, $341,954 and
$374,419, respectively) 116,007 335,279 365,195
----------- ----------- -----------
Total Investments in Debt and
Equity Securities 9,275,983 8,464,881 8,127,065
Loans held-for-sale 129,569 96,955 83,879
Loans and leases, net of unearned
income 21,871,875 21,265,000 21,098,142
----------- ----------- -----------
Total Loans and Leases 22,001,444 21,361,955 21,182,021
Reserve for possible loan losses (308,869) (284,165) (286,042)
----------- ----------- -----------
Net Loans and Leases 21,692,575 21,077,790 20,895,979
Bank premises and equipment 541,099 531,650 513,418
Intangible assets 794,593 839,285 853,722
Receivable for credit card loans
sold -- -- 372,835
Other assets 748,968 532,304 685,848
----------- ----------- -----------
Total Assets $34,596,521 $33,332,190 $33,124,668
=========== =========== ===========
LIABILITIES
Deposits
Non-interest bearing $ 3,788,416 $ 3,956,138 $3,463,883
Interest bearing 20,426,340 20,267,878 20,520,898
Foreign 327,551 585,439 669,483
---------- ----------- ----------
Total Deposits 24,542,307 24,809,455 24,654,264
Federal funds purchased and
repurchase agreements 1,562,384 2,127,443 2,420,159
Other short-term borrowings 1,000,750 1,551,097 1,546,227
Bank notes 25,000 175,000 175,000
Long-term Federal Home Loan Bank
advances 2,888,728 578,484 261,538
Other long-term debt 793,026 789,687 789,731
Company obligated mandatorily
redeemable preferred securities
of Mercantile Capital Trust I 150,000 150,000 150,000
Other liabilities 575,652 388,722 428,337
---------- ----------- ----------
Total Liabilities 31,537,847 30,569,888 30,425,256
Commitments and contingent liabilities -- -- --
<CAPTION>
SEPT. 30 DEC. 31 SEPT. 30
1998 1997 1997
-------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY
Preferred stock--no par value
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding -- -- -- -- -- --
Common stock--$.01 par value
Shares authorized 400,000 200,000 200,000
Shares issued 157,346 148,874 148,624 1,574 1,489 1,486
Capital surplus 996,239 1,016,844 1,015,555
Retained earnings 1,993,671 1,724,752 1,660,354
Accumulated other comprehensive
income 70,607 25,222 27,431
Treasury stock, at cost 76 162 157 (3,417) (6,005) (5,414)
----------- ----------- -----------
Total Shareholders' Equity 3,058,674 2,762,302 2,699,412
----------- ----------- -----------
Total Liabilities and
Shareholders' Equity $34,596,521 $33,332,190 $33,124,668
=========== =========== ===========
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
($ IN THOUSANDS)
<CAPTION>
COMMON STOCK
---------------------- TOTAL
OUTSTANDING CAPITAL RETAINED TREASURY SHAREHOLDERS'
SHARES DOLLARS SURPLUS EARNINGS<F*> STOCK EQUITY
----------- ------- ------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 134,174,597 $ 683,832 $ 16,091 $1,647,521 $ (84,201) $2,263,243
Net income 141,423 141,423
Common dividends declared:
Mercantile Bancorporation Inc.--$.861 per share (95,086) (95,086)
Pooled companies prior to acquisition (24,313) (24,313)
Issuance of common stock in acquisitions of:
Roosevelt Financial Group, Inc. 18,948,884 123 353,128 6,872 280,981 641,104
Regional Bancshares, Inc. 900,625 (474) 361 28,813 28,700
Change in par value of common stock from
$5.00 per share to $.01 per share (676,575) 676,575 --
Issuance of common stock for:
Employee incentive plans 695,266 320 6,166 4,773 11,259
Convertible notes 75,384 80 758 838
Other comprehensive income 11,014 11,014
Purchase of treasury stock (6,750,199) (285,958) (285,958)
Reissuance of treasury stock (7,396) (42,950) 50,346 --
Pre-merger transactions of pooled companies and
other 422,151 1,102 6,261 (7) (168) 7,188
----------- --------- ---------- ---------- --------- ----------
BALANCE AT SEPTEMBER 30, 1997 148,466,708 $ 1,486 $1,015,555 $1,687,785 $ (5,414) $2,699,412
=========== ========= ========== ========== ========= ==========
BALANCE AT DECEMBER 31, 1997 148,712,307 $ 1,489 $1,016,844 $1,749,974 $ (6,005) $2,762,302
Net income 285,150 285,150
Common dividends declared:
Mercantile Bancorporation Inc.--$.93 per share (130,853) (130,853)
Pooled companies prior to acquisition (10,466) (10,466)
Issuance of common stock in acquisitions of:
First Financial Bancorporation 3,139,069 31 8,534 50,343 58,908
Financial Services Corporation of the Midwest 2,071,448 21 5,093 27,730 32,844
HomeCorp, Inc. 854,760 9 6,727 13,792 20,528
Horizon Bancorp, Inc. 2,549,970 25 10,755 35,615 357 46,752
Issuance of common stock for:
Employee incentive plans 1,453,000 13 38,467 7,462 45,942
Convertible notes 23,892 1 265 266
Other comprehensive income 43,007 43,007
Reissuance of treasury stock (94,471) 94,471 --
Purchase of treasury stock (1,806,250) (99,702) (99,702)
Pre-merger transactions of pooled companies and
other 271,638 (15) 4,025 (14) 3,996
----------- --------- ---------- ---------- --------- ----------
BALANCE AT SEPTEMBER 30, 1998 157,269,834 $ 1,574 $ 996,239 $2,064,278 $ (3,417) $3,058,674
=========== ========= ========== ========== ========= ==========
<FN>
<F*>Includes accumulated other comprehensive income.
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 285,150 $ 141,423
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 39,752 78,728
Depreciation and amortization 55,323 44,397
Provision for deferred income taxes (credits) (6,593) (78)
Net change in loans held-for-sale (26,540) (8,502)
Net change in trading securities (4,088) (147,324)
Net change in accrued interest receivable (5,479) 59
Net change in accrued interest payable 11,282 39,932
Other, net (72,171) (57,119)
----------- -----------
Net Cash Provided by Operating Activities 276,636 91,516
INVESTING ACTIVITIES
Investments in debt and equity securities, other than trading securities
Purchases (5,463,631) (2,754,785)
Proceeds from maturities 3,859,077 2,576,787
Proceeds from sales of available-for-sale securities 1,283,036 430,056
Net change in loans and leases 146,108 (781,599)
Purchases of loans and leases (434,839) (248,655)
Proceeds from sale of mortgage servicing rights 26,330 --
Proceeds from sales of loans and leases 640,738 413,823
Purchases of premises and equipment (62,764) (75,349)
Proceeds from sales of premises and equipment 19,361 4,011
Proceeds from sales of foreclosed property 41,198 38,153
Cash and cash equivalents from acquisitions, net of cash paid 125,833 (231,736)
Sale of banking offices, net of cash paid 57,947 (167,488)
Other, net 18,046 (8,252)
----------- -----------
Net Cash Provided (Used) by Investing Activities 256,440 (805,034)
FINANCING ACTIVITIES
Net change in non-interest bearing, savings, interest bearing demand and
money market deposit accounts (376,849) 915,819
Net change in time certificates of deposit under $100,000 (949,703) (1,668,756)
Net change in time certificates of deposit $100,000 and over 32,068 11,197
Net change in other time deposits (60,772) (21,219)
Net change in foreign deposits (257,888) 417,596
Net change in short-term borrowings (1,166,957) 524,887
Principal payments on bank notes (150,000) --
Issuance of long-term FHLB advances and other long-term debt 2,336,500 616,835
Issuance of company-obligated mandatorily
redeemable preferred securities -- 150,000
Principal payments on long-term debt (65,906) (13,402)
Cash dividends paid (135,222) (119,044)
Proceeds from issuance of common stock for employee incentive plans and
pre-merger transactions of pooled companies 18,496 18,176
Purchase of treasury stock (99,702) (297,733)
Other, net (118) (1,351)
----------- -----------
Net Cash Provided (Used) by Financing Activities (876,053) 533,005
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (342,977) (180,513)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,886,280 1,856,314
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,543,303 $ 1,675,801
=========== ===========
</TABLE>
6
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
ACCOUNTING POLICIES
The consolidated financial statements include all adjustments which are, in the
opinion of management, necessary for the fair statement of the results of these
periods and are of a normal recurring nature, with the exception of the
nonrecurring charges as disclosed with an asterisk on the Consolidated
Statement of Income on page 3.
NOTE B
NEW ACCOUNTING STANDARDS
Financial Accounting Standard ("FAS") 128, "Earnings per Share," was issued in
February 1997. This statement, effective in the fourth quarter of 1997,
requires additional reporting of earnings per share which gives effect to
dilutive common share equivalents such as stock options or convertible notes.
The Corporation's disclosure under FAS 128 is included in Note C to the
Consolidated Financial Statements.
FAS 130, "Reporting Comprehensive Income," was issued in June 1997.
Comprehensive income is defined as net income plus certain items that are
recorded directly to shareholders' equity, such as unrealized gains and losses
on available-for-sale securities. Components of the Corporation's comprehensive
income are included in Note E.
FAS 131, "Disclosures about Segments of an Enterprise and Related Information,"
is effective for financial statements for periods beginning after December 15,
1997, but interim period reporting is not required in 1998. An operating
segment is defined under FAS 131 as a component of an enterprise that engages
in business activities that generate revenue and expense for which operating
results are reviewed by the chief operating decision maker in the determination
of resource allocation and performance. Mercantile is currently evaluating the
impact of FAS 131 on future financial statement disclosures.
FAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," addresses disclosure of such benefit plans and is effective for
fiscal years beginning after December 31, 1997. The Corporation does not
anticipate a significant impact when making these new disclosures.
FAS 133, "Accounting for Derivative Instruments and Hedging Activities," which
was issued in June 1998, establishes accounting and reporting standards for
derivative instruments and hedging activities. Under FAS 133, derivatives are
recognized on the balance sheet at fair value as an asset or liability. Changes
in the fair value of derivatives are reported as a component of other
comprehensive income or recognized as earnings through the income statement
depending on the nature of the instrument. FAS 133 is effective for all
quarters of fiscal years beginning after June 15, 1999 with earlier adoption
permitted. The Corporation is currently evaluating FAS 133's effect.
FAS 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," is effective in the first fiscal quarter beginning after December
15, 1998. FAS 134 is not anticipated to impact Mercantile.
NOTE C
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period.
7
<PAGE>
<PAGE>
Diluted earnings per share gives effect to both the increase in the average
shares outstanding that would have resulted from both the exercise of dilutive
stock options and the conversion of the entire balance of outstanding
convertible notes. Net income is increased in the diluted earnings per share
computation by interest expense that would not be incurred on notes if they
converted, net of taxes. The components of basic and diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER SHARE DATA)
THIRD QUARTER NINE MONTHS
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net income $63,144 $13,356 $285,150 $141,423
Weighted average shares outstanding 153,427,490 148,327,222 152,150,676 137,117,594
BASIC EARNINGS PER SHARE $.41 $.09 $1.87 $1.03
DILUTED
Net income $63,144 $13,356 $285,150 $141,423
Interest on convertible notes, net of taxes 10 14 33 69
------- ------- -------- --------
Diluted Net Income $63,154 $13,370 $285,183 $141,492
======= ======= ======== ========
Weighted average common shares outstanding 153,427,490 148,327,222 152,150,676 137,117,594
Employee incentive plans 2,209,843 2,731,394 2,494,483 2,303,074
Convertible notes 83,850 108,834 91,849 146,850
----------- ----------- ----------- -----------
Diluted Average Shares Outstanding 155,721,183 151,167,450 154,737,008 139,567,518
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $.41 $.09 $1.84 $1.01
</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. Per share
data for 1997 gives effect to the computational and reporting requirements of
FAS 128.
NOTE D
ACQUISITIONS
On July 1, 1998, the Corporation acquired CBT Corporation ("CBT") of Paducah,
Kentucky, and Firstbank of Illinois Co. ("Firstbank"), headquartered in
Springfield, Illinois. The CBT and Firstbank acquisitions were accounted for
under the pooling-of-interests method, and accordingly, Mercantile's financial
statements have been restated. Net income and basic earnings per share prior to
this restatement were as follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT
PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30, 1998
-----------------
<S> <C>
MERCANTILE
Net income $198,902
Basic earnings per share 1.50
CBT
Net income 7,151
Basic earnings per share 1.40
FIRSTBANK
Net income 15,953
Basic earnings per share 1.21
</TABLE>
On July 1, 1997, the Corporation acquired Roosevelt Financial Group, Inc.
("Roosevelt"), a $7.3 billion-asset thrift holding company headquartered in St.
Louis, Missouri. The Roosevelt acquisition was accounted for as a purchase.
Unaudited pro forma combined consolidated financial data including the
Corporation and Roosevelt for the nine months ending September 30, 1997 is
8
<PAGE>
<PAGE>
disclosed below. The unaudited pro forma combined consolidated financial data
provided includes the impact of goodwill amortization and the reduction in net
interest income due to: 1) interest lost on cash paid for share repurchases or
paid directly to Roosevelt shareholders as consideration; and 2) interest on
$650 million of senior debt, subordinated debt and redeemable preferred
securities issued in 1997 largely to finance the Roosevelt acquisition, offset
by interest earned on funds not utilized in the acquisition.
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
---------------------------------
<S> <C>
Net interest income $849,323
Other income 292,549
Net income 100,854
Basic earnings per share .69
</TABLE>
In the third quarter of 1998, the Corporation consummated its acquisitions of:
1) Financial Services Corporation of the Midwest ("FSCM"), headquartered in
Rock Island, Illinois; 2) Iowa City-based First Financial Bancorporation
("First Financial"); and 3) Bruno, Stolze & Company, Inc. ("Bruno Stolze"), a
St. Louis-based discount brokerage company. The acquisitions of FSCM and First
Financial were accounted for as poolings-of-interests. However, due to their
immateriality the Corporation did not restate its financial statements. The
Bruno Stolze acquisition was accounted for under the purchase method of
accounting.
NOTE E
COMPREHENSIVE INCOME
Comprehensive income as defined by FAS 130 is as follows:
<TABLE>
<CAPTION>
(THOUSANDS)
THIRD QUARTER NINE MONTHS
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 63,144 $13,356 $285,150 $141,423
Other comprehensive income before tax:
Holding gains on available-for-sale securities 61,172 20,951 75,749 22,193
Less: Reclassification adjustment for securities gains
included in net income above (2,297) (2,131) (9,584) (5,248)
-------- ------- -------- --------
Other Comprehensive Income Before Tax 58,875 18,820 66,165 16,945
Income Taxes Related to Other Comprehensive Income (20,606) (6,587) (23,158) (5,931)
-------- ------- -------- --------
Other Comprehensive Income Net of Tax 38,269 12,233 43,007 11,014
-------- ------- -------- --------
COMPREHENSIVE INCOME $101,413 $25,589 $328,157 $152,437
======== ======= ======== ========
</TABLE>
NOTE F
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE
CAPITAL TRUST I
Mercantile Capital Trust I is a subsidiary of which the Corporation owns all
the outstanding common securities; its sole assets are the $150,000,000 in
mandatorily redeemable preferred securities, and considered together, the
back-up undertakings constitute a full and unconditional guarantee by the
Corporation of the trust's obligations under the preferred securities.
9
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 1
HIGHLIGHTS<F1>
<CAPTION>
THIRD QUARTER NINE MONTHS
($ IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 CHANGE 1998 1997 CHANGE
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Diluted earnings per share $.41 $.09 --% $1.84 $1.01 82.2%
Basic earnings per share .41 .09 -- 1.87 1.03 81.6
Dividends declared .31 .287 8.0 .93 .861 8.0
Book value at September 30 19.45 18.18 7.0 19.45 18.18 7.0
Market price at September 30 48 3/8 50 3/4 (4.7) 48 3/8 50 3/4 (4.7)
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS AND SELECTED RATIOS
EXCLUDING NONRECURRING AMOUNTS<F2>
Adjusted net income $110,506 $103,307 7.0% $332,512 $273,800 21.4%
Adjusted diluted earnings per share .71 .68 4.4 2.15 1.96 9.7
Adjusted basic earnings per share .72 .70 2.9 2.19 2.00 9.5
Return on assets 1.29% 1.25% 1.29% 1.32%
Return on equity 14.84 14.94 15.24 15.30
Efficiency ratio 56.56 54.83 55.58 54.69
Other expense to average assets 2.59 2.66 2.59 2.87
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS<F3>
Taxable-equivalent net interest income $276,985 $288,199 (3.9)% $833,434 $786,290 6.0%
Tax-equivalent adjustment 3,906 4,477 (12.8) 12,332 13,760 (10.4)
Net interest income 273,079 283,722 (3.8) 821,102 772,530 6.3
Provision for possible loan losses 23,871 29,209 (18.3) 39,752 78,728 (49.5)
Other income 161,839 112,344 44.1 413,541 305,123 35.5
Other expense 311,152 339,167 (8.3) 756,416 768,257 (1.5)
Income taxes 36,751 14,334 -- 153,325 89,245 71.8
Net income 63,144 13,356 -- 285,150 141,423 --
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS AND DATA<F3>
Return on assets .74% .16% 1.10% .68%
Return on equity 8.48 1.93 13.07 7.90
Efficiency ratio 70.91 84.68 60.66 70.39
Other expense to average assets 3.63 4.11 2.93 3.69
Net interest rate margin 3.51 3.79 3.56 4.13
Tangible equity to tangible assets 6.70 5.72
Equity to assets 8.84 8.15
Tier I capital to risk-adjusted assets 9.87 9.35
Total capital to risk-adjusted assets 12.75 12.56
Leverage 7.12 6.30
Reserve for possible loan losses to
outstanding loans 1.40 1.35
Reserve for possible loan losses to
non-performing loans 231.98 217.65
Non-performing loans to outstanding loans .61 .62
Banks 20 37
Banking offices 628 666
Full-time equivalent employees 10,919 10,905
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Total assets $34,260,343 $33,030,120 3.7% $34,414,208 $27,749,161 24.0%
Earning assets 31,275,935 30,208,065 3.5 31,344,274 25,478,078 23.0
Loans and leases 21,673,393 21,587,546 .4 21,690,744 18,621,892 16.5
Deposits 24,371,409 24,788,328 (1.7) 24,793,816 21,452,650 15.6
Shareholders' equity 2,979,246 2,766,664 7.7 2,909,216 2,385,789 21.9
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> All previously reported financial information has been restated to reflect
the July 1, 1998 mergers with Firstbank of Illinois Co. and CBT
Corporation, which were accounted for as poolings-of-interests.
<F2> Nonrecurring amounts reduced net income in the first nine months of 1998
and 1997 by $47,362,000 and $132,377,000, respectively.
<F3> Includes nonrecurring amounts noted in (2) above.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<PAGE>
PERFORMANCE SUMMARY
Net income for Mercantile Bancorporation Inc. ("Mercantile" or
"Corporation") was $63,144,000 in the third quarter of 1998 versus
$13,356,000 in the same period of 1997. Basic and diluted earnings per share
was $.41 compared with $.09 in the third quarter of 1997. Net income for the
nine months ended September 30, 1998 was $285,150,000 compared with
$141,423,000 last year, and the corresponding diluted earnings per share
figures were $1.84 and $1.01, respectively.
The comparison of operating results from 1997 to 1998 is significantly
affected by several factors. The Corporation recorded one-time after-tax
acquisition costs of $76,783,000 ($.49 per share) in the third quarter of
1998. Additionally, in the third quarter the Corporation recorded a gain on
the required divestiture of the two Missouri banks owned by Firstbank of
Illinois Co. ("Firstbank"). The sale of these banks, which had total assets
of approximately $300 million, resulted in an after-tax gain of $.19 per
share. Thus the one-time acquisition costs net of the sale proceeds was $.30
per share in the third quarter of 1998.
In 1997, similar expense was recorded for Roosevelt Financial Group, Inc.
("Roosevelt") in the third quarter of 1997 and for both Mark Twain
Bancshares, Inc. ("Mark Twain") and Regional Bancshares, Inc. in the second
quarter of 1997. Another one-time expense resulted in a pre-tax charge to
earnings of $50,000,000 in the third quarter of 1997, as the Corporation
sold $405 million in former co-branded credit card receivables to Direct
Merchants Credit Card Bank, N.A. at a discount.
Exhibit 2 presents third quarter and year-to-date 1997 and 1998 results
adjusted to exclude such nonrecurring amounts, and as shown, year-to-date
adjusted diluted earnings per share was $2.15 in 1998, up 9.7% from the 1997
comparable figure of $1.96. For the third quarter of 1998, the adjusted
figure was $.71, up 4.4% from the 1997 comparable per share amount.
<TABLE>
- -------------------------------------------------------------------------------
EXHIBIT 2
ADJUSTED RESULTS
<CAPTION>
DILUTED
NET INCOME EARNINGS RETURN ON
(THOUSANDS) PER SHARE ASSETS
----------- --------- ---------
<S> <C> <C> <C>
THIRD QUARTER ENDED
SEPTEMBER 30, 1998:
Reported $ 63,144 $ .41 .74%
Acquisition expenses 76,783 .49 .89
Gain on sale of
subsidiaries (29,421) (.19) (.34)
-------- ----- ----
Adjusted $110,506 $ .71 1.29%
======== ===== ====
NINE MONTHS ENDED
SEPTEMBER 30, 1998:
Reported $285,150 $1.84 1.10%
Acquisition expenses 76,783 .50 .30
Gain on sale of
subsidiaries (29,421) (.19) (.11)
-------- ----- ----
Adjusted $332,512 $2.15 1.29%
======== ===== ====
THIRD QUARTER ENDED
SEPTEMBER 30, 1997:
Reported $ 13,356 $ .09 .16%
Acquisition expenses 57,451 .38 .70
Loss on sale of credit card
loans 32,500 .21 .39
-------- ----- ----
Adjusted $103,307 $ .68 1.25%
======== ===== ====
NINE MONTHS ENDED
SEPTEMBER 30, 1997:
Reported $141,423 $1.01 .68%
Acquisition expenses 99,877 .72 .48
Loss on sale of credit card
loans 32,500 .23 .16
-------- ----- ----
Adjusted $273,800 $1.96 1.32%
======== ===== ====
- -------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<PAGE>
The Corporation believes it is significant to disclose cash based earnings,
which excludes intangible asset amortization, because it is more indicative
of cash flows, and thus, the Corporation's ability to support growth and pay
dividends. Mercantile added $608 million of goodwill to its balance sheet in
conjunction with the purchase of Roosevelt on July 1, 1997. Intangible asset
amortization for the first nine months of 1998 was $43,369,000 compared with
$25,180,000 for the same 1997 period. Third quarter 1998 cash based adjusted
diluted earnings per share was $.80, up 2.6% from the $.78 earned in 1997.
See Exhibit 3 for other cash based performance ratios.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 3
CASH BASED EARNINGS
($ IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
THIRD QUARTER NINE MONTHS
1998 1997 CHANGE 1998 1997 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Adjusted Net Income $110,506 $103,307 7.0% $332,512 $273,800 21.4%
Add Back:
Goodwill amortization 13,700 13,876 (1.3) 41,503 20,884 98.7
Other intangible asset amortization 611 1,400 (56.4) 1,866 4,296 (56.6)
-------- -------- -------- --------
Total Intangible Asset Amortization 14,311 15,276 (6.3) 43,369 25,180 72.2
Less:
Tax effect (221) (461) (52.1) (673) (1,410) (52.3)
-------- -------- -------- --------
CASH BASED ADJUSTED NET INCOME $124,596 $118,122 5.5 $375,208 $297,570 26.1
======== ======== ======== ========
CASH BASED ADJUSTED DILUTED EARNINGS PER SHARE $.80 $.78 2.6 $2.43 $2.13 14.1
CASH BASED ADJUSTED PERFORMANCE RATIOS
Return on tangible assets 1.49% 1.47% 1.49% 1.45%
Return on tangible equity 22.91 24.90 23.93 20.34
Efficiency ratio 52.91 51.02 51.96 52.38
Other expense to average tangible assets 2.48 2.54 2.48 2.79
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 4 details acquisitions completed during 1997 and 1998. On July 1,
1998, Mercantile completed the acquisition of CBT Corporation ("CBT") of
Paducah, Kentucky, a bank holding company with assets totaling $1.0 billion.
The merger was accounted for as a pooling-of-interests. Also on July 1,
1998, Mercantile completed the acquisition of Firstbank, a $2.3 billion-
asset bank holding company headquartered in Springfield, Illinois. This
merger was also accounted for as a pooling-of-interests. Mercantile
converted the banks in the Firstbank group to its operating systems on
September 18, 1998. At that time, nine offices in Illinois located in the
St. Louis metropolitan area joined Mercantile Bank N.A. and the remaining
banks became part of Mercantile Bank of Illinois. All prior period
financial results have been restated to reflect the poolings with CBT and
Firstbank.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 4
ACQUISITIONS
($ IN THOUSANDS)
<CAPTION>
CONSIDERATION
-----------------
GROSS ACCOUNTING
DATE ASSETS DEPOSITS CASH SHARES METHOD
---- ------ -------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
BANK ACQUISITIONS COMPLETED
First Financial Bancorporation Sept. 28, 1998 $ 558,483 $ 477,573 $ -- 3,139,069 Pooling<F1>
Financial Services Corporation of the Midwest Aug. 3, 1998 514,051 414,350 4 2,071,448 Pooling<F1>
CBT Corporation July 1, 1998 1,006,384 695,923 34 5,123,214 Pooling
Firstbank of Illinois Co. July 1, 1998 2,285,146 1,969,600 64 13,352,641 Pooling
HomeCorp, Inc. Mar. 2, 1998 335,137 309,157 14 854,760 Pooling<F1>
Horizon Bancorp, Inc. Feb. 2, 1998 536,507 454,230 2 2,549,970 Pooling<F1>
Roosevelt Financial Group, Inc. July 1, 1997 7,251,985 5,317,514 374,477 18,948,884 Purchase
Mark Twain Bancshares, Inc. Apr. 25, 1997 3,227,972 2,519,474 73 24,088,713 Pooling
Regional Bancshares, Inc. Mar. 5, 1997 171,979 135,954 12,300 900,625 Purchase
NONBANK ACQUISITION COMPLETED
Bruno, Stolze & Company, Inc. Sept. 30, 1998 <F2> <F2> Purchase
<FN>
<F1> The Corporation's historical financial statements were not restated for
the acquisition due to the immateriality of the acquiree's financial
condition and results of operations to those of Mercantile.
<F2> Terms of the transaction not disclosed.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<PAGE>
On August 3, 1998, Mercantile acquired Financial Services Corporation of the
Midwest, a $514 million one-bank holding company headquartered in Rock
Island, Illinois. The company's subsidiary bank, The Rock Island Bank N.A.
has the leading market share position in Rock Island County, which forms the
eastern half of the Quad Cities metropolitan area. On September 28, 1998,
the Corporation completed its acquisition of First Financial Bancorporation,
headquartered in Iowa City, Iowa. First Financial is the $558 million
one-bank holding company for First National Bank Iowa, which operates in ten
locations in the Iowa City / Cedar Rapids corridor. Both of these banks will
be merged into Mercantile banks in November 1998 and their systems will be
converted at the same time. These acquisitions meet the requirements for
treatment as poolings-of-interests; however, due to the immateriality of
their financial condition and results of operations to that of Mercantile,
the historical financial statements of the Corporation were not restated.
Finally, on September 30, 1998, Mercantile announced the completion of the
acquisition of St. Louis-based Bruno, Stolze & Company, Inc., by Mercantile
Investment Services, Inc., the Corporation's broker-dealer subsidiary. This
acquisition accelerates Mercantile's expansion into the fast-growing
discount brokerage business. There are currently no acquisitions pending.
Mercantile's acquisition of Roosevelt on July 1, 1997 was accounted for as a
purchase. Thus, historical financial statements were not restated and
Roosevelt's results of operations are included in Mercantile's financial
results only from July 1, 1997 forward. This accounting makes year-to-date
1997 and 1998 comparisons somewhat difficult.
Net interest income was up 6.3% to $821,102,000 for the first nine months of
1998 yet decreased 3.8% to $273,079,000 for the third quarter of 1998 when
compared with the third quarter of 1997. The net interest rate margin
stabilized at 3.51% this quarter compared with 3.53% in the second quarter
of 1998 and 3.79% for the third quarter of 1997, while the year-to-date
margin was 3.56% compared with 4.13% last year. The third quarter 1997
acquisition of Roosevelt, continued competitive pricing for both loans and
deposits, accelerated mortgage asset refinancings and prepayments, the flat
yield curve, and the divestiture of selected credit card portfolios
significantly impacted the Corporation's mix of earning assets and costing
sources of funds, and thus lowered the rate margin. Average earning
assets for the first three quarters of 1998 of $31.3 billion were 23.0%
higher than the $25.5 billion reported last year, as average loan volume
increased by 16.5%.
For the first nine months of 1998, other income was $413,541,000, an
increase of $108,418,000 or 35.5% from last year. Included in 1998 other
income was a $48,051,000 gain on the sale of two Firstbank subsidiaries that
were divested due to state restrictions on deposit concentration and
$1,649,000 in securities losses due to portfolio restructurings of several
recently acquired banks. Additionally, Mercantile recorded a $23,155,000
pre-tax gain on the sale of mortgage servicing rights in the first quarter
of 1998. Excluding these items non-interest income grew by 12.7% in 1998.
Adjusted third quarter non-interest expenses were $221,960,000 compared with
$219,637,000 last year, an increase of 1.1%. Excluding the one-time
adjustments, year-to-date operating expenses were up by 11.8%, due largely
to the inclusion of Roosevelt in three quarters of 1998 but only one quarter
of 1997 through September 30.
The Corporation is committed to reducing its cost base and has engaged a
consultant to assist it in its analysis of this issue. Certain one-time
charges will be incurred in this restructuring effort. At a minimum, a
$15,000,000 charge relating to staff rightsizing will be taken in the fourth
quarter of 1998. Significant additional charges resulting from
centralization and branch closings, consolidation of back office functions
and possible further staff rightsizing may be taken in the fourth quarter
as well, following completion by the Corporation of such analysis.
The provision for possible loan losses for the third quarter of 1998 was
$23,871,000 compared with $29,209,000 the prior year, and was $39,752,000
for the first nine months of 1998 compared with $78,728,000 in 1997. The
provision in 1998 and 1997 included $19,600,000 and $20,340,000,
respectively, in acquisition-related expense. Net charge-offs were
$30,703,000 versus $70,584,000 last year, and on an annualized basis were
.19% of average loans compared with .51% last year. The lower provision and
charge-offs were primarily due to the decrease in average credit card loans,
which was caused by the sale of non-strategic credit card receivables in the
third quarter of 1997 and first quarter of 1998. Partially offsetting this
decrease was $5,600,000 of charge-offs in the third quarter of 1998 related
to recently acquired banks. At September 30, 1998, the reserve for possible
loan losses was $308,869,000 and provided coverage of 231.98% of
non-performing loans compared with 241.91% at year-end and 217.65% last
September 30.
13
<PAGE>
<PAGE>
Non-performing loans (i.e., non-accrual and renegotiated loans) as of
September 30, 1998 were $133,145,000 or .61% of total loans compared with
$120,765,000 or .55% at June 30, 1998 and $131,422,000 or .62% at September
30, 1997. Foreclosed assets totaled $16,276,000 at September 30, 1998
compared with $23,293,000 at June 30, 1998 and $21,203,000 last September
30.
Consolidated assets of $34.6 billion were up 4.4% from a year ago. Total
deposits decreased by .5% to $24.5 billion, loans were $22.0 billion, up
3.9% from last year, and shareholders' equity of $3.1 billion was 13.3%
higher than at September 30, 1997. All measures of capital adequacy remained
adequate. Tier I capital to risk-adjusted assets was 9.87% while total
capital to risk-adjusted assets at September 30, 1998 was 12.75%.
The following financial commentary presents a more thorough discussion and
analysis of the results of operations and financial position of the
Corporation for the third quarter and first nine months of 1998.
NET INTEREST INCOME
Net interest income for the third quarter of 1998 was $273,079,000, a 3.8%
decrease from the $283,722,000 earned last year, and for the first nine
months of 1998 was $821,102,000, 6.3% higher than last year. For the
quarter, the net interest rate margin was 3.51% compared with 3.79% last
year, and the year-to-date margin was 3.56% compared with 4.13% last year.
The acquisition of Roosevelt caused a significant shift in the mix of
earning assets and funding sources. These shifts, combined with the cost of
debt issued to acquire Roosevelt and the sale of the former co-branded
credit card portfolio, resulted in an estimated 60-basis-point decline in
the net interest rate margin during the second half of 1997. The third
quarter and year-to-date 1998 net interest rate margins dropped further due
to competitive pressures on both deposit and loan pricing, accelerated
mortgage asset prepayments and refinancings, the flat yield curve, and the
divestiture of selected portions of the Corporation's remaining credit card
portfolio. It is possible that margins could continue to decline in the
fourth quarter and 1999 for these same reasons.
Average earning assets for the first nine months of 1998 grew by $5.9
billion or 23.0% when compared with 1997, and average loans grew by $3.1
billion or 16.5%. This growth was funded by an increase of $3.0 billion or
15.7% in average core deposits, a $291 million increase in purchased
deposits, a $770 million increase in short-term borrowed funds and $650
million of long-term debt issued in the first half of 1997. The net result
of these funding changes likewise caused a reduction in the rate margin.
<TABLE>
- -------------------------------------------------------------------------------
EXHIBIT 5
LOANS AND LEASES
($ IN THOUSANDS)
<CAPTION>
SEPTEMBER 30
1998 1997 CHANGE
---- ---- ------
<S> <C> <C> <C>
Commercial $ 5,654,349 $ 4,789,208 18.1%
Real estate--commercial 3,902,864 3,530,393 10.6
Real estate--construction 813,529 714,861 13.8
Real estate--residential
mortgage 8,239,045 8,793,386 (6.3)
Real estate--home equity
credit loans 540,294 581,300 (7.1)
Consumer 2,819,513 2,477,695 13.8
Credit card loans issued 431,850 695,178 (37.9)
Securitized credit card loans (400,000) (400,000) --
----------- -----------
Total Loans and Leases $22,001,444 $21,182,021 3.9
=========== ===========
- -------------------------------------------------------------------------------
</TABLE>
Investment securities averaged $9.1 billion in the first nine months of
1998, and increased by 42.1% from 1997. Roosevelt increased investment
securities by approximately $2.7 billion. The held-to-maturity and
available-for-sale portfolios as of September 30, 1998 consisted of 67.56%
in U.S. and other government agency securities, including 33.52% in
mortgage-related issues, 5.24% in state and municipal securities, and 27.20%
of other miscellaneous securities. The comparable distribution at September
30, 1997 was 62.96%, 27.17%, 6.95% and 30.09%, respectively. State and
municipal securities decreased from $555 million at September 30, 1997 to
$481 million this year due to paydowns and the lack of attractive
reinvestment opportunities. Miscellaneous securities are largely
privately issued mortgage-backed securities and collateralized mortgage
obligations. Total investment securities declined on average by 2.4% from
the second to the third quarter of 1998 due to paydowns on mortgage
securities, sales from portfolio restructurings and the lack of reinvestment
opportunities.
Year-to-date average commercial loans increased by $648 million or 13.5%,
while average commercial real estate mortgage loans increased by $186
million or 5.4% and construction loans increased by $96 million or 15.1%.
14
<PAGE>
<PAGE>
Year-to-date average residential real estate mortgage loans increased by
$2.4 billion or 38.9%. The Roosevelt acquisition added approximately $3.9
billion in volume on July 1, 1997, thereby more than accounting for this
loan growth. Quarterly average residential mortgage loans declined however
for the third consecutive quarter. These declines resulted from both
prepayments and customer refinancings to fixed-rate residential mortgage
loans that Mercantile generally sells. Home equity credit loans averaged
$559 million in the first nine months of 1998, a 15.2% increase over the
prior year, again reflecting the impact of the Roosevelt acquisition. Home
equity credit loans likewise have declined for three consecutive quarters
for the same reasons.
Consumer loans increased on average by $283 million or 11.9% over the first
nine months of 1997. Over 40% of the growth was in the indirect loan
portfolio of Mercantile Bank N.A. Average credit card loans were down $591
million or 78.5% in 1998. The largest part of the decline was due to the
sale of $405 million in loans related to co-branded cards on September 25,
1997. Prior to that date, the Corporation had managed to a $224 million
decline due to more aggressive risk-based pricing of the cards, as well as
transferring $123 million of loans to the investment portfolio as required
by FAS 125. Partially offsetting the sale, the managed decline and the FAS
125 transfer was the addition of $112 million in Roosevelt credit card loans
on July 1, 1997; the out-of-territory Roosevelt credit card loans were
subsequently sold in March 1998.
Average core deposits increased by $3.0 billion or 15.7% in the first nine
months of 1998. At September 30, 1998, Mercantile was substantially core
funded at 90.70% of total deposits and 70.34% of earning assets. As
anticipated, Mercantile has experienced certificate of deposit run-off from
former Roosevelt depositors, largely due to changed pricing policies and
intense competition in major markets. Additionally, the low rate environment
in 1998 has not made certificates of deposit attractive to certain
customers, thereby causing further deposit run-off. Changes in average core
deposits for the past seven quarters are shown in the Consolidated Quarterly
Average Balance Sheet on pages 25 and 26 of this report.
Average non-interest bearing deposits increased by $516 million or 15.5%
over the first nine months of 1997. Some of the growth occurred due to the
Roosevelt acquisition and part of the remaining growth came from the U.S.
Government, a significant cash management customer of Mercantile Bank N.A.
that pays for services rendered via compensating balances. These average
balances have increased from $691 million in the first nine months of 1997
to $752 million in 1998. Partially offsetting this increase was growth of
$170 million in cash and due from banks; this growth was minimized by both
float and reserve reduction efforts.
Year-to-date average interest bearing demand, savings, money market accounts
and consumer time certificates under $100,000 increased by 6.1%, 20.5%,
18.6% and 17.8%, respectively, largely due to the Roosevelt acquisition.
Roosevelt had a greater percentage of consumer time certificates in its
total core deposits, and as a result, Mercantile's year-to-date average of
consumer time certificates to total core deposits increased to 42.98% from
42.20% in 1997, even though certificates of deposit continued to decline.
Average short-term borrowings increased by $770 million or 28.9% over the
first nine months of 1997; this increase funded earning asset growth and
replaced the decline in bank notes outstanding. In the second quarter of
1998, Mercantile established a $3.0 billion bank note offering program that
is now an available funding source to the five largest affiliate banks,
however, no funding was outstanding from the new bank note program as of
September 30, 1998. Year-to-date average long-term debt increased by $2.1
billion. The increase was due to long-term FHLB advances acquired in the
Roosevelt transaction and subsequent borrowings incurred to lower wholesale
borrowing costs and improve liquidity. In addition, long-term debt was
issued by the Corporation in the first half of 1997 to fund the acquisition
of Roosevelt. Average shareholders' equity increased by $523 million or
21.9%, due to net earnings retained, shares issued in acquisitions and a
favorable adjustment in the fair value of available-for-sale securities.
The factors discussed above are consistent with Mercantile's overall
corporate policy relative to rate sensitivity and liquidity, which is to
produce the optimal yield and maturity mix consistent with interest rate
expectations and projected liquidity needs. The Consolidated Quarterly
Average Balance Sheet, with rates earned and paid, is summarized by quarter
on pages 25 and 26.
15
<PAGE>
<PAGE>
OTHER INCOME
Non-interest income increased 44.1% during the third quarter of 1998 to
$161,839,000, and for the nine months was $413,541,000 compared with
$305,123,000 a year ago, an improvement of 35.5%. In September 1998,
Firstbank divested its two Missouri banks due to state restrictions on
deposit concentrations. These banks had total assets of approximately $300
million. A pre-tax gain of $48,051,000 was recorded in the third quarter of
1998. Additionally, Mercantile recorded a $23,155,000 gain on the sale of
mortgage servicing rights in the first quarter of 1998. Excluding these two
items, other income for the nine months ended September 30, 1998 was 12.2%
higher than in the year-earlier period.
Deposit service charges were the largest source of non-interest income in
1998, and were $87,815,000 compared with $79,941,000 during 1997, an
increase of 9.8%. For the quarter, service charge revenue was up 2.4% from a
year ago. The increase was generated by additional deposits and fees from
acquired customer bases, partially offset by attrition.
Trust fees were the second largest source of non-interest income in 1998,
and for the nine months of 1998 were $84,386,000 compared with $77,535,000
during 1997, an increase of 8.8%. Personal trust fees earned by Mercantile
Trust Company N.A. were the largest source of trust revenue and increased
slightly from last year. Income from Mississippi Valley Advisors Inc., the
investment management subsidiary of Mercantile, rose by 17.1%. Mississippi
Valley Advisors Inc. manages 17 proprietary mutual funds--the ARCH funds,
which had assets of $4.1 billion at September 30, 1998 compared with $3.5
billion last year. Quarterly trust fees grew only by 2.1% over 1997 due to
less favorable market conditions. Increases in the value of assets managed
and successful new business development efforts accounted for the
year-to-date growth in trust fees. Partially offsetting these increases was
the reduction in trust fees caused by the sales of Mercantile's document
custody business and Mark Twain's corporate trust division.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 6
OTHER INCOME
($ IN THOUSANDS)
<CAPTION>
THIRD QUARTER NINE MONTHS
1998 1997 CHANGE 1998 1997 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Trust $ 27,442 $ 26,888 2.1% $ 84,386 $ 77,535 8.8%
Service charges 30,498 29,770 2.4 87,815 79,941 9.8
Retail brokerage revenue 4,624 5,130 (9.9) 14,818 8,916 66.2
Other investment banking 5,136 5,707 (10.0) 15,834 19,105 (17.1)
Mortgage banking 6,149 7,819 (21.4) 21,051 14,691 43.3
Gain on sale of mortgage servicing rights -- -- -- 23,155 -- --
Credit card fees 3,045 5,836 (47.8) 9,128 16,927 (46.1)
Securitization revenue 5,775 3,357 72.0 14,818 15,374 (3.6)
Securities gains 2,297 2,131 7.8 9,584 5,248 82.6
Gain on sale of subsidiaries 48,051 -- -- 48,051 -- --
Miscellaneous 28,822 25,706 12.1 84,901 67,386 26.0
-------- -------- -------- --------
Total Other Income $161,839 $112,344 44.1 $413,541 $305,123 35.5
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In January 1998, the Corporation sold $1.9 billion in loan servicing which
reduced originated mortgage servicing assets by approximately $3.2 million.
A pre-tax gain of $23,155,000 was recognized in the first quarter of 1998.
This sale was consistent with the Corporation's goals to "right size" the
servicing portfolio as all Mercantile servicing operations were consolidated
in Nevada, Missouri. The sale also lowered the prepayment risk associated
with the servicing portfolio and helped to fund the Corporation's systems
cost to become Year 2000 compliant. All other mortgage banking income was
$21,051,000 in the first nine months of 1998 versus $14,691,000 the prior
year. The growth was attributable to Roosevelt's servicing volume and the
higher than expected level of refinancing activity in 1998. Mortgages
serviced totaled $11.4 billion at September 30, 1998 compared with $13.9
billion at September 30, 1997. Total originated and purchased mortgage
servicing rights on the balance sheet at September 30, 1998 totaled $48
million. The Corporation recorded a $2,700,000 valuation reserve on
purchased mortgage servicing rights in the third quarter of 1998 due to
accelerated refinancing activity. In this current low interest rate
environment, the value of servicing rights will be carefully monitored in
future quarters.
16
<PAGE>
<PAGE>
Year-to-date retail brokerage revenue was $14,818,000 compared with
$8,916,000 last year. Roosevelt's customer base had a positive impact on
this source of revenue. Comparative third quarter revenue was down by
$506,000 or 9.9% due to unfavorable market conditions in 1998. Other
investment banking income for the first nine months of 1998 was 17.1% lower
than last year due to lower levels of activity in institutional fixed income
sales and the exit from the international currency bond business.
For the first nine months and third quarter of 1998, credit card income was
significantly less than the comparable 1997 periods. Credit card income
primarily represents interchange fees received on transactions of Mercantile
cardholders and cardholders' miscellaneous fees. The two aforementioned
portfolio sales largely accounted for the decline in credit card income.
Securitization revenue for the first nine months of 1998 was $14,818,000
compared with $15,374,000 last year, and represents amounts accruing to
Mercantile on the $400 million in credit card loans securitized in the
Mercantile Credit Card Master Trust during May 1995, as well as $2,200,000
recognized in 1997 under FAS 125 for investor certificate loans that were
sold and reclassified to the investment portfolio. Excluding that one-time
accounting gain, securitization revenue increased by $1,644,000 or 12.5%.
For securitized loans, amounts that would otherwise have been reported as
interest income, interest expense, credit card fees and provision for loan
losses are instead netted in non-interest income as securitization revenue.
Year-to-date miscellaneous income of $84,901,000 was 26.0% higher than in
1997. The corporate trust business of Mark Twain was sold in the first
quarter of 1998 at a $2,002,000 gain. Mercantile had previously sold its
comparable corporate trust business during 1996. The Corporation also sold
the out-of-market Roosevelt credit card portfolio in the first quarter of
1998 at a gain of $2,658,000. Excluding these two 1998 gains and the 1997
gain of $2,300,000 on the sale of Mark Twain's merchant credit card
processing business, year-to-date miscellaneous income increased by 23.3%
over 1997. Credit life and other insurance product sales, loan syndication
fees, operating lease income, and ATM, official check and debit card fees
accounted for the increase. Net securities gains of $9,584,000 were realized
through September 30, 1998 on the restructuring of the available-for-sale
investment portfolio compared with $5,248,000 in gains last year. Net
securities gains in the third quarter of 1998, net of $1,649,000 in
nonrecurring losses, totaled $2,297,000 versus $2,131,000 in 1997.
OTHER EXPENSE
For the first nine months of 1998, expenses other than interest expense and
the provision for possible loan losses were $756,416,000, a 1.5% decrease
from the 1997 level. If the nonrecurring merger-related expenses of
$89,192,000 in 1998 and $121,393,000 in 1997, and the $50,000,000 loss on
the sale of the credit card portfolio in 1997 are excluded, adjusted other
expense increased by $70,360,000 or 11.8% over 1997. The adjusted efficiency
ratio was 55.58% compared with 54.69% in 1997 while the operating expense to
average asset ratio improved to 2.59% from 2.87%.
Year-to-date salary expenses increased by $31,772,000 or 11.3% from last
year. The impact of Roosevelt on salaries for the first nine months of 1998
was estimated to be $12,000,000. Additionally, temporary help salaries rose
by $9,333,000 and were primarily utilized in operations, mortgage banking
and in the Year 2000 effort. The decline in year-to-date 1998 employee
benefit expense was due largely to the Corporation's decision to modify its
defined benefit pension plan to a cash balance plan, cost-effective changes
to 401(k) and employee welfare plans, an increase in temporary help salaries
for which few benefits are paid, and a general decline in the Corporation's
stock price, which is the basis for certain employee benefit expenses.
Occupancy and equipment costs through September 30, 1998 increased by 18.0%
from the prior year, reflecting the costs of maintaining additional offices
and a consistent program of upgrading systems and equipment to improve
customer service and enhance employee efficiency. A new deposit system that
has been installed throughout most of the Corporation also increased
equipment expense in 1998 over 1997.
Exhibit 7 details the composition of all other operating expenses. General
increases reflect the impact of Roosevelt through September 30 in the
Corporation's results for nine months of 1998 versus three months in 1997.
Credit card expense declined by $3,672,000 or 45.8%, due primarily to the
absence of the costs associated with the portfolios that were sold.
Mercantile contributed $1,600,000 to its charitable foundation in the first
quarter of 1998, which increased miscellaneous expense. Additionally,
17
<PAGE>
<PAGE>
there was $559,000 in foreclosure expense in the first nine months of 1998
compared with recoveries related to foreclosed property of $5,490,000 in
1997.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 7
OTHER EXPENSE
($ IN THOUSANDS)
<CAPTION>
THIRD QUARTER NINE MONTHS
1998 1997 CHANGE 1998 1997 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries $106,007 $101,728 4.2% $312,385 $280,613 11.3%
Employee benefits 18,148 22,800 (20.4) 58,727 64,595 (9.1)
-------- -------- -------- --------
Total Personnel Expense 124,155 124,528 (.3) 371,112 345,208 7.5
Net occupancy 17,448 17,018 2.5 49,647 45,373 9.4
Equipment 21,160 18,307 15.6 63,273 50,318 25.7
Postage and freight 6,918 6,827 1.3 20,798 20,030 3.8
Marketing/business development 4,283 5,085 (15.8) 12,906 13,013 (.8)
Office supplies 4,371 4,153 5.2 13,060 11,775 10.9
Communications 4,816 4,758 1.2 14,084 12,204 15.4
Data processing 4,040 4,751 (15.0) 13,471 14,241 (5.4)
Legal and professional 3,806 3,300 15.3 11,741 10,343 13.5
Credit card 1,276 3,194 (60.1) 4,353 8,025 (45.8)
FDIC insurance 1,382 1,050 31.6 4,204 2,692 56.2
Foreclosed property expense (recoveries) 647 (1,296) -- 559 (5,490) --
Miscellaneous 13,347 12,686 5.2 44,647 43,952 1.6
-------- -------- -------- --------
Adjusted Other Expense Before Intangible Asset
Amortization 207,649 204,361 1.6 623,855 571,684 9.1
Intangible asset amortization 14,311 15,276 (6.3) 43,369 25,180 72.2
-------- -------- -------- --------
Adjusted Other Expense 221,960 219,637 1.1 667,224 596,864 11.8
Nonrecurring merger-related expense 89,192 69,530 (28.3) 89,192 121,393 (26.5)
Loss on sale of credit card loans -- 50,000 -- -- 50,000 --
-------- -------- -------- --------
Total Other Expense $311,152 $339,167 (8.3) $756,416 $768,257 (1.5)
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Intangible asset amortization was $43,369,000 in the first nine months of
1998 compared with $25,180,000 in 1997. The increase was caused by
additional amortization on goodwill recorded on 1997 purchase acquisitions
that are being amortized using the straight-line method over 15 years.
During 1997, Mercantile recorded adjustments related to the acquisitions of
Roosevelt, Mark Twain and Regional Bancshares, Inc. These adjustments
totaled $121,393,000 and were originally recorded as an accrued liability.
Of that original liability, $102,541,000 has been utilized at September 30,
1998 and $18,852,000 remains to absorb future cash payments. These
nonrecurring expenses included: 1) investment banking and other professional
services; 2) change in control and severance payments; 3) contract
penalties; 4) a loss incurred on the sale of unnecessary Roosevelt interest
rate floors; 5) write-downs of duplicative branches and equipment held for
sale to fair market value; 6) transition and duplicative costs related to
systems, etc; and 7) other adjustments to conform the acquirees' accounting
policies to those of Mercantile. Of the comparable $89,192,000 liability
recorded in the third quarter of 1998 for this year's acquisitions,
$31,347,000 has been utilized at September 30, 1998 and $57,845,000 remains
to absorb future payments.
INCOME TAXES
For the nine months ended September 30, 1998, the Corporation recorded
income tax expense of $153,325,000 compared with 1997 expense of
$89,245,000. Both years included tax benefits recorded on the nonrecurring
charges. Excluding those benefits, the adjusted effective tax rate decreased
to 33.61% in 1998 from 35.18% in 1997. The implementation of various
business strategies that included the realignment of corporate entities
consistent with the plan of reducing bank charters resulted in a $7,000,000
tax benefit in the second quarter of 1998 and an additional $8,000,000
benefit in the third quarter of 1998. A comparable tax benefit is expected
to be recorded in the fourth quarter of 1998.
18
<PAGE>
<PAGE>
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses was $308,869,000 or 1.40% of loans
outstanding at September 30, 1998 compared with $284,165,000 or 1.33% at
year's end and 1.35% at September 30, 1997. Approximately 40% of the
Corporation's total loan portfolio is invested in residential real estate
loans for which the loan loss experience averaged only .03% for the past
five years. If residential mortgages and its allocated reserve are excluded,
the reserve represents 2.07% of outstanding loans at September 30, 1998. In
addition, the Corporation does not engage in lending to emerging markets or
invest in hedge funds.
The year-to-date 1998 provision for possible loan losses was $39,752,000,
which included a nonrecurring provision of $19,600,000 that was made
largely to conform the credit policies of recently acquired entities to
those of Mercantile. The provision for possible loan losses exceeded
year-to-date 1998 net charge-offs of $30,703,000 by $9,049,000 or 29.5%. The
annualized ratio of net charge-offs to average loans for the first nine
months of 1998 declined to .19% from .51% last year. The lower 1998
charge-off ratio was due to improvement in overall credit quality and the
decline in average credit card loans from portfolio sales in late 1997 and
early 1998. Net charge-offs in the third quarter of 1998 included $5,600,000
related to recently acquired banks.
Mercantile evaluates the reserves of all banks on a quarterly basis to
ensure the timely charge-off of loans and to determine the adequacy of those
reserves. Management believes the consolidated reserve as of September 30,
1998 was adequate based on the risks identified at such date in the
respective portfolios.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 8
RESERVE FOR POSSIBLE LOAN LOSSES
($ IN THOUSANDS)
<CAPTION>
THIRD QUARTER NINE MONTHS
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BEGINNING BALANCE $292,795 $263,237 $284,165 $257,718
PROVISION<F*> 23,871 29,209 39,752 78,728
Charge-offs (20,588) (29,681) (48,027) (87,944)
Recoveries 4,892 4,660 17,324 17,360
-------- -------- -------- --------
NET CHARGE-OFFS (15,696) (25,021) (30,703) (70,584)
Acquired Reserves 7,899 18,617 15,655 20,180
-------- -------- -------- --------
ENDING BALANCE $308,869 $286,042 $308,869 $286,042
======== ======== ======== ========
LOANS AND LEASES
September 30 balance $22,001,444 $21,182,021 $22,001,444 $21,182,021
=========== =========== =========== ===========
Average balance $21,673,393 $21,587,546 $21,690,744 $18,621,892
=========== =========== =========== ===========
RATIOS
Reserve balance to outstanding loans 1.40% 1.35% 1.40% 1.35%
Reserve balance to non-performing loans 231.98 217.65 231.98 217.65
Net charge-offs to average loans .29 .46 .19 .51
<FN>
<F*>Includes nonrecurring provision of $19,600,000 and $20,340,000 in the first nine months of 1998 and 1997,
respectively.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NON-PERFORMING ASSETS
Non-performing loans (non-accrual and renegotiated loans) were $133,145,000
or .61% of total loans outstanding at September 30, 1998. By the
Corporation's definition, all non-accrual and renegotiated
commercial-related loans are considered impaired as defined by FAS 114,
"Accounting by Creditors for Impairment of a Loan," as amended by FAS 118.
Impaired loans totaled $59,612,000 at September 30, 1998 and averaged
$66,296,000 for the first nine months of 1998. Foreclosed assets at
September 30, 1998 were $16,276,000. The ratio of non-performing loans and
foreclosed assets to outstanding loans and foreclosed assets was .68% at
September 30, 1998 compared with .66% at June 30, 1998 and .72% last year.
19
<PAGE>
<PAGE>
Non-accrual loans increased by $10,502,000 from the June 30, 1998 level,
largely reflecting the conforming of acquirees' accounting policies to
those of Mercantile. Foreclosed property decreased by $7,017,000 from the
prior quarter due to sales. As of September 30, 1998, Mercantile had only
eight non-accrual loans with balances in excess of $1,000,000; the largest
totaled $4,912,000. As significant, the Corporation held only one foreclosed
asset with a book value in excess of $1,000,000. Over 40% of the
Corporation's non-accrual loans are residential mortgage loans for which
losses have averaged only .03% for the past five years.
All loans classified as renegotiated were paying in accordance with their
modified terms at September 30, 1998. Over one-half of the loans past due 90
days or more and still accruing interest consisted of consumer loans and
residential real estate mortgage loans. Exhibit 9 details the composition of
loans past due 90 days and over.
<TABLE>
- -----------------------------------------------------------------------------------
EXHIBIT 9
NON-PERFORMING ASSETS
($ IN THOUSANDS)
<CAPTION>
SEPT. 30 DEC. 31 SEPT. 30
1998 1997 1997
-------- ------- --------
<S> <C> <C> <C>
NON-ACCRUAL LOANS
Commercial $ 26,888 $ 42,602 $ 47,964
Real estate--commercial 28,232 18,362 20,881
Real estate--construction 2,620 1,948 3,045
Real estate--residential
mortgage 55,768 42,870 47,626
Real estate--home equity
credit loans 1,799 228 66
Consumer 11,343 7,124 6,972
-------- -------- --------
Total Non-accrual Loans 126,650 113,134 126,554
RENEGOTIATED LOANS 6,495 4,335 4,868
-------- -------- --------
TOTAL NON-PERFORMING LOANS 133,145 117,469 131,422
FORECLOSED ASSETS
Foreclosed real estate 12,717 16,869 17,810
Other foreclosed assets 3,559 4,229 3,393
-------- -------- --------
TOTAL FORECLOSED ASSETS 16,276 21,098 21,203
-------- -------- --------
TOTAL NON-PERFORMING LOANS AND
FORECLOSED ASSETS<F1> 149,421 138,567 152,625
Impaired investment securities 68,253 85,887 35,599
-------- -------- --------
TOTAL NON-PERFORMING ASSETS $217,674 $224,454 $188,224
======== ======== ========
PAST-DUE LOANS
(90 DAYS OR MORE)<F2>
Commercial $ 8,722 $ 5,656 $ 5,284
Real estate--commercial 4,195 467 572
Real estate--construction 856 -- 74
Real estate--residential
mortgage 7,760 3,587 3,556
Real estate--home equity
credit loans 576 1,856 712
Consumer 6,956 5,355 3,639
Credit card 418 5,411 5,788
-------- -------- --------
Total Past-due Loans $ 29,483 $ 22,332 $ 19,625
======== ======== ========
RATIOS<F2>
Non-performing loans to
outstanding loans .61% .55% .62%
Non-performing loans and
foreclosed assets to
outstanding loans and
foreclosed assets .68 .65 .72
Non-performing assets to
total assets .63 .67 .57
<FN>
<F1> Excludes insured FHA and government-guaranteed VA loans that were acquired
primarily in the Roosevelt transaction and are contractually past due more
than 90 days. Since these loans are fully insured or guaranteed for the
payment of both principal and interest by the U.S. Government, the
Corporation does not consider these loans to be non-performing assets,
consistent with Roosevelt's past disclosure for these loans. The total of
such insured or guaranteed loans was $28,836,000 at September 30, 1998,
$37,677,000 at December 31, 1997, and $40,596,000 at September 30, 1997.
<F2> Past-due loans 90 days or more are not included in non-performing asset
totals or ratios.
- -----------------------------------------------------------------------------------
</TABLE>
The Corporation's impaired investment securities were primarily acquired in
the Roosevelt transaction, and have decreased from June 30, 1998 by
$5,656,000 due to paydowns. During 1998, impaired investment securities have
declined by $17,634,000. Roosevelt owned pools of privately issued
mortgage-backed securities. The current yield on the net book value of
these impaired securities was 6.24% at September 30, 1998.
CAPITAL RESOURCES
Mercantile maintains a capital base which provides a foundation for
anticipated future asset growth and promotes depositor and investor
confidence. Capital management is a continuous process at Mercantile, and is
focused on ensuring that adequate capital is provided for both current needs
and anticipated growth. This strategy has enabled Mercantile to profitably
expand its balance sheet, while maintaining capital ratios that exceed
minimum regulatory capital requirements.
At September 30, 1998, shareholders' equity was $3.1 billion, an increase of
13.3% from September 30, 1997. This increase was derived primarily from the
four 1998 bank acquisitions accounted for as poolings without restatement
and a $43,007,000 favorable FAS 115 adjustment, partially offset by
dividends and share repurchases. As of September 30, 1998, the balance of
the valuation on available-for-sale securities increased shareholders'
equity by $71 million.
20
<PAGE>
<PAGE>
In the first nine months of 1998, the Corporation repurchased 1,806,250
shares of its common stock via designated broker-dealers at an average cost
of $55.20 per share. Only 28,125 shares were repurchased in each the second
and third quarters of 1998 to match systematic pattern needs. The remaining
1,750,000 shares were purchased in the first quarter and have been reissued
since then. As of September 30, 1998, Mercantile had only 76,443 treasury
shares and none were tainted for pooling-of-interests accounting purposes.
The Parent Company's double leverage ratio, which measures the extent to
which the equity capital of its subsidiaries is supported by Parent Company
debt rather than equity, improved to 122.83% at September 30, 1998 compared
with 125.38% at year-end 1997. Intangible assets totaled $795 million at
September 30, 1998 compared with $854 million a year ago. Intangible assets
consisted primarily of $737 million in goodwill and $48 million in mortgage
servicing rights. The decrease largely reflects the impact of the Roosevelt
goodwill amortization for the past twelve months.
The tangible equity to tangible assets ratio improved to 6.70% at September
30, 1998 from 5.72% at September 30, 1997, exceeding the 6.00% goal the
Corporation established during the third quarter of 1997. Additionally, all
regulatory capital ratios have improved since year-end 1997 and
significantly exceed regulatory minimums.
On August 11, 1998, the Board of Directors declared a quarterly cash
dividend of $.31 per share of common stock. This dividend was paid October
1, 1998 to shareholders of record at the end of business September 10,
1998. Book value per common share was $19.45 at September 30, 1998 compared
with $18.18 a year earlier, an increase of 7.0%. Exhibit 10 details
significant capital ratios. Public debt ratings of the Corporation and
Mercantile Bank N.A. are shown in Exhibit 11.
<TABLE>
- -------------------------------------------------------------------------------
EXHIBIT 10
RISK-BASED CAPITAL
($ IN MILLIONS)
<CAPTION>
SEPT. 30 DEC. 31 SEPT. 30
1998 1997 1997
-------- ------- --------
<S> <C> <C> <C>
Capital
Tier I $ 2,383 $ 2,104 $ 2,028
Total 3,079 2,779 2,725
Risk-adjusted assets 24,147 22,373 21,696
Tier I capital to
risk-adjusted assets 9.87% 9.40% 9.35%
Total capital to
risk-adjusted assets 12.75 12.42 12.56
Leverage 7.12 6.52 6.30
Tangible equity to
tangible assets 6.70 5.92 5.72
Double leverage 122.83 125.38 126.63
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
EXHIBIT 11
DEBT RATINGS
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------------
FITCH THOMSON STANDARD
MOODY'S IBCA 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>
21
<PAGE>
<PAGE>
YEAR 2000
Financial institutions are particularly vulnerable to Year 2000 issues
because of heavy reliance in the industry on electronic data processing and
funds transfer systems. In 1996, the Corporation initiated a formal and
centralized Year 2000 Program with the objective of addressing all aspects
of the Year 2000 issue. All business units of the organization were brought
into the Program through the creation of a Year 2000 Operational Task Force.
A Program Manager, who provides monthly Year 2000 status reports to executive
management and quarterly reports to the Board of Directors, was appointed.
The Corporation has completed the assessment, analysis and planning
phases of its Year 2000 Program and is well into the execution phase. A
comprehensive Year 2000 Program Plan was developed and implemented in the
third quarter of 1997. The Plan addresses both Information Technology ("IT")
projects, such as insuring that data processing and data network applications
are Year 2000 compliant, and non-IT projects, such as insuring that all
building facilities and security systems having "embedded technology" will be
operational when Year 2000 arrives. Of the projects identified, approximately
52% have been completed, and approximately 47% more are currently in
progress. It is planned and expected that 97% of all identified projects will
be completed by December 31, 1998.
As part of its Plan, Mercantile identified those systems and business
applications which are "mission critical," that is, systems and business
applications which, if they failed, would render Mercantile incapable of
performing core business processes. As of September 30, 1998, renovation of
such identified mission-critical applications was estimated to be 93%
complete. In fact, approximately 90% of all business applications already
have been reintroduced to production, or are in testing. It is the goal of
the Program to have all mission-critical applications renovated and
substantially tested "2000 compliant" by no later than December 31, 1998.
As a financial institution, Mercantile's Year 2000 efforts are subjected to
regulation and monitoring by bank and bank holding company regulatory
agencies. These agencies, under the auspices of the Federal Financial
Institutions Examination Council ("FFIEC"), have established specific
guidelines and interim deadlines for achieving Year 2000 compliance.
Mercantile's Program has met all of the deadlines and complied with all
guidelines to date, and fully intends and expects to continue to do so.
In addition to Year 2000 compatibility of all Mercantile applications,
Mercantile's Year 2000 program addresses third party Year 2000 issues.
Mercantile has numerous customers, vendors, service providers, counterparties
and other business relationships with third parties. Failure of any of these
parties to address Year 2000 issues could result in significant and in some
cases material disruptions of business and costs to Mercantile. Mercantile
has undertaken an assessment of all third-party relationships and thus far
has completed its evaluation of such relationships which are considered
to be material. Follow up plans have been put in place to deal with
relationships which have been identified as "high risk". Loan loss reserves
have been set aside where appropriate. In addition, all customers with whom
Mercantile exchanges electronic data have received notification of Year
2000-related date format impacts. Finally, plans are being finalized now to
perform Year 2000 date testing with a representative sample of third party
customers and others in 1999. Review of third party relationships will be an
ongoing process throughout 1999.
Mercantile estimates that its total costs related to Year 2000 remediation
will be approximately $30,000,000. Year-to-date expenses of the Program are
$11,212,000. Personnel costs for internal personnel and outside consultants
working on the program, and the cost of setting up testing environments are
the largest components of the total program cost. Other costs include costs
for training, and for required hardware and software replacement, upgrade or
renovation. Year 2000 expenditures are expensed as incurred. It is not
expected that Year 2000 costs or activities will have a material adverse
impact on operations of the Corporation.
The principal risks associated with the Year 2000 problem can be grouped
into two categories. The first is the risk that Mercantile does not
successfully ready its operations for the next century. The second is the
risk of disruption of Mercantile operations due to operational failures of
third parties. The first category includes those risks which are largely
under Mercantile's control. As set forth above, Management believes it will
be able to make the necessary corrections to its internal systems on time and
22
<PAGE>
<PAGE>
therefore that there is little risk of any internal critical system or asset
not being Year 2000 ready by the end of 1999. In the unlikely event that
Mercantile does not successfully complete its remediation on time, it could
be materially adversely affected as a result of disruption of core business
processes.
The second risk category is largely outside of Mercantile's control.
Computer failure of third parties may jeopardize Mercantile operations. The
most serious impact on Mercantile operations from Year 2000 failures of
others would result if basic services such as telecommunications, electric
power and service provided by other financial institutions and governmental
agencies were disrupted. Similarly, operational failures affecting
Mercantile's sources of major funding, larger borrowers and capital market
counterparties could affect the ability of such parties to continue to
provide funding or meet obligations when due. Significant public disclosure
of the state of readiness among basic infrastructure and other suppliers,
funding sources and counterparties has not generally been available. Although
inquiries are underway to assess this potential risk, Mercantile does not yet
have the necessary information to estimate the likelihood of such significant
disruptions. An initial plan is being developed to address funding issues and
will be completed in early 1999. The review of this plan will be an ongoing
process throughout 1999. There can be no assurance that Year 2000 failures
of third parties will not have a material adverse impact on Mercantile.
Mercantile is developing remediation contingency plans and business
resumption contingency plans specific to the Year 2000 issues. Remediation
contingency plans address the actions to be taken if the current approach to
remediating a system is falling behind schedule or otherwise appears in
jeopardy of failing to deliver a Year 2000 ready system when needed.
Business resumption contingency plans address the actions that would be
taken if core business processes and critical business functions cannot be
carried out in the normal manner upon entering the next century due to
system or supplier failure. Remediation contingency plans with trigger dates
for review and implementation have been developed for mission-critical
applications. The effort to develop business resumption contingency plans
is in progress. The first two phases of this effort, Organizational Planning
Guidelines and Business Impact Analysis, are complete. The third and fourth
phases, Plan Development and Method for Validation of Plans, are
approximately 10% and 5% complete, respectively. These phases are due to be
completed in the first six months of 1999, as required by FFIEC guidelines.
The review of these plans will be an ongoing process throughout 1999.
23
<PAGE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED QUARTERLY STATEMENT OF INCOME
($ IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
1997 1998
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $365,300 $376,819 $462,063 $447,634 $442,332 $445,880 $443,631
Investments in debt and equity securities 84,566 86,635 131,622 136,714 144,117 149,856 146,296
Short-term investments 4,767 6,103 8,727 7,728 6,731 8,351 7,334
-------- -------- -------- -------- -------- -------- --------
Total Interest Income 454,633 469,557 602,412 592,076 593,180 604,087 597,261
Tax-equivalent adjustment 4,575 4,708 4,477 4,324 4,235 4,191 3,906
-------- -------- -------- -------- -------- -------- --------
TAXABLE-EQUIVALENT INTEREST INCOME 459,208 474,265 606,889 596,400 597,415 608,278 601,167
INTEREST EXPENSE
Deposits 177,308 180,066 244,202 241,373 237,420 237,267 231,983
Borrowed funds 35,284 42,724 74,488 75,495 83,039 91,518 92,199
-------- -------- -------- -------- -------- -------- --------
Total Interest Expense 212,592 222,790 318,690 316,868 320,459 328,785 324,182
-------- -------- -------- -------- -------- -------- --------
TAXABLE-EQUIVALENT NET INTEREST INCOME 246,616 251,475 288,199 279,532 276,956 279,493 276,985
PROVISION FOR POSSIBLE LOAN LOSSES 20,090 29,429 29,209 7,627 8,537 7,344 23,871
OTHER INCOME
Trust 24,716 25,931 26,888 26,393 28,128 28,816 27,442
Service charges 25,178 24,993 29,770 29,117 28,244 29,073 30,498
Investment banking and brokerage 8,721 8,463 10,837 10,160 11,066 9,826 9,760
Mortgage banking 3,515 3,357 7,819 11,934 29,098 8,959 6,149
Securities gains (losses) 1,046 2,071 2,131 2,401 4,453 2,834 2,297
Other 33,182 31,606 34,899 29,065 35,962 35,243 85,693
-------- -------- -------- -------- -------- -------- --------
Total Other Income 96,358 96,421 112,344 109,070 136,951 114,751 161,839
OTHER EXPENSE
Personnel expense 109,973 110,707 124,528 121,782 125,178 121,779 124,155
Net occupancy and equipment 29,733 30,633 35,325 36,278 37,042 37,270 38,608
Other 47,020 101,024 179,314 60,061 58,318 65,677 148,389
-------- -------- -------- -------- -------- -------- --------
Total Other Expense 186,726 242,364 339,167 218,121 220,538 224,726 311,152
-------- -------- -------- -------- -------- -------- --------
TAXABLE-EQUIVALENT INCOME BEFORE INCOME
TAXES 136,158 76,103 32,167 162,854 184,832 162,174 103,801
INCOME TAXES
Income taxes 46,270 28,641 14,334 53,131 65,738 50,836 36,751
Tax-equivalent adjustment 4,575 4,708 4,477 4,324 4,235 4,191 3,906
-------- -------- -------- -------- -------- -------- --------
Adjusted Income Taxes 50,845 33,349 18,811 57,455 69,973 55,027 40,657
-------- -------- -------- -------- -------- -------- --------
NET INCOME $ 85,313 $ 42,754 $ 13,356 $105,399 $114,859 $107,147 $ 63,144
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA
Basic earnings per share $.64 $.33 $.09 $.71 $.76 $.71 $.41
Diluted earnings per share .63 .32 .09 .70 .75 .69 .41
SIGNIFICANT RATIOS
Return on assets 1.38% .67% .16% 1.27% 1.35% 1.23% .74%
Return on equity 15.25 7.97 1.93 15.39 16.03 14.88 8.48
</TABLE>
24
<PAGE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET
($ IN MILLIONS)
<CAPTION>
1997
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
------------------- ------------------ ------------------ ------------------
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, net of unearned
income
Commercial $ 4,666 8.55% $ 4,861 8.66% $ 4,858 8.57% $ 4,907 8.59%
Real estate--commercial 3,407 8.57 3,451 8.73 3,550 8.69 3,550 8.65
Real estate--construction 584 8.89 640 8.94 684 8.82 736 8.84
Real estate--residential
mortgage 4,728 7.96 4,813 7.99 8,738 7.84 8,765 7.76
Real estate--home equity credit
loans 442 9.55 446 9.84 566 9.68 585 9.71
Consumer 2,312 9.06 2,354 9.11 2,453 9.17 2,493 9.12
Credit card 820 13.31 703 13.33 738 12.83 286 10.03
------- ------- ------- -------
Total Loans and Leases 16,959 8.65 17,268 8.76 21,587 8.59 21,322 8.42
Investments in debt and equity
securities
Trading 69 6.81 93 7.00 101 6.41 155 6.68
Taxable 4,978 6.17 5,046 6.23 7,520 6.58 7,750 6.60
Tax-exempt 485 8.16 469 8.18 465 8.08 462 8.10
------- ------- ------- -------
Total Investments in Debt and
Equity Securities 5,532 6.35 5,608 6.41 8,086 6.67 8,367 6.68
Short-term investments 350 5.45 428 5.64 535 6.39 498 6.08
------- ------- ------- -------
Total Earning Assets 22,841 8.15 23,304 8.16 30,208 7.97 30,187 7.84
Non-earning assets 1,883 2,098 2,822 2,910
------- ------- ------- -------
Total Assets $24,724 $25,402 $33,030 $33,097
======= ======= ======= =======
LIABILITIES
Acquired Funds
Deposits
Non-interest bearing $ 3,065 $ 3,412 $ 3,522 $ 3,636
Interest bearing demand 2,911 2.12 2,884 2.07 2,945 1.95 2,997 1.90
Money market accounts 3,050 3.96 3,056 4.01 3,854 4.07 3,879 4.04
Savings 1,326 2.31 1,336 2.31 1,636 2.43 1,582 2.48
Consumer time certificates under
$100,000 7,141 5.49 7,092 5.50 10,287 5.56 10,006 5.60
Other time 201 4.93 205 4.60 207 4.16 208 4.82
------- ------- ------- -------
Total Core Deposits 17,694 4.20 17,985 4.20 22,451 4.41 22,308 4.41
Time certificates $100,000 and
over 1,538 5.53 1,482 5.57 1,808 5.71 1,868 5.71
Foreign 344 5.48 469 5.67 529 5.70 487 5.66
------- ------- ------- -------
Total Purchased Deposits 1,882 5.54 1,951 5.62 2,337 5.73 2,355 5.71
------- ------- ------- -------
Total Deposits 19,576 4.36 19,936 4.37 24,788 4.56 24,663 4.55
Short-term borrowings 1,980 5.06 2,283 5.23 3,703 5.60 3,725 5.34
Bank notes 175 5.81 175 5.95 175 6.01 175 5.99
Long-term debt<F2> 420 7.33 554 7.07 1,145 6.42 1,345 6.41
------- ------- ------- -------
Total Acquired Funds 22,151 4.52 22,948 4.57 29,811 4.81 29,908 4.79
Other liabilities 335 307 452 450
SHAREHOLDERS' EQUITY 2,238 2,147 2,767 2,739
------- ------- ------- -------
Total Liabilities and
Shareholders' Equity $24,724 $25,402 $33,030 $33,097
======= ======= ======= =======
SIGNIFICANT RATIOS
Net interest rate spread 3.63% 3.59% 3.16% 3.05%
Net interest rate margin 4.38 4.33 3.79 3.67
<FN>
<F1> Taxable-equivalent basis.
<F2> Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET
($ IN MILLIONS)
<CAPTION>
1998
1ST QTR. 2ND QTR. 3RD QTR.
-------------------- --------------------- --------------------
VOLUME RATE<F1> VOLUME RATE<F1> VOLUME RATE<F1>
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans and leases, net of unearned income
Commercial $ 5,152 8.48% $ 5,608 8.38% $ 5,566 8.19%
Real estate--commercial 3,585 8.53 3,631 8.47 3,750 8.58
Real estate--construction 729 8.86 726 8.78 742 8.69
Real estate--residential mortgage 8,742 7.66 8,505 7.60 8,203 7.60
Real estate--home equity credit loans 579 9.64 562 9.65 536 9.63
Consumer 2,550 9.15 2,655 9.08 2,763 9.04
Credit card 248 9.30 126 6.76 113 2.51
------- ------- -------
Total Loans and Leases 21,585 8.22 21,813 8.20 21,673 8.21
Investments in debt and equity securities
Trading 125 6.67 169 6.69 115 6.24
Taxable 8,404 6.47 8,728 6.47 8,560 6.49
Tax-exempt 434 8.38 417 8.47 411 7.94
------- ------- -------
Total Investments in Debt and Equity
Securities 8,963 6.57 9,314 6.56 9,086 6.56
Short-term investments 479 5.62 600 5.51 517 5.55
------- ------- -------
Total Earning Assets 31,027 7.81 31,727 7.69 31,276 7.63
Non-earning assets 3,012 3,214 2,984
------- ------- -------
Total Assets $34,039 $34,941 $34,260
======= ======= =======
LIABILITIES
Acquired Funds
Deposits
Non-interest bearing $ 3,746 $ 4,003 $ 3,801
Interest bearing demand 3,128 1.98 3,136 1.90 3,009 1.82
Money market accounts 3,884 4.11 3,979 4.08 3,960 4.06
Savings 1,647 2.50 1,762 2.62 1,774 2.72
Consumer time certificates under $100,000 9,836 5.60 9,685 5.57 9,420 5.53
Other time 196 5.93 196 5.50 174 5.20
------- ------- -------
Total Core Deposits 22,437 4.41 22,761 4.36 22,138 4.33
Time certificates $100,000 and over 1,908 5.62 1,928 5.62 1,837 5.65
Foreign 541 5.63 441 5.60 397 5.61
------- ------- -------
Total Purchased Deposits 2,449 5.64 2,369 5.63 2,234 5.65
------- ------- -------
Total Deposits 24,886 4.55 25,130 4.50 24,372 4.47
Short-term borrowings 3,876 5.40 3,570 5.31 2,860 5.32
Bank notes 152 6.13 25 5.82 25 5.85
Long-term debt<F2> 1,823 6.23 2,911 5.87 3,641 5.69
------- ------- -------
Total Acquired Funds 30,737 4.82 31,636 4.77 30,898 4.75
Other liabilities 436 424 383
SHAREHOLDERS' EQUITY 2,866 2,881 2,979
------- ------- -------
Total Liabilities and Shareholders'
Equity $34,039 $34,941 $34,260
======= ======= =======
SIGNIFICANT RATIOS
Net interest rate spread 2.99% 2.92% 2.88%
Net interest rate margin 3.62 3.53 3.51
<FN>
<F1> Taxable-equivalent basis.
<F2> Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.<PAGE>
<CAPTION>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET (CONTINUED)
($ IN MILLIONS)
1997 1998
NINE MONTHS NINE MONTHS
-------------------- --------------------
VOLUME RATE<F1> VOLUME RATE<F1>
------ -------- ------ --------
<S> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans and leases, net of unearned income
Commercial $ 4,796 8.59% $ 5,443 8.34%
Real estate--commercial 3,470 8.66 3,656 8.53
Real estate--construction 636 8.88 732 8.78
Real estate--residential mortgage 6,108 7.89 8,481 7.62
Real estate--home equity credit loans 485 9.69 559 9.64
Consumer 2,374 9.12 2,657 9.09
Credit card 753 13.16 162 7.08
------- -------
Total Loans and Leases 18,622 8.65 21,690 8.21
Investments in debt and equity securities
Trading 88 6.72 136 6.56
Taxable 5,857 6.35 8,565 6.48
Tax-exempt 473 8.14 421 8.27
------- -------
Total Investments in Debt and Equity
Securities 6,418 6.49 9,122 6.56
Short-term investments 438 5.90 532 5.56
------- -------
Total Earning Assets 25,478 8.08 31,344 7.71
Non-earning assets 2,271 3,070
------- -------
Total Assets $27,749 $34,414
======= =======
LIABILITIES
Acquired Funds
Deposits
Non-interest bearing $ 3,334 $ 3,850
Interest bearing demand 2,914 2.04 3,091 1.90
Money market accounts 3,323 4.02 3,941 4.08
Savings 1,434 2.36 1,729 2.62
Consumer time certificates under $100,000 8,185 5.52 9,645 5.57
Other time 204 4.56 188 5.55
------- -------
Total Core Deposits 19,394 4.29 22,444 4.37
Time certificates $100,000 and over 1,611 5.61 1,891 5.63
Foreign 448 5.63 459 5.62
------- -------
Total Purchased Deposits 2,059 5.63 2,350 5.64
------- -------
Total Deposits 21,453 4.44 24,794 4.51
Short-term borrowings 2,662 5.36 3,432 5.35
Bank notes 175 5.92 67 6.05
Long-term debt<F2> 709 6.77 2,798 5.87
------- -------
Total Acquired Funds 24,999 4.65 31,091 4.78
Other liabilities 364 414
SHAREHOLDERS' EQUITY 2,386 2,909
------- -------
Total Liabilities and Shareholders'
Equity $27,749 $34,414
======= =======
SIGNIFICANT RATIOS
Net interest rate spread 3.43% 2.93%
Net interest rate margin 4.13 3.56
<FN>
<F1> Taxable-equivalent basis.
<F2> Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
</TABLE>
26
<PAGE>
<PAGE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this report that relate to the plans, objectives or
future performance of Mercantile Bancorporation Inc. may be deemed to be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve
certain risks and uncertainties. For example, by accepting deposits at fixed
rates, at different times and for different terms, and lending funds at
fixed rates for fixed periods, a bank accepts the risk that the cost of
funds may rise and the use of the funds may be at a fixed rate. Similarly,
the cost of funds may fall, but a bank may have committed by virtue of the
term of a deposit to pay what becomes an above-market rate. Investments may
decline in value in a rising interest rate environment. Because the business
of banking is highly regulated, decisions of governmental authorities, such
as the rate of deposit insurance, can have a major effect on operating
results. Unanticipated events associated with Year 2000 compliance, relating
to required work on developments or modifications to the Corporation's
computer systems and software, including work performed by suppliers or
vendors or relating to the failure of third parties upon whom the Corporation
relies, including customers, suppliers, governmental entities and others, to
address their own Year 2000 issues, could affect Mercantile's future
financial condition and operating results. Actual charges associated with
completed acquisitions may prove to be greater than current estimates. In
addition, management's objectives with respect to the Corporation's capital
base and equity levels may not reach the targeted objectives within the
targeted periods due to numerous factors, including those previously
mentioned. All of these uncertainties, as well as others, are present in a
banking operation and shareholders are cautioned that management's view of
the future on which it prices it products, evaluates collateral, sets loan
reserves and estimates costs of operation and regulation may prove to be
other than as anticipated. Actual strategies and results in future periods
may differ materially from those currently expected.
27
<PAGE>
<PAGE>
PART II--OTHER INFORMATION
Item 5. Other Information.
The By-Laws of Mercantile provide that shareholder proposals, including
nominations of directors, which do not appear in the proxy statement may
be considered at a meeting of shareholders only if they involve a matter
proper for shareholder action and written notice of the proposal is received
by the Secretary of Mercantile not less than 60 and not more than 90 days
prior to the anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than
30 days before or more than 60 days after such anniversary date, notice by
the shareholder to be timely must be so delivered not earlier than the 90th
day prior to such annual meeting and not later than the later of the 60th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by Mercantile.
Pursuant to the By-Laws of Mercantile, the date by which written notice of
a proposal must be received by Mercantile to be considered at the 1999
Annual Meeting of Shareholders is February 22, 1999. Any such written
notice of a shareholder proposal by a shareholder to the Secretary of
Mercantile must include (a) a brief description of the business desired
to be brought before the Annual Meeting and the reasons for conducting
such business at the Annual Meeting, (b) the name and address, as they
appear on Mercantile's books, of the shareholder proposing such business
and the beneficial owner, if any, on whose behalf the proposal is made,
(c) the class and number of shares of Mercantile which are owned
beneficially and of record by the shareholder and such beneficial owner
and (d) any material interest of the shareholder and such beneficial
owner in such business.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule (September 30, 1998)
27.2 Restated Financial Data Schedule (September 30, 1997)
(b) Reports on Form 8-K:
Registrant filed one (1) Current Report on Form 8-K during the quarter
ended September 30, 1998. In a Report dated July 16, 1998, under Item
5, Registrant disclosed that it had, effective July 1, 1998,
consummated its acquisition of Firstbank of Illinois Co. ("Firstbank")
through merger of Firstbank with and into a wholly owned subsidiary of
Registrant, with the shareholders of Firstbank to receive an aggregate
of approximately 13,786,135 shares of Registrant's common stock in
exchange for their Firstbank shares.
In addition, the Registrant filed a Current Report on Form 8-K dated
October 7, 1998 under Item 5, which contained supplemental consolidated
financial statements for the years ended December 31, 1997, 1996 and
1995. Said statements restated Registrant's historical consolidated
financial statements for those years to reflect the acquisitions of
Firstbank and CBT Corporation ("CBT") on July 1, 1998. The Firstbank
and CBT acquisitions were accounted for under the pooling-of-interests
method of accounting. Registrant also filed Unaudited Interim
Consolidated Financial Statements restating the Registrant's historical
consolidated financial statements for the Firstbank and CBT
transactions: 1) as of and for the three month periods ended March 31,
1998 and 1997; and 2) as of June 30, 1998 and 1997, and for the three
and six month periods ended June 30, 1998 and 1997.
Under Item 7, Registrant filed the consent of KPMG Peat Marwick LLP to
incorporation by reference of its report on the Supplemental Financial
Statements into pending registration statements of the Registrant.
28
<PAGE>
<PAGE>
The October 7, 1998 Form 8-K included the financial statements, notes
and auditor's report listed below:
Independent Auditor's Report of KPMG Peat Marwick LLP dated October
7, 1998.
Supplemental Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995.
Supplemental Consolidated Balance Sheet as of December 31, 1997, 1996
and 1995.
Supplemental Consolidated Statement of Changes in Shareholders'
Equity for the years ended December 31, 1997, 1996 and 1995.
Supplemental Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Supplemental Consolidated Financial Statements.
Supplemental Interim Consolidated Statement of Income (Unaudited) for
the three months ended March 31, 1998 and 1997.
Supplemental Interim Consolidated Balance (Unaudited) as of March 31,
1998 and 1997.
Supplemental Interim Consolidated Statement of Changes in
Shareholders' Equity (Unaudited) for the three months ended March 31,
1998 and 1997.
Supplemental Interim Consolidated Statement of Cash Flows (Unaudited)
for the three months ended March 31, 1998 and 1997.
Supplemental Interim Consolidated Statement of Comprehensive Income
(Unaudited) for the three months ended March 31, 1998 and 1997.
Supplemental Interim Consolidated Statement of Income (Unaudited) for
the three months and six months ended June 30, 1998 and 1997.
Supplemental Interim Consolidated Balance (Unaudited) as of June 30,
1998 and 1997.
Supplemental Interim Consolidated Statement of Changes in
Shareholders' Equity (Unaudited) for the six months ended June 30,
1998 and 1997.
Supplemental Interim Consolidated Statement of Cash Flows (Unaudited)
for the six months ended June 30, 1998 and 1997.
Supplemental Interim Consolidated Statement of Comprehensive Income
(Unaudited) for the three months and six months ended June 30, 1998
and 1997.
29
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCANTILE BANCORPORATION INC.
(Registrant)
Date November 13, 1998 /s/ JOHN W. MCCLURE
----------------------- -------------------------------------
John W. McClure
Chief Financial Officer
30
<PAGE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<C> <S> <C>
27.1 Financial Data Schedule (September 30, 1998) Included herein
27.2 Restated Financial Data Schedule (September 30, 1997) Included herein
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,175,006
<INT-BEARING-DEPOSITS> 153,408
<FED-FUNDS-SOLD> 214,889
<TRADING-ASSETS> 98,301
<INVESTMENTS-HELD-FOR-SALE> 9,061,675
<INVESTMENTS-CARRYING> 116,007
<INVESTMENTS-MARKET> 117,538
<LOANS> 22,001,444
<ALLOWANCE> 308,869
<TOTAL-ASSETS> 34,596,521
<DEPOSITS> 24,542,307
<SHORT-TERM> 2,563,134
<LIABILITIES-OTHER> 575,652
<LONG-TERM> 3,831,754
0
0
<COMMON> 1,574
<OTHER-SE> 3,057,100
<TOTAL-LIABILITIES-AND-EQUITY> 34,596,521
<INTEREST-LOAN> 1,331,843
<INTEREST-INVEST> 440,269
<INTEREST-OTHER> 22,416
<INTEREST-TOTAL> 1,794,528
<INTEREST-DEPOSIT> 706,670
<INTEREST-EXPENSE> 973,426
<INTEREST-INCOME-NET> 821,102
<LOAN-LOSSES> 39,752
<SECURITIES-GAINS> 9,584
<EXPENSE-OTHER> 756,416
<INCOME-PRETAX> 438,475
<INCOME-PRE-EXTRAORDINARY> 285,150
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 285,150
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 3.56
<LOANS-NON> 126,650
<LOANS-PAST> 29,483
<LOANS-TROUBLED> 6,495
<LOANS-PROBLEM> 0<F1>
<ALLOWANCE-OPEN> 284,165
<CHARGE-OFFS> 48,027
<RECOVERIES> 17,324
<ALLOWANCE-CLOSE> 308,869
<ALLOWANCE-DOMESTIC> 308,869
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>Only reported at fiscal year-end date.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,169,211
<INT-BEARING-DEPOSITS> 313,591
<FED-FUNDS-SOLD> 192,999
<TRADING-ASSETS> 137,817
<INVESTMENTS-HELD-FOR-SALE> 7,624,053
<INVESTMENTS-CARRYING> 365,195
<INVESTMENTS-MARKET> 374,419
<LOANS> 21,182,021
<ALLOWANCE> 286,042
<TOTAL-ASSETS> 33,124,668
<DEPOSITS> 24,654,264
<SHORT-TERM> 3,966,386
<LIABILITIES-OTHER> 428,337
<LONG-TERM> 1,201,269
0
0
<COMMON> 1,486
<OTHER-SE> 2,697,926
<TOTAL-LIABILITIES-AND-EQUITY> 33,124,668
<INTEREST-LOAN> 1,204,182
<INTEREST-INVEST> 302,823
<INTEREST-OTHER> 19,597
<INTEREST-TOTAL> 1,526,602
<INTEREST-DEPOSIT> 601,576
<INTEREST-EXPENSE> 754,072
<INTEREST-INCOME-NET> 772,530
<LOAN-LOSSES> 78,728
<SECURITIES-GAINS> 5,248
<EXPENSE-OTHER> 768,257
<INCOME-PRETAX> 230,668
<INCOME-PRE-EXTRAORDINARY> 141,423
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,423
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 0
<LOANS-NON> 126,554
<LOANS-PAST> 19,625
<LOANS-TROUBLED> 4,868
<LOANS-PROBLEM> 0<F1>
<ALLOWANCE-OPEN> 257,718
<CHARGE-OFFS> 87,944
<RECOVERIES> 17,360
<ALLOWANCE-CLOSE> 286,042
<ALLOWANCE-DOMESTIC> 286,042
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>Only reported at fiscal year-end date.
</TABLE>
