<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
----------------
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, Commission File No. 1-11792
1998
----------------
Mercantile Bancorporation Inc.
(Exact name of Registrant as specified in its charter)
Missouri 43-0951744
(State of Incorporation) (IRS Employer
Identification No.)
P.O. Box 524 63166-0524
St. Louis, Missouri (Zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: 314-418-2525
Securities registered pursuant to Section Name of exchange on which registered:
12(b) of the Act:
(1) Common Stock ($0.01 Par Value) (1) New York Stock Exchange
(2) Preferred Stock Purchase Rights (2) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 26, 1999: Common Stock, $0.01 par value,
$6,099,118,381
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of February 26, 1999: Common Stock $0.01 par
value, 157,625,883 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
As provided herein, portions of the documents below are incorporated by
reference:
<TABLE>
<CAPTION>
Document Part--Form 10-K
-------- ---------------
<S> <C>
Annual Report of the Registrant to its Shareholders for the
Year Ended December 31, 1998.................................. Parts I, II, IV
Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders.................................................. Part III
</TABLE>
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<PAGE>
PART I
Item 1. Business
THE COMPANY
Mercantile Bancorporation Inc. ("Mercantile" or "Corporation") is a bank
holding company which, as of February 26, 1999, owned, directly or indirectly,
all of the stock of Mercantile Bank National Association ("Mercantile Bank"),
six other commercial banks, one trust company, and other non-banking
subsidiaries located in Missouri, Illinois, Iowa, eastern Kansas, northern and
central Arkansas, and western Kentucky. At December 31, 1998, Mercantile
reported consolidated assets of $35,800,177,000, consolidated loans of
$22,311,258,000, consolidated deposits of $25,461,397,000 and consolidated
shareholders' equity of $3,073,755,000. At December 31, 1998, Mercantile Bank
and its consolidated subsidiaries reported assets of $22,653,777,000, loans of
$13,070,938,000, deposits of $15,023,894,000, and shareholder's equity of
$1,762,076,000.
Mercantile has its principal offices at One Mercantile Center, St. Louis,
Missouri 63101 (telephone number 314-418-2525).
BUSINESS
General
Mercantile was organized on March 10, 1970, as a Missouri corporation for
the purpose of becoming a multi-bank holding company. Mercantile commenced
operations as a bank holding company in March 1971. Since then Mercantile has
acquired and organized additional financial institutions and bank holding
companies located throughout Missouri, Illinois, Iowa, eastern Kansas,
northern and central Arkansas, and western Kentucky.
Financial Summary of Mercantile
A financial summary of Mercantile and its consolidated subsidiaries is
detailed below:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Thousands)
<S> <C> <C> <C> <C> <C>
Total assets............ $35,800,177 $33,332,190 $24,995,735 $23,651,434 $22,089,195
Loans and leases........ 22,311,258 21,361,955 16,937,254 15,584,285 14,558,820
Investments in debt and
equity securities...... 9,470,937 8,464,881 5,429,759 5,626,084 5,573,913
Deposits................ 25,461,397 24,809,455 19,784,845 18,463,655 17,341,514
Shareholders' equity.... 3,073,755 2,762,302 2,263,243 2,210,845 1,897,387
</TABLE>
Subsidiaries
The table setting forth the names and locations of Mercantile's subsidiary
financial institutions is included as Exhibit 21 hereto.
Services and Transactions with Subsidiaries
Mercantile provides its subsidiaries with advice and specialized services
in the areas of accounting and taxation, budgeting and strategic planning,
employee benefits and human resources, insurance, operations, marketing,
credit analysis and administration, loan support and participations,
investments, auditing, trust, data processing, bank security and banking and
corporate law. A fee is charged by Mercantile for these services. The
responsibility for the management of each subsidiary remains with its Board of
Directors and with the officers elected by each Board. Intercompany
transactions between Mercantile and its subsidiaries are subject to
restrictions of existing laws and accepted principles of fair dealing.
Mercantile uses the premises of Mercantile Bank for its offices and pays
Mercantile Bank a fee for services and facilities furnished to it.
1
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Employees
At December 31, 1998, Mercantile had 306 full-time equivalent employees,
while Mercantile and its subsidiaries had a combined total of 10,475 full-time
equivalent employees. Mercantile provides a variety of employment benefits and
believes it enjoys a good relationship with its employees.
Operations
Financial Services. Through its subsidiaries, Mercantile offers complete
banking and trust services to the consumer, institutional, commercial,
corporate, affluent and agricultural segments of the market areas which it
serves. Services include commercial, real estate, installment and credit card
loans, checking, savings and time deposits, trust and other fiduciary
services, and various other customer services such as brokerage services,
direct equipment lease financing, international banking and safe deposit
services.
Most of Mercantile's subsidiary financial institutions serve only the
general area in which they are located, predominantly in the 7th, 8th and 10th
Federal Reserve Districts. Membership in Mercantile's subsidiary group
provides each subsidiary institution with a means of satisfying the credit
needs of its customers beyond its own legal lending limit.
Trust and Investment Advisory Services. Mercantile, through its
subsidiaries, offers clients all types of fiduciary services, ranging from the
management of funds for individuals, corporate retirement plans and charitable
foundations to the administration of estates and trusts. To investors it
offers portfolio management, advisory and custodian services. Mercantile Trust
Company National Association ("Mercantile Trust") is a federally-chartered
bank which provides personal trust services. Mississippi Valley Advisors Inc.,
a registered investment advisor, among other things, provides investment
advisory services for employee benefit funds, including pension and profit-
sharing plans, endowment funds and registered mutual funds. At December 31,
1998, Mercantile subsidiaries managed investments with a market value of
approximately $25.9 billion and administered $16.2 billion additional in non-
managed assets.
Investment Services. Mercantile Bank offers a wide range of investment
services to individuals, corporations, correspondent banks and others.
Included in those services are foreign exchange, derivative products, money
market and bond trading operations which serve banks and corporations in the
purchase and sale of various investments and/or hedging instruments. In
addition, Mercantile Bank is registered as a municipal securities dealer.
Brokerage Services. Mercantile Investment Services, Inc. ("MISI"), a
subsidiary of Mercantile Bank, is a registered broker/dealer and a member of
both the National Association of Securities Dealers, Inc. ("NASD") and the
Securities Investors Protection Corporation ("SIPC"). MISI currently offers
both retail and discount brokerage services, including execution of
transactions involving stocks, bonds, options, mutual funds and other
securities.
International. Mercantile Bank maintains accounts at 92 foreign banks, and
31 foreign banks maintain accounts at Mercantile Bank. In addition, Mercantile
Bank is engaged in providing its customers with international banking
services. Mercantile Bank and Mercantile Bank--Kansas/Kansas City offer a wide
range of services to their customers involved in international business
including currency exchange and letters of credit. Mercantile Bank maintains a
Hong Kong subsidiary, Mercantile Trade Services Ltd., which enables the bank
to issue, amend and negotiate letters of credit in Hong Kong on behalf of the
bank's importing customers. Customers of other subsidiary banks with a need
for international services are referred to these banks.
Mercantile Bank also maintains a branch in the City of Georgetown in the
Grand Cayman Islands. This branch enables Mercantile Bank to participate in
the Eurodollar market for deposits and loans. At December 31, 1998, total
deposits of the foreign branch amounted to $554,547,000.
Correspondent Banking. In addition to Mercantile's services for individuals
and corporations, its largest subsidiary bank, Mercantile Bank National
Association (St. Louis), is a correspondent bank for approximately 250
commercial banks located primarily in the lower Midwest. Correspondent banking
services to banks in
2
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Kansas and the Kansas City metropolitan area are provided through Mercantile
Bank--Kansas/Kansas City. Correspondent banking services include the
processing of checks and collection items, financing for acquisitions and
capital augmentation, and assistance with training and operations.
Competition
Mercantile's subsidiary financial institutions are subject to intense
competition from other banks and financial institutions in their service
areas, predominantly the 7th, 8th and 10th Federal Reserve Districts. In
making loans, substantial competition is encountered from banks and other
lending institutions such as savings and loan associations, insurance
companies, finance companies, credit unions, factors, small loan companies and
pension trusts. In addition, Mercantile subsidiaries compete for retail
deposits with savings and loan associations, credit unions, insurance
companies and money market mutual funds. The competition provided by other
financial institutions is not limited to those institutions with offices
located in the area served by the particular subsidiary.
Many other institutions also offer some or all of the trust and fiduciary
services performed by Mercantile's subsidiaries. Mercantile Bank competes with
all local institutions and, in the field of corporate pension trust services,
competition is nationwide.
Supervision and Regulation
General. As a bank holding company, Mercantile is subject to regulation
under the Bank Holding Company Act of 1956, as amended ("BHCA"), and its
examination and reporting requirements. Under the BHCA, a bank holding company
may not directly or indirectly acquire the ownership or control of more than
5% of the voting shares or substantially all of the assets of any company,
including a bank or savings and loan association, without the prior approval
of the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). In addition, bank holding companies are generally prohibited under
the BHCA from engaging in nonbanking activities, subject to certain
exceptions.
Mercantile and its subsidiaries are subject to supervision and examination
by applicable federal and state banking agencies. The earnings of Mercantile's
subsidiaries, and therefore the earnings of Mercantile, are affected by
general economic conditions, management policies and the legislative and
governmental actions of various regulatory authorities, including the Federal
Reserve Board, the Federal Deposit Insurance Corporation ("FDIC"), the Office
of the Comptroller of the Currency (the "Comptroller") and various state
financial institution regulatory agencies. In addition, there are numerous
governmental requirements and regulations that affect the activities of
Mercantile and its subsidiaries.
Certain Transactions with Affiliates. There are various legal restrictions
on the extent to which a bank holding company and certain of its nonbank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries.
In general, these restrictions require that any such extensions of credit must
be on non-preferential terms and secured by designated amounts of specified
collateral and be limited, as to the holding company or any one of such
nonbank subsidiaries, to 10% of the lending institution's capital stock and
surplus, and as to the holding company and all such nonbank subsidiaries in
the aggregate, to 20% of such capital stock and surplus.
Payment of Dividends. Mercantile is a legal entity separate and distinct
from its financial institutions and other subsidiaries. The principal source
of Mercantile's revenues is dividends from its financial institution
subsidiaries. Various federal and state statutory provisions limit the amount
of dividends an affiliate financial institution can pay to Mercantile without
regulatory approval. Generally, approval of federal and state bank regulatory
agencies, as appropriate, is required for any dividend if the total of all
dividends declared in any calendar year would exceed the total of the
institution's net profits, as defined by regulatory agencies, for such year
combined with its retained net profits for the preceding two years. In
addition, a national bank or a state member bank may not pay a dividend in an
amount greater than its net profits then on hand. The payment of dividends by
any financial institution subsidiary also may be affected by other factors,
such as the maintenance of adequate capital.
3
<PAGE>
Capital Adequacy. The Federal Reserve Board has issued standards for
measuring capital adequacy for bank holding companies. These standards are
designed to provide risk-responsive capital guidelines and to incorporate a
consistent framework for use by financial institutions operating in major
international financial markets. The banking regulators have issued standards
for banks that are similar to, but not identical with, the standards for bank
holding companies.
In general, the risk-related standards require financial institutions and
financial institution holding companies to maintain certain capital levels
based on "risk-adjusted" assets, so that categories of assets with potentially
higher credit risk will require more capital backing than categories with
lower credit risk. In addition, banks and bank holding companies are required
to maintain capital to support off-balance-sheet activities such as loan
commitments. Mercantile and each of its subsidiary financial institutions
exceed all applicable capital adequacy standards.
Support of Subsidiary Banks. Under Federal Reserve Board policy, Mercantile
is expected to act as a source of financial strength to each subsidiary bank
and to commit resources to support each of the subsidiaries in circumstances
where it might not choose to do so absent such a policy. This may be required
at times when Mercantile may not find itself able to provide such support. In
addition, any capital loans by Mercantile to any of its subsidiaries also
would be subordinate in right of payment to deposits and certain other
indebtedness of such subsidiary.
Consistent with this policy regarding bank holding companies serving as a
source of financial strength for their subsidiary banks, the Federal Reserve
Board has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fully fund the
dividends, and the prospective rate of earnings retention appears consistent
with the bank holding company's capital needs, asset quality and overall
financial condition.
FIRREA and FDICIA. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a cross-guarantee provision that
could result in insured depository institutions owned by Mercantile being
assessed for losses incurred by the FDIC in connection with assistance
provided to, or the failure of, any other insured depository institution owned
by Mercantile. Under FIRREA, failure to meet the capital guidelines could
subject a banking institution to a variety of enforcement remedies available
to federal regulatory authorities, including the termination of deposit
insurance by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made extensive changes to the federal banking laws. FDICIA
instituted certain changes to the supervisory process, including provisions
that mandate certain regulatory agency actions against undercapitalized
institutions within specified time limits. FDICIA contains various other
provisions that may affect the operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal
banking regulators to assign each insured institution to one of five capital
categories ("well capitalized," "adequately capitalized" or one of three
"undercapitalized" categories) and to take progressively more restrictive
actions based on the capital categorization, as specified below. Under FDICIA,
capital requirements include a leverage limit, a risk-based capital
requirement and any other measure of capital deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to fail to satisfy the minimum levels for any
relevant capital measure.
The FDIC, the OCC and the Federal Reserve Board adopted capital-related
regulations under FDICIA. Under those regulations, a bank will be well
capitalized if it: (i) had a total risk-based capital ratio of 10% or greater;
(ii) had a ratio of Tier I capital to risk-weighted assets of 6% or greater;
(iii) had a ratio of Tier I capital to adjusted total assets of 5% or greater;
and (iv) was not subject to an order, written agreement, capital directive or
prompt corrective action directive to meet and maintain a specific capital
level for any capital measure. An association will be adequately capitalized
if it was not "well capitalized" and: (i) had a total risk-based capital
4
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ratio of 8% or greater; (ii) had a ratio of Tier I capital to risk-weighted
assets of 4% or greater; and (iii) had a ratio of Tier I capital to adjusted
total assets of 4% or greater (except that certain associations rated
"Composite 1" under the federal banking agencies' CAMEL rating system in their
most recent examination may be adequately capitalized if their ratios of Tier
I capital to adjusted total assets were 3% or greater). All Mercantile
subsidiary financial institutions as of December 31, 1998 were categorized as
"well capitalized."
Banking agencies also have adopted regulations that mandate that regulators
take into consideration concentrations of credit risk and risks from non-
traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation is made as part of the institution's regular safety and soundness
examination. Banking agencies also have adopted regulations requiring
regulators to consider interest rate risk (when the interest rate sensitivity
of an institution's assets does not match the sensitivity of its liabilities
or its off-balance-sheet position) in the evaluation of a bank's capital
adequacy and have established an explicit risk-based capital charge for
interest rate risk.
Depositor Preference Statute. Legislation enacted in August 1993 provides a
preference for deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution in the
liquidation or other resolution of such an institution by any receiver. Such
obligations would be afforded priority over other general unsecured claims
against such an institution, including federal funds and letters of credit, as
well as any obligation to shareholders of such an institution in their
capacity as such.
FDIC Insurance Assessments. The subsidiary depository institutions of
Mercantile are subject to FDIC deposit insurance assessments. The FDIC has
adopted a risk-based premium schedule. Each financial institution is assigned
to one of three capital groups--well capitalized, adequately capitalized or
undercapitalized--and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state supervisors, and on the basis of
other information relevant to the institution's financial condition and the
risk posed to the applicable insurance fund. The actual assessment rate
applicable to a particular institution will, therefore, depend in part upon
the risk assessment classification so assigned to the institution by the FDIC.
See "--FIRREA and FDICIA."
Interstate Banking and Other Recent Legislation. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"), enacted in 1994,
facilitates the interstate expansion and consolidation of banking
organizations by permitting (i) bank holding companies that are adequately
capitalized and managed to acquire banks located in states outside their home
states regardless of whether such acquisitions are authorized under the law of
the host state, (ii) interstate merger of banks, except for banks located in
Montana and Texas, which states enacted legislation to "opt out" of this
authority, (iii) banks to establish new branches on an interstate basis
provided that such action is specifically authorized by the law of the host
state, (iv) foreign banks to establish, with approval of the regulators in the
United States, branches outside their home states to the same extent that
national or state banks located in the home state would be authorized to do
so, and (v) banks to receive deposits, renew time deposits, close loans,
service loans and receive payments on loans and other obligations as agent for
any bank or thrift affiliate, whether the affiliate is located in the same
state or a different state. One effect of Riegle-Neal is to permit Mercantile
to acquire banks located in any state and to permit bank holding companies
located in any state to acquire banks and bank holding companies in Missouri.
There also have been a number of recent legislative and regulatory
proposals designed to improve the overall financial stability of the United
States banking system, and to provide for other changes in the bank regulatory
structure, including proposals to reduce regulatory burdens on banking
organizations and to expand the nature of products and services banks and bank
holding companies may offer. It is not possible to predict whether or in what
form these proposals may be adopted in the future, and, if adopted, what their
effect will be on Mercantile.
5
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Statistical Disclosures
The following statistical disclosures, except as noted, are included in the
Annual Report of the Registrant to its Shareholders for the year ended December
31, 1998, and incorporated herein by reference.
<TABLE>
<CAPTION>
Annual Report
Schedule Reference
- - -------- -------------------
<S> <C>
I. Distribution of Assets, Liabilities and Shareholders'
Equity; Interest Rates and Interest Differential
A. Average Balance Sheets Page 82
B. Analysis of Net Interest Earnings (included herein at
page 7) N/A
C. Taxable-Equivalent Rate-Volume Analysis (included
herein at page 7) N/A
II. Investment Portfolio
A. Book Value by Type of Security Note F, Page 64
B. Maturity Distribution (included herein at page 8) N/A
III. Loan Portfolio
A. Types of Loans Exhibit 13, Page 39
B. Maturities and Sensitivities to Changes in
Interest Rates Exhibit 13, Page 39
C. Risk Elements
1. Non-Accrual, Past Due and Restructured Loans Exhibit 16, Page 43
Exhibit 17, Page 43
Note A, Page 59
2. Potential Problem Loans Commentary, Page 44
3. Foreign Outstandings *
IV. Summary of Loan Loss Experience
A. Reserve for Possible Loan Losses Exhibit 14, Page 40
Commentary, Page 40
Note A, Page 59
B. Allocation of the Reserve for Possible Loan Exhibit 15, Page 41
Losses
V. Deposits
A. Average Balances and Rates Paid by Deposit Category Page 82
B. Maturity Distribution of Certain CDs and Time
Deposits Exhibit 7, Page 33
VI. Return on Equity and Assets Exhibit 4, Page 28
VII. Short-term Borrowings (included herein at page 9) N/A
</TABLE>
*There were no significant interest bearing deposits with foreign banks at
December 31, 1998, 1997 or 1996.
6
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TAXABLE-EQUIVALENT RATE-VOLUME ANALYSIS
(Dollars in Millions)
<TABLE>
<CAPTION>
Average
Average Volume Rate(/1/) Interest
- - ------------------------ ------------------ --------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- - ------- ------- ------- ---- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans and leases(/3/)
$ 5,539 $ 4,824 $ 4,365 8.20% 8.59% 8.57% Commercial $ 454 $ 415 $ 374
3,711 3,490 3,208 8.50 8.66 8.66 Real estate--commercial 315 302 278
769 661 593 8.66 8.87 9.10 Real estate--construction 67 59 54
8,386 6,777 4,340 7.57 7.84 8.10 Real estate--residential mortgage 635 532 352
552 510 417 9.48 9.69 9.67 Real estate--home equity credit loans 52 49 40
2,694 2,404 2,217 9.06 9.12 9.18 Consumer 244 219 203
129 636 850 6.63 12.83 12.87 Credit card 9 82 110
- - ------- ------- ------- ------ ------ ------
21,780 19,302 15,990 8.16 8.59 8.82 Total Loans and Leases 1,776 1,658 1,411
Investments in debt and equity securities
135 105 57 6.56 6.80 6.49 Trading 9 7 4
8,630 6,334 5,189 6.47 6.42 6.08 Taxable 559 407 315
425 470 511 8.13 8.13 8.01 Tax-exempt 35 38 41
- - ------- ------- ------- ------ ------ ------
9,190 6,909 5,757 6.55 6.54 6.25 Total 603 452 360
Short-term investments
232 189 71 5.72 5.50 5.83 Due from banks--interest bearing 13 10 4
Federal funds sold and repurchase
311 265 267 5.44 6.41 5.67 agreements 17 17 15
- - ------- ------- ------- ------ ------ ------
543 454 338 5.56 6.03 5.71 Total Short-term Investments 30 27 19
- - ------- ------- ------- ------ ------ ------
$31,513 $26,665 $22,085 7.64 8.01 8.10 Total Interest Income(/1/) $2,409 $2,137 $1,790
======= ======= ======= ====== ====== ======
Interest Expense
Interest Bearing Deposits
$ 3,088 $ 2,935 $ 2,683 1.84 2.01 2.27 Interest bearing demand $ 57 $ 59 $ 61
3,991 3,463 3,029 4.04 4.02 3.64 Money market accounts 161 139 110
1,739 1,471 1,351 2.58 2.39 2.34 Savings 45 35 32
Consumer time certificates
9,574 8,644 7,055 5.54 5.55 5.58 under $100,000 530 479 393
185 205 192 5.31 4.62 4.22 Other time 10 10 8
- - ------- ------- ------- ------ ------ ------
18,577 16,718 14,310 4.32 4.32 4.22 Total Interest Bearing Core Deposits 803 722 604
1,893 1,675 1,440 5.58 5.64 5.35 Time certificates $100,000 and over 106 95 77
411 458 184 5.65 5.72 5.70 Foreign 23 26 11
- - ------- ------- ------- ------ ------ ------
2,304 2,133 1,624 5.59 5.66 5.39 Total Purchased Deposits 129 121 88
- - ------- ------- ------- ------ ------ ------
20,881 18,851 15,934 4.46 4.47 4.34 Total Interest Bearing Deposits 932 843 692
3,294 2,930 1,671 5.29 5.43 5.37 Short-term borrowings 174 159 90
56 175 261 6.09 6.02 5.88 Bank notes 4 11 15
3,050 869 343 5.85 6.72 7.29 Long-term debt(/4/) 178 58 25
- - ------- ------- ------- ------ ------ ------
$27,281 $22,825 $18,209 4.72 4.69 4.52 Total Interest Expense $1,288 $1,071 $ 822
======= ======= ======= ====== ====== ======
2.92 3.32 3.58 Net Interest Rate Spread
Net Interest Rate Margin
3.56 4.00 4.38 and Net Interest Income(/1/) $1,121 $1,066 $ 968
====== ====== ======
<CAPTION>
Increase (Decrease)
---------------------------------------------
1997 to 1998 1996 to 1997
---------------------- ----------------------
Rate(/2/) Vol. Total Rate(/2/) Vol. Total
--------- ----- ------ --------- ----- ------
<C> <C> <C> <C> <C> <C>
Interest Income
Loans and leases(/3/)
Commercial $(21) $ 60 $ 39 $ 1 $ 40 $ 41
Real estate--commercial (6) 19 13 -- 24 24
Real estate--construction (2) 10 8 (1) 6 5
Real estate--residential mortgage (23) 126 103 (17) 197 180
Real estate--home equity credit loans (1) 4 3 -- 9 9
Consumer (1) 26 25 (1) 17 16
Credit card (8) (65) (73) -- (28) (28)
------- ----- ------ --------- ----- ------
Total Loans and Leases (62) 180 118 (18) 265 247
Investments in debt and equity securities
Trading -- 2 2 -- 3 3
Taxable 4 148 152 22 70 92
Tax-exempt -- (3) (3) 1 (4) (3)
------- ----- ------ --------- ----- ------
Total 4 147 151 23 69 92
Short-term investments
Due from banks--interest bearing 1 2 3 (1) 7 6
Federal funds sold and repurchase
agreements (3) 3 -- 2 -- 2
------- ----- ------ --------- ----- ------
Total Short-term Investments (2) 5 3 1 7 8
------- ----- ------ --------- ----- ------
Total Interest Income(/1/) $(60) $332 $272 $ 6 $341 $347
======= ===== ====== ========= ===== ======
Interest Expense
Interest Bearing Deposits
Interest bearing demand $ (5) $ 3 $ (2) $(8) $ 6 $ (2)
Money market accounts 1 21 22 13 16 29
Savings 3 7 10 -- 3 3
Consumer time certificates
under $100,000 (1) 52 51 (3) 89 86
Other time 1 (1) -- 1 1 2
------- ----- ------ --------- ----- ------
Total Interest Bearing Core Deposits (1) 82 81 3 115 118
Time certificates $100,000 and over (1) 12 11 5 13 18
Foreign -- (3) (3) -- 15 15
------- ----- ------ --------- ----- ------
Total Purchased Deposits (1) 9 8 5 28 33
------- ----- ------ --------- ----- ------
Total Interest Bearing Deposits (2) 91 89 8 143 151
Short-term borrowings (5) 20 15 2 67 69
Bank notes -- (7) (7) 1 (5) (4)
Long-term debt(/4/) (27) 147 120 (5) 38 33
------- ----- ------ --------- ----- ------
Total Interest Expense $(34) $251 $217 $ 6 $243 $249
======= ===== ====== ========= ===== ======
Net Interest Rate Spread
Net Interest Rate Margin
and Net Interest Income(/1/)
</TABLE>
(/1/)Taxable-equivalent basis includes tax-equivalent adjustments of
$16,664,000, $18,084,000 and $18,593,000 for 1998, 1997 and 1996,
respectively, based on a Federal income tax rate of 35%.
(/2/)The rate-volume variance is allocated entirely to rate.
(/3/)Income from loans on non-accrual status is included on a cash basis, while
non-accrual loan balances are included in average volume.
(/4/)Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
- - -------------------------------------------------------------------------------
7
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INVESTMENTS IN DEBT AND EQUITY SECURITIES(/1/)
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
Available-for-sale Held-to-maturity
-------------------------------- ------------------------------
Estimated
Amortized Estimated Amortized Fair
Cost Fair Value Yield(/2/) Cost Value Yield(/2/)
---------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Within one year $ 217,801 $ 218,971 6.53% $ 6,513 $ 6,560 6.87%
One to five
years 59,619 60,655 6.01 -- -- --
Five to 10
years -- -- -- -- -- --
After 10 years -- -- -- -- -- --
---------- ---------- ------- -------
Total 277,420 279,626 6.41 6,513 6,560 6.87
Average
Maturity 9 mos. 5 mos.
U.S. Government
Agencies(/3/)
Within one year 469,387 471,286 6.36 24,886 24,980 6.25
One to five
years 4,105,446 4,137,876 6.27 64,355 65,984 8.32
Five to 10
years 1,400,245 1,408,487 6.21 -- -- --
After 10 years 19,318 19,746 6.71 -- -- --
---------- ---------- ------- -------
Total 5,994,396 6,037,395 6.27 89,241 90,964 7.74
Average
Maturity 4 yrs. 1 mo. 2 yrs. 1 mo.
Obligations of
State and
Political
Subdivisions
Within one year 90,652 91,461 7.53 -- -- --
One to five
years 157,653 162,456 7.89 -- -- --
Five to 10
years 100,725 105,162 8.09 -- -- --
After 10 years 80,790 83,922 8.02 -- -- --
---------- ---------- ------- -------
Total 429,820 443,001 7.89 -- -- --
Average
Maturity 5 yrs. 3 mos.
Other(/3/)
Within one year 240,659 240,890 6.58 1,704 1,664 9.61
One to five
years 1,280,833 1,289,507 6.85 -- -- --
Five to 10
years 217,948 220,458 5.48 149 148 6.41
After 10 years 258,591 249,232 7.11 -- -- --
---------- ---------- ------- -------
Total 1,998,031 2,000,087 6.70 1,853 1,812 9.35
Average
Maturity 6 yrs. 3 mos. 3 yrs. 2 mos.
Total Interest
Earning
Investments(/3/)
Within one year 1,018,499 1,022,608 6.55 33,103 33,204 6.54
One to five
years 5,603,551 5,650,494 6.45 64,355 65,984 8.32
Five to 10
years 1,718,918 1,734,107 6.23 149 148 6.41
After 10 years 358,699 352,900 7.29 -- -- --
---------- ---------- ------- -------
Total 8,699,667 8,760,109 6.45 97,607 99,336 7.72
Average
Maturity 4 yrs. 6 mos. 2 yrs. 0 mos.
Federal Reserve
Bank Stock,
Federal Home
Loan Bank Stock
and Other
Equity
Investments 486,103 486,681 7.68 -- -- --
---------- ---------- ------- -------
Total Portfolio $9,185,770 $9,246,790 6.52 $97,607 $99,336 7.72
========== ========== ======= =======
</TABLE>
(1) This exhibit excludes trading securities, which are reported at estimated
fair value on the Consolidated Balance Sheet. Trading securities totaled
$126,540,000, $70,536,000 and $31,361,000 at December 31, 1998, 1997, and
1996, respectively.
(2) Taxable-equivalent basis.
(3) Maturities of asset-backed obligations are based on the remaining weighted
average maturities.
- - -------------------------------------------------------------------------------
8
<PAGE>
- - --------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Average Average Average
Amount Rate Maturity Amount Rate Maturity Amount Rate Maturity
---------- ---- -------- ---------- ---- -------- ---------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At Year End
Federal
funds
purchased
and
repurchase
agreements $2,087,373 4.60% 8 days $2,127,443 5.49% 14 days $1,861,994 5.77% 8 days
Short-term
FHLB
advances 667,672 5.13 38 days 1,412,701 5.86 164 days 123,094 5.75 157 days
Treasury
tax and
loan notes 222,044 4.69 4 days 104,535 5.42 2 days 118,886 5.16 2 days
Commercial
paper 3,025 5.23 29 days 1,510 5.25 15 days 19,405 5.45 17 days
Other
short-term
borrowings 22,546 5.84 4 days 32,351 6.32 2 days 9,295 6.52 4 days
---------- ---------- ----------
Total
Short-term
Borrowings $3,002,660 4.73 14 days $3,678,540 5.64 71 days $2,132,674 5.74 16 days
========== ========== ==========
Average for
the Year
Federal
funds
purchased
and
repurchase
agreements $2,051,219 5.13% $2,085,927 5.32% $1,446,828 5.29%
Short-term
FHLB
advances 1,052,433 5.61 718,697 5.73 117,705 6.36
Treasury
tax and
loan notes 157,074 5.20 87,513 5.25 78,909 5.20
Commercial
paper 1,712 5.49 17,097 5.56 18,222 5.42
Other
short-term
borrowings 31,640 5.74 20,592 6.43 9,688 6.48
---------- ---------- ----------
Total
Short-term
Borrowings $3,294,078 5.29 $2,929,826 5.43 $1,671,352 5.37
========== ========== ==========
Maximum
Month-End
Balance
Federal
funds
purchased
and
repurchase
agreements $2,370,228 $2,579,789 $1,886,127
Short-term
FHLB
advances 1,472,114 1,412,701 130,239
Treasury
tax and
loan notes 402,733 260,822 439,181
Commercial
paper 5,010 24,800 21,660
Other
short-term
borrowings 79,366 102,833 45,142
</TABLE>
- - --------------------------------------------------------------------------------
9
<PAGE>
Item 2. Properties
Mercantile and Mercantile Bank occupy 22 stories of the Mercantile Tower, a
35-story building owned by Mercantile Bank and located at Seventh and
Washington Streets in St. Louis, Missouri. Among the other properties owned by
Mercantile Bank are a four-story, 223,262 square foot data processing center
located at 1005 Convention Plaza, St. Louis, Missouri, and a four-story,
110,503 square foot banking facility located at 721 Locust Street, St. Louis,
Missouri. In addition, Mercantile Bank leases a two-story, 34,773 square foot
banking facility located at 10 North Hanley Road, Clayton, Missouri.
Mercantile's subsidiaries own and lease other facilities in Missouri,
Illinois, Kansas, Iowa, Arkansas and Kentucky. See Note H to the Consolidated
Financial Statements included on page 66 in the Annual Report of the
Registrant to its Shareholders for the year ended December 31, 1998, which is
incorporated herein by reference.
Item 3. Legal Proceedings
Mercantile and its subsidiaries are subject to various legal actions and
proceedings in the normal course of business, some of which involve
substantial claims for compensatory or punitive damages. Although litigation
is subject to many uncertainties and the ultimate exposure with respect to
these matters cannot be ascertained, management does not believe that the
final outcome of any known or threatened litigation will have a material
adverse effect on the financial condition of Mercantile.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4a. Executive Officers of the Registrant
See Part III, Item 10.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Information concerning the Common Stock of the Registrant, included on page
85 in the Annual Report of the Registrant to its Shareholders for the year
ended December 31, 1998, is incorporated herein by reference.
Item 6. Selected Financial Data
Selected Financial Data, included as Exhibit 3 on page 27 in the Annual
Report of the Registrant to its Shareholders for the year ended December 31,
1998, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included on pages 25 through 52 of the Annual Report of the
Registrant to its Shareholders for the year ended December 31, 1998, is
incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk, included as
Exhibit 6 on page 32 and under the Section entitled "Interest Rate
Sensitivity" on page 31 of the Annual Report of the Registrant to its
Shareholders for the year ended December 31, 1998, is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements, included in the Annual
Report of the Registrant to its Shareholders for the year ended December 31,
1998, are incorporated herein by reference.
<TABLE>
<CAPTION>
Annual Report
Statement Reference
- - --------- -------------
<S> <C>
Independent Auditors' Report. Page 53
Consolidated Statement of Income--Years ended December 31, 1998,
1997 and 1996. Page 54
Consolidated Balance Sheet--December 31, 1998, 1997 and 1996. Page 55
Consolidated Statement of Changes in Shareholders' Equity--Years
ended December 31, 1998, 1997 and 1996. Page 56
Consolidated Statement of Cash Flows--Years ended December 31,
1998, 1997 and 1996. Page 57
Consolidated Statement of Comprehensive Income Page 58
Notes to Consolidated Financial Statements. Pages 59-79
</TABLE>
Selected Quarterly Financial Data, included as Exhibit 20 on page 52 in the
Annual Report of the Registrant to its Shareholders for the year ended
December 31, 1998, is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is contained in "Election of Directors" and
"Beneficial Ownership of Stock by Management," included in the Registrant's
Proxy Statement for the 1999 Annual Meeting of Shareholders, which information
is incorporated herein by reference.
11
<PAGE>
The following is a list, as of February 26, 1999, of the names and ages of
the executive officers of Mercantile and all positions and offices with
Mercantile presently held by the person named. There is no family relationship
between any of the named persons.
<TABLE>
<CAPTION>
Name Age All Positions and Offices Held with Mercantile
---- --- ----------------------------------------------
<C> <C> <S>
W.Randolph Adams 54 Senior Executive Vice President and Chief
Administrative Officer
John Q. Arnold 54 Vice Chairman, Private Banking and Investments
Jon W. Bilstrom 52 General Counsel and Secretary
John P. Dubinsky 55 Chairman, President and Chief Executive Officer,
Mercantile Bank National Association
John R. Elmore 42 President and Chief Executive Officer, Mercantile
Credit Corp., Inc.
Arthur G. Heise 50 Senior Vice President and Auditor
Thomas H. Jacobsen 59 Chairman of the Board, President and Chief Executive
Officer
Stephen F. Milstid 48 Vice Chairman--Operations, Mercantile Bank National
Association
John W. McClure 53 Vice Chairman and Chief Financial Officer
Michael T. Normile 49 Senior Vice President, Finance and Control
</TABLE>
The executive officers were appointed by and serve at the pleasure of the
Board of Directors of Mercantile. Messrs. Adams, Arnold, Bilstrom, Heise,
Jacobsen, Milstid, McClure and Normile have served as executive or senior
officers of either Mercantile or Mercantile Bank for at least the last five
years. Mr. Dubinsky served as President and Chief Executive Officer at Mark
Twain Bancshares, Inc. prior to joining Mercantile in April of 1997. Mr.
Elmore served as President of Mercantile Bank of Lawrence from 1990 until
starting in his new position in 1998.
Information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934, as amended, is contained in "Compliance with Section
16(a) of the Exchange Act," included in the Registrant's Proxy Statement for
the 1999 Annual Meeting of Shareholders, which information is incorporated
herein by reference.
Item 11. Executive Compensation
Information regarding executive compensation is contained in "Compensation
of Executive Officers," included in the Registrant's Proxy Statement for the
1999 Annual Meeting of Shareholders, which is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is contained in "Voting Securities and Principal Holders Thereof"
and "Beneficial Ownership of Stock by Management," included in the
Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders,
which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
contained in "Interest of Management and Others in Certain Transactions,"
included in the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders, which is incorporated herein by reference.
12
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements: Incorporated herein by reference, are listed
in Item 8 hereof.
(2) Financial Statement Schedules: None.
(3) Exhibits: See Exhibit Index at page 17 hereof.
(b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K on October 7, 1998, as
previously disclosed in the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998. That 8-K, under Item 5, 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 of Illinois Co. ("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.
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 Statements.
Supplemental Interim Consolidated Statement of Income (Unaudited) for
the three months ended March 31, 1998 and 1997.
Supplemental Interim Consolidated Balance Sheets (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.
13
<PAGE>
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 Sheets (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.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MERCANTILE BANCORPORATION INC.
(Registrant)
/s/ Thomas H. Jacobsen
Date: March 26, 1999 By: _________________________________
Thomas H. Jacobsen
Chairman of the Board, President,
Chief Executive Officer and
Director
POWER OF ATTORNEY
We, the undersigned officers and directors of Mercantile Bancorporation
Inc., hereby severally and individually constitute and appoint Thomas H.
Jacobsen and John W. McClure, and each of them, the true and lawful attorneys
and agents of each of us to execute in the name, place and stead of each of us
(individually and in any capacity stated below) any and all amendments to this
Annual Report on Form 10-K and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with or
without the others and to have full power and authority to do and perform in
the name and on behalf of each of the undersigned every act whatsoever
necessary or advisable to be done in the premises as fully and to all intents
and purposes as any of the undersigned might or could do in person, and we
hereby ratify and confirm our signatures as they may be signed by our said
attorneys and agents or each of them to any and all such amendments and
instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas H. Jacobsen Chairman of the Board, March 26, 1999
____________________________________ President and Chief
(Thomas H. Jacobsen) Executive Officer
Principal Executive Officer
/s/ John W. McClure Vice Chairman, Chief March 18, 1999
____________________________________ Financial Officer
(John W. McClure)
Principal Financial Officer
/s/ Michael T. Normile Senior Vice President, March 19, 1999
____________________________________ Finance and Control
(Michael T. Normile)
Principal Accounting Officer
/s/ Richard E. Beumer Director March 16, 1999
____________________________________
(Richard E. Beumer)
/s/ Harry M. Cornell Director March 15, 1999
____________________________________
(Harry M. Cornell, Jr.)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dr. Henry Givens Director March 15, 1999
____________________________________
(Dr. Henry Givens, Jr.)
/s/ William A. Hall Director March 16, 1999
____________________________________
(William A. Hall)
/s/ Cinda A. Hallman Director March 15, 1999
____________________________________
(Cinda A. Hallman)
/s/ Frank Lyon, Jr. Director March 15, 1999
____________________________________
(Frank Lyon, Jr.)
/s/ Robert W. Murray Director March 23, 1999
____________________________________
(Robert W. Murray)
/s/ Harvey Saligman Director March 16, 1999
____________________________________
(Harvey Saligman)
/s/ Craig D. Schnuck Director March 26, 1999
____________________________________
(Craig D. Schnuck)
/s/ Alvin J. Siteman Director March 16, 1999
____________________________________
(Alvin J. Siteman)
/s/ Patrick T. Stokes Director March 22, 1999
____________________________________
(Patrick T. Stokes)
/s/ John A. Wright Director March 14, 1999
____________________________________
(John A. Wright)
</TABLE>
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
No. 3-1(a) Restated Articles of Incorporation of the Registrant, as
amended and currently in effect, filed as Exhibit 3-1(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (Commission File No. 1-11792), are
incorporated herein by reference.
No. 3-1(b) Certificate of Designation, Preferences and Rights of Series
B Junior Participating Preferred Stock of the Registrant
filed as Exhibit 3-1(b) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (Commission
File No. 1-11792), is incorporated herein by reference.
No. 3-2 By-Laws of the Registrant, as amended and currently in
effect, filed as Exhibit 3.2 to Amendment No. 2 to
Registrant's Registration Statement on Form S-4 (No. 333-
17757), are incorporated herein by reference.
No. 4-1 Form of Indenture Regarding Subordinated Securities between
the Registrant and The First National Bank of Chicago as
Trustee, filed on March 31, 1992 as Exhibit 4.1 to
Registrant's Report on Form 8-K dated September 24, 1992
(Commission File No. 1-11792), is incorporated herein by
reference.
No. 4-2 Rights Agreement dated as of May 20, 1998, between
Registrant and Harris Trust and Savings Bank, as Rights
Agent (including as an exhibit thereto the form of Rights
Certificate) filed as Exhibit 4-2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (Commission File No. 1-11792), is incorporated herein
by reference.
No. 4-3 Form of Indenture Regarding Senior Debt Securities, filed as
Exhibit 4.1 to Registrant's Registration Statement on Form
S-3 (No. 333-25775), is incorporated herein by reference.
No. 4-4 Form of Indenture Regarding Subordinated Debt Securities,
filed as Exhibit 4.2 to Registrant's Registration Statement
on Form S-3 (No. 333-25775), is incorporated herein by
reference.
No. 4-5 Indenture, dated February 4, 1997; First Supplemental
Indenture, dated February 4, 1997, and Supplemental
Indenture of First Supplemental Indenture, dated May 22,
1997, between the Company, as issuer, and The Chase
Manhattan Bank, as Indenture Trustee, filed as Exhibits 4.5,
4.6 and 4.12, respectively, to the Company's Registration
Statement on Form S-4 (No. 333-25131), are incorporated
herein by reference.
No. 10-1 The Mercantile Bancorporation Inc. 1987 Stock Option Plan,
as amended, filed as Exhibit 10-3 to Registrant's Report on
Form 10-K for the year ended December 31, 1989 (Commission
File No. 1-11792), is incorporated herein by reference.*
No. 10-2 The Mercantile Bancorporation Inc. Amended and Restated
Executive Incentive Compensation Plan, filed as Annex H to
Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders (Commission File No. 1-11792), is
incorporated herein by reference.*
No. 10-3 The Mercantile Bancorporation Inc. Employee Stock Purchase
Plan, filed as Exhibit 10-7 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1989 (Commission
File No. 1-11792), is incorporated herein by reference.*
No. 10-4 The Mercantile Bancorporation Inc. 1991 Employee Incentive
Plan, filed as Exhibit 10-7 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990 (Commission
File No. 1-11792), is incorporated herein by reference.*
No. 10-5 Amendment Number One to the Mercantile Bancorporation Inc.
1991 Employee Incentive Plan, filed as Exhibit 10-6 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 (Commission File No. 1-11792), is
incorporated herein by reference.*
No. 10-6 The Mercantile Bancorporation Inc. Amended and Restated
Stock Incentive Plan, filed as Annex G to Registrant's
definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders (Commission File No. 1-11792), is incorporated
herein by reference.*
No. 10-7 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan
for Non-Employee Directors, filed as Appendix E to
Registrant's definitive Proxy Statement for the 1994 Annual
Meeting of Shareholders (Commission File No. 1-11792), is
incorporated herein by reference.*
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
No. 10-8 The Mercantile Bancorporation Inc. Amended and Restated
Voluntary Deferred Compensation Plan, filed as Exhibit 10.1
to Registrant's Registration Statement on Form S-8 (No. 333-
47713), is incorporated herein by reference.*
No. 10-9 Mercantile Bancorporation Inc. Supplemental Retirement Plan,
filed as Exhibit 10-12 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 (Commission File
No. 1-11792), is incorporated herein by reference.*
No. 10-10 Mercantile Bancorporation Inc. Voluntary Deferred
Compensation Plan for Non-Employee Affiliate Directors and
Advisory Directors, filed as Exhibit 10.3 to Registrant's
Registration Statement on Form S-8 (No. 333-47713), is
incorporated herein by reference.*
No. 10-11 Mercantile Bancorporation Inc. Amended and Restated Stock
Incentive Plan for Non-Employee Directors, filed as Exhibit
10.2 to Registrant's Registration Statement on Form S-8 (No.
333-47713), is incorporated herein by reference.*
No. 10-12 Employment Agreement for Thomas H. Jacobsen, as amended and
restated, filed as Exhibit 10.9 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997
(Commission File No. 1-11792), is incorporated by reference
herein.*
No. 10-13 Form of Change of Control Employment Agreement for John W.
McClure, W. Randolph Adams, John Q. Arnold and Certain Other
Executive Officers, filed as Exhibit 10-10 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1989 (Commission File No. 1-11792), is incorporated herein
by reference.*
No. 10-14 Employment Agreement for Alvin J. Siteman, dated November
18, 1996, filed as Exhibit 10.3 to Registrant's Report on
Form 10-Q for the quarter ended March 31, 1997 (Commission
File No. 1-11792), is incorporated herein by reference.*
No. 10-15 Employment Agreement for John P. Dubinsky, dated October 27,
1996, filed as Exhibit 10.4 to Registrant's Report on Form
10-Q for the quarter ended March 31, 1997 (Commission File
No. 1-11792), is incorporated herein by reference.*
No. 13 Excerpts from Annual Report of the Registrant to its
Shareholders for the year ended December 31, 1998.
No. 21 Subsidiaries of the Registrant as of February 26, 1999.
No. 23 Consent of KPMG LLP.
No. 24 Power of Attorney (on signature page).
No. 27 Financial Data Schedule (December 31, 1998).
</TABLE>
- - --------
*Management contract or compensatory plan or arrangement
18
<PAGE>
EXHIBIT NO. 13
Mercantile Bancorporation Inc. and Subsidiaries
FINANCIAL CONTENTS
Financial Commentary
25 Performance Summary
29 Net Interest Income
29 Liquidity
31 Interest Rate Sensitivity
33 Deposits
34 Non-Core Funding
35 Capital Resources
37 Investments in Debt and Equity Securities
38 Loans
40 Risk Management and the
Reserve for Possible Loan Losses
42 Non-Performing Assets
44 Off-Balance-Sheet Risk
45 Other Income
47 Other Expense
49 Year 2000
50 Income Taxes
51 Fourth Quarter Results
53 Management Report on
Consolidated Financial Statements
Audited Financial Statements
53 Independent Auditors' Report
54 Mercantile Bancorporation Inc.
and Subsidiaries Consolidated
Financial Statements
59 Notes to Consolidated Financial Statements
80 Six Year Consolidated Financial Statements
Special Note
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. Such statements are based on Management's current
expectation. Actual strategies and results in future periods may differ
materially from those currently expected because of various risks and
uncertainties.
----
24
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
FINANCIAL COMMENTARY
PERFORMANCE SUMMARY
The most meaningful comparison of the fundamental financial performance of
Mercantile Bancorporation Inc. ("Mercantile" or "Corporation") excludes certain
charges from the results of operations for the years 1998, 1997 and 1996. In all
three years, Mercantile recorded anticipated costs relating to the 17
acquisitions that were made in those years. These charges include accruals to
substantially conform the accounting and credit policies of the acquired
institutions to those of Mercantile as well as to account for the infrequent
expenses associated with those transactions.
After the appropriate tax benefit, acquisition charges in 1998 totaled
$76,783,000, and they were partially offset by $29,421,000 after-tax gains
recorded on the divestitures of two Missouri banks formerly owned by Firstbank
of Illinois Co. ("Firstbank"). The corresponding gain on this sale offset nearly
40% of the 1998 acquisition charges. The sale of these banks, which had combined
assets of approximately $300 million, was required by the State of Missouri.
Additionally, in the fourth quarter of 1998, the Corporation recorded an
after-tax restructuring charge of $29,330,000 relating to staff rightsizing,
centralization, branch closings and consolidation of back office functions.
Details of this charge are described in Note V to the Consolidated Financial
Statements. The years 1997 and 1996 also included one-time after-tax charges of
$32,500,000 and $8,050,000, respectively, to recognize the sale of the
$405,000,000 non-strategic private label credit card business in 1997 at a
discount and a special assessment paid to the Savings Association Insurance Fund
("SAIF") reserve fund in 1996. Acquisition charges were also recorded in both
years.
Exhibit 1 summarizes actual results and "adjusted" results, which exclude
these infrequent expenses discussed above. It is the adjusted results that allow
for the best financial comparison for the years 1998 to 1997 and 1996. Exhibit 3
provides a six-year summary of actual results with appropriate growth rates.
After eliminating the infrequent expense previously detailed, adjusted net
income for 1998 was $451,995,000, a 19.2% increase over the adjusted
$379,199,000 earned a year ago, which in turn was up 11.2% from 1996. Diluted
earnings per share on an adjusted basis was $2.90 in 1998, 9.0% higher than the
$2.66 reported in 1997. Adjusted diluted earnings per share in 1997 was 6.0%
higher than in 1996. Adjusted return on assets was 1.31% in 1998 compared with
1.30% in 1997, while adjusted return on average equity for the year was 15.29%
versus 15.32% last year.
Including the infrequent charges, reported net income for Mercantile in 1998
was $375,303,000 as compared with $246,822,000 earned a year ago and
$284,453,000 in 1996. The corresponding basic earnings per share in 1998 was
$2.45 compared with $1.76 and $2.12 in the prior years, respectively. Diluted
earnings per share was $2.41 in 1998 versus $1.73 in 1997 and $2.09 in 1996.
Exhibit 1
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------
ADJUSTED RESULTS Year Ended December 31, 1998
--------------------------------------
Diluted
Earnings per Return
(Dollars in thousands except per share data) Net Income Share on Assets
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reported $375,303 $2.41 1.09%
Acquisition expenses 76,783 .49 .22
Gain on sale of subsidiaries (29,421) (.19) (.08)
Restructuring charge 29,330 .19 .08
- - ---------------------------------------------------------------------------------------
Adjusted $451,995 $2.90 1.31%
- - ---------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1997
--------------------------------------
<S> <C> <C> <C>
Reported $246,822 $1.73 .85%
Acquisition expenses 99,877 .70 .34
Loss on sale of
credit card loans 32,500 .23 .11
- - ---------------------------------------------------------------------------------------
Adjusted $379,199 $2.66 1.30%
- - ---------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1996
--------------------------------------
<S> <C> <C> <C>
Reported $284,453 $2.09 1.19%
Acquisition expenses 48,489 .36 .20
Special SAIF assessment 8,050 .06 .04
- - ---------------------------------------------------------------------------------------
Adjusted $340,992 $2.51 1.43%
- - ---------------------------------------------------------------------------------------
</TABLE>
As noted above, the past three years included significant acquisition
activity. In 1998, seven transactions were completed adding $5.2 billion in
assets. In 1997, three acquisitions were closed adding $10.7 billion in assets,
while in 1996 there were seven transactions that added $3.0 billion in assets.
Note C to the Consolidated Financial Statements details acquisition activity for
the past three years. There are no pending transactions as of December 31, 1998,
and at year-end 1998 Mercantile operated from 11 bank charters and 474 banking
offices in six states. As recently as December 31, 1995, Mercantile had 75 bank
charters and one thrift charter. The reduction in charters has increased
operating efficiency and expanded customer service. By March 1, 1999, Mercantile
further reduced its bank charters to seven and all banks were operating on
common Mercantile systems.
Mercantile's acquisition of St. Louis-based Roosevelt Financial Group, Inc.
("Roosevelt") was consummated on July 1, 1997 and accounted for as a purchase.
Thus, historical financial statements were not restated, and its results of
operations are included with Mercantile's from July 1, 1997 forward.
------
25
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
All figures have been restated to include the pre-acquisition accounts and
results of operations of Firstbank and CBT Corporation ("CBT"), which were
merged with Mercantile on July 1, 1998 in transactions accounted for as
poolings-of-interests. The earnings per share dilution from these transactions
was $.03 in the first half of 1998. There were four other poolings-of-interests
in 1998, but they were immaterial to the financial position and results of
operations of Mercantile, and thus the historical financial statements were not
restated for these acquisitions.
It is important to recognize cash based earnings, which excludes intangible
asset amortization, because it is more indicative of cash flows and thus the
Corporation's ability to support growth and pay dividends. Goodwill of
$608,076,000 was added to the Corporation's balance sheet in conjunction with
the July 1, 1997 purchase transaction. Incremental goodwill amortization in 1998
versus 1997 was $20,394,000, and the earnings per share impact was $.13. In
1998, cash based adjusted diluted earnings per share was $3.26, up 11.3% from
the $2.93 earned in 1997. See Exhibit 2 for other cash based performance ratios
and the related comparisons to 1997.
Net interest income increased 5.4% to $1.1 billion during 1998. The
acquisition of Roosevelt caused a significant shift in the mix of earning assets
and funding sources, which in a changed interest rate environment had a
dampening effect on net interest income growth. These shifts, combined with the
cost of debt issued in conjunction with the acquisition 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 net
interest rate margin dropped further during the first three quarters of 1998,
before stabilizing, 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. The year-to-date margin was 3.56% in 1998 compared with
4.00% in 1997 and 4.38% in 1996. Average earning assets for 1998 of $31.5
billion were 18.2% higher than last year following growth of 20.7% in 1997. The
mortgage asset attrition significantly impacted average earning asset growth in
1997 and 1998.
For the year ended December 31, 1998, other income was $541,918,000, an
improvement of $127,725,000 or 30.8% from last year following growth of 12.5% in
1997. Excluding 1998's $48,051,000 gain on the required divestiture of the two
Missouri Firstbank units and securities losses incurred on the realignment of
acquired portfolios, 1998 other income was up 19.6%. Other income grew due to
fee growth in core businesses, increased service charge revenue, higher retail
brokerage and mortgage banking income, and gains recorded on the sales of both
selected businesses and investment securities. Gains on the sale of selected
non-strategic businesses occurred in all three years and are discussed in the
other income section on page 45 of this report.
Exhibit 2
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
CASH BASED EARNINGS
-----------------------------
(Dollars in thousands except per share data) 1998 1997 Change
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Adjusted net income $451,995 $379,199 19.2%
Add back:
Goodwill amortization 55,257 34,863 58.5
Other intangible asset
amortization 2,537 5,307 (52.2)
- - -----------------------------------------------------------------------------
Total Intangible
Asset Amortization 57,794 40,170 43.9
Less tax effect (917) (1,720) (46.7)
- - -----------------------------------------------------------------------------
Cash Based Adjusted
Net Income $508,872 $417,649 21.8
- - -----------------------------------------------------------------------------
CASH BASED
ADJUSTED DILUTED
EARNINGS PER SHARE $ 3.26 $ 2.93 11.3%
- - -----------------------------------------------------------------------------
CASH BASED ADJUSTED
PERFORMANCE RATIOS
Return on tangible assets 1.51% 1.46%
Return on tangible equity 23.72 21.57
Efficiency ratio 51.63 52.35
Other expense to average
tangible assets 2.47 2.71
- - -----------------------------------------------------------------------------
</TABLE>
Non-interest expenses were up $40,379,000 or 4.1% from a year ago and totaled
$1,026,757,000 compared with $986,378,000 last year and $805,187,000 in 1996.
Other expense in 1998, 1997 and 1996 included $89,192,000, $121,393,000 and
$51,071,000, respectively, in infrequent merger-related costs. As discussed
earlier, 1998 also included the $45,130,000 restructuring charge, 1997 included
a $50,000,000 discount on the sale of former co-branded credit card loans, and
1996 included the one-time SAIF assessment of $12,385,000. Excluding these
infrequent costs, 1998 operating expenses grew by $77,450,000 or 9.5%; however,
increased goodwill amortization accounted for $20,394,000 of this increase. On
an adjusted basis, the year-to-date efficiency ratio was 55.21% compared with
55.07% last year, and the other expense to average assets ratio improved to
2.58% in 1998 from 2.80% in 1997. The cash based
------
26
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
efficiency ratio improved to 51.63% from 52.35% last year, and the expense to
asset ratio contracted to 2.47% from 2.71% in 1997.
Exhibit 3
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
Growth Rates
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 One Year Five Years
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS EXCLUDING
INFREQUENT ITEMS
Adjusted net income
(Thousands) $ 451,995 $ 379,199 $ 340,992 $ 318,155 $285,276 $246,605 19.2% 12.9%
Adjusted basic earnings
per share 2.95 2.71 2.54 2.37 2.18 1.92 8.9 9.0
Adjusted diluted earnings
per share 2.90 2.66 2.51 2.33 2.14 1.88 9.0 9.1
PER SHARE DATA
Basic earnings per share $ 2.45 $ 1.76 $ 2.12 $ 2.37 $ 2.05 $ 1.79 39.2% 6.5%
Diluted earnings per share 2.41 1.73 2.09 2.33 2.02 1.75 39.3 6.6
Dividends declared 1.24 1.148 1.092 .88 .748 .66 8.0 13.4
Book value at year-end 19.53 18.57 16.87 16.31 14.43 13.46 5.2 7.7
Market price at year-end 46 1/8 61 1/2 34 1/4 30 11/16 20 13/16 20 1/16 (25.0) 18.1
OPERATING RESULTS
(Thousands)/1/
Taxable-equivalent net
interest income $1,120,924 $1,065,822 $ 967,556 $ 938,004 $ 929,199 $ 895,808 5.2% 4.6%
Tax-equivalent adjustment 16,664 18,084 18,593 20,225 20,920 22,395 (7.9) (5.7)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,104,260 1,047,738 948,963 917,779 908,279 873,413 5.4 4.8
Provision for possible
loan losses 51,154 86,355 78,766 44,952 53,094 77,485 (40.8) (8.0)
Other income 541,918 414,193 368,010 339,989 297,783 316,025 30.8 11.4
Other expense 1,026,757 986,378 805,187 725,915 732,566 754,130 4.1 6.4
Income taxes 192,964 142,376 148,567 168,746 151,826 127,718 35.5 8.6
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 375,303 $ 246,822 $ 284,453 $ 318,155 $ 268,576 $ 230,105 52.1 10.3
- - -----------------------------------------------------------------------------------------------------------------------------------
ENDING BALANCE SHEET
(Millions)
Total assets $ 35,800 $ 33,332 $ 24,996 $ 23,651 $ 22,089 $ 21,443 7.4% 10.8%
Earning assets 32,376 30,383 22,775 21,555 20,394 19,765 6.6 10.4
Loans and leases 22,311 21,362 16,937 15,584 14,559 13,292 4.4 10.9
Investments in debt and
equity securities 9,471 8,465 5,430 5,626 5,574 5,904 11.9 9.9
Deposits 25,461 24,809 19,785 18,464 17,342 17,607 2.6 7.7
Long-term debt/2/ 3,723 1,518 328 371 382 384 57.5
Shareholders' equity 3,074 2,762 2,263 2,211 1,897 1,757 11.3 11.8
Reserve for possible loan
losses 309 284 258 261 275 262 8.7 3.3
Average Balance Sheet
(Millions)
Total assets $ 34,571 $ 29,097 $ 23,899 $ 22,915 $ 21,677 $ 21,081 18.8% 10.4%
Earning assets 31,513 26,665 22,085 21,207 20,007 19,366 18.2 10.2
Loans and leases 21,780 19,302 15,990 15,265 13,687 12,918 12.8 11.0
Investments in debt and
equity securities 9,190 6,909 5,757 5,547 5,914 5,874 33.0 9.4
Deposits 24,781 22,262 19,112 18,143 17,656 17,648 11.3 7.0
Long-term debt/2/ 3,050 869 343 381 395 378 51.8
Shareholders' equity 2,955 2,475 2,199 2,072 1,843 1,661 19.4 12.2
- - -----------------------------------------------------------------------------------------------------------------------------------
/1/ Infrequent items included herein.
/2/ Includes company-obligated mandatorily redeemable securities of Mercantile
Capital Trust I.
</TABLE>
The provision for possible loan losses in 1998 was $51,154,000 compared with
$86,355,000 the prior year and $78,766,000 in 1996. Included are infrequent
merger-related provisions of $19,600,000 in 1998, $20,340,000 in 1997 and
$13,666,000 in 1996. Net charge-offs for the year were $42,084,000 and
represented .19% of average loans in 1998, compared with $81,070,000 and .42%
the prior year and $92,193,000 or .58% in 1996. The declining loss rate reflects
favorable asset quality trends and diminished credit card losses. At December
31, 1998, the reserve for possible loan losses was $308,890,000 and provided
coverage of 222.76% of non-performing loans (i.e., non-accrual and renegotiated
loans) compared with 241.91% last year.
------
27
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 4
<TABLE>
<CAPTION>
SELECTED RATIOS
---------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTED RATIOS
Return on assets 1.31% 1.30% 1.43% 1.39% 1.32% 1.17%
Return on equity 15.29 15.32 15.50 15.36 15.48 14.85
Efficiency ratio 55.21 55.07 55.41 56.80 58.67 61.18
Other expense to average assets 2.58 2.80 3.10 3.17 3.32 3.52
Dividend payout 42.76 43.16 43.51 37.77 34.95 35.11
AS REPORTED RATIOS
Return on assets 1.09 .85 1.19 1.39 1.24 1.09
Return on equity 12.70 9.97 12.93 15.36 14.58 13.85
Efficiency ratio 61.75 66.65 60.29 56.80 59.70 62.23
Other expense to average assets 2.97 3.39 3.37 3.17 3.38 3.58
Dividend yield 2.69 1.87 3.19 2.87 3.59 3.29
Dividend payout* 51.45 66.36 52.25 37.77 37.03 37.71
Tangible equity to tangible assets 6.55 5.92 8.31 8.83 8.08 7.61
Equity to assets 8.59 8.29 9.05 9.35 8.59 8.19
Tier I capital to risk-adjusted assets 9.84 9.40 11.50 12.37 12.03 10.97
Total capital to risk-adjusted assets 12.55 12.42 14.02 15.02 14.83 13.81
Leverage 7.16 6.52 8.52 8.87 8.37 7.73
Loans to deposits (Average) 87.89 86.71 83.66 84.14 77.52 73.20
Reserve for possible loan losses to outstanding loans 1.38 1.33 1.52 1.68 1.89 1.97
Reserve for possible loan losses to non-performing loans 222.76 241.91 298.11 240.34 536.18 290.58
Non-performing loans to outstanding loans .62 .55 .51 .70 .35 .68
Non-performing assets to total assets .60 .67 .42 .55 .36 .68
Net interest rate margin 3.56 4.00 4.38 4.42 4.64 4.63
- - ---------------------------------------------------------------------------------------------------------------------------
*Based upon diluted earnings per share.
</TABLE>
Non-performing loans and foreclosed assets as of December 31, 1998 were
$152,163,000 or .68% of total loans and foreclosed assets, compared with
$138,567,000 or .65% last year. The increase was largely in residential mortgage
loans, which historically have low loan loss rates. Additional non-performing
assets include investment securities acquired July 1, 1997, which had incurred a
change in value that is considered an "other than temporary" impairment. These
securities totaled $85,887,000 at December 31, 1997 and are discussed in detail
on page 44 of this report. With paydowns, they had declined to $63,296,000 at
December 31, 1998. Foreclosed assets declined to $13,500,000 from $21,098,000 at
December 31, 1997.
Consolidated assets of $35.8 billion at December 31, 1998 were up 7.4% from
last December 31. Core deposits increased by 2.6% to $23.0 billion, loans were
$22.3 billion, up 4.4% from last year, and shareholders' equity of $3.1 billion
was 11.3% higher than at December 31, 1997. All measures of capital adequacy
remained adequate and were significantly strengthened from December 31, 1997
levels. Tier I capital to risk-adjusted assets was 9.84%, while total capital to
risk-adjusted assets at December 31, 1998 was 12.55%. The ratio of tangible
equity to tangible assets was 6.55% at December 31, 1998, up significantly from
the 5.92% at year-end 1997. At the Board of Directors meeting on February 17,
1999, the quarterly dividend was increased by 9.7% to $.34 from $.31 per share.
At December 31, 1998, Mercantile's assets are distributed as follows: St.
Louis metropolitan area $18.4 billion, outstate Missouri $4.4 billion,
metropolitan Kansas City $4.2 billion, Iowa and northwestern Illinois $3.8
billion, Arkansas $1.8 billion, outstate Illinois $2.4 billion and western
Kentucky $1.0 billion.
Financial Accounting Standard ("FAS") 131, "Disclosures about Segments of an
Enterprise and Related Information," requires for the first time in 1998 results
of operations for the various business activities in the manner that the
Corporation internally manages. Those results are portrayed in Note U to the
Consolidated Financial Statements.
The following financial commentary presents a more thorough discussion and
analysis of the results of operations and financial condition of the Corporation
for the years
------
28
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
ended December 31, 1998, 1997 and 1996. It should be read in conjunction with
the accompanying audited Consolidated Financial Statements and related notes.
Financial highlights for the past six years are presented in Exhibits 3 and 4.
NET INTEREST INCOME
Net interest income, the difference between total interest income on earning
assets and total interest expense, the cost of funds supporting those assets, is
Mercantile's primary source of earnings. Representing the Corporation's gross
profit from lending, investing, deposit gathering and borrowing activities, net
interest income is affected by many variables including the volume, yield and
mix of earning assets and interest bearing liabilities, the level of non-
performing assets, the level of non-interest bearing liabilities, the general
level of interest rates and the slope of the yield curve. The net interest rate
margin is net interest income on a fully taxable-equivalent basis as a
percentage of average earning assets.
In 1998, net interest income was $1.1 billion, an increase of $56,522,000 or
5.4% from the $1.0 billion earned in 1997, which was up 10.4% over 1996 results.
The volume of average earning assets grew by 18.2% in 1998, and the net interest
rate margin was 3.56% compared with 4.00% in 1997 and 4.38% in 1996. The July 1,
1997 acquisition caused a significant shift in the mix of earning assets and
funding sources. This shift and the cost of the debt issued in the transaction
caused an estimated 60-basis-point decline in the net interest rate margin
during the second half of 1997. Competitive pressures on both loan and deposit
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 caused further contraction in the net interest rate margin
in the first three quarters of 1998.
Average earning assets in 1998 grew by $4.8 billion or 18.2% when compared
with 1997, and average loans grew by 12.8%. This growth was funded by an
increase of $2.3 billion or 11.7% in average core deposits, a $170,745,000
increase in purchased deposits, a $364,252,000 increase in short-term borrowed
funds and a $1.9 billion increase in Federal Home Loan Bank ("FHLB") term
borrowings. The shift in funding was necessitated by the lower overall interest
rate environment and management's efforts to bring down the average cost of
funds.
On average, lower-yielding residential real estate mortgage loans as a
percentage of earning assets increased from 25.42% in 1997 to 26.61% in 1998,
even though from year-end 1997 to year-end 1998 residential mortgage loans were
down $549,055,000 or 6.3%. Additionally, the ratio of higher costing consumer
time certificates under $100,000 to total average core deposits remained above
40% even though from year-end 1997 these deposits declined by $663,906,000 or
6.7%. It has been management's strategy to reduce the Corporation's reliance on
both to levels more typical for Mercantile in periods prior to 1997.
The decline in the net interest rate margin in 1998 from 1997 and 1996 levels
also was attributable to continued competitive pricing for both loans and
deposits, the sales of investment securities at gains, the interest expense
incurred on recent debt issues, the continued movement of retail deposits from
savings and transaction accounts to mutual funds, a greater dependence on
wholesale funding and the absence of high-yielding credit card loans as a
significant earning asset. Partially offsetting these negative factors in 1998
were increases in net demand deposits (non-interest bearing demand deposits less
cash and due from banks) of $317,291,000 or 14.1%.
Subsequent discussions on liquidity and interest rate sensitivity, deposits,
securities and loans further detail the changes in net interest income and the
net interest rate margin for the years 1998, 1997 and 1996.
LIQUIDITY
The Corporation's Asset/Liability Management Committee ("ALCO") meets monthly to
formulate guidelines for and to monitor the composition of assets and
liabilities. The objectives are to meet earnings goals by producing the optimal
yield and maturity mix consistent with pre-established guidelines for interest
rate and liquidity plus capital constraints. Key to these goals is liquidity
management, which ensures Mercantile has ready access to sufficient funds at
reasonable rates to meet both existing commitments and future financial
obligations. Liquidity management also is necessary to withstand fluctuations in
deposit levels and to provide for customers' credit needs in a timely and cost-
effective manner. Liquidity management is viewed from a long-term and short-term
perspective, as well as from a liability and asset perspective. Management
monitors liquidity through a periodic review of maturity profiles, yield and
rate behaviors, and loan and deposit forecasts to minimize funding risks.
------
29
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Long-term liquidity is a function of a strong capital position and a large
core deposit base. Growth and stability of both of these components form the
foundation for Mercantile's long-term liquidity strength. Short-term liquidity
needs arise from the continuous fluctuations in the flow of funds on both sides
of the balance sheet, and to a lesser extent from seasonal and cyclical customer
demands.
The six bank acquisitions made in 1998, as well as the acquisition of Mark
Twain Bancshares, Inc. ("Mark Twain") in the second quarter of 1997, did not
have a significant impact on the liquidity profile and funding needs of the
Corporation, as their balance sheet profiles were those of a typical bank. The
July 1, 1997 acquisition of Roosevelt significantly modified the liquidity
profile as: 1) $650,000,000 of term debt was obtained in capital markets largely
to fund the transaction; 2) significant FHLB borrowings were assumed; 3) a
liquid and largely unpledged investment portfolio was acquired; 4) significant
mortgage assets were acquired that generated large cash flows over time and
provided opportunities to secure additional FHLB borrowings; and 5) substantial
core deposits and customer relationships came with the transaction.
The most important source of liquidity for Mercantile continues to be
liability liquidity, which is the ability to raise new funds and renew maturing
liabilities in a variety of markets. The most critical factor in assuring
liability liquidity is the maintenance of confidence in Mercantile by suppliers
of funds. The Corporation has its current liability position in line with
established strategic objectives. Some of these objectives emphasize significant
core deposit funding of subsidiary banks and capital positions that exceed
regulatory guidelines. Mercantile's extensive retail network continues to
provide the necessary core deposits to meet desired liquidity levels.
Examples of the Corporation's liability liquidity include: 1) FHLB borrowing
availability of $6.0 billion, of which only $3.5 billion was utilized at
December 31, 1998; 2) an expanded, but as yet unused, $3.0 billion bank note
program developed in 1998 supported by strong and improved credit ratings, which
allows all of the major subsidiary banks to issue senior and subordinated notes
over a broad range of maturities; 3) the $35.8 billion-asset size of Mercantile,
which allows for greater diversification of funding sources where higher limits
of funds can be obtained from large providers; and 4) $100,000,000 in lines of
credit available to the Parent Company. These programs provide the Corporation
with significant access to funds at a wide range of maturities.
Asset liquidity is typically provided through the maturities of various
assets, the net cash flow of fee-based businesses, the ability to convert loans
and investments into cash, securitizations and the utilization of securities as
collateral in repurchase agreements. Unpledged investment securities were $3.7
billion at December 31, 1998 compared with $4.5 billion last year-end.
The reputation of Mercantile Bank N.A., as well as its financial strength and
numerous long-term customer relationships, enables it to raise funds as needed
in various markets. Historically, these funds have been purchased locally,
nationally and internationally in the federal funds market and via large
certificates of deposit and eurodollar transactions, capitalizing on
relationships maintained with investment banks, money center banks and money
market funds.
At December 31, 1998, the Parent Company held $283,174,000 in cash, liquid
money market investments and available-for-sale securities. The Parent Company's
routine cash requirements consist primarily of operating expenses, dividends to
shareholders, principal and interest payments on debt, and funds used in
acquisitions, which are expected to be insignificant in 1999. Operating expenses
are funded by subsidiary bank management fees, while shareholder dividends and
debt service are satisfied by quarterly subsidiary bank dividends. The Parent
Company has the ability to borrow funds in the commercial paper market, and has
access to long-term capital markets. Maintaining favorable debt ratings is
critical to liquidity as these ratings affect the availability and cost of funds
to the Corporation. These public ratings are indicated in Exhibit 9 on page 35.
Net cash provided by operating activities for the Corporation in 1998 was
$356,739,000. Net income of $375,303,000, adjusted for non-cash charges, largely
accounted for the net cash provided by operating activities. Net cash used by
investing activities was $249,189,000 in 1998. The largest component of cash
used by investing activities was the purchase of investment securities, which
totaled $6.9 billion. Net cash provided by financing activities in 1998 was
$360,840,000. The increase in the Corporation's long-term FHLB advances was a
major source of net cash from financing activities.
------
30
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
INTEREST RATE SENSITIVITY
Interest sensitivity is related to liquidity, as each is affected by maturing
assets and sources of funds. Interest sensitivity, however, also takes into
consideration those assets and liabilities with interest rates that are subject
to change prior to maturity. The objective and primary focus of interest
sensitivity management is to optimize earnings results, while managing, within
internal policy constraints, interest rate risk. Mercantile's policy on rate
sensitivity is to manage exposure to potential risks associated with changing
interest rates by maintaining a balance sheet posture in which annual net
interest income and the market value of portfolio equity are not significantly
impacted by unexpected changes in interest rates. The total absence of risk, as
well as excessive risk, will result in less than acceptable returns; therefore,
Mercantile manages its interest sensitivity risk between those two extremes.
Interest rate risk at a given point in time can be represented by an interest
rate sensitivity position ("gap"). Exhibit 5 presents a summary balance sheet at
December 31, 1998 with an interest rate gap analysis that shows the difference
between the amount of assets and liabilities maturing or subject to repricing in
given time periods. The cumulative gap represents the net position of assets and
liabilities subject to repricing over specified time periods. A static gap
report is one measure of the risk inherent in the existing balance sheet
structure as it relates to potential changes in net interest income; it
indicates that the Corporation was modestly negatively gapped, i.e., slightly
liability sensitive, at December 31, 1998 within the one-year timeframe.
Exhibit 5
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY December 31, 1998
------------------------------------------------------------------------
Total
Variable 1-3 4-6 7-12 1 Year Over
(Dollars in millions) Rate Months Months Months or Less 1 Year Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans and leases/1/ $ 2,934 $ 4,432 $ 1,822 $ 2,741 $11,929 $10,382 $22,311
Investments in debt and equity securities 127 2,004 1,162 787 4,080 5,391 9,471
Short-term investments 228 360 1 5 594 -- 594
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 3,289 $ 6,796 $ 2,985 $ 3,533 $16,603 $15,773 $32,376
- - ------------------------------------------------------------------------------------------------------------------------------------
ACQUIRED FUNDS
Interest bearing core deposits2 $ 5,436 $ 2,112 $ 1,926 $ 2,329 $11,803 $ 6,772 $18,575
Purchased deposits 391 790 514 349 2,044 389 2,433
Short-term borrowings 1,848 1,120 32 3 3,003 -- 3,003
Bank notes -- 25 -- -- 25 -- 25
Long-term debt3 -- 1,653 1 106 1,760 1,963 3,723
Net effect of credit card securitization -- 176 -- -- 176 (176) --
Interest rate swaps -- 590 -- -- 590 (590) --
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Acquired Funds 7,675 6,466 2,473 2,787 19,401 8,358 27,759
Non-interest bearing deposits/2/ 1,408 -- -- -- 1,408 3,045 4,453
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Acquired Funds $ 9,083 $ 6,466 $ 2,473 $ 2,787 $20,809 $11,403 $32,212
- - ------------------------------------------------------------------------------------------------------------------------------------
GAP ANALYSIS
Interest sensitivity gap $(5,794) $ 330 $ 512 $ 746 $(4,206)
- - ------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(5,794) $(5,464) $(4,952) $(4,206)
- - ------------------------------------------------------------------------------------------------------------------------------------
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities .36 .65 .73 .80
- - ------------------------------------------------------------------------------------------------------------------------------------
/1/ Non-accrual loans are reported in the "Over 1 Year" category.
/2/ Mercantile's experience with interest bearing demand, money market accounts,
savings and non-interest bearing deposits has been that, although these deposits
are subject to immediate withdrawal or repricing, a portion of the balances has
remained relatively constant in periods of both rising and falling rates.
Therefore, a portion of these deposits is included in the "Over 1 Year"
category. If these deposits were all included in the "Total 1 Year or Less"
category, the cumulative ratio of interest-sensitive assets to interest-
sensitive liabilities would be .60.
/3/ Includes company-obligated mandatorily redeemable securities of Mercantile
Capital Trust I.
</TABLE>
------
31
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 6
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
MARKET RISK DISCLOSURE December 31, 1998
--------------------------------------------------------------------------------------------
Book or Notional Value Fair Value
--------------------------------------------------------------------------------------------
More than More than More than More than
Within 1 Year to 2 Years to 3 Years to 4 Years to Over
(Dollars in millions) 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans and leases:*
Fixed interest rate $ 168 $ 2,052 $ 1,249 $ 1,657 $ 1,476 $ 5,922 $12,524 $10,470
Average interest rate 8.36% 7.89% 8.47% 8.41% 8.48% 8.78% 8.51%
Variable/adjustable
interest rate $ 161 $ 1,750 $ 488 $ 458 $ 317 $ 6,613 $ 9,787 $12,401
Average interest rate 8.79% 8.19% 7.93% 8.02% 8.04% 6.67% 7.15%
Investments in debt and
equity securities:
Fixed interest rate $ 593 $ 365 $ 582 $ 241 $ 1,578 $ 4,534 $ 7,893 $ 7,909
Average interest rate 6.04% 6.56% 6.27% 6.55% 6.06% 5.93% 6.04%
Variable/adjustable
interest rate $ 6 $ 2 $ 2 $ -- $ 1 $ 1,567 $ 1,578 $ 1,563
Average interest rate 4.57% 5.61% 7.93% 6.78% 7.10% 7.09%
Short-term investments $ 594 $ -- $ -- $ -- $ -- $ -- $ 594 $ 594
Average interest rate 5.56% 5.56%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 1,522 $ 4,169 $ 2,321 $ 2,356 $ 3,372 $18,636 $32,376 $32,937
- - ------------------------------------------------------------------------------------------------------------------------------------
ACQUIRED FUNDS
Deposits:
Transaction deposits $ 7,846 $ 2,357 $ 1,201 $ 1,490 $ -- $ -- $12,894 $12,894
Average interest rate 1.77% 1.77% 1.47% 1.34% 1.70%
Time deposits $ 9,170 $ 2,022 $ 621 $ 350 $ 303 $ 101 $12,567 $12,984
Average interest rate 4.73% 5.48% 5.68% 5.93% 5.80% 6.44% 4.97%
Borrowed funds:
Fixed interest rate $ 2,883 $ 20 $ 4 $ 164 $ 55 $ 1,369 $ 4,495 $ 4,565
Average interest rate 4.78% 5.13% 6.29% 7.46% 5.14% 5.90% 5.23%
Variable interest rate $ 1,220 $ 465 $ 10 $ 10 $ -- $ 551 $ 2,256 $ 2,342
Average interest rate 5.43% 5.48% 5.07% 5.52% 5.58% 5.47%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Acquired Funds $21,119 $ 4,864 $ 1,836 $ 2,014 $ 358 $ 2,021 $32,212 $32,785
- - ------------------------------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS
Pay variable/receive fixed
interest rate exchange
agreements: $ 65 $ 5 $ 70 $ 71
Average rate paid 8.48% 5.50% 8.19%
Average rate received 8.16% 6.90% 8.07%
- - ------------------------------------------------------------------------------------------------------------------------------------
*The book value of loans represents loans before deducting the reserve for
possible loan losses. The fair value of loans was estimated by utilizing cash
flow analysis discounted at rates that include a credit risk premium.
</TABLE>
Because the static gap portrayal does not capture many of the factors that
determine interest rate risk, Mercantile places more emphasis on the use of
sophisticated simulation models to estimate changes in net interest income and
market value. These models encompass the entire range of assets, liabilities and
off-balance-sheet investments, and they capture multiple aspects of interest
rate risk, including rate-driven customer behavior such as the prepayment of
mortgages. The Corporation uses this information to adjust its strategies to
protect the net interest margin and market value against significant interest
rate fluctuations. Uniform sensitivity reports and guidelines are used by all
subsidiary banks.
Current model projections indicate that in 1999 net interest income would
increase by 1% should rates rise gradually by 200 basis points from their
current level over the next 12 months. Similarly, if rates were to gradually
decline by 150 basis points, 1999 net interest income would be negatively
impacted by less than 1%. As the year-end 1998 gap report shows a negative
interest sensitivity gap position, i.e., liability sensitive for all periods
less than one year, it would be expected that net interest income would
generally be enhanced in a declining rate environment, and if rates rose net
interest income would be somewhat negatively impacted. The Corporation's
simulation models are contrary to that expectation and
------
32
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
additionally point to a concern that if the yield curve remains flat or inverted
in 1999, net interest income will continue to be negatively impacted. Likewise,
if the prime rate were to drop immediately and funding costs did not adjust as
quickly, the net interest income decline would be greater. The Corporation
believes it is appropriately positioned for subsequent rate movements in the
current economic environment; however, since the Corporation still holds
significant mortgage assets, as in 1998, the potential for large paydowns of
mortgage-backed securities and the refinancing of mortgage loans held in the
loan portfolio do present risk to the current level of net interest income. If
the yield curve remains flat, profitable reinvestment opportunities of the cash
flows generated by these paydowns will not exist and balance sheet leverage may
be lessened.
Exhibit 6 provides additional information about the Corporation's financial
instruments and derivatives used for purposes other than trading that are
sensitive to changes in interest rates. For loans and leases, investment
securities and liabilities with contractual maturities, the table presents
principal cash flows and weighted average interest rates by contractual
maturities as well as the Corporation's historical experience of the impact of
interest rate fluctuations on the prepayment of loans and mortgage-backed
securities. For interest bearing transaction deposits, while such amounts are
subject to immediate withdrawal or repricing, a portion of the balances has
remained constant during periods of rising and falling interest rates.
Therefore, a portion of these amounts has been allocated to periods outside of
one year based on management's assessment of the most likely withdrawal
behavior. For interest rate swaps and cap and floor agreements, the table
presents notional amounts and applicable weighted average interest rates by
contractual maturity dates. Forward rates are based on the implied forward rates
on the reporting dates.
Deposits
Deposits are the Corporation's primary source for the funding of its earning
assets and are acquired from a broad base of local markets, including both
individual and corporate customers. Total deposits at December 31, 1998 were
$25.5 billion, a 2.6% increase from the $24.8 billion of a year ago, which was
up $5.0 billion or 25.4% from December 31, 1996. On average, total deposits grew
by $2.5 billion or 11.3%; average balances were affected by the inclusion of the
July 1, 1997 purchase transaction for 12 months of 1998 versus six months in
1997. Exhibit 8 details the components of the Corporation's deposit mix for the
past five years.
Core deposits remain Mercantile's largest, most reliable and most important
funding source. Core deposits include both interest bearing and non-interest
bearing demand deposits, money market and savings deposits, consumer
certificates of deposit under $100,000 and other time deposits. Average core
deposits grew by 11.7% in 1998 and represented 71.33% of earning assets compared
with 75.49% last year.
Exhibit 7
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------
MATURITY OF DOMESTIC
TIME DEPOSITS $100,000 December 31, 1998
AND OVER ------------------------------------
(Thousands) Certificates Other Time
of Deposit Deposits Total
<S> <C> <C> <C>
- - ---------------------------------------------------------------------
Three months or less $ 699,094 $ 173,454 $ 872,548
Over three through six months 514,011 4,741 518,752
Over six through 12 months 348,940 9,241 358,181
Over 12 months 388,632 135 388,767
- - ---------------------------------------------------------------------
Total $1,950,677 $ 187,571 $2,138,248
- - ---------------------------------------------------------------------
</TABLE>
Deposit run-off has been monitored closely by the Corporation since the
transaction was announced in December 1996. Tracking from July 1, 1997 (the
effective date of the merger) through November 14, 1997 (the date that Roosevelt
was split into nine Mercantile banks), indicates that only $158,000,000 or a
3.0% deposit run-off occurred in that four and one-half month period. Deposit
run-off since November 1997 has been higher than 3%.
Excluding the mandated divestitures of Firstbank deposits noted earlier,
Mercantile disposed of $59,500,000 additional deposits in 1998 as five non-
strategic branches were sold. An additional $235,622,000 of deposits were sold
in 1997 with specific branch sales.
Average non-interest bearing deposits increased by $489,368,000 or 14.3% from
1997. Part of the growth came from the U.S. Government, which is a significant
cash management customer of Mercantile Bank N.A. and pays for services rendered
via compensating balances. These average balances have increased from
$637,386,000 in 1996 to $675,793,000 in 1997 and finally $765,653,000 in 1998,
and are expected to continue to grow in 1999. Cash and due from banks volume is
directly related to non-interest bearing deposit volume and increased on average
by $172,077,000 or 14.9%. Successful efforts in managing float and minimizing
reserve requirements coupled with deposit volume growth resulted in an increase
in average net non-interest bearing funds of $317,291,000 for 1998.
------
33
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 8
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
DEPOSITS December 31
---------------------------------------------------------------
(Thousands) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest bearing $ 4,453,048 $ 3,956,138 $ 3,389,776 $ 2,925,272 $ 2,775,055
Interest bearing demand 3,281,788 3,086,259 2,800,964 2,769,944 2,806,657
Money market accounts 4,151,540 3,811,081 3,152,825 2,712,227 2,614,531
Savings 1,766,918 1,559,441 1,323,775 1,353,335 1,455,381
Consumer time certificates under $100,000 9,186,531 9,850,437 7,136,532 6,468,366 6,344,298
Other time 189,122 191,199 233,997 656,532 38,717
- - ------------------------------------------------------------------------------------------------------------
Total Core Deposits 23,028,947 22,454,555 18,037,869 16,885,676 16,034,639
Time certificates $100,000 and over 1,950,677 1,769,461 1,495,089 1,368,809 1,087,740
Foreign 481,773 585,439 251,887 209,170 219,135
- - ------------------------------------------------------------------------------------------------------------
Total Purchased Deposits 2,432,450 2,354,900 1,746,976 1,577,979 1,306,875
- - ------------------------------------------------------------------------------------------------------------
Total Deposits $25,461,397 $24,809,455 $19,784,845 $18,463,655 $17,341,514
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
Average interest bearing demand, savings, money market accounts and retail
certificates of deposit increased by 5.2%, 18.2%, 15.3% and 10.8%, respectively.
Mercantile's average of consumer time certificates to total core deposits was
42.60% in 1998 and 42.94% in 1997 compared with 40.34% in 1996.
Certificates of deposit greater than $100,000 and foreign branch deposits
increased on average by 8.0% to $2.3 billion as this source of funding became
more important to replace core deposit run-off and to fund earning asset growth.
Most of the large domestic deposits were gathered from the local retail,
commercial and institutional customer base, which provides a natural access to
purchased funds and, accordingly, tends to be less volatile than other
categories of purchased funds. Exhibit 7 portrays the maturities of domestic
time deposits $100,000 and over.
Non-Core Funding
Other than core deposits, long-term debt (excluding FHLB borrowings) and
shareholders' equity, Mercantile has alternative funding sources including bank
notes, certificates of deposit greater than $100,000, eurodollar deposits and
short-term borrowings, which are defined as federal funds purchased, treasury
tax and loan note option accounts, securities sold under agreements to
repurchase, short-term FHLB advances and commercial paper. All these sources of
funding are utilized primarily by Mercantile Bank N.A., and volumes are
monitored by ALCO. As a major bank in the Midwest with a significant
correspondent bank network and corporate account base, Mercantile Bank N.A.
purchases excess funds from correspondent banks and borrows on a short-term
basis from commercial customers. Accordingly, some of Mercantile's non-core
funding can be considered a stable source of funds, similar to core deposits.
Depending on funding requirements and liquidity strategies employed by ALCO,
these funds are either used internally or redeployed as short-term investments.
Average short-term borrowings increased by $364,252,000 or 12.4% in 1998, due
largely to the addition of Roosevelt's short-term FHLB advances for a full year
and an increase in treasury tax and loan note option accounts to fund the
earning asset growth that was in excess of core deposit growth. The FHLB
advances funded a significant part of its investment portfolio. Bank note
borrowings declined on average from $175,000,000 in 1997 to $56,233,000 in 1998
as the Corporation utilized less costly sources of funding.
Long-term FHLB advances became a significant funding source for Mercantile in
1998, averaging $2.1 billion compared with only $170,774,000 in 1997. These
borrowings are secured by residential mortgage loans, and in 1998 the pricing
was attractive relative to bank notes and purchased deposits.
Short-term investments include due from banks interest bearing, federal funds
sold and securities purchased under agreements to resell. Short-term investments
averaged $542,670,000 in 1998, an increase of $89,627,000 or 19.8% from 1997.
------
34
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
CAPITAL RESOURCES
Mercantile maintains a capital base that provides a foundation for anticipated
future asset growth and promotes depositor and investor confidence. Capital
management is a continuous process at Mercantile and is focused on ensuring that
adequate capital is available for both current needs and anticipated growth.
This strategy has enabled the Corporation to profitably expand its balance sheet
while maintaining capital ratios that exceed minimum capital requirements.
At December 31, 1998, shareholders' equity was $3.1 billion, an increase of
11.3% from a year ago. The increase from last year was from retained earnings,
the four 1998 bank acquisitions accounted for as poolings without restatement
and a favorable FAS 115 adjustment, partially offset by share repurchases.
The tangible equity to tangible assets ratio increased to 6.55% at December
31, 1998 from 5.92% a year ago, 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. Exhibits 11 and 12 detail significant capital information
for the past five years.
As long-term interest rates continued to decline during 1998, the Corporation
recorded a favorable adjustment to equity of $13,703,000 on available-for-sale
investment securities. As of December 31, 1998, the balance of the valuation on
available-for-sale securities totaled $41,160,000. In 1997, the net fair value
adjustment increased equity by $8,805,000, likewise due to the lower level of
interest rates.
In 1998, the Corporation repurchased 1,834,375 shares of its common stock via
designated broker-dealers at an average cost of $55.06. Most of the 1998 share
repurchases occurred when Mercantile's stock price was at higher levels. Of
these shares, 1,750,000 were subsequently reissued in acquisitions that closed
by July 1, 1998. The remaining shares were repurchased under Mercantile's
systematic reacquisition plan. During 1997, the Corporation repurchased
6,778,324 shares of its common stock via designated broker-dealers at an average
cost of $42.38 per share. As in 1998, these repurchases occurred largely through
accelerated stock repurchase programs. A small portion of that stock was held
for reissuance in conjunction with the 1994 Stock Incentive Plan, while the
remainder was reissued in the July 1, 1997 transaction. The Corporation has no
current authorization to repurchase shares in the open market, other than those
Exhibit 9
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
DEBT RATINGS December 31, 1998
----------------------------------------------------------------
Thomson Standard
Moody's Fitch BankWatch & Poor's
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MERCANTILE BANCORPORATION INC.
Issuer rating B
Commercial paper F1 TBW-1
6.800% senior notes, due 2001 A2 A- BBB+
7.050% senior notes, due 2004 A2 A- BBB+
7.625% subordinated notes, due 2002 A3 BBB+ BBB
7.300% subordinated notes, due 2007 A3 BBB+ 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/TBW-1 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) A1/P-1 A-/A-2
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 10
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS December 31
-------------------------------------------------------------------
(Thousands) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Goodwill $ 723,186 $ 777,693 $ 171,539 $ 110,537 $ 98,832
Mortgage servicing rights 49,413 51,955 6,712 5,372 --
Core deposit premium 6,531 7,440 11,104 14,954 16,765
Other 2,058 2,197 12,716 2,982 6,834
- - ------------------------------------------------------------------------------------------------------------------------------
Total $ 781,188 $ 839,285 $ 202,071 $ 133,845 $ 122,431
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
------
35
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 11
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL December 31
-------------------------------------------------------------------
(Thousands) 1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier I capital $ 2,451,449 $ 2,104,078 $ 2,049,795 $ 2,051,263 $ 1,832,180
Tier II capital 674,039 674,716 450,359 439,862 425,123
- - -----------------------------------------------------------------------------------------------------------------------------
Total Risk-based Capital $ 3,125,488 $ 2,778,794 $ 2,500,154 $ 2,491,125 $ 2,257,303
- - -----------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets $24,907,551 $22,372,830 $17,831,456 $16,582,726 $15,224,325
- - -----------------------------------------------------------------------------------------------------------------------------
Quarterly average tangible assets $34,220,797 $32,276,375 $24,056,623 $23,130,977 $21,893,661
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 12
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS December 31
-------------------------------------------------------------------
1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets 9.84% 9.40% 11.50% 12.37% 12.03%
Total capital to risk-adjusted assets 12.55 12.42 14.02 15.02 14.83
Leverage 7.16 6.52 8.52 8.87 8.37
Equity to assets
Consolidated 8.59 8.29 9.05 9.35 8.59
Combined bank subsidiaries 7.99 7.80 8.15 8.91 8.41
Tangible equity to tangible assets 6.55 5.92 8.31 8.83 8.08
Double leverage 120.75 125.38 104.53 106.81 107.11
Long-term debt to total capitalization* 23.29 25.38 11.38 12.20 15.60
- - -----------------------------------------------------------------------------------------------------------------------------
*Excluding long-term FHLB advances.
</TABLE>
systematically repurchased pursuant to the Corporation's benefit plans and/or
for the Mercantile Bancorporation Inc. Shareholder Investment Plan. At December
31, 1998, Mercantile had only 82,691 treasury shares, and none were tainted for
pooling-of-interests accounting purposes.
In order to finance a part of the Roosevelt acquisition, the Corporation
formed Mercantile Capital Trust I on January 29, 1997. Through this trust,
Mercantile obtained $150,000,000 of floating-rate debt that, for regulatory
purposes, is considered part of Tier I capital. Senior and subordinated debt
securities in the amount of $500,000,000 were issued in June 1997, for the same
purpose. By December 31, 1997, the ratio of long-term debt to total
capitalization increased to 25.38% from 11.38% at year-end 1996, reflecting the
impact of the debt issued earlier in the year. At year-end 1998, the ratio had
declined to 23.29%. FHLB advances are excluded from long-term debt in this
ratio.
The Corporation has $53,450,000 of 9.00% mortgage-backed notes that mature in
1999. Additionally, Mercantile's $400,000,000 credit card securitization is
scheduled to begin a 12-month amortization period in November 1999. Excluding
FHLB advances, the maturities of the remaining long-term debt are laddered
between 2001 and 2007.
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 120.75% at December 31, 1998 from 125.38% last
year. Intangible assets, which consisted largely of goodwill, totaled
$781,188,000 at December 31, 1998 compared with $839,285,000 a year ago and
$202,071,000 at December 31, 1996. The 1997 Roosevelt acquisition, accounted for
as a purchase, initially increased goodwill by $608,076,000; however, subsequent
amortization has lowered the balance to $547,317,000 at December 31, 1998.
Due to the strength of the capital base at the 11 individual bank
subsidiaries, approximately $82,939,000 was available at December 31, 1998 for
distribution through dividends to the Parent Company without prior regulatory
approval and without reducing the capital of the respective subsidiary banks
below present minimum standards. An additional $311,578,000 would be available
in the form of loans to the Parent Company under current regulations.
Cash dividends totaling $1.24 per share were declared and paid during 1998, an
8.0% increase from last year's total of $1.148. In addition, on February 17,
1999, the quarterly dividend payable April 1, 1999 was increased by 9.7% to $.34
per share. This was the eighth consecutive
------
36
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
year of dividend increases and the five-year compound growth rate for dividends
per share from 1994 to 1999 is 12.7%. Book value per share at December 31, 1998
was $19.53 compared with $18.57 at the prior year-end, an increase of 5.2%.
Additional data relating to Mercantile's common stock and dividends are included
on the Investor Information summary on page 85. Debt ratings for the Corporation
and Mercantile Bank N.A. are included in Exhibit 9.
Management has established financial objectives designed to monitor future
capital needs. Mercantile's dividend policy is influenced by the belief that
most shareholders are interested in long-term performance as well as current
yield. The current dividend payout level is considered reasonable given the
Corporation's present cash flow position, level of earnings and the strength of
its subsidiary banks' capital. Future dividends will be determined based on
Mercantile's results of operations, growth expectations, financial condition,
regulatory constraints and other factors deemed relevant by the Board of
Directors.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Corporation's investment portfolio serves five important functions. First,
it is a vehicle for adjusting balance sheet rate sensitivity and protecting
against the impact of changes in interest rate movements by managing the
purchases and maturities of securities; second, it is a means for the investment
of excess funds depending on loan demand; third, the available-for-sale
securities provide potential immediate liquidity; fourth, it serves as
collateral for public deposits; and fifth, it is a natural balance sheet hedge
for mortgage servicing rights with gains available to offset possible
accelerated amortization of those rights. The investment portfolio is structured
to maximize the return on invested funds within acceptable interest rate risk
guidelines and to meet pledging requirements while giving consideration to loan
demand, credit risk, future liquidity needs, balance sheet strategies and the
outlook for trends in interest rates.
In 1998, the Corporation completely centralized investment portfolio
management. Such centralization allows the Corporation's Treasury area to manage
the portfolio more efficiently through a decrease in the number of specific
securities, larger positions and better control of collateral for pledging
purposes.
Securities are the largest category of earning assets after loans. During
1998, average securities represented 29.16% of earning assets compared with
25.91% in 1997 and 26.07% for 1996. Investment securities totaled $9.5 billion
at December 31, 1998 compared with $8.5 billion at December 31, 1997, an
increase of 11.9%. The increased portfolio absorbed the cash flows associated
with the higher rate of prepayment of mortgage loans.
Current accounting guidance proscribes that investment securities be
classified into three categories: trading, available-for-sale and held-to-
maturity. At December 31, 1998, trading securities totaled $126,540,000, the
available-for-sale portfolio was $9.2 billion and held-to-maturity securities
were $97,607,000. The held-to-maturity and available-for-sale portfolios as of
December 31, 1998 consisted of 68.63% in U.S. and other government agency
securities (including 35.55% in mortgage-related issues), 4.74% in state and
municipal securities and 26.63% of other miscellaneous securities. The
comparable distribution at December 31, 1997 was 62.81%, 27.46%, 6.12% and
31.07%, respectively.
The change in the mix of the investment portfolio from the prior year was
attributable primarily to continued evaluation and repositioning of the
portfolios acquired in 1997, which had a high concentration of privately issued
mortgage-backed securities and collateralized mortgage obligations. The
privately issued collateralized mortgage obligations are included in
miscellaneous securities. In 1998, these holdings dropped significantly due to
paydowns and sales. The bulk of the proceeds were reinvested in more liquid U.S.
agency mortgage-backed securities and collateralized mortgage obligations.
Second, Mercantile increased its holdings of other asset-backed securities and
corporate bonds to optimize yield. Finally, the Corporation transferred
$80,000,000 from the credit card loan portfolio to miscellaneous securities in
accordance with the terms of the securitization agreement and FAS 125.
Concentration guidelines for all types of securities are in place and are
monitored by ALCO. Note F to the Consolidated Financial Statements details the
components of the investment portfolio for the past three years.
At acquisition date, Roosevelt owned $84,706,000 of private-label
collateralized mortgage-backed securities that were considered impaired on
December 31, 1997. These have subsequently paid down to $62,056,000 on December
31, 1998. The section on non-performing assets addresses the credit risk issues
associated with these securities.
------
37
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The average maturity of the overall portfolio increased to four years and six
months at the end of 1998 from four years and one month at year-end 1997.
Likewise, duration increased slightly from 1.65 years to 1.96 years. The overall
tax-equivalent yield of the portfolio was stable during 1998 at 6.55% compared
with 6.54% in 1997.
Mercantile established real estate investment trusts and investment
subsidiaries in 1996 and 1997 and has placed participation interests in certain
real estate mortgage loans and investment securities in those entities. Such
entities aid in the management of those assets. Several of these entities were
liquidated or merged in 1998 as Mercantile continued to reduce the number of
bank charters and subsidiaries. These entities held $238,271,000 in investment
securities and $6.6 billion in loans at December 31, 1998.
Mercantile's commitment to its expanding region continued to be reflected by
the holdings of securities of Missouri, Arkansas, Illinois, Kansas, Kentucky and
Iowa and their local governmental units, although securities of many other
states were also held in the portfolio. At December 31, 1998, investments in
securities of those six states and their political subdivisions amounted to
approximately 68.49% of total tax-exempt securities. However, securities of any
one single political subdivision in any of these states did not exceed .12% of
shareholders' equity at December 31, 1998. Outside of those six states,
securities of no single issuer exceeded .17% of shareholders' equity.
Approximately 57% of the state and municipal securities held at December 31,
1998 were rated A or higher by Moody's Investors Service. Of the remaining
securities, most were non-rated bonds due to the smaller size of the issues.
These bonds generally represented local issues that are evaluated internally for
creditworthiness on an ongoing basis, similar to loans.
Approximately 79% of the non-U.S. Government guaranteed collateralized
mortgage obligations held at December 31, 1998 were rated A or higher by Moody's
Investors Service. Those not rated A are primarily the "impaired securities"
discussed later in the non-performing assets section of this commentary.
LOANS
Loans are the primary earning asset of the Corporation and were $22.3 billion at
December 31, 1998, up $949,303,000 or 4.4% from year-end 1997. This growth
follows a 26.1% increase in 1997 over 1996 year-end, reflecting the impact of
the July 1, 1997 acquisition. Negatively affecting loan growth in 1998 was the
sale of $112,000,000 in Roosevelt out-of-market credit card loans in the first
quarter and the reclassification of $80,000,000 credit card loans to investment
securities in compliance with FAS 125 and the securitization agreement.
Excluding these two transactions, the internal loan growth rate for 1998 was
approximately $1.1 billion or 5.3%. Furthermore, if the $549,055,000 decline in
residential mortgage loans is excluded, internal loan growth on the remaining
base would be approximately $1.7 billion. The vast majority of the Corporation's
loans are extended in its natural six-state trade area.
At December 31, 1998, the loan portfolio was 48.50% commercial and 51.50%
consumer-related, compared with 43.51% and 56.49%, respectively, at December 31,
1997. The accelerated paydown of residential mortgage loans, the two credit card
reductions described above, as well as good growth in commercial loans, brought
the commercial/consumer balance back to the portfolio. The portfolio remains
diversified as to both industry and geographic concentrations. Note Q to the
Consolidated Financial Statements provides more details on concentrations of
credit and the overall loan portfolio.
The 1998 average loan-to-deposit ratio for the Corporation continued to
increase and was 87.89% compared with 86.71% and 83.66% in 1997 and 1996,
respectively. Loan growth and the replacement of deposits with FHLB borrowings
likewise accounted for the increase in this ratio. Exhibit 13 portrays the
composition of the loan portfolio for the past five years.
During 1998, commercial loans averaged $5.5 billion, which represented a
growth rate of 14.8% following growth of 10.5% in 1997. Commercial loan growth
occurred on a system-wide basis and was greater in the first half of the year.
Expertise in certain specialized industries, as well as experienced lenders
coupled with a strong regional economy, accounted for the growth. Agriculture is
a segment of the regional economy that did not contribute to commercial loan
growth. At year-end 1998, Mercantile held $134,000,000 of loan participations
purchased in the national markets and held for investment. Other than these
------
38
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
loans, commercial lending has a heavy relationship focus. The Corporation does
not engage in commercial lending to emerging markets including those in Latin
America, Eastern Europe and in the Asia Pacific Region.
Exhibit 13
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
LOAN AND LEASE PORTFOLIO MATURITIES*
-------------------------------------------------------------------------------------
1 to 5 Years Over 5 Years December 31
----------------------------------------------------------------------------------------------
Under Fixed Floating Fixed Floating
(Millions) 1 Year Rate Rate Rate Rate 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 2,158 $ 2,011 $ 959 $ 743 $ 228 $ 6,099 $ 4,990 $ 4,591 $ 4,148 $ 3,918
Real estate -- commercial 915 1,753 507 313 310 3,798 3,570 3,256 3,175 2,725
Real estate -- construction 492 244 120 38 29 923 735 643 564 602
Real estate --
residential mortgage 455 588 107 1,875 5,129 8,154 8,703 4,787 4,240 3,984
Real estate --
home equity credit loans 73 1 23 4 425 526 588 440 417 426
Consumer 422 1,891 43 355 55 2,766 2,492 2,306 2,178 2,035
Credit card -- 45 -- -- -- 45 284 914 862 869
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases $ 4,515 $ 6,533 $ 1,759 $ 3,328 $ 6,176 $22,311 $21,362 $16,937 $15,584 $14,559
- - ------------------------------------------------------------------------------------------------------------------------------------
* Non-accrual loans are reported at contractual maturities and rates.
</TABLE>
Average commercial real estate mortgage and construction loans were $4.5
billion in 1998 and increased by 7.9% following a 9.2% growth rate in 1997.
These loans are generally secured by the underlying property in the six-state
corporate footprint at a 75% to 80% loan-to-appraisal value, and are typically
supported by guarantees from the project developers. Additional collateral may
be taken as deemed necessary. The strong regional economy once again accounted
for this growth.
For 1998, average residential real estate mortgage loan volume grew by $1.6
billion or 23.7% following 56.2% growth in 1997. Purchase accounting caused most
of the increase in these average balances. The trend from year-end 1997 to year-
end 1998 is more indicative of residential mortgage loan patterns, and it shows
a decline of $549,055,000 or 6.3%. The 1998 interest rate environment encouraged
borrowers to prepay or refinance into conforming fixed-rate loans that
Mercantile generally sells in the market. The year-end 1998 mortgage pipeline,
which consists primarily of fixed-rate loans to be sold, was $194,718,000. The
average balance for 1998 was $179,550,000, and it is generally 70% to 75% hedged
to mitigate interest rate risk.
Home equity credit loans increased on average but from December 31, 1997 to
December 31, 1998 declined by $62,131,000 or 10.6%. The decline in this product
likewise is due to refinancing in 1998 when many borrowers added their home
equity loan balances to a refinanced fixed-rate loan.
Average credit card loans were down $506,300,000 or 79.7% in 1998. Highly
successful targeted marketing efforts, aimed at expanding relationships with the
current Mercantile customer base, were offset by the previously mentioned card
sale, the required reclassification of $80,000,000 in loans to investment
securities and the third quarter 1997 sale of $405,000,000 in co-branded cards.
On a managed portfolio basis, credit card loans averaged $663,000,000 in 1998,
and prospects for growth in 1999 from cross-selling initiatives are excellent.
Average direct consumer loans grew by $62,933,000 or 5.6%, while indirect
consumer loans were up by $226,976,000 or 17.7%. The large growth in indirect
lending was partially attributable to the centralization of that function and
the use of risk-based pricing across the Mercantile system. Mercantile does not
engage in any significant subprime consumer lending in its own portfolio.
The overall tax-equivalent yield of the loan portfolio decreased by 43 basis
points to 8.16% in 1998 compared with 8.59% in 1997. Very competitive pricing
for loans as well as the managed decline in credit card loans, the highest
yielding loan type, and a slightly lower interest rate environment in 1998 that
drove mortgage and home equity credit loan prepayments accounted for the
decrease in yield. As shown in Exhibit 13, which portrays the maturity and
interest sensitivity of the portfolio, 55.80% of loans were priced at floating
rates or maturing within one year.
------
39
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
RISK MANAGEMENT AND THE RESERVE
FOR POSSIBLE LOAN LOSSES
The underlying objectives of Mercantile's credit management are to identify and
manage credit exposure and to support the growth of a profitable and high-
quality loan portfolio. At Mercantile, these functions are performed centrally
by corporate Credit Administration, which provides management with extensive
information on risk levels, trends, delinquencies, portfolio concentrations and
internal ratings. Credit Administration includes corporate Credit Policy,
approval of large credits and corporate Credit Review. Credit Administration
also provides special asset teams that promptly concentrate on identified
problem loans and workout situations when necessary, as well as the management
of foreclosed property. Mercantile utilizes a lender-initiated system of rating
credits that is subsequently tested by Credit Review, external auditors and bank
regulators. Adversely rated credits are included on a watch list and are
reviewed at the bank level and centrally at least on a quarterly basis.
The reserve for possible loan losses represents the aggregate reserves of the
Corporation's banking subsidiaries and at December 31, 1998 was $308,890,000
compared with $284,165,000 at the end of 1997. The year-end 1998 ratio of the
reserve to outstanding loans was 1.38% compared with 1.33% at December 31, 1997.
The reserve as a percentage of non-performing loans was 222.76% compared with
241.91% last year. The 1998 level remains reasonable considering that the risk
profile has been further lessened due to a substantial decline in higher risk
commercial non-accrual loans. Additionally, residential real estate mortgage
loans, for which historical
Exhibit 14
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
RESERVE FOR POSSIBLE LOAN LOSSES Year Ended December 31
--------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE $ 284,165 $ 257,718 $ 261,339 $ 274,636 $ 262,208
PROVISION 51,154 86,355 78,766 44,952 53,094
CHARGE-OFFS
Commercial 21,477 20,784 23,454 10,965 11,728
Real estate -- commercial 4,055 4,784 5,123 8,368 8,697
Real estate -- construction 304 306 598 275 2,203
Real estate -- residential mortgage 4,042 2,103 2,306 2,918 5,619
Real estate -- home equity credit loans 220 194 141 386 385
Consumer 24,601 20,446 16,394 13,982 8,195
Credit card 10,167 60,642 66,111 42,650 41,363
- - -----------------------------------------------------------------------------------------------------------------------
Total Charge-offs 64,866 109,259 114,127 79,544 78,190
- - -----------------------------------------------------------------------------------------------------------------------
RECOVERIES
Commercial 6,270 9,502 5,074 4,613 11,303
Real estate -- commercial 2,478 3,118 4,737 4,217 16,503
Real estate -- construction 68 84 501 154 257
Real estate -- residential mortgage 1,694 794 845 1,245 994
Real estate -- home equity credit loans 30 1 24 83 67
Consumer 6,095 5,803 4,801 3,757 3,455
Credit card 6,147 8,887 5,952 5,390 4,498
- - -----------------------------------------------------------------------------------------------------------------------
Total Recoveries 22,782 28,189 21,934 19,459 37,077
- - -----------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS 42,084 81,070 92,193 60,085 41,113
Acquired reserves 15,655 21,162 9,806 13,836 447
Transfer to Mercantile Credit Card Master Trust -- -- -- (12,000) --
- - -----------------------------------------------------------------------------------------------------------------------
ENDING BALANCE $ 308,890 $ 284,165 $ 257,718 $ 261,339 $ 274,636
- - -----------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES
December 31 balance $22,311,258 $21,361,955 $16,937,254 $15,584,285 $14,558,820
- - -----------------------------------------------------------------------------------------------------------------------
Average balance $21,780,088 $19,302,451 $15,989,784 $15,264,606 $13,687,183
- - -----------------------------------------------------------------------------------------------------------------------
RATIOS
Reserve balance to outstanding loans 1.38% 1.33% 1.52% 1.68% 1.89%
Reserve balance to non-performing loans 222.76 241.91 298.11 240.34 536.18
Net charge-offs to average loans .19 .42 .58 .39 .30
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
------
40
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
loss rates are only .03%, comprised 36.55% of the Corporation's loan portfolio
at December 31, 1998. If residential mortgages are excluded from total loans and
the reserve is adjusted down for the related loss exposure, the reserve
represents 2.05% of outstanding loans at December 31, 1998.
The provision for loan losses is the annual cost of providing a reserve for
anticipated future loan losses. In any accounting period, the amount of
provision is dependent upon many factors, including loan growth, net charge-
offs, changes in the composition of the loan portfolio, delinquencies,
management's assessment of loan quality, general economic factors and collateral
values. The 1998 total provision was $51,154,000 compared with $86,355,000 last
year. In 1998 and 1997, infrequent merger-related provisions of $19,600,000 and
$20,340,000, respectively, were recorded largely to conform the credit policies
of recently acquired entities to those of Mercantile.
The ratio of net charge-offs to average loans for 1998 improved to .19%
compared with .42% in 1997. The corresponding net charge-off figures for 1998
and 1997 were $42,084,000 and $81,070,000, respectively. The two credit card
portfolio sales significantly reduced the Corporation's charge-offs in 1998.
Exhibit 14 provides charge-offs and recoveries by loan type for the past five
years.
For the total managed portfolio of credit card loans (including securitized
loans), the ratio of net charge-offs to average loans improved to 6.88% in 1998
from 7.59% in 1997. By credit policy, losses are taken on credit card loans
after six cycles of nonpayment, or within 15 days of receipt of personal
bankruptcy notice, if earlier. Due to the 1995 securitization and FAS 125
accounting, very few credit card outstandings are accounted for as loans at
December 31, 1998.
The Corporation evaluates the loan portfolios and reserves of all banks on a
quarterly basis to ensure the timely charge-off of loans and the adequacy of
those reserves. This review is performed and validated by each bank
preliminarily with a second review by both corporate Credit Review and the Chief
Credit Officer. Factors considered in determining reserve adequacy include:
volumes and trends in delinquencies and non-performing loans; specific loan
ratings and outstandings; historical and projected loss experience based on
volumes and types of loans; the results of independent internal loan ratings or
external credit reviews; industrial or geographical concentrations; national,
regional and/or specific industry economic conditions; off-balance-sheet risk;
and other subjective factors.
Every significant problem credit is reviewed initially by the respective bank,
and a secondary review is performed quarterly to confirm the risk rating, proper
accounting and adequacy of both strategy and the loan loss reserve. In addition
to specific allocations, reserve allocations are made based on percentage
guidelines for all individually rated loans, whether criticized by examiners or
not. Allocations are made for unrated loans, such as residential mortgage,
credit card and other consumer loans, based on historical loss experience
adjusted for portfolio activity and current economic trends. These allocated
reserves are further supplemented by unallocated reserves based on judgments
regarding risk of error, local economic con-ditions and any other relevant
factors.
Exhibit 15
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES
------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Allocated Total Allocated Total Allocated Total Allocated Total Allocated Total
(Dollars in thousands) Reserves Loans Reserves Loans Reserves Loans Reserves Loans Reserves Loans
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 90,812 27.34 $ 78,516 23.36 $ 35,810 27.11 $ 65,713 26.62 $ 53,760 26.91
Real estate -
commercial 42,366 17.02 33,652 16.71 52,002 19.22 59,113 20.37 48,669 18.72
Real estate -
construction 11,274 4.14 7,909 3.44 8,715 3.80 7,473 3.62 6,738 4.13
Real estate -
residential
mortgage 13,157 36.55 24,500 40.74 17,817 28.26 16,818 27.20 14,045 27.36
Real estate -
home equity
credit loans 1,520 2.36 1,778 2.75 3,880 2.60 2,238 2.68 2,324 2.93
Consumer 42,512 12.39 20,438 11.67 16,690 13.62 16,431 13.98 18,066 13.98
Credit card 34,122 .20 18,665 1.33 57,666 5.39 27,333 5.53 36,827 5.97
Unallocated 73,127 N/A 98,707 N/A 65,138 N/A 66,220 N/A 94,207 N/A
- - -----------------------------------------------------------------------------------------------------------------------------------
Total $308,890 100.00 $284,165 100.00 $257,718 100.00 $261,339 100.00 $274,636 100.00
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
------
41
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
In Exhibit 15, the Corporation has estimated an allocation of the reserve for
possible loan losses to the various loan categories. Consideration for making
such allocations is consistent with the factors discussed above, and all of
those factors are subject to change; thus, the allocation is not necessarily
indicative of the loan categories in which future losses will occur. The total
reserve is available to absorb losses from any portion of the loan portfolio.
Management believes the December 31, 1998 consolidated reserve of 1.38% of total
loans outstanding and 222.76% of non-performing loans was adequate based on the
risks identified at such date in the loan portfolio.
The large increase in the allocated reserve to credit card loans shown in
Exhibit 15 is necessitated by the scheduled amortization of the securitized
credit card loans beginning in 1999. Over a 12-month period, approximately
$600,000,000 of loans in the trust will return to the Corporation's balance
sheet as loans, and thus the loan loss reserve must be available to absorb
charge-offs. Currently, $400,000,000 of credit card loans are off the balance
sheet and in the trust as collateral for the debt of the trust. The other
$200,000,000 in loans are also in the trust but are classified as investor
certificates and held on Mercantile's balance sheet in the investment portfolio.
The Asia Pacific Region, Russia and Latin America have been areas of concern
to the banking industry throughout 1997 and 1998. The Corporation has no direct
credit exposure in these regions and has an insignificant exposure via its
letters of credit business. No bonds from these areas are held in the trading or
the investment portfolios, and all foreign exchange transactions are done
through a correspondent bank headquartered in the United States. There are no
derivative transactions with any counterparty banks in these parts of the world.
In addition, the Corporation does not engage in lending to any emerging markets
or invest in hedge funds. High-risk speculative consumer lending programs
commonly known as subprime or 100+% loan to value are insignificant. Pork
production is currently a portfolio sector of special attention due to falling
prices. Total direct exposures to 279 hog producers is less than $150,000,000 at
year-end 1998. None of these loans are currently classified as non-performing.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, renegotiated loans,
foreclosed property and investment securities with an impairment in value which
is considered other than temporary. A summary of these assets for the past five
years is presented in Exhibit 16. At year-end 1998, non-performing loans (i.e.,
non-accrual and renegotiated) were $138,663,000 and represented .62% of total
loans compared with .55% at year-end 1997. Foreclosed assets at December 31,
1998 were $13,500,000; the ratio of non-performing loans and foreclosed assets
to total loans plus foreclosed assets was .68% at December 31, 1998 versus .65%
in the prior year.
As noted in Exhibit 16, non-accrual loans increased by $19,579,000 from last
year-end. On their respective dates of acquisition, $7,942,000 of non-accrual
loans were added from the four companies Mercantile acquired in 1998 for which
prior periods' results were not restated. Lower risk residential mortgage and
home equity credit non-accrual loans totaled $73,934,000 and represented 55.71%
of non-accrual loans at year-end 1998. They increased by $30,836,000 from year-
end 1997 while generally higher risk commercial non-accrual loans declined by
$20,803,000. Note A to the Consolidated Financial Statements details the
Corporation's policy on accounting for non-accrual loans. At December 31, 1998,
the Corporation had one non-accrual loan with a balance exceeding $2,000,000; it
totals $5,300,000 and is expected to return to performing status in 1999. As
shown in Exhibit 17, interest lost on non-performing loans cost Mercantile an
immaterial $.02 per share in 1998.
Renegotiated loans are those for which the terms have been restructured beyond
those available in the market, in order to aid the borrower by providing a
reduction or deferral of interest and/or principal. Renegotiations usually
result from a deterioration in the financial condition of the borrower.
Renegotiated loans were $5,950,000 compared with $4,335,000 at year-end 1997.
All loans classified as renegotiated were paying in accordance with their
modified terms at December 31, 1998.
Loans past due 90 days or more and still accruing interest amounted to
$28,998,000 compared with $22,332,000 at December 31, 1997. These past due loans
at year-end 1998 were one-half commercial-related and one-half consumer-related.
------
42
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 16
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS December 31
-------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans
Commercial $ 21,799 $ 42,602 $ 27,540 $ 49,261 $ 10,917
Real estate -- commercial 20,935 18,362 20,884 25,810 16,447
Real estate -- construction 3,411 1,948 1,666 4,900 691
Real estate -- residential mortgage 73,383 42,870 25,108 19,759 11,978
Real estate -- home equity credit loans 551 228 172 68 650
Consumer 12,634 7,124 5,667 5,390 3,361
- - ------------------------------------------------------------------------------------------------------------
Total Non-accrual Loans 132,713 113,134 81,037 105,188 44,044
Renegotiated loans 5,950 4,335 5,413 3,549 7,177
- - ------------------------------------------------------------------------------------------------------------
Total Non-performing Loans 138,663 117,469 86,450 108,737 51,221
FORECLOSED ASSETS
Foreclosed real estate 8,983 16,869 14,052 16,190 23,917
Other foreclosed assets 4,517 4,229 4,176 3,727 3,762
- - ------------------------------------------------------------------------------------------------------------
Total Foreclosed Assets 13,500 21,098 18,228 19,917 27,679
- - ------------------------------------------------------------------------------------------------------------
Total Non-performing Loans and Foreclosed Assets 152,163 138,567 104,678 128,654 78,900
Impaired investment securities 63,296 85,887 1,240 1,240 1,240
- - ------------------------------------------------------------------------------------------------------------
Total Non-performing Assets/1/ $215,459 $224,454 $105,918 $129,894 $ 80,140
- - ------------------------------------------------------------------------------------------------------------
PAST DUE LOANS (90 DAYS OR MORE)/2/
Commercial $ 12,263 $ 5,656 $ 3,558 $ 1,728 $ 1,377
Real estate -- commercial 1,621 467 759 1,438 2,757
Real estate -- construction -- -- 147 414 5
Real estate -- residential mortgage 6,543 3,587 4,573 6,002 6,695
Real estate -- home equity credit loans 504 1,856 553 331 554
Consumer 7,395 5,355 6,700 3,651 1,809
Credit card 672 5,411 21,608 17,383 13,209
- - ------------------------------------------------------------------------------------------------------------
Total Past-due Loans/1/ $ 28,998 $ 22,332 $ 37,898 $ 30,947 $ 26,406
- - ------------------------------------------------------------------------------------------------------------
RATIOS/2/
Non-performing loans to outstanding loans .62% .55% .51% .70% .35%
Non-performing loans and foreclosed assets
to outstanding loans and foreclosed assets .68 .65 .62 .82 .54
Non-performing assets to total assets .60 .67 .42 .55 .36
- - ------------------------------------------------------------------------------------------------------------
/1/ 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 $26,977,000 at December 31, 1998 and $37,677,000
at December 31, 1997.
/2/ Past-due loans 90 days or more are not included in non-performing asset
totals or ratios.
</TABLE>
Exhibit 17
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
INTEREST NOT RECORDED ON NON-PERFORMING LOANS Year Ended December 31
---------------------------------------------------
(Thousands except per share data) 1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest not accrued $5,263 $4,795 $ 6,088 $5,982 $4,541
Less cash-basis income (342) (526) (1,017) (658) (854)
- - -----------------------------------------------------------------------------------------------------------------------------------
Effect on Income Before Income Taxes $4,921 $4,269 $ 5,071 $5,324 $3,687
- - -----------------------------------------------------------------------------------------------------------------------------------
Effect on Net Income $3,199 $2,775 $ 3,296 $3,461 $2,397
- - -----------------------------------------------------------------------------------------------------------------------------------
Effect on Diluted Earnings per Share $ .02 $ .02 $ .02 $ .03 $ .02
- - -----------------------------------------------------------------------------------------------------------------------------------
Interest Collected Applied to Principal $ 643 $ 619 $ 930 $1,242 $ 851
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
------
43
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Foreclosed assets declined to $13,500,000 at December 31, 1998 compared with
the prior year-end level of $21,098,000. These assets are at their lowest level
in five years. Foreclosed assets consisted primarily of real estate and were
recorded at the lower of cost or fair value less estimated costs to sell. At
year-end 1998, the carrying value of all properties was less than appraised
value, and the Corporation had no foreclosed assets with a book value exceeding
$1,000,000.
With the July 1, 1997 acquisition, Mercantile acquired investment securities
with a relatively high level of credit risk. The acquiree owned pools of
privately issued adjustable-rate mortgage-backed securities where the majority
of the underlying collateral was California residential real estate. The loan
pools backing these investment securities have high delinquency and foreclosure
rates and relatively high losses on foreclosed property sales. As a result, the
securities are rated below investment grade. Roosevelt recorded an "other than
temporary" write-down of $27,100,000 on these securities during 1995. The
current net book value of $23,326,000 is net of that 1995 write-down; the
securities are paying down faster than expected and no further loss is
anticipated.
A second group of Roosevelt privately issued mortgage-backed securities was
added to impaired investment securities in the fourth quarter of 1997, as the
Corporation had received less than full principal and interest payments on these
securities. The net book value of these securities was $54,351,000 after the
write-down. That value has been paid down to $38,730,000 at year-end 1998, and
no further loss is expected. The current yield on the net book value of all
impaired securities is 8.97%. Paydowns in 1998 were $22,591,000, leaving a year-
end 1998 balance of $63,296,000.
"Potential problem loans" at December 31, 1998 amounted to $90,834,000. These
are defined as loans and commitments not included in any of the two basic non-
performing loan categories discussed above or 90 days past due and still
accruing interest, but which management, through normal internal credit review
procedures, has developed information regarding possible credit problems that
could cause the borrowers future difficulties in complying with present loan
repayment terms. There were no loans greater than $250,000 classified for
regulatory purposes as loss, doubtful or substandard that were not included
above or that caused management to have serious doubts as to the ability of such
borrowers to comply with repayment terms. In addition, there were no material
commitments to lend additional funds to borrowers whose loans were classified as
non-performing.
OFF-BALANCE-SHEET RISK
In the normal course of business, there are various commitments and contingent
liabilities outstanding that are properly not recorded on the balance sheet,
such as letters of credit, commitments under operating leases, commitments to
extend credit and interest rate swaps, caps and floors. Many of these
arrangements are complementary to the loans, investments and deposits that are
accounted for on the balance sheet. The Corporation's activities in foreign
exchange, interest rate swaps, futures contracts and forward commitments
continue to be minimal for a corporation the size of Mercantile. Mercantile
offers these products as a financial intermediary, and at present it makes very
limited use of financial derivatives to manage its own interest rate exposure.
There are $265,691,000 in forward delivery contracts outstanding as hedges to
the fixed-rate production in the residential loan pipeline.
Standby letters of credit and similar arrangements issued primarily to support
corporate obligations commit Mercantile to make payments on behalf of customers
contingent upon the occurrence of future specified events. Standbys outstanding
were related primarily to customer obligations, such as industrial revenue
financings, as well as other financial and performance-related obligations. At
December 31, 1998, the Corporation's commitments under standbys aggregated
$514,300,000, with $237,114,000 expiring within one year, $128,063,000 expiring
within one to five years and $149,123,000 expiring after five years.
At year-end 1998, Mercantile subsidiary banks had outstanding unused loan
commitments of $9.2 billion, including $194,407,000 in credit card lines and
$728,541,000 in home equity credit lines. The remaining commitments were largely
to commercial customers in Mercantile's primary service area.
Management does not anticipate any losses that would materially affect the
financial position or results of operations of the Corporation as a result of
such commitments and contingent liabilities. Note R to the Consolidated
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44
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Financial Statements provides further discussion pertaining to these off-
balance-sheet activities and provides information as to the estimated fair
values of all financial instruments, including off-balance-sheet instruments.
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 on its financial
position and results of operations, but it is not expected to have a material
impact.
OTHER INCOME
Non-interest income increased 30.8% during 1998 to $541,918,000. This follows
growth of 12.5% in 1997. In September 1998, Mercantile divested Firstbank's two
Missouri banks due to state bank regulatory restrictions on deposit
concentrations. These banks had total assets of approximately $300 million, and
a pre-tax gain of $48,051,000 was recorded on the sale. Excluding that gain and
merger-related securities losses, adjusted non-interest income grew by 19.6% in
1998. Additionally, in 1996, 1997 and 1998, Mercantile sold, in eight distinct
transactions, certain non-strategic and/or underperforming businesses that
resulted in gains. Excluding those gains, non-interest income grew by 14.5% in
1998 and 20.6% in 1997. Furthermore, if securities gains are also excluded, non-
interest revenue growth is 12.4% in 1998 and 19.5% in 1997. Exhibit 18 portrays
such transactions and a summary of all categories of fee income for the past
three years.
Deposit service charges were the largest source of non-interest income in all
three years and increased by 9.4% in 1998 and 10.3% in 1997. The Roosevelt
transaction, partially offset by customer attrition in 1998, favorably impacted
service charges in 1997 and 1998.
In 1998, trust fees were $112,999,000 compared with $103,928,000 during 1997,
an increase of 8.7% following growth of 10.9% in 1997. 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 15.9%.
Mississippi Valley Advisors Inc. manages 17 proprietary mutual funds -- the ARCH
funds, which had assets of $4.3 billion at December 31, 1998, an increase of
11.4% over last year-end. Increases in the value of assets managed and
successful new business development efforts largely accounted for the growth in
trust fees in both years. Effective March 31, 1999, the ARCH funds will adopt
the name Mercantile Mutual Funds.
At December 31, 1998, the Corporation held $25.9 billion in assets under
investment management and $16.2 billion additional assets under custodial
relationships, increases of 18.1% and 4.0%, respectively, from year-end 1997.
Mortgage banking income in 1998 was more than double what was earned in 1997,
which in turn was double the 1996 level. In January 1998, the Corporation sold
$1.9 billion in loan servicing, which reduced originated mortgage servicing
rights by approximately $3.2 million. A pre-tax gain of $23,155,000 was
recognized. 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 $31,300,000 in 1998, up 34.1% from 1997. The growth was attributable largely
to increased servicing volume and the higher than expected level of refinancing
activity in 1998. Mortgages serviced totaled $11.6 billion at December 31, 1998
compared with $12.5 billion at December 31, 1997. Total originated and purchased
mortgage servicing rights on the balance sheet at December 31, 1998 totaled
$49,413,000. The current low interest rate environment could further accelerate
refinancing activity and cause quicker amortization, and thus cause possible
future impairment in value of those assets.
Retail brokerage revenue for 1998 was $20,086,000, an increase of 49.2% over
1997, which in turn was up 36.5% over 1996. The inclusion of Roosevelt for 12
months as well as generally favorable market conditions in 1998 have had a
positive impact on this source of revenue. The Bruno Stolze & Company, Inc.
discount brokerage acquisition in late 1998 should favorably impact 1999
revenues.
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45
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 18
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
-------------------------------------------------------------
1997 to 1998 1996 to 1997
(Dollars in thousands) 1998 1997 Change 1996 Change
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust $112,999 $103,928 8.7% $ 93,704 10.9%
Service charges 119,277 109,058 9.4 98,908 10.3
Retail brokerage revenue 20,086 13,459 49.2 9,857 36.5
Other investment banking 21,051 24,722 (14.8) 25,494 (3.0)
Mortgage banking 54,455 26,625 -- 13,518 97.0
Credit card fees 12,556 21,169 (40.7) 28,415 (25.5)
Securitization revenue 20,011 18,404 8.7 16,008 15.0
Securities gains (losses) 15,435 7,649 -- 292 --
Electronic Funds Transfer Payment System (EFTPS) fees 12,812 14,039 (8.7) 4,873 --
ATM fees 15,556 13,271 17.2 8,450 57.1
Income from operating leases 9,537 3,740 -- 917 --
Loan commitment fees* 8,238 7,942 3.7 6,476 22.6
Loan late charges* 5,780 5,127 12.7 4,490 14.2
Letters of credit fees 7,518 6,810 10.4 9,432 (27.8)
Official check fees 8,339 5,041 65.4 4,648 8.5
Safe deposit box rental 5,597 5,073 10.3 4,732 7.2
Insurance commissions 7,737 4,310 79.5 3,852 11.9
Miscellaneous 84,934 23,826 -- 33,944 (29.8)
- - ------------------------------------------------------------------------------------------------------------------------
Total Other Income 541,918 414,193 30.8 368,010 12.5
Add: Merger-related securities losses 1,649 -- -- 3,114 --
Less: Gain on sale of subsidiaries (48,051) -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------
Adjusted Other Income 495,516 414,193 19.6 371,124 11.6
Less gains from:
Sale of available-for-sale securities (17,084) (7,649) -- (3,406) --
Sale of mortgage servicing rights (23,155) (3,277) -- -- --
Sale of merchant credit card business (2,658) (2,300) 15.6 (10,000) --
Sale of corporate trust (2,002) -- -- (6,750) --
Reimbursement on co-branded credit card start-up costs -- -- -- (12,000) --
Sale of leveraged lease residual values -- -- -- (3,542) --
- - ------------------------------------------------------------------------------------------------------------------------
Adjusted Other Income After Gains $450,617 $400,967 12.4 $335,426 19.5
- - ------------------------------------------------------------------------------------------------------------------------
*Excludes such fees from the Corporation's mortgage banking and credit card
operations, which are included in mortgage banking and credit card revenue.
</TABLE>
Other investment banking revenue declined for the second consecutive year.
Growth in foreign exchange revenue was more than offset by declines in
commission income earned on fixed income securities, caused by the lack of
demand for such product, due largely to the low level of interest rates in 1997
and 1998 and the flat yield curve.
Credit card income declined from 1996 to 1997 and then again in 1998. Credit
card income now represents primarily interchange fees received on transactions
of Mercantile cardholders and other cardholder miscellaneous fees. The three
sales of merchant processing businesses and the two portfolio sales largely
accounted for the decline in credit card income. In the fourth quarter of 1998,
Mercantile credit cards were reissued under Missouri law, which allows the
Corporation greater flexibility in pricing and the opportunity to increase fee
revenue in 1999.
Securitization revenue in 1998 was $20,011,000 compared with $18,404,000 last
year and $16,008,000 in 1996, and represents amounts accruing to Mercantile on
the $400,000,000 in credit card loans securitized in the 1995 Mercantile Credit
Card Master Trust, as well as amounts recognized under FAS 125 for investor
certificate loans that were sold and reclassified to the investment portfolio.
For securitized loans, amounts that would otherwise have been reported as
interest income, interest expense, credit card fees and provision for loan
losses are instead netted in non-interest income as securitization revenue.
Because credit losses are absorbed against credit card servicing income over the
life of these transactions, such income may vary depending upon the credit
performance of the securitized loans. Lower levels of net charge-offs positively
impacted securitization revenue in 1998. Mercantile acts
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46
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
as servicing agent and receives loan servicing fees equal to 2% per annum of the
securitized receivables. As servicing agent, Mercantile continues to provide
customer service to collect past due accounts and to provide other services
typically performed for its customers. Accordingly, Mercantile's relationship
with its credit card customers is not affected by the securitization. The
securitized loans will start amortizing in November 1999, and credit card loans
will be purchased by Mercantile from the trust for 12 consecutive months.
Letters of credit fees grew by 10.4% in 1998 following a 27.8% decline in
1997. In 1998, there was growth in standby and export letters of credit fees.
The 1997 decline was due to the loss of a large customer as well as more
selective servicing of the retail industry.
Significant other revenue growth categories in both years included credit life
and other insurance product sales, operating lease income, both ATM surcharge
and cardholder fees and official check fees. Excluding the gain on sale of
subsidiaries shown in Exhibit 18, year-to-date miscellaneous income increased by
54.8% over 1997. Miscellaneous income includes the gain on sales of merchant
credit card, corporate trust and leveraged leases; this category grew as a
result of a focus to increase ancillary fees.
Net securities gains on investment securities totaled $17,084,000, $7,649,000
and $3,406,000 in 1998, 1997 and 1996, respectively. These amounts exclude
securities losses incurred by newly acquired banks in portfolio restructurings
of $1,649,000 in 1998 and $3,114,000 in 1996. Repositioning of the acquired
portfolios and more active portfolio management in the lower 1998 interest rate
environment account for the increase in gains.
OTHER EXPENSE
Expenses other than interest expense and the provision for possible loan losses
for 1998 were $1,026,757,000, an increase of 4.1% from 1997, which was up 22.5%
from 1996. Exhibit 19 portrays the growth in operating expenses after excluding
from 1996, 1997 and 1998 the following infrequent expenses: 1) the merger-
related charges in all years; 2) the 1998 restructuring charge; 3) the 1997 loss
on the sale of a credit card portfolio; and 4) the 1996 nonrecurring SAIF
assessment. Adjusted other expense grew by 9.5% from 1997 to 1998 and by 9.9%
from 1996 to 1997.
Acquisition expenses of $89,192,000, $121,393,000 and $51,071,000 for the
respective years 1998, 1997 and 1996 represent costs incurred for the 17
acquisitions Mercantile made in the past three years.
The fourth quarter 1998 restructuring charge of $45,130,000 relates to 26
branch closings and severance for 1,400 staff separations due to staff
rightsizing, centralization and further consolidation of back office functions.
Approximately 650 staff were served notices of separation in late 1998, and
approximately 750 more will be severed in 1999. The severance, outplacement,
vacation pay and related benefits costs for those staff are estimated to be
$40,000,000. The remaining $5,130,000 charge is the estimated cost to shut down
and exit the 26 branches that are to be closed. It is expected that these
branches will be closed and sold during 1999.
The 1,400 separated staff cross all levels of employment, and many of the
recent 750 include management positions as Mercantile's management will broaden
its span of control as it restructures the company. The continued consolidation
of bank charters and efforts to centralize back office functions account for the
remaining severed staff.
On September 25, 1997, the Corporation announced the sale of its former co-
branded credit card loans. The terms of the sale contract resulted in a pre-tax
charge of $50,000,000, which represented the discount on the loan balances, a
write-off of an intangible asset associated with the cards, investment banking
fees and accruals for severance and other expenses.
Excluding the above infrequent items, adjusted other expense was $892,435,000
for 1998 compared with $814,985,000 in 1997, an increase of $77,450,000 or 9.5%.
However, increased goodwill amortization was $20,394,000 of the growth in the
1998 expense level. Roosevelt's results of operations were included for 12
months in 1998 versus only six in 1997 and accounted for over one-half of the
increase in expenses. Adjusted other expense as a percentage of average assets,
however, improved to 2.58% versus 2.80% in 1997 and 3.10% in 1996. The
efficiency ratio, defined as adjusted operating expenses as a percentage of
taxable-equivalent net interest income and other income, was 55.21% compared
with 55.07% last year and 55.41% in 1996.
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47
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 19
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
--------------------------------------------------------------
1997 to 1998 1996 to 1997
(Dollars in thousands) 1998 1997 Change 1996 Change
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries $ 418,351 $381,942 9.5% $335,803 13.7%
Employee benefits 77,608 85,048 (8.7) 77,437 9.8
- - ------------------------------------------------------------------------------------------------------------------------------
Total Personnel Expense 495,959 466,990 6.2 413,240 13.0
Net occupancy 67,003 61,697 8.6 55,489 11.2
Equipment 85,426 70,272 21.6 60,605 16.0
Postage and freight 28,028 27,061 3.6 26,427 2.4
Marketing/business development 17,696 18,856 (6.2) 15,183 24.2
Office supplies 17,141 16,178 6.0 15,037 7.6
Communications 20,309 16,719 21.5 13,886 20.4
Legal and professional 16,792 14,541 15.5 15,523 (6.3)
Credit card 5,707 11,322 (49.6) 15,891 (28.8)
FDIC insurance 5,456 3,652 49.4 4,757 (23.2)
Foreclosed property expense (recoveries) 682 (4,997) -- (788) --
Miscellaneous 74,442 72,524 2.6 93,244 (22.2)
- - ------------------------------------------------------------------------------------------------------------------------------
Adjusted Other Expense Before Intangible Asset Amortization 834,641 774,815 7.7 728,494 6.4
Intangible asset amortization 57,794 40,170 43.9 13,237 --
- - ------------------------------------------------------------------------------------------------------------------------------
Adjusted Other Expense 892,435 814,985 9.5 741,731 9.9
Acquisition expenses 89,192 121,393 (26.5) 51,071 --
Restructuring charge 45,130 -- -- -- --
Loss on sale of credit card loans -- 50,000 -- -- --
Special SAIF assessment -- -- -- 12,385 --
- - ------------------------------------------------------------------------------------------------------------------------------
Total Other Expense $1,026,757 $986,378 4.1 $805,187 22.5
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Personnel expense increased by $28,969,000 or 6.2% during 1998 as salaries
rose by $36,409,000 or 9.5%, while employee benefit costs declined by $7,440,000
or 8.7%. The impact of significant acquisitions on salaries was estimated to be
$6,000,000. Additionally, external temporary help salaries rose by $9,672,000,
and were utilized primarily in operations, mortgage banking and in the Year 2000
effort. Incentive compensation increased by $9,059,000 from last year as
Mercantile continued to move toward more performance-based compensation. The
remaining increase was due to merit increases and the 1998 salaries of other
acquirees. Personnel expense increased by $53,750,000 from 1996 to 1997 as
salary and benefit costs grew by 13.7% and 9.8%, respectively. The impact of the
July 1, 1997 acquisition was estimated to be $12,500,000.
Employee benefit costs grew at a lower rate than salaries in 1997 and were
indicative of the Corporation's efforts in controlling benefit costs. In 1998,
employee benefit costs actually declined due to the continued effect of 1997
efforts, the implementation of a cash balance plan that lowered pension costs by
approximately $3,800,000, a reconfiguration of the 401(k) plan that saved
$2,500,000 and, finally, employees paid a larger portion of total health and
welfare costs in 1998.
Occupancy and equipment costs grew by 15.5% during 1998 following an increase
of 13.7% in 1997. These growth rates reflect the addition of Roosevelt expenses,
the costs of maintaining additional offices, and a consistent program of
investing in new technology to improve customer service and enhance employee
efficiency. A new deposit system installed throughout most of the Corporation
also contributed to the increased equipment expense in 1998 over 1997. The
benefits of this system are included in lower staff costs. Additionally, with
the growth of the Mercantile leasing business, depreciation of equipment
Mercantile leases to customers has increased by $4,601,000 in 1998 over 1997.
The rent received on this equipment is included in miscellaneous income. Total
capital expenditures were $93,008,000, $122,785,000 and $76,386,000 in 1998,
1997 and 1996, respectively.
The major components of all other operating expenses for the past three years
are shown in Exhibit 19. Commu-nications expense grew by 21.5% in 1998,
following an increase of 20.4% in 1997, reflecting the costs of technology to
expand both voice and data networking. Credit card expense declined in 1997 and
again in 1998, due primarily to the absence of the costs associated with the
merchant processing businesses and the two credit card portfolios that were
sold. The reduced rate of growth in
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48
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
office supplies was also due to the absence of those business lines and expense
control initiatives. Marketing and business development expense declined in 1998
as a corporate-wide image advertising campaign that began in 1997 wound down in
1998. During 1998, there was a reduction of miscellaneous expense of $3,601,000
realized by gains on the sales of selected non-strategic Mercantile branch
offices. The comparable gains in 1997 and 1996 were $18,263,000 and $3,003,000,
respectively.
Intangible asset amortization was $57,794,000 in 1998 versus $40,170,000 in
1997 and $13,237,000 in 1996. The increase was caused by amortization of
goodwill recorded in 1996 and 1997 purchase acquisitions, which is being
amortized using the straight-line method over 15 years. The Roosevelt
acquisition increased goodwill by $608,076,000 and added $40,500,000 to annual
amortization expense.
During 1997, Mercantile recorded acquisition adjustments totaling $121,393,000
that were originally recorded as an accrued liability. Of that original
liability, $117,491,000 has been utilized at December 31, 1998 and $3,902,000
remains to absorb future cash payments. Of the comparable $89,192,000 liability
recorded in the third quarter of 1998 for this year's seven acquisitions,
$48,960,000 has been utilized at December 31, 1998 and $40,232,000 remains to
absorb future payments. Substantially all the merger-related provisions made for
acquisitions prior to 1997 have been exhausted.
YEAR 2000
Financial institutions are particularly vulnerable to Year 2000 issues because
of industry reliance on electronic data processing and funds transfer systems.
In 1996, the Corporation initiated a formal and centralized Year 2000 Program
("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. As part of the
Program, a comprehensive Year 2000 Program Plan ("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 plan projects
identified, approximately 87% have been completed. Most remaining projects are
dependent upon external testing for completion, which is scheduled to be
completed by the end of the second quarter of 1999.
As part of its Plan, Mercantile identified those systems and business
applications that are "mission critical," that is, systems and business
applications which, if they failed, would render Mercantile incapable of
performing core business processes. As of December 31, 1998, renovation and
testing of such identified mission-critical applications was 100% complete.
Achievement of this milestone fulfilled the Program goal 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 subject 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 that
have been identified as "high risk." In addition, all customers with whom
Mercantile exchanges electronic data have received notification of Year 2000-
related date format impacts. Now, plans are being finalized 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.
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49
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Mercantile estimates that its total costs related to Year 2000 remediation
will be approximately $31,000,000. Expenses of the Program in 1998 were
$14,597,000, and total expenses through December 31, 1998 were $24,012,000.
Personnel costs for Mercantile employees 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
communication and 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 that are largely under Mercantile's control. As
set forth above, the Corporation believes it has made the necessary corrections
to its mission-critical internal systems and therefore, there is little risk of
any critical internal system or asset not being Year 2000 ready by the end of
1999. In the unlikely event that Mercantile has not successfully completed its
remediation, 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 services
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 under way to assess this
potential risk, Mercantile does not yet have the necessary information to
estimate the likelihood of such significant disruptions. An initial plan to
address funding issues is expected to be completed by June 1999. 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 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 65% and 75% 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.
INCOME TAXES
Mercantile records a provision for income taxes currently payable and for income
taxes payable in the future that arise due to timing differences in the
recognition of certain items for financial statement and income tax purposes.
For the year ended December 31, 1998, the Corporation recorded income tax
expense of $192,964,000 compared with $142,376,000 in 1997 and $148,567,000 in
1996. The effective tax rate for 1998 was 33.96% compared with 36.58% last year
and 34.31% in 1996. Income tax benefits relating to infrequent charges totaled
$30,828,000 in 1998, $59,356,000 in the prior year and $23,697,000 in 1996,
resulting in year-to-date adjusted income tax expense for 1998 of $223,792,000
compared with $201,732,000 in 1997 and $172,264,000 in 1996. Excluding the tax
benefits recorded in conjunction with
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50
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
acquisitions and other infrequent charges previously discussed, the
Corporation's year-to-date adjusted effective tax rate was 33.56% in 1996
compared with 34.73% and 33.12% in 1997 and 1998, respectively.
The effective tax rates in 1998 and 1997 were influenced by nondeductible
goodwill amortization and lower levels of tax-exempt income. These were
partially offset by reductions in state and local taxes resulting from the
benefits of captive real estate investment trusts, investment subsidiaries and
mergers, the realignment of corporate entities consistent with its plan of
reducing bank charters, the realization of state and federal tax credits, and
benefits recorded due to the resolution of certain tax uncertainties.
A three-year summary of significant income tax data is presented in Note M to
the Consolidated Financial Statements, which provides an analysis of deferred
income taxes as well as a reconciliation between the amount of taxes computed
using the statutory rate and the amount actually recorded. As disclosed,
Mercantile had a net deferred tax asset of $103,833,000 at December 31, 1998.
Due to the significant amount of taxes paid for the past three years and the
forecasted taxes payable for 1999, no valuation reserve for the deferred tax
asset is deemed necessary. The Corporation currently has only insignificant
operating loss carryforwards from acquired entities and federal returns have
been examined through 1994 by the Internal Revenue Service.
FOURTH QUARTER RESULTS
Mercantile earned $90,153,000 or $.57 per diluted share in the fourth quarter of
1998. Excluding a $29,330,000 or $.18 per share restructuring charge, Mercantile
earned $119,483,000 in the fourth quarter of 1998, a 13.4% increase from the
$105,399,000 earned in the same period last year, while corresponding adjusted
diluted earnings per share improved to $.75 from $.70, an increase of 7.1%.
Mercantile remains committed to reducing its cost base and took a pre-tax
charge of $45,130,000 in the current quarter to account for the costs related to
26 branch closings and severance for approximately 1,400 staff. The staff
rightsizing results from further centralization, consolidation of back office
functions, a widened span of control and branch closures. These initiatives are
expected to enable Mercantile to hold its 1999 expense base flat with 1998 and
slightly improve top line revenue.
Net interest income improved by 2.9% to $283,158,000 as the volume of average
earning assets increased by 6.1%. This growth was partially offset by a decline
in the net interest rate margin to 3.56% from 3.67% last year. Average loan
volume was up 3.4% with growth in commercial, commercial real estate and
consumer loans partially offset by decline in residential real estate. The
commentary on net interest income on page 29 provides more details on the
dynamics of net interest income and the net interest rate margin.
The provision for possible loan losses for the fourth quarter was $11,402,000
compared with $7,627,000 the prior year. Net charge-offs were $11,381,000 or
.21% of average loans for the quarter compared with the year-earlier $10,486,000
or .20%, which included a $3,600,000 recovery on a commercial real estate loan.
Other income grew by $19,307,000 or 17.7% from the fourth quarter of 1997.
Strong results in service charge income, all miscellaneous fee businesses and in
both the trust and retail brokerage businesses were partially offset by declines
in credit card fees and mortgage banking. Mortgage banking revenue last year
included a $3,277,000 gain on the sale of mortgage servicing rights, while the
current quarter increased by a $2,700,000 revaluation of purchased mortgage
servicing rights. Fourth quarter 1998 included $5,851,000 in securities gains
compared with $2,401,000 last year. A detailed explanation of the year-over-year
increase in non-interest income is included on page 45.
Other operating expenses of $270,341,000 were up $52,220,000 from a year ago.
The 1998 results included the $45,130,000 restructuring charge. Excluding this
charge, operating expenses grew by only 3.3% even though last year included a
$6,041,000 gain on the sale of an office building. Excluding that gain, 1998
operating expenses were flat with the fourth quarter of 1997.
The adjusted effective tax rate this quarter was 31.69% compared with 33.51%
last year. This quarter included $10,000,000 in federal tax benefits realized
from the realignment of corporate entities. Exhibit 20 presents condensed
quarterly financial data for the last two years.
------
51
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Exhibit 20
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY
-------------------------------------------------------------------------------------
1997 1998
-------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS AND
SELECTED RATIOS EXCLUDING
INFREQUENT EXPENSE
Adjusted net income
(Thousands) $ 85,313 $ 85,180 $103,307 $105,399 $114,859 $107,147 $110,506 $119,483
Adjusted basic earnings
per share .64 .66 .70 .71 .76 .71 .72 .76
Adjusted diluted earnings
per share .63 .64 .68 .70 .75 .69 .71 .75
Return on assets 1.38% 1.34% 1.25% 1.27% 1.35% 1.23% 1.29% 1.36%
Return on equity 15.25 15.87 14.94 15.39 16.03 14.88 14.84 15.46
Efficiency ratio 54.44 54.76 54.83 56.13 53.28 57.00 56.56 54.15
Other expense to average
assets 3.02 3.00 2.66 2.64 2.59 2.57 2.59 2.57
PER SHARE DATA
Basic earnings per share $ .64 $ .33 $ .09 $ .71 $ .76 $ .71 $ .41 $ .57
Diluted earnings per share .63 .32 .09 .70 .75 .69 .41 .57
Dividends declared .287 .287 .287 .287 .31 .31 .31 .31
Book value at period-end 16.69 16.23 18.18 18.57 18.77 19.16 19.45 19.53
Market price at period-end 35 5/16 40 1/2 50 3/4 61 1/2 54 13/16 50 3/8 48 3/8 46 1/8
OPERATING RESULTS*
(Thousands)
Taxable-equivalent net
interest income $246,616 $251,475 $288,199 $279,532 $276,956 $279,493 $276,985 $287,490
Tax-equivalent adjustment 4,575 4,708 4,477 4,324 4,235 4,191 3,906 4,332
- - ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 242,041 246,767 283,722 275,208 272,721 275,302 273,079 283,158
Provision for possible
loan losses 20,090 29,429 29,209 7,627 8,537 7,344 23,871 11,402
Other income 96,358 96,421 112,344 109,070 136,951 114,751 161,839 128,377
Other expense 186,726 242,364 339,167 218,121 220,538 224,726 311,152 270,341
Income taxes 46,270 28,641 14,334 53,131 65,738 50,836 36,751 39,639
- - ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 85,313 $ 42,754 $ 13,356 $105,399 $114,859 $107,147 $ 63,144 $ 90,153
- - ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
(Millions)
Total assets $ 24,724 $ 25,402 $ 33,030 $ 33,097 $ 34,039 $ 34,941 $ 34,260 $ 35,037
Earning assets 22,841 23,304 30,208 30,187 31,027 31,727 31,276 32,014
Loans and leases 16,959 17,268 21,587 21,322 21,585 21,813 21,673 22,045
Deposits 19,576 19,936 24,788 24,663 24,886 25,130 24,372 24,743
Shareholders' equity 2,238 2,147 2,767 2,739 2,866 2,881 2,979 3,092
SELECTED RATIOS
Return on assets 1.38% .67% .16% 1.27% 1.35% 1.23% .74% 1.03%
Return on equity 15.25 7.97 1.93 15.39 16.03 14.88 8.48 11.66
Efficiency ratio 54.44 69.67 84.68 56.13 53.28 57.00 70.91 65.01
Other expense to average
assets 3.02 3.82 4.11 2.64 2.59 2.57 3.63 3.09
Tangible equity to
tangible assets 7.97 7.37 5.72 5.92 5.88 6.19 6.70 6.55
Equity to assets 8.78 8.18 8.15 8.29 8.09 8.38 8.84 8.59
Tier I capital to
risk-adjusted assets 11.76 10.96 9.35 9.40 9.20 9.55 9.87 9.84
Total capital to
risk-adjusted assets 14.25 14.49 12.56 12.42 12.11 12.46 12.75 12.55
Leverage 8.81 8.08 6.30 6.52 6.60 6.65 7.12 7.16
Loans to deposits (Average) 86.63 86.62 87.09 86.45 86.73 86.80 88.93 89.10
Reserve for possible loan
losses
to outstanding loans 1.51 1.51 1.35 1.33 1.35 1.34 1.40 1.38
Reserve for possible loan
losses
to non-performing loans 261.69 268.69 217.65 241.91 227.48 242.45 231.98 222.76
Non-performing loans
to outstanding loans .58 .56 .62 .55 .59 .55 .61 .62
Net interest rate margin 4.38 4.33 3.79 3.67 3.62 3.53 3.51 3.56
- - ----------------------------------------------------------------------------------------------------------------------------------
*Infrequent income statement amounts included herein.
</TABLE>
------
52
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
The management of Mercantile Bancorporation Inc. is responsible for the
preparation and the integrity and objectivity of the accompanying financial
statements. The financial statements necessarily include amounts that are based
on management's best estimates and judgments. Future economic conditions and
events, and the economic prospects of the Corporation's borrowers, create the
possibility that such estimates and judgments may be subject to review and
revision.
The Corporation maintains an accounting system and related internal controls
that have been deemed sufficient to provide reasonable assurance that the
financial records are reliable for preparing the financial statements and
maintaining accountability for assets. The concept of reasonable assurance is
based upon the recognition that the cost of a system of internal controls must
be related to the benefits derived, and that the balancing of those factors
requires estimates and judgments. The system of internal controls includes
written policies and procedures, proper delegation of authority, and segregation
of duties. In addition, written Standards of Conduct adopted by the Corporation
help to ensure the highest standards of ethical conduct by all employees.
Management continually monitors compliance with the system of internal controls,
primarily through an extensive program of internal audits. The system of
internal controls and compliance therewith are considered by independent
auditors, in accordance with generally accepted auditing standards, to the
extent necessary to render an opinion on the financial statements, and by
regulatory examiners.
The financial statements were audited by KPMG LLP, independent auditors, in
accordance with generally accepted auditing standards. Their independent
professional opinion on the Corporation's financial statements is presented
herein.
/s/ Thomas H. Jacobsen /s/ John W. McClure
Thomas H. Jacobsen John W. McClure
Chairman of the Board, Vice Chairman and
President and Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
MERCANTILE BANCORPORATION INC.:
We have audited the accompanying consolidated balance sheets of Mercantile
Bancorporation Inc. and subsidiaries as of December 31, 1998, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' equity,
cash flows, and comprehensive income for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercantile
Bancorporation Inc. and subsidiaries as of December 31, 1998, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
January 20, 1999
------
53
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME Year Ended December 31
---------------------------------------------
(Thousands except per share data) 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 1,771,235 $ 1,651,816 $ 1,404,809
Investments in debt and equity securities
Trading 8,821 7,077 3,630
Taxable 558,635 406,663 315,120
Tax-exempt 23,230 25,797 28,255
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Investments in Debt and Equity Securities 590,686 439,537 347,005
Due from banks - interest bearing 13,293 10,379 4,128
Federal funds sold and repurchase agreements 16,904 16,946 15,178
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 2,392,118 2,118,678 1,771,120
INTEREST EXPENSE
Interest bearing deposits 908,534 816,771 681,637
Foreign deposits 23,182 26,178 10,501
Short-term borrowings 174,335 159,013 89,676
Bank notes 3,423 10,537 15,333
Long-term debt and mandatorily redeemable preferred securities 178,384 58,441 25,010
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 1,287,858 1,070,940 822,157
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 1,104,260 1,047,738 948,963
PROVISION FOR POSSIBLE LOAN LOSSES* 51,154 86,355 78,766
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 1,053,106 961,383 870,197
OTHER INCOME
Trust 112,999 103,928 93,704
Service charges 119,277 109,058 98,908
Investment banking and brokerage 41,137 38,181 35,351
Securitization revenue 20,011 18,404 16,008
Mortgage banking 31,300 23,348 13,518
Gain on sale of mortgage servicing rights 23,155 3,277 --
Securities gains (losses)* 15,435 7,649 292
Gain on sale of subsidiaries* 48,051 -- --
Miscellaneous 130,553 110,348 110,229
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Other Income 541,918 414,193 368,010
OTHER EXPENSE
Salaries 418,351 381,942 335,803
Employee benefits 77,608 85,048 77,437
Net occupancy 67,003 61,697 55,489
Equipment 85,426 70,272 60,605
Intangible asset amortization 57,794 40,170 13,237
Restructuring and merger-related costs* 134,322 121,393 51,071
Loss on sale of credit card loans* -- 50,000 --
Miscellaneous* 186,253 175,856 211,545
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Other Expense 1,026,757 986,378 805,187
- - -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 568,267 389,198 433,020
INCOME TAXES* 192,964 142,376 148,567
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Income* $ 375,303 $ 246,822 $ 284,453
- - -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings per share $ 2.45 $ 1.76 $ 2.12
Diluted earnings per share 2.41 1.73 2.09
Dividends declared 1.24 1.148 1.092
- - -----------------------------------------------------------------------------------------------------------------------------------
*Includes the following infrequent amounts:
Provision for possible loan losses $ 19,600 $ 20,340 $ 13,666
Securities losses 1,649 -- 3,114
Gain on sale of subsidiaries (48,051) -- --
Loss on sale of credit card loans -- 50,000 --
Restructuring and merger-related costs 134,322 121,393 51,071
Miscellaneous expense -- -- 12,385
Income tax benefit (30,828) (59,356) (23,697)
- - -----------------------------------------------------------------------------------------------------------------------------------
Reduction of Net Income $ 76,692 $ 132,377 $ 56,539
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
------
54
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,760,636 $ 1,330,512 $ 1,448,637
Due from banks - interest bearing 367,304 251,909 96,714
Federal funds sold and repurchase
agreements 226,730 303,859 310,963
Investments in debt and equity
securities
Trading 126,540 70,536 31,361
Available-for-sale (Amortized cost
of $9,185,770, $8,023,157 and
$4,731,005, respectively) 9,246,790 8,059,066 4,741,677
Held-to-maturity (Estimated fair
value of $99,336, $341,954 and
$661,632, respectively) 97,607 335,279 656,721
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Debt and
Equity Securities 9,470,937 8,464,881 5,429,759
Loans held-for-sale 217,941 96,955 75,377
Loans and leases, net of
unearned income 22,093,317 21,265,000 16,861,877
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 22,311,258 21,361,955 16,937,254
Reserve for possible loan
losses (308,890) (284,165) (257,718)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Loans and Leases 22,002,368 21,077,790 16,679,536
Bank premises and equipment 545,559 531,650 428,972
Intangible assets 781,188 839,285 202,071
Other assets 645,455 532,304 399,083
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $35,800,177 $33,332,190 $24,995,735
- - ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Non-interest bearing $ 4,453,048 $ 3,956,138 $ 3,389,776
Interest bearing 20,526,576 20,267,878 16,143,182
Foreign 481,773 585,439 251,887
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 25,461,397 24,809,455 19,784,845
Federal funds purchased and repurchase
agreements 2,087,373 2,127,443 1,861,994
Other short-term borrowings 915,287 1,551,097 270,680
Bank notes 25,000 175,000 175,000
Long-term Federal Home Loan Bank
advances 2,790,336 578,484 37,085
Other long-term debt 782,998 789,687 290,590
Company-obligated mandatorily
redeemable preferred securities of
Mercantile Capital Trust I 150,000 150,000 --
Other liabilities 514,031 388,722 312,298
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 32,726,422 30,569,888 22,732,492
Commitments and contingent
liabilities -- -- --
-----------------------------
SHAREHOLDERS' EQUITY 1998 1997 1996
-----------------------------
Preferred stock - no par value
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding -- -- -- -- -- --
Common stock - $.01 par value at
December 31, 1998 and 1997, and
$5.00 par value at
December 31, 1996
Shares authorized 400,000 200,000 200,000
Shares issued 157,487 148,874 136,766 1,574 1,489 683,832
Capital surplus 999,595 1,016,844 16,091
Retained earnings 2,035,157 1,724,752 1,638,610
Accumulated other comprehensive
income 41,160 25,222 8,911
Treasury stock, at cost 83 162 2,591 (3,731) (6,005) (84,201)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 3,073,755 2,762,302 2,263,243
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $35,800,177 $33,332,190 $24,995,735
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
------
55
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------- Total
Outstanding Preferred Capital Retained Treasury Shareholders'
(Dollars in thousands) Shares Dollars Stock Surplus Earnings* Stock Equity
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 134,845,809 $ 684,581 $ 12,153 $ 72,528 $1,502,140 $ (60,557) $ 2,210,845
Net income 284,453 284,453
Common dividends declared:
Mercantile Bancorporation
Inc., $1.092 per share (101,499) (101,499)
Pooled companies prior to
acquisition (33,938) (33,938)
Preferred dividends declared (408) (408)
Redemption of preferred
stock (12,153) (531) (12,684)
Issuance of common stock in
acquisitions of:
Today's Bancorp, Inc. 1,690,587 (2,195) 52,321 50,126
First Financial
Corporation of America 388,113 (1,226) 12,954 11,728
Peoples State Bank 488,756 849 14,791 15,640
Metro Savings Bank, F.S.B. 296,853 57 14 8,983 9,054
Security Bank of Conway,
F.S.B. 482,946 75 14,614 14,689
First Sterling Bancorp,
Inc. 782,126 3,911 572 13,772 18,255
Issuance of common stock
for:
Employee incentive plans 411,775 1,638 (4,318) 2,397 (283)
Convertible notes 438,002 2,190 2,681 4,871
Other comprehensive income (16,841) (16,841)
Purchase of treasury stock (5,890,426) (186,811) (186,811)
Reissuance and retirement
of treasury stock (9,688) (47,478) 57,166 --
Pre-merger transactions of
pooled companies and other 240,056 1,200 (5,454) 359 (59) (3,954)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 134,174,597 683,832 -- 16,091 1,647,521 (84,201) 2,263,243
Net income 246,822 246,822
Common dividends declared:
Mercantile Bancorporation
Inc., $1.148 per share (132,535) (132,535)
Pooled companies prior to
acquisition (28,134) (28,134)
Issuance of common stock in
acquisitions of:
Roosevelt Financial Group,
Inc. 18,948,884 123 353,128 6,872 280,981 641,104
Regional Bancshares, Inc. 900,625 (474) 361 28,813 28,700
Change in par value of
common stock from
$5.00 per share to $.01
per share (676,575) 676,575 --
Issuance of common stock
for:
Employee incentive plans 899,716 322 5,846 5,512 11,680
Convertible notes 79,335 80 802 882
Other comprehensive income 8,805 8,805
Purchase of treasury stock (6,778,324) (287,288) (287,288)
Reissuance and retirement
of treasury stock (7,396) (42,950) 50,346 --
Pre-merger transactions of
pooled companies and other 487,474 1,103 7,826 262 (168) 9,023
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 148,712,307 1,489 -- 1,016,844 1,749,974 (6,005) 2,762,302
Net income 375,303 375,303
Common dividends declared:
Mercantile Bancorporation
Inc., $1.24 per share (179,642) (179,642)
Pooled companies prior to
acquisition (10,466) (10,466)
Issuance of common stock in
acquisitions of:
First Financial
Bancorporation 3,138,823 31 8,522 50,343 58,896
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 1,613,060 14 41,800 8,446 50,260
Convertible notes 26,407 1 293 294
Other comprehensive income 13,703 13,703
Purchase of treasury stock (1,834,375) (101,000) (101,000)
Reissuance and retirement
of treasury stock (94,471) 94,471 --
Pre-merger transactions of
pooled companies and other 271,638 (16) 4,032 (35) 3,981
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 157,404,038 $ 1,574 $ -- $ 999,595 $2,076,317 $ (3,731) $ 3,073,755
- - ------------------------------------------------------------------------------------------------------------------------------------
*Includes accumulated other comprehensive income.
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
------
56
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 375,303 $ 246,822 $ 284,453
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 51,154 86,355 78,766
Depreciation and amortization 74,028 62,637 52,566
Provision for deferred income tax credits (11,724) (9,995) (23,318)
Net change in loans held-for-sale (114,912) (21,578) 30,516
Net change in trading securities (43,298) (53,020) 32,745
Net change in accrued interest receivable 8,120 (2,780) 11,366
Net change in accrued interest payable (8,176) 36,254 (12,348)
Other, net 26,244 55,194 85,651
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 356,739 399,889 540,397
INVESTING ACTIVITIES
Investments in debt and equity securities, other than trading securities
Purchases (6,928,474) (4,509,883) (2,455,696)
Proceeds from maturities 4,358,854 3,608,721 2,366,128
Proceeds from sales of available-for-sale securities 2,040,541 802,007 506,636
Net change in loans and leases (148,977) (642,617) (898,355)
Purchases of loans and leases (626,655) (442,154) (141,600)
Proceeds from sale of mortgage servicing rights 26,330 4,958 --
Proceeds from sales of loans and leases 880,656 696,454 255,043
Purchases of premises and equipment (93,008) (122,785) (76,386)
Proceeds from sales of premises and equipment 21,081 19,679 4,997
Proceeds from sales of foreclosed property 55,925 45,905 32,353
Net cash and cash equivalents received from (paid for) acquisitions 124,071 (231,537) 57,152
Net cash and cash equivalents received from (paid for) sale of banking offices 16,300 (193,058) (12,154)
Other, net 24,167 14,160 18,391
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (249,189) (950,150) (343,491)
FINANCING ACTIVITIES
Net change in consumer certificates under $100,000 (1,255,266) (726,907) (406,202)
Net change in time certificates $100,000 and over 33,637 (68,418) 74,010
Net change in other time deposits (9,623) (42,798) 190,437
Net change in foreign deposits (103,666) 333,552 42,717
Net change in other deposits 685,658 156,414 460,853
Net change in short-term borrowings (738,915) 259,830 23,670
Issuance of bank notes -- -- 25,000
Principal payments on bank notes (150,000) -- (100,000)
Issuance of long-term debt, including FHLB advances 2,336,500 980,175 2,607
Issuance of company-obligated mandatorily redeemable preferred securities -- 150,000 --
Principal payments on long-term debt, including FHLB advances (176,162) (16,195) (41,081)
Cash dividends paid (182,286) (160,347) (135,578)
Net proceeds from issuance of common stock from employee
incentive plans and pre-merger transactions of pooled companies 22,096 13,220 (22,089)
Purchase of treasury stock (101,000) (299,063) (175,036)
Redemption of preferred stock -- -- (12,684)
Other, net (133) 764 2,176
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 360,840 580,227 (71,200)
- - ------------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 468,390 29,966 125,706
Cash and Cash Equivalents at Beginning of Year 1,886,280 1,856,314 1,730,608
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,354,670 $ 1,886,280 $ 1,856,314
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
------
57
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 375,303 $ 246,822 $ 284,453
Other comprehensive income, before tax:
Holding gains (losses) on available-for-sale securities 36,517 21,186 (25,635)
Less: Reclassification adjustment on available-for-sale securities
gains included in net income above 15,435 7,640 274
- - ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) Before Tax 21,082 13,546 (25,909)
Income taxes related to other comprehensive income (loss) 7,379 4,741 (9,068)
- - ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Net of Tax 13,703 8,805 (16,841)
- - ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 389,006 $ 255,627 $ 267,612
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
------
58
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--ACCOUNTING POLICIES
Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") and its
subsidiaries follow generally accepted accounting principles and reporting
practices applicable to the banking industry. The significant accounting
policies are summarized below.
Basis of Presentation
Consolidation: The Consolidated Financial Statements include the accounts of
Mercantile Bancorporation Inc. and its subsidiaries. Material intercompany
transactions are eliminated.
Reclassification: Certain reclassifications have been made to the 1997 and
1996 historical financial statements to conform with the 1998 presentation.
New Accounting Standards
Financial Accounting Standard ("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. The Corporation's
Consolidated Statement of Comprehensive Income is presented on page 58.
FAS 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. 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. The new
disclosures are included in Note U to the Consolidated Financial Statements.
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 15, 1997. The new disclosures are included
in Note N to the Consolidated Financial Statements.
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 has not adopted FAS 133 yet and is currently evaluating FAS
133's effect on its financial position and results of operations, but it is not
expected to have a material impact.
Use of Estimates
Management of the Corporation has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the Consolidated Financial
Statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Investments in Debt and Equity Securities
Trading securities, which include any security held primarily for near-term
sale, are valued at fair value. Gains and losses on trading securities, both
realized and unrealized, are recorded in investment banking and brokerage
income.
Available-for-sale securities, which include any security for which the
Corporation has no immediate plan to sell but which may be sold in the future,
are valued at fair value. Realized gains and losses, based on the amortized cost
of the specific security, are included in other income as securities gains
(losses). Unrealized gains and losses are recorded, net of related income tax
effects, in retained earnings.
Held-to-maturity securities, which include any security for which the
Corporation has the positive intent and ability to hold until maturity, are
valued at historical cost adjusted for amortization of premiums and accretion of
discounts computed by the level-yield method. Unrealized losses on held-to-
maturity and available-for-sale securities are recognized in the Consolidated
Statement of Income only if market valuation differences are deemed to be other
than temporary impairments in value.
Loans Held-for-Sale
In its lending activities, the Corporation originates residential mortgage loans
and student loans intended for sale in the secondary market. Loans held-for-sale
are carried at the lower of cost or fair value, which is determined on an
aggregate basis. Gains or losses on the sale of loans held-for-sale are
determined on a specific identification method.
------
59
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Loans and Leases
Interest income on loans is generally accrued on a simple interest basis. Loan
fees and direct costs of loan originations are deferred and amortized over the
estimated life of the loans under methods approximating the interest method.
The finance method is used to account for direct and leveraged equipment lease
contracts. Income is recorded over the lease periods in proportion to the
unrecovered investment in the leases after consideration of investment tax
credits and other related income tax effects.
When, in management's opinion, the collection of interest on a loan (exclusive
of certain consumer and credit card loans) is unlikely, or when either principal
or interest is past due over 90 days, that loan is generally placed on non-
accrual status. When a loan is placed on non-accrual status, accrued interest
for the current year is reversed and charged against current earnings, and
accrued interest from prior years is charged against the reserve for possible
loan losses. Interest payments received on non-accrual loans are applied to
principal if there is doubt as to the collectibility of such principal;
otherwise, these receipts are recorded as interest income. A loan remains on
non-accrual status until the loan is current as to payment of both principal and
interest, and/or the borrower demonstrates the ability to pay and remain
current.
All non-accrual and renegotiated commercial-related loans are considered
impaired. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price, or the fair value of the collateral, if the loan
is collateral dependent.
Reserve for Possible Loan Losses
The reserve for possible loan losses is increased by provisions charged to
expense and reduced by loans charged off, net of recoveries. The reserve is
maintained at a level considered adequate to provide for potential loan losses
based on management's evaluation of current economic conditions, changes in the
character and size of the portfolio, past experience, expected future losses and
other pertinent factors. Mercantile charges off credit card loans after six
cycles of nonpayment, or within 15 days of receipt of personal bankruptcy
notice, if earlier.
Foreclosed Assets
Foreclosed assets include real estate and other assets acquired through
foreclosure or other proceedings and are included in other assets in the
Consolidated Balance Sheet.
Foreclosed assets are valued at the lower of cost or fair value less estimated
costs to sell. Losses arising at the time of transfer from loans are charged to
the reserve for possible loan losses. Subsequent reductions in valuation based
upon periodic appraisals are charged against current earnings.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Provisions for depreciation are computed principally by the straight-line method
and are based on estimated useful lives of the assets. The carrying values of
assets sold or retired and the related accumulated depreciation are eliminated
from the accounts, and the resulting gains or losses are reflected in net
income.
Expenditures for maintenance and repairs are expensed, while expenditures for
major renewals are capitalized.
Intangible Assets
Intangible assets consist primarily of goodwill and mortgage servicing rights.
Goodwill, the excess of cost over the net assets acquired in business
combinations accounted for as purchases, is amortized using the straight-line
method over the estimated period to be benefited, most recently 15 years, but
not exceeding 40 years.
Mortgage servicing rights represent recorded value associated with the
contractual right to service loans in return for a fee. These assets may be
purchased and recorded at fair value or result from the sale of loans, where
servicing is retained and recorded at an allocated carrying amount based on the
relative fair value of the assets sold. This intangible is amortized using the
level-yield method over the estimated lives of the related loans. The carrying
value of mortgage servicing rights is subject to periodic adjustment based upon
changing market conditions.
Income Taxes
Deferred income taxes, computed using the liability method, are provided on
temporary differences between the financial reporting basis and the tax basis of
the assets and liabilities of the Corporation.
Treasury Stock
The purchase of the Corporation's common stock is recorded at cost. Upon
subsequent reissuance, the treasury stock account is reduced by the average cost
basis of such stock.
Cash Equivalents
Cash and due from banks, due from banks--interest bearing, and federal funds
sold and repurchase agreements are considered cash equivalents for purposes of
the Consolidated Statement of Cash Flows.
------
60
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Financial Instruments
Financial instruments include cash, evidence of an ownership interest in an
entity or a contract that both a) imposes on the Corporation a contractual
obligation, 1) to deliver a financial instrument to another party or 2) to
exchange other financial instruments on potentially unfavorable terms with
another party; and b) conveys to another party a contractual right, 1) to
receive a financial instrument from the Corporation or 2) to exchange other
financial instruments on potentially favorable terms with the Corporation.
Derivative Financial Instruments
The Corporation is a party to certain financial instruments, primarily to
stabilize interest rate margins and to hedge against interest rate movements. An
instrument designated as a hedge of an asset or liability carried at cost is
accounted for on an accrual basis, in which the interest income or interest
expense of the related asset or liability is adjusted for the net amount of any
interest receivable or payable generated by the hedging instrument. There is no
market valuation on these interest rate contracts. If the underlying assets or
liabilities hedged are no longer recorded on the Consolidated Balance Sheet
(e.g., due to sale), the remaining gain or loss related to the interest rate
contract is recognized through earnings immediately.
In the normal course of business, the Corporation does not maintain trading
positions in interest rate derivative financial instruments. The Corporation's
non-hedging transactions are entered into on behalf of customers and are
simultaneously hedged by the Corporation. As a consequence, these transactions
do not represent exposure to market risk. The Corporation manages the potential
credit exposure through established credit approvals, risk control limits and
other monitoring procedures. These contracts are recorded at their fair value
with gains or losses included in the Consolidated Statement of Income.
Mercantile has entered into foreign exchange forward contracts, primarily to
facilitate customers' foreign exchange requirements. The Corporation maintains a
generally matched position; therefore, exchange rate and market risks are
minimal. Credit risk to the Corporation could result from non-performance by a
counterparty to a contract. Credit risk is managed as indicated in the previous
paragraph. Unrealized gains and losses on these foreign exchange forward
contracts are reflected in the Consolidated Statement of Income.
NOTE B--EARNINGS PER SHARE
Basic earnings per share data is calculated by dividing net income, after
deducting dividends on preferred stock, by the weighted average number of common
shares outstanding during the period.
Diluted earnings per share gives effect to both the increase in the average
shares outstanding that would have resulted from both the exercise of dilutive
stock options and the conversion of the entire balance of outstanding
convertible notes. Net income attributable to common shareholders' equity in the
diluted earnings per share computation is increased by interest expense that
would not be incurred on notes if they converted, net of taxes. The components
of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
(Thousands except
per share data) 1998 1997 1996
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
Net income $ 375,303 $ 246,822 $ 284,453
Preferred stock
dividends -- -- (408)
- - ----------------------------------------------------------------------
Net Income
Attributable
to Common
Shareholders' Equity $ 375,303 $ 246,822 $ 284,045
- - ----------------------------------------------------------------------
Weighted average
common shares
outstanding 153,462,295 140,009,105 133,925,697
- - ----------------------------------------------------------------------
Basic Earnings
per Share $ 2.45 $ 1.76 $ 2.12
- - ----------------------------------------------------------------------
DILUTED
Net income
attributable
to common
shareholders' equity $ 375,303 $ 246,822 $ 284,045
Interest on convertible
notes, net of taxes 43 83 120
- - ----------------------------------------------------------------------
Diluted Net Income $ 375,346 $ 246,905 $ 284,165
- - ----------------------------------------------------------------------
Weighted average
common shares
outstanding 153,462,295 140,009,105 133,925,697
Employee
incentive plans 2,370,290 2,493,277 1,775,913
Convertible notes 88,613 136,605 294,419
- - ----------------------------------------------------------------------
Diluted Weighted
Average Common
Shares Outstanding 155,921,198 142,638,987 135,996,029
- - ----------------------------------------------------------------------
Diluted Earnings
per Share $ 2.41 $ 1.73 $ 2.09
- - ----------------------------------------------------------------------
</TABLE>
------
61
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE C--ACQUISITIONS
Listed below are the acquisitions completed by Mercantile during the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Original Consideration
Intangible -------------------------- Accounting
(Dollars in thousands) Date Assets Asset Cash Gross Shares Method
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACQUISITIONS COMPLETED
Bruno Stolze & Company, Inc. Sept. 30, 1998 /1/ $ -- /1/ /1/ Purchase
First Financial Bancorporation Sept. 28, 1998 $ 558,483 -- $ 12 3,138,823 Pooling/2/
Financial Services Corporation of the
Midwest Aug. 3, 1998 514,051 -- 4 2,071,448 Pooling/2/
CBT Corporation ("CBT") July 1, 1988 1,006,384 -- 34 5,123,214 Pooling
Firstbank of Illinois Co.
("Firstbank") July 1, 1998 2,285,146 -- 64 13,352,641 Pooling
HomeCorp, Inc. Mar. 2, 1998 335,137 -- 14 854,760 Pooling/2/
Horizon Bancorp, Inc. Feb. 2, 1998 536,507 -- 2 2,549,970 Pooling/2/
Roosevelt Financial
Group, Inc. ("Roosevelt") July 1, 1997 7,251,985 608,076 374,477 18,948,884 Purchase
Mark Twain Bancshares, Inc.
("Mark Twain") April 25, 1997 3,227,972 -- 73 24,088,713 Pooling
Regional Bancshares, Inc. March 5, 1997 171,979 16,217 12,300 900,625 Purchase
Today's Bancorp, Inc. Nov. 7, 1996 501,418 46,854 34,912 1,690,587 Purchase
First Financial
Corporation of America Nov. 1, 1996 87,649 5,137 3,253 388,113 Purchase
Peoples State Bank Aug. 22, 1996 95,657 7,552 -- 488,756 Purchase
Metro Savings Bank, F.S.B. March 7, 1996 80,857 3,016 5 296,853 Purchase
Security Bank of Conway,
F.S.B. Feb. 9, 1996 102,502 6,000 1 482,946 Purchase
Hawkeye Bancorporation Jan. 2, 1996 1,978,540 -- 80 11,838,294 Pooling
First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 -- 1 782,126 Pooling/2/
- - ------------------------------------------------------------------------------------------------------------------------------------
/1/ Terms of the transaction not disclosed.
/2/ The historical financial statements of the Corporation were not restated for
the acquisition due to the immateriality of the acquiree's financial condition
and results of operations to those of Mercantile.
</TABLE>
The Firstbank and CBT acquisitions were accounted for as poolings-of-
interests. Net income, net interest income and basic earnings per share in 1998
for the Corporation, CBT and Firstbank prior to this restatement were as
follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30
-------------
(Thousands except per share data) 1998
- - --------------------------------------------------
<S> <C>
Corporation
Net income $198,902
Net interest income 482,912
Basic earnings per share 1.50
CBT
Net income 7,151
Net interest income 21,038
Basic earnings per share 1.40
Firstbank
Net income 15,953
Net interest income 44,073
Basic earnings per share 1.21
- - --------------------------------------------------
</TABLE>
During 1998, the Corporation recorded adjustments related to the acquisitions
of Bruno Stolze & Company, Inc., First Financial Bancorporation, Financial
Services Corporation of the Midwest, CBT, Firstbank, HomeCorp, Inc. and Horizon
Bancorp, Inc. These adjustments consisted of $19,600,000 in provision for loan
losses, $1,649,000 in realized losses on securities sold in portfolio
restructurings, $89,192,000 of other expense and a related tax benefit of
$15,028,000. Of the $89,192,000 merger-related liability established,
$48,960,000 had been used by December 31, 1998 and $40,232,000 remains to absorb
future payments.
As a result of the acquisition by Mercantile, Firstbank's two Missouri banks
were sold in September 1998 due to state restrictions on deposit concentration.
An after-tax gain of $29,421,000 was recorded in connection with these
divestitures.
Firstbank acquired BankCentral Corporation and its wholly-owned subsidiary,
Central National Bank of Mattoon on June 10, 1997. The acquisition involved an
exchange of cash and Firstbank common stock totaling approximately $13,000,000,
and was recorded using the purchase method of accounting.
------
62
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The Roosevelt acquisition was accounted for as a purchase. The following
unaudited pro forma combined consolidated financial data gives effect to the
July 1, 1997 acquisition of Roosevelt as if it had been consummated on January
1, 1996. The unaudited pro forma combined consolidated financial data provided
includes the impact of goodwill amortization and the reduction in net interest
income due to: 1) interest lost on cash paid for share repurchases or paid
directly to Roosevelt shareholders as consideration; and 2) interest on
$650,000,000 of senior debt, subordinated debt and redeemable preferred
securities issued in 1997 largely to finance the Roosevelt acquisition, offset
by interest earned on funds not utilized in the acquisition. There is no
estimate of potential cost savings included in the following table:
<TABLE>
<CAPTION>
As of or for the
Year Ended December 31
-----------------------
(Thousands except per share data) 1997 1996
- - ------------------------------------------------------------
<S> <C> <C>
Total assets N/A $33,025,746
Net interest income $1,125,021 1,080,885
Other income 401,619 332,043
Net income 216,564 224,351
Basic earnings per share 1.48 1.53
- - ------------------------------------------------------------
</TABLE>
The Mark Twain acquisition was accounted for as a pooling-of-interests. Net
income, net interest income and basic earnings per share for the Corporation and
Mark Twain in 1997 prior to this restatement were as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------
(Thousands except per share data) 1997
- - -------------------------------------------------
<S> <C>
Corporation
Net income $ 60,336
Net interest income 179,515
Basic earnings per share .67
Mark Twain
Net income 14,659
Net interest income 32,446
Basic earnings per share .85
- - -------------------------------------------------
</TABLE>
During 1997, Mercantile recorded adjustments related to the acquisitions of
Roosevelt, Mark Twain and Regional Bancshares, Inc. The adjustments consisted of
$20,340,000 in provision for loan losses, $121,393,000 other expense, reduced by
a related tax benefit of $41,856,000, for a net income reduction of $99,877,000.
Of the $121,393,000 merger-related liability established, $117,491,000 had been
utilized at December 31, 1998.
During 1996, adjustments were recorded by the Corporation related to companies
acquired that year. These adjustments consisted of a $13,666,000 increase in
provision for loan losses, $3,114,000 in losses on securities sold in portfolio
restructurings, a $51,071,000 charge to other expense and a related tax benefit
of $19,362,000, resulting in an after-tax reduction to net income of
$48,489,000. These accruals have been substantially exhausted.
For all acquisitions accounted for as purchases, the unamortized excess of
cost over the fair value of assets acquired was $723,186,000, $777,693,000 and
$171,539,000 at December 31, 1998, 1997 and 1996, respectively.
NOTE D--CASH FLOWS
The Corporation paid interest on deposits, short-term borrowings, bank notes
and long-term debt of $1,320,709,000, $1,033,434,000 and $834,516,000 in 1998,
1997 and 1996, respectively. The Corporation paid Federal income taxes of
$114,926,000, $159,797,000 and $162,068,000 in 1998, 1997 and 1996,
respectively.
The following details cash and cash equivalents from acquisitions accounted
for as purchases or poolings without restatement, net of cash paid:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of
assets purchased $(1,943,257) $(8,065,744) $(1,260,315)
Fair value of
liabilities assumed 1,780,406 7,044,026 1,090,663
Issuance of common stock 159,319 676,433 136,124
- - ------------------------------------------------------------------------
Net Cash Paid
for Acquisitions (3,532) (345,285) (33,528)
Cash and cash
equivalents acquired 127,603 113,748 90,680
- - ------------------------------------------------------------------------
Net Cash and Cash
Equivalents Received from
(Paid for) Acquisitions $ 124,071 $ (231,537) $ 57,152
- - ------------------------------------------------------------------------
</TABLE>
NOTE E--CASH AND DUE FROM BANKS RESTRICTIONS
The Corporation's subsidiary banks are required to maintain average reserve
balances that place withdrawal and/or usage restrictions on cash and due from
banks balances. The average amount of these restricted balances for the year
ended December 31, 1998 was $205,533,000.
------
63
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE F--INVESTMENTS IN DEBT AND EQUITY SECURITIES
Available-for-Sale
The amortized cost, estimated fair values, and unrealized gains and losses of
available-for-sale securities were as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government $6,271,816 $50,590 $ 5,385 $6,317,021
State and political subdivisions:
Tax-exempt 405,109 12,991 21 418,079
Taxable 24,711 211 -- 24,922
- - ------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 429,820 13,202 21 443,001
Privately issued collateralized mortgage obligations 864,584 5,949 4,030 866,503
Other 1,619,550 10,345 9,630 1,620,265
- - ------------------------------------------------------------------------------------------------------
Total $9,185,770 $80,086 $19,066 $9,246,790
- - ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
U.S. Government $4,998,860 $33,373 $ 7,697 $5,024,536
State and political subdivisions:
Tax-exempt 359,834 8,214 243 367,805
Taxable 61,817 279 82 62,014
- - ------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 421,651 8,493 325 429,819
Privately issued collateralized mortgage obligations 1,727,572 8,698 8,182 1,728,088
Other 875,074 3,372 1,823 876,623
- - ------------------------------------------------------------------------------------------------------
Total $8,023,157 $53,936 $18,027 $8,059,066
- - ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
U.S. Government $4,042,304 $21,839 $17,432 $4,046,711
State and political subdivisions:
Tax-exempt 403,803 8,555 936 411,422
Taxable 112,158 490 469 112,179
- - ------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 515,961 9,045 1,405 523,601
Privately issued collateralized mortgage obligations 20,316 316 172 20,460
Other 152,424 144 1,663 150,905
- - ------------------------------------------------------------------------------------------------------
Total $4,731,005 $31,344 $20,672 $4,741,677
- - ------------------------------------------------------------------------------------------------------
</TABLE>
------
64
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Held-to-Maturity
The amortized cost, estimated fair values, and unrealized gains and losses of
held-to-maturity securities were as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government $ 95,754 $ 3,477 $1,707 $ 97,524
Other 1,853 -- 41 1,812
- - -----------------------------------------------------------------------------------------
Total $ 97,607 $ 3,477 $1,748 $ 99,336
- - -----------------------------------------------------------------------------------------
DECEMBER 31, 1997
U.S. Government $247,705 $ 6,625 $3,938 $250,392
State and political subdivisions:
Tax-exempt 80,330 3,825 8 84,147
Taxable 3,822 132 -- 3,954
- - -----------------------------------------------------------------------------------------
Total State and Political Subdivisions 84,152 3,957 8 88,101
Other 3,422 158 119 3,461
- - -----------------------------------------------------------------------------------------
Total $335,279 $10,740 $4,065 $341,954
- - -----------------------------------------------------------------------------------------
DECEMBER 31, 1996
U.S. Government $558,911 $ 9,784 $7,750 $560,945
State and political subdivisions:
Tax-exempt 88,287 3,294 525 91,056
Taxable 4,304 66 3 4,367
- - -----------------------------------------------------------------------------------------
Total State and Political Subdivisions 92,591 3,360 528 95,423
Other 5,219 220 175 5,264
- - -----------------------------------------------------------------------------------------
Total $656,721 $13,364 $8,453 $661,632
- - -----------------------------------------------------------------------------------------
</TABLE>
In conjunction with the acquisition of Roosevelt, the Corporation acquired
privately issued adjustable-rate mortgage-backed securities that have incurred
an impairment in value which is considered other than temporary. The loan pools
backing these securities have been affected by high delinquency and foreclosure
rates, and higher than anticipated losses on foreclosed property sales. The net
book value of these mortgage-backed securities was $62,056,000 as of December
31, 1998.
During the third quarter of 1996, the Corporation transferred securities from
the available-for-sale classification to the held-to-maturity classification.
The securities transferred had an amortized cost basis of $370,014,000 and an
estimated fair value of $373,557,000 on the transfer date. The unrealized gain
on the date of the transfer remained in shareholders' equity and is being
amortized over the remaining life of the transferred securities. The unamortized
balance as of December 31, 1998 was $1,007,000.
Securities with a carrying value of $5,656,506,000 at December 31, 1998,
$3,918,545,000 at December 31, 1997 and $3,348,145,000 at December 31, 1996 were
pledged to secure public and trust deposits, securities sold under agreements to
repurchase and for other purposes required by law.
The following table presents proceeds from sales of securities and the
components of net securities gains. There were no transfers of securities from
the held-to-maturity category to available-for-sale during 1996, 1997 and 1998.
Held-to-maturity securities gains and losses resulted from portfolio
restructurings in connection with subsidiary bank acquisitions or calls by the
security issuer prior to maturity.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
(Thousands) 1998 1997 1996
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales of
available-for-sale securities $2,040,541 $802,007 $506,636
- - ----------------------------------------------------------------------
Securities gains on:
Available-for-sale securities $ 19,390 $ 8,225 $ 4,295
Held-to-maturity securities -- 9 18
- - ----------------------------------------------------------------------
Total Securities Gains 19,390 8,234 4,313
Securities losses on:
Available-for-sale securities 3,955 585 4,021
Held-to-maturity securities -- -- --
- - ----------------------------------------------------------------------
Total Securities Losses 3,955 585 4,021
- - ----------------------------------------------------------------------
Net Securities Gains
Before Income Taxes 15,435 7,649 292
Applicable income taxes (5,402) (2,677) (102)
- - ----------------------------------------------------------------------
Net Securities Gains $ 10,033 $ 4,972 $ 190
- - ----------------------------------------------------------------------
</TABLE>
------
65
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE G--LOANS AND LEASES
Loans and leases consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------
(Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 6,099,692 $ 4,990,505 $ 4,591,604
Real estate--commercial 3,798,032 3,569,922 3,255,590
Real estate--construction 922,915 734,722 643,345
Real estate--residential
mortgage 8,153,824 8,702,879 4,787,012
Real estate--home equity
credit loans 526,097 588,228 439,806
Consumer 2,765,556 2,492,150 2,306,184
Credit card 45,142 283,549 913,713
- - -------------------------------------------------------------------------------------------------------------
Total Loans and Leases $22,311,258 $21,361,955 $16,937,254
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in the reserve for possible loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
(Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 284,165 $ 257,718 $ 261,339
Provision 51,154 86,355 78,766
Charge-offs (64,866) (109,259) (114,127)
Recoveries 22,782 28,189 21,934
- - -------------------------------------------------------------------------------------------------------------
Net Charge-offs (42,084) (81,070) (92,193)
Acquired reserves 15,655 21,162 9,806
- - -------------------------------------------------------------------------------------------------------------
Ending Balance $ 308,890 $ 284,165 $ 257,718
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
Non-performing loans consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------------------------
(Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual $ 132,713 $ 113,134 $ 81,037
Renegotiated 5,950 4,335 5,413
- - -------------------------------------------------------------------------------------------------------------
Non-performing Loans $ 138,663 $ 117,469 $ 86,450
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
By the Corporation's definition, all non-accrual and renegotiated commercial-
related loans are considered impaired. The following table presents information
on impaired loans:
<TABLE>
<CAPTION>
As of or for the Year Ended December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Ending impaired loans $47,598 $65,188 $53,294
Related reserve for possible
loan losses 6,487 13,890 11,284
Average impaired loans 61,622 66,785 59,532
Interest income recognized
on impaired loans 332 374 748
- - -----------------------------------------------------------------------------
</TABLE>
Certain directors and executive officers of the Corporation were loan
customers of the Corporation's banks during 1998, 1997 and 1996. Such loans were
made in the ordinary course of business at normal terms, including interest rate
and collateralization, and did not represent more than a normal risk. Loans to
those persons, their immediate families and companies in which they were
principal owners were $55,539,000, $15,255,000 and $26,570,000, at December 31,
1998, 1997 and 1996, respectively. During 1998, $56,641,000 of new loans were
made to these persons, and repayments totaled $16,357,000.
NOTE H--BANK PREMISES AND EQUIPMENT
Bank premises and equipment were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------
(Thousands) 1998 1997 1996
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Land $ 81,830 $ 82,154 $ 70,021
Bank premises 466,540 460,408 392,250
Leasehold improvements 48,864 45,343 50,519
Furniture and equipment 504,748 462,179 366,444
- - ---------------------------------------------------------------
Total Cost 1,101,982 1,050,084 879,234
Accumulated depreciation (556,423) (518,434) (450,262)
- - ---------------------------------------------------------------
Net Carrying Value $ 545,559 $ 531,650 $ 428,972
- - ---------------------------------------------------------------
</TABLE>
At December 31, 1998, the Corporation had certain long-term leases, none of
which were considered to be capital leases, which were principally related to
the use of land, buildings and equipment. The following table summarizes the
future minimum rental commitments for noncancelable operating leases which had
initial or remaining noncancelable lease terms in excess of one year:
<TABLE>
<CAPTION>
Minimum
Rental
Period (Thousands)
- - -----------------------------
<S> <C>
1999 $18,374
2000 15,884
2001 11,928
2002 8,840
2003 6,403
2004 and later 19,160
- - -----------------------------
Total $80,589
- - -----------------------------
</TABLE>
Net rental expense for all operating leases was $19,031,000 in 1998,
$19,706,000 in 1997 and $15,232,000 in 1996.
------
66
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE I--DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------
(Thousands) 1998 1997 1996
- - --------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing $ 4,453,048 $ 3,956,138 $ 3,389,776
Interest bearing demand 3,281,788 3,086,259 2,800,964
Money market accounts 4,151,540 3,811,081 3,152,825
Savings 1,766,918 1,559,441 1,323,775
Consumer time certificates
under $100,000 9,186,531 9,850,437 7,136,532
Other time 189,122 191,199 233,997
- - --------------------------------------------------------------------
Total Core Deposits 23,028,947 22,454,555 18,037,869
Time certificates $100,000
and over 1,950,677 1,769,461 1,495,089
Foreign 481,773 585,439 251,887
- - --------------------------------------------------------------------
Total Purchased
Deposits 2,432,450 2,354,900 1,746,976
- - --------------------------------------------------------------------
Total Deposits $25,461,397 $24,809,455 $19,784,845
- - --------------------------------------------------------------------
</TABLE>
The scheduled maturities of Mercantile's consumer time certificates under
$100,000, time certificates $100,000 and over and other time deposits were as
follows:
<TABLE>
<CAPTION>
Scheduled
Maturity
Amount
Period (Thousands)
- - ------------------------------
<S> <C>
1999 $ 7,929,081
2000 2,021,757
2001 621,143
2002 350,619
2003 302,714
2004 and later 101,016
- - ------------------------------
Total $11,326,330
- - ------------------------------
</TABLE>
NOTE J--SHORT-TERM BORROWINGS
Short-term borrowings were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------
(Thousands) 1998 1997 1996
- - -----------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and
repurchase agreements $2,087,373 $2,127,443 $1,861,994
Short-term Federal Home
Loan Bank ("FHLB")
advances 667,672 1,412,701 123,094
Treasury tax and loan notes 222,044 104,535 118,886
Commercial paper 3,025 1,510 19,405
Other short-term borrowings 22,546 32,351 9,295
- - -----------------------------------------------------------------
Total Short-term
Borrowings $3,002,660 $3,678,540 $2,132,674
- - -----------------------------------------------------------------
</TABLE>
The average balance of total short-term borrowings was $3,294,078,000,
$2,929,826,000 and $1,671,352,000 during 1998, 1997 and 1996, respectively. The
average rate on total short-term borrowings was 5.29% in 1998, 5.43% in 1997 and
5.37% in 1996.
The maximum balances at month-end are listed below:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- - -----------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and
repurchase agreements $2,370,228 $2,579,789 $1,886,127
Short-term FHLB advances 1,472,114 1,412,701 130,239
Treasury tax and loan notes 402,733 260,822 439,181
Commercial paper 5,010 24,800 21,660
Other short-term borrowings 79,366 102,833 45,142
- - -----------------------------------------------------------------
</TABLE>
The Corporation had unused lines of credit arrangements with unaffiliated
banks for support of commercial paper and for other uses totaling $100,000,000
at December 31, 1998.
NOTE K--LONG-TERM DEBT AND BANK NOTES
Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------
(Thousands) 1998 1997 1996
- - ---------------------------------------------------------------
<S> <C> <C> <C>
MERCANTILE
BANCORPORATION INC.
(PARENT COMPANY ONLY)
7.300% subordinated notes,
due 2007 $ 200,000 $ 200,000 $ --
6.800% senior notes,
due 2001 150,000 150,000 --
7.050% senior notes,
due 2004 150,000 150,000 --
7.625% subordinated notes,
due 2002 150,000 150,000 150,000
7.000% convertible
subordinated notes,
due 1999 859 1,153 --
- - ---------------------------------------------------------------
Subtotal 650,859 651,153 150,000
SECOND-TIER HOLDING
COMPANIES 3,641 -- 2,036
BANKS AND OTHER
SUBSIDIARIES
6.375% subordinated notes,
due 2004 75,000 75,000 75,000
9.000% mortgage-backed
notes, due 1999 53,450 53,450 53,450
Other 48 10,084 10,104
- - ---------------------------------------------------------------
Subtotal 128,498 138,534 138,554
- - ---------------------------------------------------------------
Total Long-term Debt
Before FHLB Advances 782,998 789,687 290,590
FHLB advances 2,790,336 578,484 37,085
- - ---------------------------------------------------------------
Total Long-term Debt $3,573,334 $1,368,171 $327,675
- - ---------------------------------------------------------------
</TABLE>
------
67
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
In June 1997, the Corporation issued $200,000,000 of subordinated notes with a
10-year maturity and a coupon rate of 7.300%, $150,000,000 of senior notes with
a four-year maturity and a coupon rate of 6.800%, and $150,000,000 of senior
notes with a seven-year maturity and a coupon rate of 7.050%. The subordinated
and senior debt was primarily issued to assist in the financing of the Roosevelt
acquisition. For regulatory purposes the subordinated notes qualify as Tier II
capital.
In June 1987, Mark Twain issued 7.000% convertible subordinated capital notes
which are due in 1999. These convertible notes were transferred to Mercantile
Bancorporation Inc. (Parent Company Only) during 1997. The balance of the
convertible notes was $2,036,000 at December 31, 1996. The notes are convertible
into common stock at a conversion price equivalent to $11.127 per Mercantile
share.
Included in other long-term debt in 1997 and 1996 was a $10,000,000 term note
to Fidelity Credit Corporation, a subsidiary of CBT. This term note was paid off
and refinanced with loans from Mercantile subsidiary banks in the third quarter
of 1998.
FHLB advances at December 31, 1998 consisted of various debt instruments with
rates varying from 4.850% to 6.850%. This debt was collateralized by certain
loans and securities.
During 1996, Roosevelt defeased mortgage-backed bonds totaling $19,700,000 by
delivering treasury securities to the bond trustee for the periodic payment of
interest and the ultimate payment of the bonds to the bondholders on the
maturity date of April 15, 2018. Mercantile exercised the bonds' call provision
during the second quarter of 1998.
A summary of annual principal reductions of long-term debt is presented below:
<TABLE>
<CAPTION>
(Thousands)
Period FHLB Advances Other Total
- - -----------------------------------------------------
<S> <C> <C> <C>
1999 $1,410,716 $ 55,068 $1,465,784
2000 98,120 653 98,773
2001 12,075 152,277 164,352
2002 124,604 150,000 274,604
2003 355,650 -- 355,650
2004 and later 789,171 425,000 1,214,171
- - -----------------------------------------------------
Total $2,790,336 $782,998 $3,573,334
- - -----------------------------------------------------
</TABLE>
Bank Notes
Beginning in 1994, certain subsidiary banks could offer unsecured bank notes. In
1998, the bank note program was restructured. Note maturities can range from
seven days to 30 years from the date of issue and may be issued with fixed or
floating interest rates. Each bank note issued will be an obligation solely of
that issuing bank and will not be an obligation of, or otherwise guaranteed by,
the other issuing banks or the Corporation. The bank notes issued under this
program may be senior bank notes or subordinated bank notes. The bank notes are
being offered and sold only to institutional investors, and are not insured by
the Federal Deposit Insurance Corporation or any other governmental agency.
Bank notes as presented below were issued under the 1994 program:
<TABLE>
<CAPTION>
December 31
---------------------------
(Thousands) 1998 1997 1996
- - --------------------------------------------------------
<S> <C> <C> <C>
MERCANTILE BANK N.A.
5.462% floating-rate bank
notes, due 1999 $25,000 $ 25,000 $ 25,000
6.056% floating-rate bank
notes, due 1998 -- 150,000 150,000
- - --------------------------------------------------------
Total Bank Notes $25,000 $175,000 $175,000
- - --------------------------------------------------------
</TABLE>
NOTE L -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
MERCANTILE CAPITAL TRUST I
In January 1997, the Corporation formed Mercantile Capital Trust I. Through this
trust, the Corporation obtained $150,000,000 of floating-rate debt maturing in
2027 that, for regulatory purposes, is part of Tier I capital. Mercantile
Capital Trust I is a subsidiary of which the Corporation owns all the
outstanding common securities; its sole assets are the $150,000,000 in
mandatorily redeemable preferred securities, and considered together, the back-
up undertakings constitute a full and unconditional guarantee by Mercantile
Bancorporation Inc. of the trust's obligations under the preferred securities.
------
68
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE M -- INCOME TAXES
The Corporation's results include income tax expense as follows:
<TABLE>
<CAPTION>
(Thousands) Current Deferred Total
- - ---------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1998
U.S. Federal $179,319 $ (11,342) $167,977
State and local 25,369 (382) 24,987
- - ---------------------------------------------------
Total $204,688 $ (11,724) $192,964
- - ---------------------------------------------------
YEAR ENDED
DECEMBER 31, 1997
U.S. Federal $141,435 $ (9,593) $131,842
State and local 10,936 (402) 10,534
- - ---------------------------------------------------
Total $152,371 $ (9,995) $142,376
- - ---------------------------------------------------
YEAR ENDED
DECEMBER 31, 1996
U.S. Federal $155,218 $ 22,306) $132,912
State and local 16,667 (1,012) 15,655
- - ---------------------------------------------------
Total $171,885 $(23,318) $148,567
- - ---------------------------------------------------
</TABLE>
The tax effects of temporary differences that gave rise to the deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
December 31
---------------------------------
(Thousands) 1998 1997 1996
- - -----------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Reserve for possible
loan losses $ 99,130 $ 91,027 $ 82,964
Foreclosed property 140 839 1,448
Deferred compensation 9,451 5,290 5,869
Expenses not currently
allowable for tax purposes 58,353 20,977 23,386
State tax liabilities -- -- 1,595
Retirement expenses in
excess of tax deduction 12,478 9,324 5,130
Other 5,215 13,775 7,780
- - -----------------------------------------------------------------
Total Gross Deferred
Tax Assets 184,767 141,232 128,172
DEFERRED TAX LIABILITIES
Leasing (20,915) (26,938) (29,956)
Intangible assets -- -- (5,637)
Depreciation (7,769) (6,000) (6,698)
Investments in debt and
equity securities -- FAS 115 (19,595) (13,583) (3,413)
FHLB stock dividends (11,073) (9,672) --
Other (21,582) (10,330) (12,132)
- - -----------------------------------------------------------------
Total Gross Deferred
Tax Liabilities (80,934) (66,523) (57,836)
- - -----------------------------------------------------------------
Net Deferred Tax Assets $103,833 $ 74,709 $ 70,336
- - -----------------------------------------------------------------
</TABLE>
Certain events covered by IRC Section 593(e), which was not repealed, will
trigger a recapture of the base year reserve of acquired thrift institutions.
The base year reserve of acquired thrift institutions would be recaptured if an
entity ceases to qualify as a bank for federal income tax purposes. The base
year reserves of thrift institutions also remain subject to income tax penalty
provisions that, in general, require recapture upon certain stock redemptions
of, and excess distributions to, stockholders. At December 31, 1998, retained
earnings included approximately $101.8 million of base year reserves for which
no deferred federal income tax liability has been recognized.
Income tax expense as reported differs from the amounts computed by applying
the statutory U.S. Federal income tax rate to pre-tax income as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $198,893 $136,219 $151,557
Increase (reduction) in
income taxes resulting
from:
Tax-exempt income (10,078) (10,839) (11,833)
State and local income
taxes, net of federal
income tax benefit 16,242 6,847 10,176
Amortization of goodwill 19,311 12,216 403
Liquidation of affiliate (25,000) -- --
Other, net (6,404) (2,067) (1,736)
- - ------------------------------------------------------------
Total Tax Expense $192,964 $142,376 $148,567
- - ------------------------------------------------------------
</TABLE>
NOTE N -- RETIREMENT PLANS
Pension Plans
The Corporation maintains both qualified and nonqualified noncontributory
pension plans that cover all employees meeting certain age and service
requirements.
For the qualified plan, the Corporation's funding policy is to contribute
annually at least the minimum amount required by government funding standards
but not more than is tax deductible. No contribution was required during 1998,
1997 or 1996. The nonqualified plans provide pension benefits that would have
been provided under the qualified plan in the absence of limits placed on
qualified plan benefits by the Internal Revenue Service. The Corporation's
funding policy is to fund benefits as they are paid.
------
69
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Effective in 1998, Mercantile changed the type of formula used to determine
pension benefits for its qualified and nonqualified plans. Pension benefits
under this formula are calculated based upon compensation and age.This change is
first reflected in 1998 net periodic benefit cost. In 1997 and 1996, the
qualified and nonqualified plans provided pension benefits based on the
employee's length of service and the five highest consecutive years of
compensation.
The Corporation generally begins covering employees of acquired corporations
in its pension and life insurance plans within a year following the acquisition
date. The effect of acquisitions that are accounted for as purchases or
poolings-of-interests without restatement is first reflected in net periodic
cost reported below for the year the employees first become covered in the
plans. Changes in benefit obligations and plan assets attributable to these
acquisitions are illustrated below.
The net periodic pension expense related to the qualified and nonqualified
plans included in the Consolidated Statement of Income is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 9,216 $ 12,169 $ 11,361
Interest cost 15,937 15,770 14,219
Expected return on assets (18,834) (16,817) (15,138)
Amortization of:
Transition obligation (asset) (159) (679) (584)
Prior service cost (1,180) (126) 22
Actuarial loss 268 100 379
- - ------------------------------------------------------------------------------------------------------------
FAS 87 cost 5,248 10,417 10,259
Curtailment charge -- 94 --
- - ------------------------------------------------------------------------------------------------------------
Total Net Periodic
Pension Cost $ 5,248 $ 10,511 $ 10,259
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted average assumptions used as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate in determining
benefit obligations 6.75% 7.25% 7.50%
Expected long-term rate
on plan assets 9.50 9.50 9.50
Rate of increase in
compensation levels 5.00 5.00 5.00
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
The table below sets forth the change in benefit obligation:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net benefit obligation at
beginning of year $232,266 $199,676 $178,677
Service cost 9,216 12,169 11,361
Interest cost 15,937 15,770 14,219
Plan amendments (11,213) (5,042) --
Actuarial loss 4,257 19,409 4,847
Acquisitions/divestitures 8,981 -- --
Gross benefits paid (10,455) (8,913) (9,428)
Curtailments -- (803) --
- - ------------------------------------------------------------------------------------------------------------
Net Benefit Obligation at
End of Year $248,989 $232,266 $199,676
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
The change in plan assets is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of plan assets at
beginning of year $218,155 $183,137 $170,446
Actual return on plan assets 25,526 35,100 17,476
Employer contributions 2,517 2,296 4,643
Acquisitions/divestitures 13,512 6,535 --
Gross benefits paid (10,455) (8,913) (9,428)
- - ------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at
End of Year $249,255 $218,155 $183,137
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of funded status is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status at end of year $ 266 $(14,111) $(16,539)
Unrecognized net
actuarial loss 1,426 7,389 13,484
Unamortized prior
service cost (14,136) (4,226) 53
Unrecognized net transition
obligation (asset) (1,230) (881) (703)
- - ------------------------------------------------------------------------------------------------------------
Net Amount Recognized at
End of Year $(13,674) $(11,829) $ (3,705)
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
The prepaid benefit cost on the Consolidated Balance Sheet was $7,235,000,
$4,906,000 and $11,528,000 at December 31, 1998, 1997 and 1996, respectively.
The accrued benefit cost on the Consolidated Balance Sheet was $20,909,000,
$16,735,000 and $11,528,000 at December 31, 1998, 1997 and 1996, respectively.
------
70
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The projected benefit obligation and accumulated benefit obligation for
pension plans with accumulated benefit obligations in excess of plan assets were
$29,662,000 and $27,941,000, respectively, as of December 31, 1998 and
$22,239,000 and $20,761,000, respectively, as of December 31, 1997. The plans
referred to in this paragraph have no assets.
Other Postretirement Benefits:
The Corporation provides other postretirement benefits, largely medical benefits
and life insurance, to its retirees. Medical benefit contributions are adjusted
annually; the life insurance is noncontributory.
The net periodic postretirement expense included in the Consolidated Statement
of Income is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(Thousands) 1998 1997 1996
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 832 $ 793 $ 820
Interest cost 2,719 2,790 2,748
Amortization of:
Transition obligation (asset) 1,581 1,581 1,581
Prior service cost 8 8 8
Actuarial loss 38 19 124
- - ----------------------------------------------------------------------------------
Total Net Periodic
Postretirement Cost $ 5,178 $ 5,191 $ 5,281
- - ----------------------------------------------------------------------------------
</TABLE>
Weighted average assumptions used as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate in determining 6.75% 7.25% 7.50%
benefit obligations
Health care cost trend:
First year 7.50 8.50 9.50
Ultimate (2001 and after) 5.50 5.50 5.50
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the change in benefit obligation:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net benefit obligation
at beginning of year $39,614 $38,210 $36,204
Service cost 832 793 820
Interest cost 2,719 2,790 2,748
Plan participants'
contributions 992 -- --
Actuarial loss 638 329 872
Gross benefits paid (3,515) (2,508) (2,434)
- - --------------------------------------------------------------------------------------------------------------------
Net Benefit Obligation
at End of Year $41,280 $39,614 $38,210
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of funded status is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
(Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status at end of year $(41,280) $(39,614) $(38,210)
Unrecognized net
actuarial loss 2,897 2,298 1,988
Unamortized
prior service cost 124 132 140
Unrecognized
transition obligation 22,146 23,727 25,308
- - --------------------------------------------------------------------------------------------------------------------
Net Amount Recognized
at End of Year $(16,113) $(13,457) $(10,774)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The sensitivity of reported figures for postretirement welfare benefits to
changes in the assumed health care cost trend are set forth below:
<TABLE>
<CAPTION>
1 Percentage Point
Change in Health Care Cost
---------------------------
(Thousands) Increase Decrease
- - -----------------------------------------------------------------
<S> <C> <C>
Effect on service and interest
cost components of net periodic cost $ 112 $ (99)
Effect on accumulated
postretirement benefit obligation 1,542 (1,365)
- - -----------------------------------------------------------------
</TABLE>
NOTE O--SHAREHOLDERS' EQUITY
Common Stock
At Mercantile's Annual Meeting on April 24, 1997, the Corporation's shareholders
approved an amendment to its Restated Articles of Incorporation that reduced the
par value of the Corporation's common stock from $5.00 per share to $.01 per
share. The authorized common stock of the Corporation consisted of 400,000,000
shares in 1998 and 200,000,000 shares in 1997 and 1996, of which 157,404,038,
148,712,307 and 134,174,597 shares were outstanding at December 31, 1998, 1997
and 1996, respectively.
The Corporation's Shareholder Investment Plan ("Plan") allows new shareholders
a means to make an initial investment in Mercantile common stock or for
shareholders of record to purchase additional shares. Under the Plan,
participants have the option of reinvesting dividends.
------
71
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Preferred Stock
The authorized preferred stock of the Corporation consists of 5,000,000 shares,
no par value, of which none were issued or outstanding at December 31, 1998,
1997 and 1996, although 2,000,000 shares were reserved for issuance pursuant to
the Preferred Share Purchase Rights Plan. The preferred stock, which is issuable
in series, shall have specific terms, preferences and other rights as determined
by the Board of Directors for each series.
Preferred Share Purchase Rights Plan
One preferred share purchase right ("MBI Right") is attached to each share of
common stock. The MBI Rights trade automatically with shares of common stock and
become exercisable and will trade separately from the common stock on the tenth
day after public announcement that a person or group has acquired, or has the
right to acquire, beneficial ownership of 20% or more of the outstanding shares
of common stock, or upon commencement or announcement of intent to make a tender
offer for 20% or more of the outstanding shares of common stock, in either case
without prior written consent of the Board. When exercisable, each MBI Right
will entitle the holder to buy 1/100 of a share of MBI Series B Junior
Participating Preferred Stock at an exercise price of $212 per MBI Right. In the
event a person or group acquires beneficial ownership of 20% or more of common
stock, holders of MBI Rights (other than the acquiring person or group) may
purchase common stock having a market value of twice the then current exercise
price of each MBI Right.If the Corporation is acquired by any person or group
after the rights become exercisable, each MBI Right will entitle its holder to
purchase stock of the acquiring company having a market value of twice the
current exercise price of each MBI Right. The MBI Rights are designed to protect
the interests of MBI and its shareholders against coercive takeover tactics. The
purpose of the MBI Rights is to encourage potential acquirors to negotiate with
Mercantile's Board of Directors prior to attempting a takeover and and to give
the Board leverage in negotiating on behalf of all shareholders the terms of any
proposed takeover. The MBI Rights may deter certain takeover proposals. The
MBI Rights, which can be redeemed by MBI's Board of Directors in certain
circumstances, expire by their terms on June 3, 2008.
Stock Options
The Corporation had stock options outstanding under various plans at December
31, 1998, including plans assumed in acquisitions. The original Mercantile plans
provide for the granting to employees of the Corporation and its subsidiaries of
options to purchase shares of common stock of the Corporation over periods of up
to 10 years at a price not less than the market value of the shares at the date
the options are granted. The plans provide for the granting of options that
either qualify or do not qualify as Incentive Stock Options as defined by
Section 422 of the Internal Revenue Code of 1986, as amended. As of December 31,
1998, there were 4,235,102 options available for grant. The per share price
range for options exercisable was $3.61 to $58.31 as of December 31, 1998.
The following table summarizes stock options outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------
Weighted Average
Range of Remaining Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3.61 - 21.18 1,471,023 2.36 yrs. $13.66
21.44 - 21.67 1,245,550 4.62 21.67
21.77 - 33.13 1,478,453 5.21 28.02
34.08 - 52.69 1,579,142 7.83 36.57
53.06 - 58.31 1,365,837 9.28 54.45
- - ----------------------------------------------------------------------------------------------------------------------
3.61 - 58.31 7,140,005 5.88 30.90
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in options outstanding were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995 6,295,043 $17.36
Granted 1,066,576 28.90
Exercised (826,963) 10.74
Canceled (156,318) 24.79
Assumed 76,488 15.27
- - ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 6,454,826 19.91
Granted 1,889,201 34.72
Exercised (1,407,609) 17.20
Canceled (108,121) 27.19
Assumed 610,536 17.72
- - ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 7,438,833 23.90
Granted 1,580,662 53.64
Exercised (1,720,684) 19.57
Canceled (296,262) 37.18
Assumed 137,456 20.81
- - ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 7,140,005 30.90
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
------
72
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The numbers of shares exercisable under stock options as of December 31, 1998,
1997 and 1996 were 4,271,291, 4,936,522 and 3,436,204, respectively, with a
weighted average exercise price of $22.84, $19.47 and $15.71, respectively.
The fair value of the option grants was estimated on the date of grant using
an option-pricing model based upon the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.69% 2.85% 3.30%
Expected volatility 29.52 29.80 31.70
Average risk-free
interest rate 5.36 6.13 5.15
Expected option life
from vesting date 1.55 yrs. 1.40 yrs. 1.26 yrs.
Weighted per share
average fair value of
stock options granted $16.01 $ 8.26 $ 7.15
- - ---------------------------------------------------------------
</TABLE>
The Corporation applies Accounting Principles Board Opinion 25 in accounting
for its stock option plans. The compensation cost that has been charged against
income for stock-based compensation plans was $6,866,000, $5,984,000 and
$4,081,000 for 1998, 1997 and 1996, respectively. Had the Corporation adopted
FAS 123's optional accounting method, the Corporation's net income and earnings
per share would have been reduced to the pro forma amounts noted below:
<TABLE>
<CAPTION>
(Thousands except per share data) As Reported Pro Forma
- - ------------------------------------------------------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net income $375,303 $370,840
Basic earnings per share 2.45 2.42
Diluted earnings per share 2.41 2.37
YEAR ENDED DECEMBER 31, 1997
Net income 246,822 240,132
Basic earnings per share 1.76 1.72
Diluted earnings per share 1.73 1.68
YEAR ENDED DECEMBER 31, 1996
Net income 284,453 280,514
Basic earnings per share 2.12 2.09
Diluted earnings per share 2.09 2.06
- - ------------------------------------------------------------
</TABLE>
The effect of applying FAS 123 as presented above is not representative of the
effects on pro forma net income for future years.
Debt and Dividend Restrictions
Consolidated retained earnings at December 31, 1998 were not restricted under
any agreement as to payment of dividends or reacquisition of common stock.
The primary source of funds for dividends paid by the Corporation to its
shareholders is dividends received from bank subsidiaries. At December 31, 1998,
approximately $82,939,000 of the equity of bank subsidiaries was available for
distribution as dividends to the Parent Company without prior regulatory
approval or without reducing the capital of the respective subsidiary banks
below present minimum standards. An additional $311,578,000 would be available
for loans to the Parent Company under Federal Reserve regulations. The remaining
equity of bank subsidiaries approximating $2,495,319,000 was restricted as to
transfers to the Parent Company.
NOTE P--REGULATORY MATTERS
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Mercantile and its subsidiary banks must meet specific
capital guidelines that involve quantitative measures of the Corporation and its
subsidiary banks' assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Mercantile and subsidiary
banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Corporation and its subsidiary banks to maintain minimum amounts and
ratios, as set forth in the table on the next page, of Tier I and total capital
to risk-weighted assets, and of Tier I capital to average assets, the leverage
ratio. Management believes, as of December 31, 1998, the Corporation and its
subsidiary banks met all their capital adequacy requirements.
------
73
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The actual and required capital amounts and ratios as of December 31, 1998,
1997 and 1996 for the Corporation and Mercantile Bank N.A. are listed in the
following table:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
-------------------------------------------------------------------------------------------------------
Minimum Capital Minimum Capital Minimum Capital
Actual Requirements Actual Requirements Actual Requirements
-------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Amount Ratio Amount Amount Ratio Amount
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS)
Corporation $2,451,449 9.84% $ 996,302 $2,104,078 9.40% $ 894,913 $2,049,795 11.50% $ 713,258
Mercantile Bank N.A. 1,731,390 10.82 639,898 1,210,872 10.86 446,178 499,602 9.51 210,225
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS)
Corporation 3,125,488 12.55 1,992,604 2,778,794 12.42 1,789,826 2,500,154 14.02 1,426,516
Mercantile Bank N.A. 1,974,542 12.34 1,279,795 1,406,983 12.61 892,356 620,308 11.80 420,450
LEVERAGE
(TO AVERAGE ASSETS)
Corporation 2,451,449 7.16 1,368,832 2,104,078 6.52 1,291,055 2,049,795 8.52 962,265
Mercantile Bank N.A. 1,731,390 7.99 866,856 1,210,872 7.33 660,542 499,602 6.97 286,873
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Minimum capital ratios are 4.00% for Tier I capital and leverage, and 8.00%
for total capital.
As of November 30, 1998, the date of the most recent notification from
regulatory agencies, the subsidiary banks were categorized as well capitalized
under the regulatory framework. There are no conditions or events since that
notification that management believes have changed the subsidiary banks'
category.
NOTE Q--CONCENTRATIONS OF CREDIT
The Corporation's primary market area is the state of Missouri and the lower
Midwest. At December 31, 1998, approximately 87% of the total loan portfolio,
and 86% of the commercial and commercial real estate loan portfolio, were to
borrowers within this region. The diversity of the region's economic base tends
to provide a stable lending environment.
Real estate constituted the only other area of significant concentration of
credit risk. Real estate-related financial instruments (loans, commitments and
standby letters of credit) composed 47% of all such instruments of the
Corporation. However, of this total, approximately 64% was consumer-related in
the form of residential real estate mortgages and home equity lines of credit.
The Corporation is, in general, a secured lender. At December 31, 1998,
approximately 93% of the loan portfolio was secured. Collateral is required in
accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction.
NOTE R--FINANCIAL INSTRUMENTS
Fair Values
Fair values for financial instruments are management's estimates of the values
at which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, certain financial
instruments and all non-financial instruments are excluded from the fair value
disclosure requirements of FAS 107, "Disclosures about Fair Value of Financial
Instruments." Therefore, the fair values presented below should not be construed
as the underlying value of the Corporation.
The following methods and assumptions were used in estimating fair values for
financial instruments.
Cash and Due from Banks, Short-term Investments and Short-term Borrowings: The
carrying values reported in the Consolidated Balance Sheet approximated fair
values.
Investments in Debt and Equity Securities: Fair values for held-to-maturity
securities were based upon quoted market prices where available. Fair values for
trading and available-for-sale securities, which also were the amounts reported
in the Consolidated Balance Sheet, were based on quoted market prices where
available. If quoted market prices were not available, fair values were based
upon quoted market prices of comparable instruments.
Loans and Leases: The fair values for most fixed-rate loans were estimated by
utilizing discounted cash flow analysis, applying interest rates currently being
offered
------
74
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
for similar loans to borrowers with similar risk profiles. The discount
rates used, therefore, include a credit risk premium. The fair values of
variable-rate loans and all residential mortgages were estimated by utilizing
the same type of discounted cash flows, but over a range of interest rate
scenarios, in order to incorporate the value of the options imbedded in these
assets. Loans with similar characteristics were aggregated for purposes of these
calculations.
Deposits: The fair values disclosed for deposits generally payable on demand
(i.e., interest bearing and non-interest bearing demand, savings and money
market accounts) were considered equal to their respective carrying amounts as
reported in the Consolidated Balance Sheet. Fair values for certificates of
deposit and foreign deposits were estimated using a discounted cash flow
calculation that applied interest rates generally offered on similar
certificates to a schedule of aggregated expected monthly maturities of time
deposits. The fair value estimate of the deposit portfolio has not been adjusted
for any value derived from the retention of those deposits for an expected
future period of time, and was neither considered in the fair value amounts
below nor recorded as an intangible asset on the Consolidated Balance Sheet.
Bank Notes and Long-term Debt: The fair value of publicly traded debt was
based upon quoted market prices, where available, or upon quoted market prices
of comparable instruments. The fair values of bank notes and long-term debt were
estimated using discounted cash flow analysis, based on the Corporation's
current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments: Fair values of foreign exchange contracts,
interest rate contracts and when-issued securities were determined from quoted
market prices. Fair values of commitments to extend credit, standby letters of
credit and commercial letters of credit were based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standings.
The estimated fair values of the Corporation's financial instruments were as
follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
(Thousands) Value Value Value Value Value Value
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks, and
short-term investments $ 2,354,670 $ 2,354,670 $ 1,886,280 $ 1,886,280 $ 1,856,314 $ 1,856,314
Trading securities 126,540 126,540 70,536 70,536 31,361 31,361
Held-to-maturity securities 97,607 99,336 335,279 341,954 656,721 661,632
Available-for-sale securities 9,246,790 9,246,790 8,059,066 8,059,066 4,741,677 4,741,677
Net loans and leases 22,002,368 22,871,157 21,077,790 21,525,593 16,679,536 17,129,917
FINANCIAL LIABILITIES
Deposits 25,461,397 25,877,849 24,809,455 25,112,466 19,784,845 19,999,832
Short-term borrowings 3,002,660 3,002,660 3,678,540 3,678,540 2,132,674 2,132,674
Bank notes and long-term debt 3,748,334 3,904,190 1,693,171 1,709,813 502,675 506,954
OFF-BALANCE-SHEET
Foreign exchange contracts purchased 322 (5,880) (428)
Foreign exchange contracts sold 1,425 4,367 39
Interest rate contracts 34,164 17,244 (143)
When-issued securities purchased 647 (2,578) --
When-issued securities sold (6,702) 2,509 --
Commitments to extend credit (33,738) (37,790) (17,779)
Standby letters of credit (4,477) (3,862) (2,879)
Commercial letters of credit (2,100) (1,998) (5,406)
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFF-BALANCE-SHEET RISK
The Corporation is, in the normal course of business, a party to certain off-
balance-sheet financial instruments. These instruments, which include
commitments to extend credit, standby letters of credit, interest rate options
written, interest rate swaps and foreign exchange contracts, are used by the
Corporation to meet the financing needs of its customers and to reduce its own
exposure to interest rate fluctuations. They involve varying degrees of credit,
interest rate and liquidity risk, but do not represent unusual risks for the
Corporation. Management does not anticipate any significant losses as a result
of these transactions.
------
75
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The notional or contract amounts of financial instruments with off-balance-
sheet credit risk were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------
(Thousands) 1998 1997 1996
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to
extend credit
Commercial $5,152,065 $4,175,423 $3,325,464
Consumer 4,056,684 2,270,781 6,176,412
- - ---------------------------------------------------------------------
Total $9,208,749 $6,446,204 $9,501,876
- - ---------------------------------------------------------------------
Standby letters of credit $ 514,300 $ 442,245 $ 462,082
- - ---------------------------------------------------------------------
Interest rate contracts $ 978,666 $1,021,563 $ 391,000
- - ---------------------------------------------------------------------
When-issued securities:
Commitments to purchase $ 213,895 $ 178,475 $ --
Commitments to sell 291,700 230,981 --
- - ---------------------------------------------------------------------
</TABLE>
The Corporation's maximum exposure to credit loss under commitments to extend
credit and standby letters of credit is the equivalent of the contractual amount
of those instruments. The same credit policies are used by the Corporation in
granting commitments and conditional obligations as are used in the extension of
credit.
Commitments to extend credit are legally binding agreements to lend to a
borrower as long as the borrower performs in accordance with the terms of the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. As many of the commitments are
expected to expire without being drawn upon, the total commitment amount does
not necessarily represent future cash requirements. Included in consumer
commitments are the unused portions of lines of credit for credit card and home
equity credit loans.
Standby letters of credit are commitments issued by the Corporation to
guarantee specific performance of a customer to a third party.
Collateral is required for both commitments and standby letters of credit in
accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction. Collateral held varies but may include commercial real
estate, accounts receivable, inventory or equipment.
Included in interest rate contracts are interest rate swaps and floors.
Derivative Financial Instruments
Held or Issued for Trading Purposes: In the normal course of business, the
Corporation maintains minimal trading positions in a variety of derivative
financial instruments. Most of the Corporation's trading activities are customer
oriented, with trading positions established to meet the financing and foreign
exchange transaction needs of customers. This activity complements the
Corporation's traditional money and capital markets trading business, which also
exists to meet customers' demands.
Net revenue recognized on interest rate contracts and foreign exchange
contracts totaled $4,699,000, $4,615,000 and $3,916,000 in 1998, 1997 and 1996,
respectively. The notional amounts of interest rate options written, foreign
exchange contracts purchased and foreign exchange contracts sold were as
follows:
<TABLE>
<CAPTION>
December 31
------------------------------
(Thousands) 1998 1997 1996
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Interest rate options written $ 5,475 $ 13,533 $ 16,456
Foreign exchange contracts
purchased 431,246 328,127 243,800
Foreign exchange
contracts sold 383,637 291,995 193,179
- - ---------------------------------------------------------------
</TABLE>
These transactions are generally entered into on behalf of customers and are
simultaneously hedged by the Corporation. As a consequence, these matched
transactions do not represent exposure to market risk. The Corporation manages
the potential credit exposure through established credit approvals, risk control
limits and other monitoring procedures. Credit risk to the Corporation could
result from non-performance by a counterparty to a contract; however, currently
that credit risk is minimal.
Held or Issued for Purposes Other Than Trading: The Corporation uses off-
balance-sheet derivative financial instruments such as interest rate swaps and
floors to manage interest rate risk. The Corporation's exposure to interest rate
risk stems from the mismatch between the sensitivity to movements in interest
rates of the Corporation's assets and liabilities. The use of derivatives to
manage interest rate risk is primarily for interest sensitivity adjustments.
Interest rate swaps are generally used to lengthen the interest rate sensitivity
of short-term assets and to shorten the repricing characteristics of longer term
liabilities. Gains or losses are used to adjust the basis of the related asset
or liability, and interest differentials are adjustments of the related interest
income or expense.
------
76
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Of the commitments to extend credit discussed in the preceding paragraphs,
$587,796,000, $554,396,000 and $346,850,000 were entered into with fixed rates
for commercial loan customers at December 31, 1998, 1997 and 1996, respectively.
Fixed-rate commitments for consumer (residential mortgage) loan customers
totaled $233,256,000 at December 31, 1998, $231,204,000 at December 31, 1997 and
$77,727,000 at December 31, 1996. Fixed-rate commitments to extend credit are
defined as fixed-rate commercial loan commitments with remaining maturities
greater than one year, fixed-rate residential mortgage loan commitments, and
adjustable-rate residential mortgage loan commitments for loans with adjustment
periods greater than one year.
Fixed-rate mortgage loans held for resale are partially hedged with contracts
for forward delivery in the secondary mortgage market. This hedging activity is
designed to protect the Corporation from changes in interest rates. Gains and
losses from the hedging transactions on mortgage loans held for resale are
deferred and included in the cost of the loans for determining the gain or loss
when the loans are sold. Forward delivery contracts outstanding totaled
$265,691,000 as of December 31, 1998, $85,585,000 as of December 31, 1997 and
$62,823,000 as of December 31, 1996.
NOTE S--CONTINGENT LIABILITIES
In the ordinary course of business, there are various legal proceedings pending
against the Corporation and its subsidiaries. Management, after consultation
with legal counsel, is of the opinion that the ultimate resolution of these
proceedings will have no material adverse effect on the consolidated financial
condition or results of operations of the Corporation.
NOTE T--PARENT COMPANY FINANCIAL INFORMATION
Following are the condensed financial statements of Mercantile Bancorporation
Inc. (Parent Company Only) for the periods indicated.
For the Statement of Cash Flows (Parent Company Only), cash and short-term
investments were considered cash equivalents. Interest paid on commercial paper
and long-term debt was $52,568,000, $35,494,000 and $12,420,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
STATEMENT OF INCOME December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from
subsidiaries $ 402,026 $ 324,884 $ 444,136
Other interest and
dividends 8,678 11,386 4,359
Management fees 29,681 21,404 16,987
Other 6,225 6,602 5,159
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Income 446,610 364,276 470,641
- - -----------------------------------------------------------------------------------------------------------------------------------
EXPENSE
Interest on commercial
paper 94 951 987
Interest on long-term debt
and mandatorily redeem-
able preferred securities 52,929 38,243 11,681
Personnel expense 29,902 32,889 18,503
Intangible asset amortization 51,187 30,615 6,046
Other operating expenses 132,880 115,534 40,326
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Expense 266,992 218,232 77,543
- - -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME
TAX BENEFIT AND EQUITY
IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 179,618 146,044 393,098
Income tax benefit 68,283 48,458 16,514
- - -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY
IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 247,901 194,502 409,612
Equity in undistributed
income of subsidiaries 127,402 52,320 (125,159)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 375,303 $ 246,822 $ 284,453
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash $ 193 $ 15 $ 33
Short-term investments 264,145 224,230 128,480
Available-for-sale securities 18,836 28,578 30,167
Investment in subsidiaries 2,988,236 2,685,587 2,194,274
Intangible assets 672,742 723,785 126,239
Loans and advances
to subsidiaries 3,025 1,510 19,405
Other assets 80,288 36,929 9,316
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $4,027,465 $3,700,634 $2,507,914
- - -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Commercial paper $ 3,025 $ 1,510 $ 19,405
Long-term debt 650,859 651,153 150,000
Company-obligated
mandatorily redeemable
preferred securities 150,000 150,000 --
Other liabilities 149,826 135,669 75,266
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 953,710 938,332 244,671
- - -----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 3,073,755 2,762,302 2,263,243
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $4,027,465 $3,700,634 $2,507,914
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
------
77
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS Year Ended December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 375,303 $ 246,822 $ 284,453
Adjustments to reconcile net income to net cash provided by operating activities
Net income of subsidiaries (529,428) (377,204) (318,977)
Dividends from subsidiaries 402,026 312,072 421,299
Other, net 35,383 79,097 33,386
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 283,284 260,787 420,161
INVESTING ACTIVITIES
Investments in debt and equity securities
Purchases (10,626) (4,554) (8,339)
Proceeds from maturities 11,555 4,100 --
Acquisitions (130) (386,850) (33,082)
Other, net (2,456) 8,846 (2,943)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (1,657) (378,458) (44,364)
FINANCING ACTIVITIES
Cash dividends paid (171,813) (132,535) (101,907)
Net issuance of common stock for employee incentive plans 29,764 11,762 (327)
Purchase of treasury stock (101,000) (299,063) (175,036)
Redemption of preferred stock -- -- (12,684)
Issuance of long-term debt -- 501,859 --
Issuance of mandatorily redeemable preferred securities -- 150,000 --
Net change in commercial paper 1,515 (17,895) 2,455
Other, net -- (725) (164)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (241,534) 213,403 (287,663)
- - -----------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 40,093 95,732 88,134
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 224,245 128,513 40,379
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 264,338 $ 224,245 $ 128,513
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE U--LINE OF BUSINESS RESULTS
The financial performance of Mercantile is monitored by an internal
profitability measurement system that produces line of business results and key
performance measures on a pre-tax basis. Mercantile's three major business units
in 1998 included general commercial and retail banking ("Banking"), private
banking and investments, and specialty retail banking. The reported results
reflect the underlying economics of the businesses which are match-funded for
interest rate risk. Expenses for centrally provided services are allocated based
on usage of those services, and loan loss provision is allocated based on credit
quality. The contribution of Mercantile's major business units to consolidated
results for 1998 is summarized in the table on page 79. Comparable financial
information for 1997 is not available due to the significant amount of
acquisition activity that occurred in that year and thus the lack of comparable
management accounting information.
Banking includes the Corporation's branch network and deposit gathering,
commercial lending, non-specialty retail lending, the investment portfolio and
the treasury function. It is by far the largest business unit, and it houses
most staff department functions.
Private Banking & Investments was structured to serve the investment
management needs of high net worth individuals. It includes private banking
offices, personal and institutional trust activities, institutional money
management and retail brokerage.
Specialty retail banking (Mercantile Credit Corp.) includes residential
mortgage origination and servicing, credit card, indirect lending, insurance
activities and consumer product management.
Parent Company and Other includes interest expense on Parent Company debt,
goodwill amortization, consolidation eliminations, provision for loan losses not
allocated to the business units and some general corporate expenses not
allocated to the business units.
------
78
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The "Adjusted Results" below exclude the financial impact of the conforming
adjustments that relate to the seven 1998 acquisitions and the fourth quarter
1998 restructuring charge. These adjustments would be allocated largely to the
Banking segment, but to show meaningful financial results, they are displayed
separately.
The management accounting system of Mercantile allows for double counting of
the results of certain product lines and business units because of the level of
cooperation necessary to generate favorable results. In the table below, this
double counting is eliminated.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------------------------------------------------------
Conforming
Private Parent Adjustments &
Mercantile Banking & Company Adjusted Restructuring
(Dollars in millions) Banking Credit Corp. Investments & Other Results Charges Consolidated
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Taxable-equivalent net interest
income $ 1,087 $ 51 $ 13 $ (30) $ 1,121 $ -- $ 1,121
Provision for possible loan losses 13 13 -- 5 31 20 51
Other income 294 96 138 (32) 496 46 542
Other expense 704 73 94 22 893 134 1,027
- - -----------------------------------------------------------------------------------------------------------------------------------
Taxable-equivalent Income Before
Income Taxes $ 664 $ 61 $ 57 $ (89) $ 693 $ (108) $ 585
- - -----------------------------------------------------------------------------------------------------------------------------------
Percent of Adjusted
Taxable-equivalent
Income Before Income Taxes 95.82% 8.80% 8.22% (12.84)% 100.00%
- - -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans and leases $20,683 $ 1,005 $ 103 $ (11) $21,780 $ -- $21,780
Total assets 33,008 1,298 165 100 34,571 -- 34,571
Deposits 24,568 393 329 (509) 24,781 -- 24,781
- - -----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Efficiency ratio 50.94% 49.52% 62.21% -- 55.21% 61.75%
Net interest rate margin 3.55 4.44 8.84 -- 3.56 3.56
Net charge-offs to average loans .14 1.26 (.01) -- .19 .19
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE V--RESTRUCTURING CHARGE
During the fourth quarter of 1998, Mercantile recorded a $45,130,000 charge
relating to cost management programs and customer service initiatives. The
charge will fund the costs related to 26 branch closings and severance for
approximately 1,400 staff reductions that will result from further
centralization, consolidation of back office functions, branch closures and a
wider span of control.
These programs are to be substantially completed by the first quarter of 1999.
Any additional costs that do not qualify for recognition in the charge will be
expensed as incurred, but are not expected to be material. Total payments
through December 31, 1998 were $2,287,000 and the remaining balance of
$42,843,000 represents the liability for the future cash outflows associated
with these specific actions.
------
79
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
SIX YEAR CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Growth Rates
(Thousands except per -----------------
share data) 1998 1997 1996 1995 1994 1993 1 Year 5 Years
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases $1,771,235 $ 1,651,816 $ 1,404,809 $ 1,371,083 $ 1,146,450 $1,076,675 7.2% 10.5%
Investments in debt and
equity securities
Trading 8,821 7,077 3,630 3,457 4,746 3,687 24.6 19.1
Taxable 558,635 406,663 315,120 296,425 299,328 318,454 37.4 11.9
Tax-exempt 23,230 25,797 28,255 31,202 33,554 34,265 (10.0) (7.5)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Investments in
Debt and Equity
Securities 590,686 439,537 347,005 331,084 337,628 356,406 34.4 10.6
Due from banks--interest
bearing 13,293 10,379 4,128 2,508 2,878 3,521 28.1 30.4
Federal funds sold and
repurchase agreements 16,904 16,946 15,178 21,644 15,083 15,646 (.2) 1.6
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 2,392,118 2,118,678 1,771,120 1,726,319 1,502,039 1,452,248 12.9 10.5
Tax-equivalent
adjustment* 16,664 18,084 18,593 20,225 20,920 22,395 (7.9) (5.7)
- - ----------------------------------------------------------------------------------------------------------------------------------
Taxable-equivalent
Interest Income 2,408,782 2,136,762 1,789,713 1,746,544 1,522,959 1,474,643 12.7 10.3
INTEREST EXPENSE
Deposits 931,716 842,949 692,138 664,974 500,184 516,979 10.5 12.5
Borrowed funds 356,142 227,991 130,019 143,566 93,576 61,856 56.2 41.9
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 1,287,858 1,070,940 822,157 808,540 593,760 578,835 20.3 17.3
- - ----------------------------------------------------------------------------------------------------------------------------------
Taxable-equivalent Net
Interest Income 1,120,924 1,065,822 967,556 938,004 929,199 895,808 5.2 4.6
PROVISION FOR POSSIBLE
LOAN LOSSES 51,154 86,355 78,766 44,952 53,094 77,485 (40.8) (8.0)
OTHER INCOME
Trust 112,999 103,928 93,704 84,066 78,455 77,969 8.7 7.7
Service charges 119,277 109,058 98,908 91,951 89,033 88,020 9.4 6.3
Investment banking and
brokerage 41,137 38,181 35,351 30,543 30,831 31,764 7.7 5.3
Credit card fees 12,556 21,169 28,415 20,634 27,487 26,289 (40.7) (13.7)
Securitization revenue 20,011 18,404 16,008 23,005 8.7
Securities gains (losses) 15,435 7,649 292 4,634 2,889 6,310 19.6
Other 220,503 115,804 95,332 85,156 69,088 85,673 90.4 20.8
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Other Income 541,918 414,193 368,010 339,989 297,783 316,025 30.8 11.4
OTHER EXPENSE
Salaries 418,351 381,942 335,803 320,687 311,754 301,188 9.5 6.8
Employee benefits 77,608 85,048 77,437 72,149 70,676 68,876 (8.7) 2.4
Net occupancy 67,003 61,697 55,489 53,044 51,548 52,327 8.6 5.1
Equipment 85,426 70,272 60,605 54,745 52,348 51,559 21.6 10.6
Other 378,369 387,419 275,853 225,290 246,240 280,180 (2.3) 6.2
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Other Expense 1,026,757 986,378 805,187 725,915 732,566 754,130 4.1 6.4
- - ----------------------------------------------------------------------------------------------------------------------------------
Taxable-equivalent
Income Before Income
Taxes 584,931 407,282 451,613 507,126 441,322 380,218 43.6 9.0
INCOME TAXES
Income taxes 192,964 142,376 148,567 168,746 151,826 127,718 35.5 8.6
Tax-equivalent adjustment* 16,664 18,084 18,593 20,225 20,920 22,395 (7.9) (5.7)
- - ----------------------------------------------------------------------------------------------------------------------------------
Adjusted Income Taxes 209,628 160,460 167,160 188,971 172,746 150,113 30.6 6.9
- - ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 375,303 $ 246,822 $ 284,453 $ 318,155 $ 268,576 $ 230,105 52.1 10.3
- - ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings per share $ 2.45 1.76 $ 2.12 $ 2.37 $ 2.05 $ 1.79 39.2 6.5
Diluted earnings per share 2.41 1.73 2.09 2.33 2.02 1.75 39.3 6.6
Dividends declared 1.24 1.148 1.092 .88 .748 .66 8.0 13.4
- - ----------------------------------------------------------------------------------------------------------------------------------
TAX-EQUIVALENT ADJUSTMENT*
Loans $ 5,214 5,409 $ 5,630 $ 5,776 $ 5,517 $ 6,187 (3.6) (3.4)
Investments in debt and
equity securities 11,450 12,675 12,963 14,449 15,403 16,208 (9.7) (6.7)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Tax-equivalent
Adjustment $ 16,664 18,084 $ 18,593 $ 20,225 $ 20,920 $ 22,395 (7.9) (5.7)
- - ----------------------------------------------------------------------------------------------------------------------------------
*Taxable-equivalent basis.
</TABLE>
------
80
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
SIX YEAR CONSOLIDATED AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands) Volume Rate/1/ Volume Rate/1/
- - -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Earning assets
Loans and leases
Commercial $ 5,538,558 8.20% $ 4,823,799 8.59%
Real estate--commercial 3,710,849 8.50 3,490,043 8.66
Real estate--construction 768,804 8.66 661,455 8.87
Real estate--
residential mortgage 8,386,390 7.57 6,777,396 7.84
Real estate--home equity
credit loans 552,381 9.48 510,261 9.69
Consumer 2,693,839 9.06 2,403,930 9.12
Credit card 129,267 6.63 635,567 12.83
- - -----------------------------------------------------------------------
Total Loans and Leases 21,780,088 8.16 19,302,451 8.59
Investments in debt and
equity securities
Trading 135,285 6.56 104,897 6.80
Taxable 8,630,333 6.47 6,334,401 6.42
Tax-exempt 424,648 8.13 470,187 8.13
- - -----------------------------------------------------------------------
Total Investments in Debt
and Equity Securities 9,190,266 6.55 6,909,485 6.54
Short-term investments
Due from banks interest
bearing 232,220 5.72 188,756 5.50
Federal funds sold and
repurchase agreements 310,450 5.44 264,287 6.41
- - -----------------------------------------------------------------------
Total Short-term
Investments 542,670 5.56 453,043 6.03
- - -----------------------------------------------------------------------
Total Earning Asset 31,513,024 7.64 26,664,979 8.01
Non-earning assets
Cash and due from banks 1,329,870 1,157,793
Bank premises and
equipment 540,545 478,561
Other assets 1,481,834 1,063,661
Reserve for possible
loan losses (294,058) (267,809)
- - -----------------------------------------------------------------------
Total Assets $34,571,215 $29,097,185
- - -----------------------------------------------------------------------
LIABILITIES
Acquired funds
Deposits
Non-interest bearing $ 3,899,766 $ 3,410,398
Interest bearing demand 3,088,268 1.84 2,934,822 2.01
Money market accounts 3,991,348 4.04 3,462,844 4.02
Savings 1,739,005 2.58 1,471,442 2.39
Consumer time
certificates
under $100,000 9,574,189 5.54 8,643,840 5.55
Other time 184,433 5.31 205,437 4.62
- - -----------------------------------------------------------------------
Total Core Deposits 22,477,009 4.32 20,128,783 4.32
Time certificates
$100,000 and over 1,893,255 5.58 1,675,343 5.64
Foreign 410,644 5.65 457,811 5.72
- - -----------------------------------------------------------------------
Total Purchased Deposits 2,303,899 5.59 2,133,154 5.66
- - -----------------------------------------------------------------------
Total Deposits 24,780,908 4.46 22,261,937 4.47
Short-term borrowings 3,294,078 5.29 2,929,826 5.43
Bank notes 56,233 6.09 175,000 6.02
Long-term debt/2/ 3,049,791 5.85 869,495 6.72
- - -----------------------------------------------------------------------
Total Acquired Funds 31,181,010 4.72 26,236,258 4.69
Other liabilities 434,858 386,090
- - -----------------------------------------------------------------------
Total Liabilities 31,615,868 26,622,348
SHAREHOLDERS' EQUITY 2,955,347 2,474,837
- - -----------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $34,571,215 $29,097,185
- - -----------------------------------------------------------------------
/1/Taxable-equivalent basis.
/2/Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
</TABLE>
------
81
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
SIX YEAR CONSOLIDATED AVERAGE BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994 1993 Growth Rates
- - ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Volume Rate/1/ Volume Rate/1/ Volume Rate/1/ Volume Rate/1/ 1 Year 5 Years
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Loans and leases
Commercial $ 4,365,041 8.57% $ 4,114,286 9.10% $ 3,847,614 7.82% $ 3,587,630 7.41% 14.8% 9.1%
Real estate--commercial 3,208,049 8.66 3,012,825 8.88 2,722,408 8.07 2,542,309 7.99 6.3 7.9
Real estate--construction 592,976 9.10 614,810 9.97 575,419 8.16 542,765 8.53 16.2 7.2
Real estate--
residential mortgage 4,339,596 8.10 4,194,013 7.80 3,489,239 7.65 3,543,574 7.81 23.7 18.8
Real estate--home equity
credit loans 417,426 9.67 414,148 10.04 418,561 8.38 418,561 7.43 8.3 5.7
Consumer 2,216,771 9.18 2,134,742 9.06 1,868,318 8.55 1,601,863 9.33 12.1 11.0
Credit card 849,925 12.87 779,782 14.29 765,624 15.99 681,283 16.24 (79.7) (28.3)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 15,989,784 8.82 15,264,606 9.02 13,687,183 8.42 12,917,985 8.38 12.8 11.0
Investments in debt and
equity securities
Trading 56,616 6.49 55,441 6.24 75,706 6.31 60,335 6.22 29.0 17.5
Taxable 5,188,833 6.08 4,942,262 6.00 5,245,252 5.71 5,225,937 6.10 36.2 10.6
Tax-exempt 511,453 8.01 548,872 8.29 593,130 8.21 587,402 8.53 (9.7) (6.3)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Investments in Debt
and Equity Securities 5,756,902 6.25 5,546,575 6.23 5,914,088 5.97 5,873,674 6.34 33.0 9.4
Short-term investments
Due from banks interest
bearing 70,850 5.83 42,148 5.95 66,834 4.31 102,145 3.45 23.0 17.9
Federal funds sold and
repurchase agreements 267,469 5.67 353,358 6.13 338,693 4.45 471,824 3.32 17.5 (8.0)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Short-term
Investments 338,319 5.71 395,506 6.11 405,527 4.43 573,969 3.34 19.8 (1.1)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Asset 22,085,005 8.10 21,206,687 8.24 20,006,798 7.61 19,365,628 7.61 18.2 10.2
Non-earning assets
Cash and due from banks 1,139,143 1,084,943 1,078,590 1,060,685 14.9 4.6
Bank premises and
equipment 404,835 384,438 369,036 358,521 13.0 8.6
Other assets 529,681 508,252 492,398 546,087 39.3 22.1
Reserve for possible
loan losses (259,871) (269,752) (269,363) (249,971) 9.8 3.3
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $23,898,793 $22,914,568 $21,677,459 $21,080,950 18.8 10.4
- - ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Acquired funds
Deposits
Non-interest bearing $ 3,178,244 $ 2,907,648 $ 2,951,411 $ 2,953,436 14.3 5.7
Interest bearing demand 2,682,839 2.27 2,711,739 2.23 2,829,843 1.96 2,629,263 2.18 5.2 3.3
Money market accounts 3,028,825 3.64 2,624,200 3.87 2,864,065 2.94 2,902,100 2.75 15.3 6.6
Savings 1,351,226 2.34 1,415,048 2.43 1,532,175 2.35 1,491,199 2.56 18.2 3.1
Consumer time
certificates
under $100,000 7,054,537 5.58 6,827,210 5.46 6,277,759 4.35 6,561,572 4.55 10.8 7.8
Other time 191,952 4.22 126,120 6.30 43,733 2.97 86,978 2.62 (10.2) 16.2
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Core Deposits 17,487,623 4.22 16,611,965 4.21 16,498,986 3.33 16,624,548 3.48 11.7 6.2
Time certificates
$100,000 and over 1,440,025 5.35 1,319,811 5.66 1,047,777 4.22 992,312 4.01 13.0 13.8
Foreign 184,182 5.70 210,873 6.21 108,986 4.95 31,093 4.38 (10.3) 67.6
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Deposits 1,624,207 5.39 1,530,684 5.74 1,156,763 4.29 1,023,405 4.02 8.0 17.6
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 19,111,830 4.34 18,142,649 4.36 17,655,749 3.40 17,647,953 3.52 11.3 7.0
Short-term borrowings 1,671,352 5.37 1,829,383 5.57 1,517,324 4.20 1,113,995 2.97 12.4 24.2
Bank notes 260,587 5.88 214,658 6.37 12,603 6.19 -- -- (67.9) --
Long-term debt/2/ 342,968 7.29 380,636 7.34 394,874 7.37 377,762 7.63 -- 51.8
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Acquired Funds 21,386,737 4.52 20,567,326 4.58 19,580,550 3.57 19,139,710 3.58 18.9 10.3
Other liabilities 312,758 275,692 254,209 280,423 12.6 9.2
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 21,699,495 20,843,018 19,834,759 19,420,133 18.8 10.2
SHAREHOLDERS' EQUITY 2,199,298 2,071,550 1,842,700 1,660,817 19.4 12.2
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $23,898,793 $22,914,568 $21,677,459 $21,080,950 18.8 10.4
- - ----------------------------------------------------------------------------------------------------------------------------------
/1/ Taxable - equivalent basis.
/2/ Includes company - obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
</TABLE>
------
82
<PAGE>
EXHIBIT NO. 21
MERCANTILE BANCORPORATION INC.
SUBSIDIARIES
AS OF FEBRUARY 26, 1999
<TABLE>
<CAPTION>
Subsidiary Jurisdiction
---------- ------------
<S> <C>
Ameribanc, Inc. Missouri
Mercantile Bank of Trenton Missouri
Mercantile Trust Company National Association United States
Mercantile Bank of Kentucky Kentucky
Mercantile Bank Missouri
Eastern Missouri Investments, LLC Illinois
Mark Twain Real Estate Development Corp. I Kansas
Mark Twain Kansas City Bank Community
Development Corporation Kansas
Mercantile Bank of Illinois Illinois
Home Federal Service Corporation Illinois
FFG Investments, Inc. Illinois
Mercantile Bank of Arkansas National Association United States
Mercantile Financial of Little Rock LLC Arkansas
Landau I, Inc. Arkansas
Mercantile Bank Midwest Iowa
Mercantile Leasing Corporation Iowa
Mercantile Guaranteed Loans Iowa
Midwest Realty Company, Inc. Iowa
Mercantile Bank National Association United States
Mercantile Business Credit, Inc. Missouri
Mississippi Valley Advisors Inc. Missouri
Mercantile Properties, Inc. Missouri
Mark Twain Brokerage Services Inc. Missouri
Sangamon Investment Company Missouri
Mercantile Insurance Services, Inc. Missouri
Mark Twain St. Louis Investment Company Missouri
Mercantile Investment Services Inc. Missouri
Bruno Stolze LLC Missouri
Metropolitan Savings Service Corporation Missouri
Lending Express, L.P. Missouri
Mercantile Center Associates Missouri
Mercantile Redevelopment Corp. Missouri
Mercantile Bank International Missouri
Mercantile Trade Services Limited Hong Kong
Manley Investment Services, Inc. Missouri
United Financial Services Illinois
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Subsidiary Jurisdiction
---------- ------------
<S> <C>
SoMo Investment Company, Inc. Missouri
Roosevelt Texas Holdings, Inc. Missouri
Mercantile Community Development Corporation Missouri
Mercantile Mortgage Financial Company Missouri
Mercantile Mortgage Realty L.L.C. Illinois
Caltrop Corporation Illinois
Lakewood Oaks Golf Club, Ltd. Missouri
Fortune Homes, Inc. Missouri
F&H Realty Corp. Missouri
Mississippi Valley Life Insurance Company Missouri
D.D. Development of Sterling Limited Partnership Illinois
Mercantile Service Corp. Missouri
Roosevelt Financial Services, Inc. Missouri
Tarquad Corporation Missouri
Mark Twain Properties, Inc. Missouri
Mark Twain Investment Advisory Company Missouri
Horizon Financial Services, Inc. Arkansas
FFG Trust, Inc. Illinois
GCT Realty Company Illinois
Mercantile Consumer Loan Company Inc. Illinois
Franklin Finance Company Delaware
Supplemental Monetary Transfer System Missouri
Mercantile Capital Trust I Missouri
</TABLE>
<PAGE>
EXHIBIT NO. 23
Independent Auditors' Consent
The Board of Directors
Mercantile Bancorporation Inc.:
We consent to the incorporation by reference in the Registration Statements No.
2-78395, No. 33-15265, No. 33-33870, No. 33-35139, No. 33-43694, No. 33-48952,
No. 33-57543, No. 333-47713, and No. 333-55905, each on Form S-8; and No. 33-
45863, No. 33-52986, No. 33-50981, No. 33-55439, No. 33-58467, No. 33-63609,
No. 333-09803, No. 333-23607, No. 333-27431, No. 333-42557, No. 333-50203, No.
333-51329, No. 333-56639, and No. 333-57345, each on Form S-4; and No. 333-
37547 on Form S-3, of Mercantile Bancorporation Inc. of our report dated
January 20, 1999, relating to the consolidated balance sheets of Mercantile
Bancorporation Inc. and subsidiaries as of December 31, 1998, 1997, and 1996,
and the related consolidated statements of income, changes in shareholders'
equity, cash flows, and comprehensive income for each of the years in the
three-year period ended December 31, 1998, which report appears in the Annual
Report on Form 10-K of Mercantile Bancorporation Inc. for the fiscal year ended
December 31, 1998.
/s/ KPMG LLP
St. Louis, Missouri
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,760,636
<INT-BEARING-DEPOSITS> 367,304
<FED-FUNDS-SOLD> 226,730
<TRADING-ASSETS> 126,540
<INVESTMENTS-HELD-FOR-SALE> 9,246,790
<INVESTMENTS-CARRYING> 97,607
<INVESTMENTS-MARKET> 99,336
<LOANS> 22,311,258
<ALLOWANCE> 308,890
<TOTAL-ASSETS> 35,800,177
<DEPOSITS> 25,461,397
<SHORT-TERM> 3,002,660
<LIABILITIES-OTHER> 514,031
<LONG-TERM> 3,723,334
<COMMON> 1,574
0
0
<OTHER-SE> 3,072,181
<TOTAL-LIABILITIES-AND-EQUITY> 35,800,177
<INTEREST-LOAN> 1,771,235
<INTEREST-INVEST> 590,686
<INTEREST-OTHER> 30,197
<INTEREST-TOTAL> 2,392,118
<INTEREST-DEPOSIT> 931,716
<INTEREST-EXPENSE> 1,287,858
<INTEREST-INCOME-NET> 1,104,260
<LOAN-LOSSES> 51,154
<SECURITIES-GAINS> 15,435
<EXPENSE-OTHER> 1,026,757
<INCOME-PRETAX> 568,267
<INCOME-PRE-EXTRAORDINARY> 375,303
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,303
<EPS-PRIMARY> 2.45
<EPS-DILUTED> 2.41
<YIELD-ACTUAL> 3.56
<LOANS-NON> 132,713
<LOANS-PAST> 28,998
<LOANS-TROUBLED> 5,950
<LOANS-PROBLEM> 90,834
<ALLOWANCE-OPEN> 284,165
<CHARGE-OFFS> 64,866
<RECOVERIES> 22,782
<ALLOWANCE-CLOSE> 308,890
<ALLOWANCE-DOMESTIC> 308,890
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 73,127
</TABLE>
