UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 30, 1999
1-2981
(Commission File Number)
---------------------------
FIRSTAR CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-1940778
(State of Incorporation) (I.R.S. EMPLOYER
Identification No.)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
(Address of Registrant's principal executive office)
(414) 765-4321
(Registrant's telephone number)
Item 5. Other Events
This Form 8-K/A amends the Form 8-K filed by Firstar Corporation on May 4,
1999, and related to the Agreement and Plan of Merger dated as of April 30,
1999, by and between Firstar Corporation and Mercantile Bancorporation, Inc.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Mercantile Bancorporation Inc.
The following consolidated financial statements of Mercantile
Bancorporation, Inc. are incorporated herein by reference to Exhibit 99.1
filed herewith.
- Consolidated Balance Sheets as of December 31, 1998 and 1997
- Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended 1998, 1997, and 1996
- Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996
- Notes to Consolidated Financial Statements
The following consolidated financial statements of Mercantile
Bancorporation, Inc. are incorporated herein by reference to Exhibit 99.2
filed herewith.
- Independent Auditors Report
- Consolidated Balance Sheets as of March 31, 1999 and 1998
- Consolidated Statements of Income for the Three Months Ended March
31, 1999 and 1998
- Consolidated Statements of Changes in Stockholders' Equity for the
Three Months Ended March 31, 1999 and 1998
- Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998
- Notes to Consolidated Financial Statements
The consent of KPMG LLP is incorporated herein by reference to Exhibit
99.3 filed herewith.
(c) Exhibits
99.1 Consolidated Financial Statements of Mercantile Bancorporation
Inc. for the Years Ended December 31, 1998, 1997, and 1996
99.2 Consolidated Financial Statements of Mercantile Bancoporation
Inc. for the Three Months Ended March 31, 1999 and 1998
99.3 Consent of KPMG LLP
Signature
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Firstar Corporation
May 18, 1999 /s/David M. Moffett
---------------------------
David M. Moffett
Vice Chairman
and Chief Financial Officer
Mercantile Bancorporation Inc. and Subsidiaries
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CONSOLIDATED BALANCE SHEET December 31
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(Thousands) 1998 1997 1996
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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
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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
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Total Loans and Leases 22,311,258 21,361,955 16,937,254
Reserve for possible loan
losses (308,890) (284,165) (257,718)
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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
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Total Assets $35,800,177 $33,332,190 $24,995,735
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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
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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
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Total Liabilities 32,726,422 30,569,888 22,732,492
Commitments and contingent
liabilities -- -- --
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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)
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Total Shareholders' Equity 3,073,755 2,762,302 2,263,243
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Total Liabilities and
Shareholders' Equity $35,800,177 $33,332,190 $24,995,735
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The accompanying notes to consolidated financial statements are an integral part
of these statements.
Mercantile Bancorporation Inc. and Subsidiaries
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CONSOLIDATED STATEMENT OF INCOME Year Ended December 31
---------------------------------------------
(Thousands except per share data) 1998 1997 1996
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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
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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
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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
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Total Interest Expense 1,287,858 1,070,940 822,157
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Net Interest Income 1,104,260 1,047,738 948,963
PROVISION FOR POSSIBLE LOAN LOSSES* 51,154 86,355 78,766
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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
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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
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Total Other Expense 1,026,757 986,378 805,187
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Income Before Income Taxes 568,267 389,198 433,020
INCOME TAXES* 192,964 142,376 148,567
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Net Income* $ 375,303 $ 246,822 $ 284,453
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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
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*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)
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Reduction of Net Income $ 76,692 $ 132,377 $ 56,539
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The accompanying notes to consolidated financial statements are an integral part
of these statements.
Mercantile Bancorporation Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock
----------------------- Total
Outstanding Preferred Capital Retained Treasury Shareholders'
(Dollars in thousands) Shares Dollars Stock Surplus Earnings* Stock Equity
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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)
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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
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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
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BALANCE AT DECEMBER 31, 1998 157,404,038 $ 1,574 $ -- $ 999,595 $2,076,317 $ (3,731) $ 3,073,755
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*Includes accumulated other comprehensive income.
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31
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(Thousands) 1998 1997 1996
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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
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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
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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
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Net Cash Provided (Used) by Financing Activities 360,840 580,227 (71,200)
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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
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Cash and Cash Equivalents at End of Year $ 2,354,670 $ 1,886,280 $ 1,856,314
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The accompanying notes to consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31
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(Thousands) 1998 1997 1996
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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
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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)
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Other Comprehensive Income (Loss), Net of Tax 13,703 8,805 (16,841)
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Comprehensive Income $ 389,006 $ 255,627 $ 267,612
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The accompanying notes to consolidated financial statements are an integral
part of these statements.
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.
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.
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:
Year Ended December 31
-----------------------------------------
(Thousands except
per share data) 1998 1997 1996
- ----------------------------------------------------------------------
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
- ----------------------------------------------------------------------
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:
Original Consideration
Intangible -------------------------- Accounting
(Dollars in thousands) Date Assets Asset Cash Gross Shares Method
- ------------------------------------------------------------------------------------------------------------------------------------
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.
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:
Six Months
Ended June 30
-------------
(Thousands except per share data) 1998
- --------------------------------------------------
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
- --------------------------------------------------
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.
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:
As of or for the
Year Ended December 31
-----------------------
(Thousands except per share data) 1997 1996
- ------------------------------------------------------------
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
- ------------------------------------------------------------
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:
Three Months
Ended March 31
--------------
(Thousands except per share data) 1997
- -------------------------------------------------
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
- -------------------------------------------------
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:
Year Ended December 31
------------------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------
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
- ------------------------------------------------------------------------
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.
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:
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------
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:
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------
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.
Year Ended December 31
------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------
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
- ----------------------------------------------------------------------
Mercantile Bancorporation Inc. and Subsidiaries
NOTE G--LOANS AND LEASES
Loans and leases consisted of the following:
December 31
---------------------------------------
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------
Changes in the reserve for possible loan losses were as follows:
Year Ended December 31
----------------------------------------
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------
Non-performing loans consisted of the following:
December 31
----------------------------------------
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Non-accrual $ 132,713 $ 113,134 $ 81,037
Renegotiated 5,950 4,335 5,413
- -------------------------------------------------------------------------------------------------------------
Non-performing Loans $ 138,663 $ 117,469 $ 86,450
- -------------------------------------------------------------------------------------------------------------
By the Corporation's definition, all non-accrual and renegotiated commercial-
related loans are considered impaired. The following table presents information
on impaired loans:
As of or for the Year Ended December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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:
December 31
----------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------
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
- ---------------------------------------------------------------
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:
Minimum
Rental
Period (Thousands)
- -----------------------------
1999 $18,374
2000 15,884
2001 11,928
2002 8,840
2003 6,403
2004 and later 19,160
- -----------------------------
Total $80,589
- -----------------------------
Net rental expense for all operating leases was $19,031,000 in 1998,
$19,706,000 in 1997 and $15,232,000 in 1996.
Mercantile Bancorporation Inc. and Subsidiaries
NOTE I--DEPOSITS
Deposits consisted of the following:
December 31
--------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------
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
- --------------------------------------------------------------------
The scheduled maturities of Mercantile's consumer time certificates under
$100,000, time certificates $100,000 and over and other time deposits were as
follows:
Scheduled
Maturity
Amount
Period (Thousands)
- ------------------------------
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
- ------------------------------
NOTE J--SHORT-TERM BORROWINGS
Short-term borrowings were as follows:
December 31
---------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------
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
- -----------------------------------------------------------------
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:
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------
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
- -----------------------------------------------------------------
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:
December 31
---------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------
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
- ---------------------------------------------------------------
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:
(Thousands)
Period FHLB Advances Other Total
- -----------------------------------------------------
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
- -----------------------------------------------------
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:
December 31
---------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------
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
- --------------------------------------------------------
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.
Mercantile Bancorporation Inc. and Subsidiaries
NOTE M -- INCOME TAXES
The Corporation's results include income tax expense as follows:
(Thousands) Current Deferred Total
- ---------------------------------------------------
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
- ---------------------------------------------------
The tax effects of temporary differences that gave rise to the deferred tax
assets and deferred tax liabilities are presented below:
December 31
---------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------
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
- -----------------------------------------------------------------
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:
Year Ended December 31
------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------
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
- ------------------------------------------------------------
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.
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:
Year Ended December 31
---------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------
Weighted average assumptions used as of December 31 were as follows:
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------
The table below sets forth the change in benefit obligation:
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------
The change in plan assets is as follows:
Year Ended December 31
---------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------
The reconciliation of funded status is as follows:
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------
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.
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:
Year Ended December 31
---------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------
Weighted average assumptions used as of December 31 were as follows:
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
The following table sets forth the change in benefit obligation:
Year Ended December 31
---------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------
The reconciliation of funded status is as follows:
Year Ended December 31
--------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------------------------------
The sensitivity of reported figures for postretirement welfare benefits to
changes in the assumed health care cost trend are set forth below:
1 Percentage Point
Change in Health Care Cost
---------------------------
(Thousands) Increase Decrease
- -----------------------------------------------------------------
Effect on service and interest
cost components of net periodic cost $ 112 $ (99)
Effect on accumulated
postretirement benefit obligation 1,542 (1,365)
- -----------------------------------------------------------------
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.
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:
Options Outstanding
-------------------------------------------------
Weighted Average
Range of Remaining Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
$ 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
----------------------------------------------------------------------------------------------------------------------
Changes in options outstanding were as follows:
Weighted
Average
Exercise
Shares Price
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
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:
1998 1997 1996
- ---------------------------------------------------------------
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
- ---------------------------------------------------------------
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:
(Thousands except per share data) As Reported Pro Forma
- ------------------------------------------------------------
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
- ------------------------------------------------------------
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.
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:
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
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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
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:
December 31
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
(Thousands) Value Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------------------------------------
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.
Mercantile Bancorporation Inc. and Subsidiaries
The notional or contract amounts of financial instruments with off-balance-
sheet credit risk were as follows:
December 31
----------------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------------
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 --
- ---------------------------------------------------------------------
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:
December 31
------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------
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
- ---------------------------------------------------------------
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.
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.
STATEMENT OF INCOME December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
Mercantile Bancorporation Inc. and Subsidiaries
STATEMENT OF CASH FLOWS Year Ended December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
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.
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.
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
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
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.
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
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS)
MARCH 31 MARCH 31
1999 DEC. 31 1998
(UNAUDITED) 1998 (UNAUDITED)
----------- ------- -----------
ASSETS
Cash and due from banks $ 1,210,972 $ 1,760,636 $ 1,316,663
Due from banks--interest bearing 291,561 367,304 280,676
Federal funds sold and repurchase agreements 366,270 226,730 336,417
Investments in debt and equity securities
Trading 188,069 126,540 125,680
Available-for-sale (Amortized cost
of $9,319,603, $9,185,770 and $8,784,082,
respectively) 9,308,727 9,246,790 8,829,585
Held-to-maturity (Estimated fair
value of $83,512, $99,336 and
$314,356, respectively) 81,906 97,607 307,234
----------- ----------- -----------
Total Investments in Debt and Equity Securities 9,578,702 9,470,937 9,262,499
Loans held-for-sale 176,050 217,941 249,407
Loans and leases, net of unearned income 22,300,949 22,093,317 21,513,860
----------- ----------- -----------
Total Loans and Leases 22,476,999 22,311,258 21,763,267
Reserve for possible loan losses (309,048) (308,890) (293,565)
----------- ----------- -----------
Net Loans and Leases 22,167,951 22,002,368 21,469,702
Bank premises and equipment 533,807 545,559 542,774
Intangible assets 765,560 781,188 823,955
Other assets 663,996 645,455 1,116,631
----------- ----------- -----------
Total Assets $35,578,819 $35,800,177 $35,149,317
=========== =========== ===========
LIABILITIES
Deposits
Non-interest bearing $3,901,014 $ 4,453,048 $ 3,834,599
Interest bearing 20,398,177 20,526,576 20,935,126
Foreign 423,206 481,773 463,426
----------- ----------- -----------
Total Deposits 24,722,397 25,461,397 25,233,151
Federal funds purchased and repurchase agreements 2,353,079 2,087,373 2,142,440
Other short-term borrowings 377,296 915,287 1,656,666
Bank notes -- 25,000 25,000
Long-term Federal Home Loan Bank advances 3,475,038 2,790,336 1,447,362
Other long-term debt 781,032 782,998 789,588
Company-obligated mandatorily redeemable preferred
securities of Mercantile Capital Trust I 150,000 150,000 150,000
Other liabilities 618,514 514,031 861,944
----------- ----------- -----------
Total Liabilities 32,477,356 32,726,422 32,306,151
Commitments and contingent liabilities -- -- --
MARCH 31 DEC. 31 MARCH 31
1999 1998 1998
-------- ------- --------
SHAREHOLDERS' EQUITY
Preferred stock--no par value
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding -- -- -- -- -- --
Common stock--$.01 par value
Shares authorized 400,000 400,000 200,000
Shares issued 157,916 157,487 153,326 1,578 1,574 1,535
Capital surplus 1,009,106 999,595 1,065,295
Retained earnings 2,099,532 2,035,157 1,840,855
Accumulated other comprehensive income (6,600) 41,160 32,740
Treasury stock, at cost 47 83 1,845 (2,153) (3,731) (97,259)
----------- ----------- -----------
Total Shareholders' Equity 3,101,463 3,073,755 2,843,166
----------- ----------- -----------
Total Liabilities and
Shareholders' Equity $35,578,819 $35,800,177 $35,149,317
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31
1999 1998
---- ----
INTEREST INCOME
Interest and fees on loans and leases $431,903 $442,332
Investments in debt and equity securities
Trading 2,579 2,065
Taxable 140,293 135,941
Tax-exempt 5,463 6,111
-------- --------
Total Investments in Debt and Equity Securities 148,335 144,117
Due from banks--interest bearing 3,691 3,093
Federal funds sold and repurchase agreements 3,009 3,638
-------- --------
Total Interest Income 586,938 593,180
INTEREST EXPENSE
Interest bearing deposits 210,757 229,803
Foreign deposits 5,881 7,617
Short-term borrowings 30,857 52,329
Bank notes 133 2,323
Long-term debt and mandatorily redeemable preferred securities 55,081 28,387
-------- --------
Total Interest Expense 302,709 320,459
-------- --------
NET INTEREST INCOME 284,229 272,721
PROVISION FOR POSSIBLE LOAN LOSSES 7,479 8,537
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 276,750 264,184
OTHER INCOME
Trust 29,142 28,128
Service charges 29,640 28,244
Investment banking and brokerage 11,082 11,066
Mortgage banking 6,199 5,943
Gain on sale of mortgage servicing rights -- 23,155
Securitization revenue 5,451 4,523
Securities gains 12,963 4,453
Miscellaneous 31,967 31,439
-------- --------
Total Other Income 126,444 136,951
OTHER EXPENSE
Salaries 101,687 102,631
Employee benefits 21,652 22,547
Net occupancy 17,191 16,184
Equipment 23,689 20,858
Intangible asset amortization 14,323 14,596
Postage and freight 7,604 7,305
Miscellaneous 39,208 36,417
-------- --------
Total Other Expense 225,354 220,538
-------- --------
INCOME BEFORE INCOME TAXES 177,840 180,597
INCOME TAXES 59,803 65,738
-------- --------
NET INCOME $118,037 $114,859
======== ========
PER SHARE DATA
Basic earnings per share $.75 $.76
Diluted earnings per share .74 .75
Dividends declared .34 .31
The accompanying notes to consolidated financial statements are an integral part
of these statements.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
------ ------- -------- ------------- -------- -------------
BALANCE AT DECEMBER 31, 1997 $1,489 $1,016,844 $1,724,752 $ 25,222 $ (6,005) $2,762,302
Net income 114,859 114,859
Other comprehensive income:
Holding gains on available-for-sale
securities, net of tax of $4,956 9,204 9,204
Less: Reclassification adjustment for
securities gains included in net income
above, net of tax of $1,559 (2,894) (2,894)
-------- ----------
Other Comprehensive Income Net of Tax 6,310 6,310
----------
Total Comprehensive Income 121,169
Common dividends declared:
Mercantile Bancorporation Inc.--$.31 per
share (41,747) (41,747)
Pooled companies prior to acquisition (5,208) (5,208)
Issuance of common stock in acquisitions of:
HomeCorp, Inc. 9 6,727 13,765 27 20,528
Horizon Bancorp, Inc. 25 10,755 34,434 1,181 357 46,752
Issuance of common stock for:
Employee incentive plans 9 28,628 2,193 30,830
Convertible notes 1 86 87
Purchase of treasury stock (93,804) (93,804)
Pre-merger transactions of pooled companies and
other 2 2,255 2,257
------ ---------- ---------- -------- -------- ----------
BALANCE AT MARCH 31, 1998 $1,535 $1,065,295 $1,840,855 $ 32,740 $(97,259) $2,843,166
====== ========== ========== ======== ======== ==========
BALANCE AT DECEMBER 31, 1998 $1,574 $ 999,595 $2,035,157 $ 41,160 $ (3,731) $3,073,755
Net income 118,037 118,037
Other comprehensive income (loss):
Holding losses on available-for-sale
securities, net of tax benefit of $21,180 (39,334) (39,334)
Less: Reclassification adjustment for
securities gains included in net income
above, net of tax of $4,537 (8,426) (8,426)
-------- ----------
Other Comprehensive Loss Net of Tax
Benefit (47,760) (47,760)
----------
Total Comprehensive Income 70,277
Common dividends declared--$.34 per share (53,662) (53,662)
Issuance of common stock for:
Employee incentive plans 4 9,384 2,863 12,251
Convertible notes 127 127
Purchase of treasury stock (1,285) (1,285)
------ ---------- ---------- ------- -------- ----------
BALANCE AT MARCH 31, 1999 $1,578 $1,009,106 $2,099,532 $ (6,600) $ (2,153) $3,101,463
====== ========== ========== ======== ======== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS)
THREE MONTHS ENDED
MARCH 31
1999 1998
---- ----
OPERATING ACTIVITIES
Net income $ 118,037 $ 114,859
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for possible loan losses 7,479 8,537
Depreciation and amortization 19,439 18,287
Provision for deferred income taxes (credits) 1,486 (2,305)
Net change in loans held-for-sale 41,891 (146,378)
Net change in trading securities 17,365 13,575
Net change in accrued interest receivable 5,911 14,722
Net change in accrued interest payable 11,465 8,449
Other, net 55,339 (41,856)
---------- -----------
Net Cash Provided (Used) by Operating Activities 278,412 (12,110)
INVESTING ACTIVITIES
Investments in debt and equity securities, other than
trading securities
Purchases (2,188,944) (2,474,948)
Proceeds from maturities 964,683 1,332,649
Proceeds from sales of available-for-sale securities 1,098,838 606,143
Net change in loans and leases (278,974) 243,072
Purchases of loans and leases (141,874) (127,651)
Proceeds from sale of mortgage servicing rights -- 26,330
Proceeds from sales of loans and leases 195,375 205,855
Purchases of premises and equipment (16,645) (20,392)
Proceeds from sales of premises and equipment 8,045 3,830
Proceeds from sales of foreclosed property 11,425 9,975
Net cash and cash equivalents received from (paid for)
acquisitions -- 34,448
Net cash and cash equivalents received from (paid for)
sale of banking offices -- (3,524)
Other, net 5,137 5,588
---------- -----------
Net Cash Used by Investing Activities (342,934) (158,625)
FINANCING ACTIVITIES
Net change in non-interest bearing, savings, interest
bearing demand and money market deposit accounts (563,103) (92,349)
Net change in time certificates of deposit under $100,000 (297,613) (308,440)
Net change in time certificates of deposit $100,000 and
over 189,885 95,093
Net change in other time deposits (9,602) 14,787
Net change in foreign deposits (58,567) (122,013)
Net change in short-term borrowings (296,867) 62,724
Principal payments on bank notes (25,000) (150,000)
Issuance of long-term FHLB advances and other long-term
debt 935,000 851,500
Principal payments on long-term debt (252,035) (5,275)
Cash dividends paid (49,789) (44,580)
Proceeds from issuance of common stock from employee
incentive plans 7,631 10,568
Purchase of treasury stock (1,285) (93,804)
---------- -----------
Net Cash Provided (Used) by Financing Activities (421,345) 218,211
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (485,867) 47,476
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,354,670 1,886,280
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,868,803 $ 1,933,756
========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
ACCOUNTING POLICIES
The consolidated financial statements include all adjustments which are, in the
opinion of management, necessary for the fair statement of the results of these
periods and are of a normal recurring nature. Certain reclassifications have
been made to the 1998 historical financial statements to conform to the 1999
presentation.
NOTE B
NEW ACCOUNTING STANDARDS
Financial Accounting Standard ("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
will be 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.
NOTE C
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share gives effect to the increase in the average shares
outstanding that would have resulted from the exercise of dilutive stock
options, the issuance of share equivalents under other employee incentive plans
and the conversion of the entire balance of outstanding convertible notes. Net
income is increased in the diluted earnings per share computation by interest
expense that would not be incurred on notes if they converted, net of taxes. The
components of basic and diluted earnings per share are as follows:
(THOUSANDS EXCEPT PER SHARE DATA)
FIRST QUARTER
1999 1998
---- ----
BASIC
Net income $118,037 $114,859
Weighted average common shares outstanding 157,632,844 151,056,828
BASIC EARNINGS PER SHARE $.75 $.76
DILUTED
Net income $118,037 $114,859
Interest on convertible notes, net of taxes 8 12
-------- --------
Diluted Net Income $118,045 $114,871
======== ========
Weighted average common shares outstanding 157,632,844 151,056,828
Employee incentive plans 1,897,044 2,722,594
Convertible notes 71,807 98,140
----------- -----------
Diluted Average Shares Outstanding 159,601,695 153,877,562
=========== ===========
DILUTED EARNINGS PER SHARE $.74 $.75
NOTE D
ACQUISITIONS
On July 1, 1998, the Corporation acquired CBT Corporation ("CBT") of Paducah,
Kentucky, and Firstbank of Illinois Co. ("Firstbank"), headquartered in
Springfield, Illinois. The CBT and Firstbank acquisitions were accounted for
under the pooling-of-interests method. 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:
(THOUSANDS EXCEPT
PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30, 1998
----------------
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
NOTE E
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE
CAPITAL TRUST I
Mercantile Capital Trust I is a subsidiary of which the Corporation owns all the
outstanding common securities; its sole assets are the $150,000,000 in
mandatorily redeemable preferred securities, and considered together, the
back-up undertakings constitute a full and unconditional guarantee by Mercantile
Bancorporation Inc. of the trust's obligations under the preferred securities.
NOTE F
PENDING MERGER
On April 30, 1999, a definitive Agreement and Plan of Merger by and between
Mercantile and Firstar Corporation ("Firstar") was signed. Pursuant to the terms
of the Merger Agreement, Mercantile will merge with and into Firstar in a
transaction structured as and intended to be a tax-free reorganization, with
Mercantile shareholders to receive Firstar common stock valued on that day at
approximately $10.6 billion. The parties at the same time also signed stock
option agreements granting each other options to purchase the other's stock,
which options become exercisable upon the occurrence of certain events. Firstar
is a $38 billion-asset bank holding company headquartered in Milwaukee. Under
terms of the agreement, Mercantile shareholders will receive 2.091 shares of
Firstar common stock for each share of Mercantile common stock owned. The
transaction will be accounted for as a pooling-of-interests, and is expected
to close in the fourth quarter of 1999, pending shareholder and regulatory
approvals.