<PAGE>
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Securities And Exchange Commission
Washington, D.C. 20549
1994
Form 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 or 15(d) of
The Securities Exchange Act of 1934
[Fee Required]
For the fiscal year ended December 31, 1994 Commission file number 0-18179
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or
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
[No Fee Required]
Harris Bankcorp, Inc.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2722782
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 West Monroe Street, Chicago, Illinois 60603
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
312/461-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $8 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
All voting stock (6,667,490 shares of Common Stock, $8 par value) is owned by
Bankmont Financial Corp. as a result of the September 4, 1984 merger between
Harris Bankcorp, Inc. and Bank of Montreal. Bankmont Financial Corp. is a
wholly-owned Delaware subsidiary of Bank of Montreal.
The Registrant meets the conditions set forth in General Instruction (J) (1) (a)
and (b) of Form 10-K and is therefore filing this Form with a reduced disclosure
format.
Documents incorporated by reference:
None
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Form 10-K Cross Reference Index Page
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Part I Item 1 Business...................................................................................... 2
Item 2 Properties.................................................................................... 4
Item 3 Legal Proceedings............................................................................. 4
Item 4 Submission of Matters to a Vote of Security Holders (during the fourth quarter of 1994)....... 4
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Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......................... 4
Item 6 Selected Financial Data....................................................................... 5
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 7
Item 8 Financial Statements and Supplementary Data:
Quarterly Financial Data...................................................................... 32
Consolidated Statement of Income.............................................................. 33
Consolidated Statement of Condition........................................................... 34
Statement of Changes in Stockholder's Equity.................................................. 35
Consolidated Statement of Cash Flows.......................................................... 36
Notes to Financial Statements................................................................. 37
Explanation of Joint Independent Auditors' Reports............................................ 56
Independent Auditors' Reports................................................................. 57
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 58
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Part III Item 10 Directors and Executive Officers of the Registrant............................................ 59
Item 12 Security Ownership of Certain Beneficial Owners and Management................................ 60
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Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 60
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Signatures........................................................................................................... 61
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</TABLE>
1
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PART I
ITEM 1--BUSINESS
Business Overview
Harris Bankcorp, Inc. ("Bankcorp") is a Delaware multibank holding company
headquartered in Chicago. Bankcorp is a wholly-owned subsidiary of Bankmont
Financial Corp. ("Bankmont"), a wholly-owned U.S. subsidiary of Bank of
Montreal. On October 1, 1994, Bankmont also became the parent company for Harris
Bankmont, Inc. (formerly Suburban Bancorp, Inc.), a Chicago area multibank
holding company with assets of $1.5 billion at December 31, 1994. The
transaction added 13 banks and 30 locations in Illinois in addition to those
owned by Bankcorp.
Bankcorp provides banking, trust and other services domestically and
internationally through 14 bank and 17 active nonbank subsidiaries. The bank
subsidiaries include Harris Trust and Savings Bank; Harris Bank Barrington,
N.A.; Harris Bank Frankfort; Harris Bank Glencoe-Northbrook, N.A.; Harris Bank
Hinsdale, N.A.; Harris Bank Libertyville; Harris Bank Naperville; Harris Bank
Roselle; Harris Bank Argo; Harris Bank Wilmette, N.A.; Harris Bank Winnetka,
N.A.; Harris Bank St. Charles; Harris Bank Batavia, N.A.; and Harris Trust Bank
of Arizona. All bank subsidiaries, with the exception of Harris Trust Bank of
Arizona, are located in Illinois. Nonbank subsidiaries consist of trust
companies and other specialized financial services companies. The trust
companies include Harris Trust Company of California, Harris Trust Company of
Florida, Harris Trust Company of New York and Bank of Montreal Trust Company.
They provide specialized nondeposit services, notably stock transfer and
indenture trust. Other principal nonbank subsidiaries, Harris Investors Direct,
Inc., a discount brokerage company, and Harris Investment Management, Inc., a
registered investment adviser, are headquartered in Chicago. Throughout this
Form 10-K ("Report"), the term "Corporation" refers to Harris Bankcorp, Inc. and
subsidiaries.
Bankcorp's lead bank subsidiary is Harris Trust and Savings Bank
("HTSB"), an Illinois state-chartered bank with its principal office, two
domestic branch offices, an international banking facility and two automatic
banking centers located in Chicago. Additionally, HTSB has representative
offices in Los Angeles, New York and Tokyo; foreign branch offices in Nassau and
London; and an Edge Act subsidiary, Harris Bank International Corporation
("HBIC"), in New York.
HTSB provides a variety of banking and financial services to
commercial and industrial companies, financial institutions, governmental units,
not-for-profit organizations and individuals throughout the U.S. and abroad.
Services rendered and products sold to customers include numerous types of
demand, savings and time deposit accounts; negotiable certificates of deposit;
various types of loans including term, real estate and those under lines of
credit and revolving credit facilities; sales and purchases of foreign
currencies; interest rate management products including swaps, forward rate
agreements and interest rate guarantees; cash management services including
lockbox and controlled disbursement processing; underwriting of municipal bonds;
and financial consulting. Additionally, HTSB trades foreign currencies and a
variety of debt securities for its own account and utilizes interest rate swaps,
financial futures and options both to manage its risk exposure and as trading
vehicles.
HTSB's overseas activities are conducted through its representative
offices, branches, an international banking facility, Bank of Montreal Trust
Company (Channel Islands), Ltd., and HBIC. Services include various types of
loans and deposits, letters of credit, personal trust services, export and
import financing and foreign exchange products.
HTSB's Trust Department furnishes a variety of trust services to
individuals, businesses, municipalities and charitable organizations. HTSB acts
as trustee of personal, corporate, pension and other employee benefit trusts;
serves as executor and administrator of estates; provides global custody and
master trust services; and acts as stock and bond registrar and transfer agent,
dividend reinvestment agent and paying agent.
2
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Effect of Government Policies
The operations of the Corporation are affected by general economic conditions
and the policies of various governmental regulatory authorities. In particular,
the Federal Reserve System regulates money and credit conditions and interest
rates in order to influence general economic conditions, primarily through open
market operations in U.S. Government securities, varying the discount rate on
bank borrowings, setting reserve requirements against financial institution
deposits and prescribing minimum capital requirements for member banks. These
policies have a significant influence on overall growth and distribution of bank
loans, investments and deposits, and affect interest rates charged on loans and
earned on investments or paid for time, savings and other deposits. Federal
Reserve Board monetary policies have had a significant effect on the operating
results of commercial banks in the past and this is expected to continue. The
effect of such policies upon the future business and earnings of the Corporation
cannot accurately be predicted.
Regulation and Supervision
Bankcorp is a legal entity separate and distinct from its subsidiaries. There
are various legal limitations on the ability of its banking subsidiaries to
finance or otherwise supply funds to Bankcorp or various of its other
affiliates. Note 13 to Financial Statements on page 52 of this Report provides
details with respect to regulatory restrictions on dividends.
In addition, the banking subsidiaries are subject to certain
restrictions on any extensions of credit to Bankcorp and (with certain
exceptions) other affiliates, on investments in stock or other securities
thereof and on the taking of such securities as collateral for loans. As a bank
holding company, Bankcorp is subject to the Bank Holding Company Act of 1956, as
amended, which in general limits the activities which may be engaged in by the
holding company and its subsidiaries to those so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
Bankcorp and its banking subsidiaries are subject to regulation by
various State and Federal authorities. Applicable laws and regulations relate to
reserves, deposit insurance, investments, loans, mergers and consolidations,
issuance of securities, payment of dividends, capital adequacy and other aspects
of their operations. Bankcorp and its nonbank subsidiaries are affiliates of the
banking subsidiaries within the meaning of the Federal Reserve Act and the
Illinois Banking Act. Certain nonbank subsidiaries including the trust
companies, Harris Investment Management, Inc., Harris Investors Direct, Inc. and
others are subject to a variety of Federal and State regulations.
The enactment of the Federal Deposit Insurance Corporation Improvement
Act of 1991, and the regulations adopted to implement its various provisions,
have had a significant effect on commercial banks. Five capital categories
ranging from "well capitalized" to "critically undercapitalized" were defined.
Adequate capital is essential if a bank or thrift is to avoid the statute's
prompt corrective action provisions. Interest rate risk limits were incorporated
into the risk-based capital standards to ensure that banks have sufficient
capital to cover their exposure. Federal regulators adopted safety and soundness
standards covering operations and management, asset quality, earnings and stock
valuation, and compensation. Federal regulations require establishment of annual
independent audits, management's assessment of internal controls over financial
reporting and compliance with designated laws and regulations, independent
auditor reports and independent audit committees. A risk-based assessment system
was designed for the calculation of deposit insurance premiums. Truth-in-savings
regulations, loan-to-value ratios for real estate lending and standards to limit
interbank exposures were adopted. The Corporation's subsidiaries are in
compliance with the statute and its regulations.
3
<PAGE>
Competition
Active competition exists in all principal geographic and product line areas in
which the Corporation is presently engaged. Competitors include other commercial
banks, investment banks, savings and loan associations, finance companies,
credit unions, insurance companies, mutual funds, mortgage banks, investment
managers and advisors, leasing companies, other domestic and foreign financial
institutions and various nonfinancial intermediaries.
Employees
The Corporation and HTSB had full-time equivalent employees of 5,655 and 4,179,
respectively, at December 31, 1994.
ITEM 2--PROPERTIES
The Corporation's headquarters and HTSB's main banking premises are located at
111 West Monroe Street, Chicago, Illinois. This bank and office building complex
is comprised of three connected buildings containing a total of approximately
1,590,000 gross square feet. Approximately 54 percent of the rentable space is
committed to use by HTSB. Virtually all of the remaining space in the entire
building complex has been rented to tenants. HTSB holds title to this property.
HTSB also owns its operations center. This 15-story building contains
approximately 415,000 gross square feet and is totally dedicated to bank use. It
is located at 311 West Monroe Street, Chicago.
Certain banking subsidiaries, other than HTSB, individually own
premises used to conduct banking business. Nonbank subsidiaries, certain
divisions of HTSB and certain other subsidiaries conduct activities from leased
premises.
In 1990 and 1991, HTSB purchased air rights and a 72,000 square foot
parcel of vacant land in Chicago's downtown business district. Construction
plans for a new operations and office building complex on this site were
deferred. For more information, see Note 5 to Financial Statements on pages 41
and 42 of this Report.
ITEM 3--LEGAL PROCEEDINGS
For information on the Corporation's legal proceedings, see Note 14 to Financial
Statements on page 53 of this Report.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Stockholder during the fourth quarter
of 1994.
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Part II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bankmont presently owns all 6,667,490 shares of the voting stock of Bankcorp,
which are not listed or traded on any securities exchange. In 1994, Bankcorp
declared and paid approximately $34.7 million in cash dividends to Bankmont.
Dividends amounting to approximately $56.6 million and $44.1 million were
declared and paid to Bankmont in 1993 and 1992, respectively. The 1993 dividend
included a $7.2 million dividend-in-kind related to the transfer of Harris
Futures Corporation to Bankmont.
4
<PAGE>
ITEM 6-SELECTED FINANCIAL DATA
Comparative Consolidated Statement of Income
Harris Bankcorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Fully taxable equivalent (FTE) basis, dollars
in thousands except per share data)
For the Years Ended December 31 1994 1993 1992 1991 1990 1989
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<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans, including fees.......................... $594,265 $515,994 $586,000 $ 727,671 $ 772,650 $ 772,652
Money market assets:
Deposits at banks............................. 30,739 25,212 32,419 51,327 45,281 71,768
Federal funds sold and securities purchased
under agreement to resell.................... 21,523 17,436 12,560 32,030 25,307 21,693
Trading account................................ 2,796 6,537 21,056 16,790 9,087 3,884
Securities held to maturity.................... 87,740 193,487 200,393 210,068 256,912 230,521
Securities available for sale.................. 121,372 - - - - -
-------- -------- -------- ---------- ---------- ----------
Total interest income......................... 858,435 758,666 852,428 1,037,886 1,109,237 1,100,518
-------- -------- -------- ---------- ---------- ----------
Interest Expense
Domestic deposits.............................. 160,357 143,614 188,082 289,040 313,845 283,554
Foreign deposits............................... 89,645 56,558 64,544 117,289 151,826 187,848
Short-term borrowings.......................... 108,485 73,043 103,988 152,253 211,505 207,041
Long-term notes................................ 19,520 26,406 18,933 13,693 9,847 7,909
-------- -------- -------- ---------- ---------- ----------
Total interest expense........................ 378,007 299,621 375,547 572,275 687,023 686,352
-------- -------- -------- ---------- ---------- ----------
Net Interest Income............................ 480,428 459,045 476,881 465,611 422,214 414,166
Provision for credit losses.................... 45,040 62,835 77,560 79,310 58,375 112,280
-------- -------- -------- ---------- ---------- ----------
Net Interest Income after Provision for
Credit Losses................................. 435,388 396,210 399,321 386,301 363,839 301,886
-------- -------- -------- ---------- ---------- ----------
Noninterest Income
Trust and investment management fees........... 148,094 148,809 145,091 131,149 121,000 108,971
Trading account................................ (396) 5,258 (4,499) 8,403 (1,429) 2,290
Foreign exchange............................... 19,769 24,302 25,062 14,718 19,226 13,162
Charge card.................................... 37,402 36,516 36,355 41,397 35,716 26,294
Service fees and charges....................... 73,621 77,774 80,056 60,940 51,757 43,547
Gain on sales of foreign claims................ - - 15,823 - - -
Securities gains (losses)...................... 5,254 13,038 4,239 2,578 3,504 (413)
Other.......................................... 30,700 31,391 32,902 36,254 34,297 43,467
-------- -------- -------- ---------- ---------- ----------
Total noninterest income...................... 314,444 337,088 335,029 295,439 264,071 237,318
-------- -------- -------- ---------- ---------- ----------
Noninterest Expenses
Employment..................................... 312,570 305,758 281,562 261,098 248,095 238,688
Net occupancy.................................. 45,052 46,676 47,673 49,415 41,729 40,539
Equipment...................................... 42,284 43,396 46,460 42,994 39,283 34,725
Deposit insurance.............................. 15,684 15,047 16,586 15,101 8,107 5,227
Advertising.................................... 14,991 13,528 11,667 10,343 9,359 9,362
Trust customer charge.......................... 51,335 - - - - -
Writedown of property held for expansion....... - - 11,802 - - -
Work force reduction........................... - - - - 17,438 -
Other.......................................... 122,212 127,682 150,223 138,624 120,163 109,627
-------- -------- -------- ---------- ---------- ----------
Total noninterest expenses.................... 604,128 552,087 565,973 517,575 484,174 438,168
-------- -------- -------- ---------- ---------- ----------
FTE pretax income.............................. 145,704 181,211 168,377 164,165 143,736 101,036
Applicable income taxes........................ 24,528 39,879 22,095 20,773 18,710 3,911
FTE adjustment................................. 23,830 25,489 33,029 39,324 45,007 44,831
-------- -------- -------- ---------- ---------- ----------
Income before cumulative effect of a change
in accounting principle...................... 97,346 115,843 113,253 104,068 80,019 52,294
Cumulative effect on prior years
(to December 31, 1992) of changing the
accounting method for income taxes............ - 1,782 - - - -
-------- -------- -------- ---------- ---------- ----------
Net Income.................................... $ 97,346 $117,625 $113,253 $ 104,068 $ 80,019 $ 52,294
======== ======== ======== ========== ========== ==========
Per Share Statistics
Net income..................................... $ 14.60 $ 17.64 $ 16.99 $ 15.61 $ 12.00 $ 7.84
Dividends...................................... 5.21 8.48 6.62 7.24 - 4.80
Average shares outstanding (in thousands)...... 6,667 6,667 6,667 6,667 6,667 6,667
Profitability Ratios
Net income:
% Average total assets........................ .68% .90% .86% .80% .65% .45%
% Average stockholder's equity................ 9.70 12.31 12.71 12.70 10.55 7.31
Number of Employees at Year-End
(full-time equivalent basis).................. 5,655 5,792 5,528 5,401 5,274 5,356
</TABLE>
5
<PAGE>
Comparative Consolidated Statement of Condition
Harris Bankcorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Daily averages, dollars in thousands
except per share data)
Years Ended December 31 1994 1993 1992 1991 1990 1989
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<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and demand balances due from banks......... $ 1,173,266 $ 1,191,748 $ 1,142,354 $ 1,046,818 $ 1,118,431 $ 1,163,122
Money market assets:
Interest-bearing deposits at banks............. 686,995 677,565 687,311 699,271 503,909 737,939
Federal funds sold and securities purchased
under agreement to resell..................... 536,185 522,757 338,027 560,936 308,895 226,318
Portfolio securities:
Held to maturity............................... 963,690 2,987,053 2,782,148 2,478,347 2,664,616 2,270,453
Available for sale............................. 2,269,171 7,213 - - - -
Trading account assets.......................... 39,812 110,493 250,578 189,622 95,845 43,312
Domestic loans, net of unearned income.......... 7,629,399 6,988,838 7,217,339 7,297,607 6,864,662 6,462,417
Foreign office loans, net of unearned income.... 43,176 55,970 76,787 110,285 152,312 220,684
----------- ----------- ----------- ----------- ----------- -----------
Total loans................................... 7,672,575 7,044,808 7,294,126 7,407,892 7,016,974 6,683,101
Allowance for possible credit losses............ (129,377) (131,243) (129,739) (124,618) (143,470) (179,311)
Premises and equipment.......................... 223,538 228,992 239,676 240,511 218,094 199,363
Customers' liability on acceptances............. 80,813 71,844 104,498 112,204 205,371 288,989
Other assets.................................... 700,675 367,954 450,640 465,729 384,647 296,416
----------- ----------- ----------- ----------- ----------- -----------
Total assets.................................. $14,217,343 $13,079,184 $13,159,619 $13,076,712 $12,373,312 $11,729,702
=========== =========== =========== =========== =========== ===========
Liabilities
Demand deposits................................. $ 2,859,643 $ 2,672,152 $ 2,346,435 $ 2,115,781 $ 2,063,854 $ 2,108,438
Interest checking deposits...................... 663,598 639,377 602,529 533,783 471,053 442,494
Money market accounts........................... 1,170,181 1,235,487 1,294,723 1,202,721 1,050,441 986,482
Savings deposits and certificates............... 2,189,049 2,164,583 2,272,386 2,411,959 2,343,344 2,087,017
Other time deposits............................. 722,373 756,560 718,140 883,854 693,164 527,490
Deposits in foreign offices..................... 2,110,342 1,813,720 1,638,363 1,931,611 1,909,282 2,066,960
----------- ----------- ----------- ----------- ----------- -----------
Total deposits................................ 9,715,186 9,281,879 8,872,576 9,079,709 8,531,138 8,218,881
Short-term borrowings........................... 2,654,891 2,332,260 2,938,501 2,757,009 2,644,213 2,308,543
Acceptances outstanding......................... 80,818 73,711 104,501 112,395 205,380 288,996
Other liabilities............................... 463,736 136,862 150,854 166,244 133,506 120,546
Long-term notes................................. 298,745 298,807 202,350 141,711 100,809 77,443
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities............................. 13,213,376 12,123,519 12,268,782 12,257,068 11,615,046 11,014,409
Stockholder's equity............................ 1,003,967 955,665 890,837 819,644 758,266 715,293
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's equity.... $14,217,343 $13,079,184 $13,159,619 $13,076,712 $12,373,312 $11,729,702
=========== =========== =========== =========== =========== ===========
Ratios (Percentage of total average assets)
Money market assets............................. 8.6% 9.2% 7.8% 9.6% 6.6% 8.2%
Portfolio securities and trading account assets. 23.0 23.7 23.0 20.4 22.3 19.7
Loans, net of unearned income................... 54.0 53.9 55.4 56.6 56.7 57.0
Deposits........................................ 68.3 71.0 67.4 69.4 68.9 70.1
Short-term borrowings........................... 18.7 17.8 22.3 21.1 21.4 19.7
Stockholder's equity............................ 7.06 7.31 6.77 6.27 6.13 6.10
Selected Year-End Data
Loans, net of unearned income................... $ 8,229,254 $ 7,703,957 $ 7,082,861 $ 7,906,892 $ 7,882,560 $ 6,997,737
Allowance for possible credit losses............ 124,734 131,676 130,123 125,091 124,829 213,347
Total assets.................................... 15,331,539 13,517,834 12,729,237 14,480,907 12,481,190 12,374,355
Deposits........................................ 9,919,732 9,375,871 8,776,734 9,458,878 9,300,617 8,960,304
Long-term notes................................. 298,810 298,681 298,813 200,287 100,859 100,771
Stockholder's equity............................ 1,021,154 1,017,672 930,191 861,077 805,277 725,258
Year-End Stockholder's Equity per Share......... $ 153.15 $ 152.63 $ 139.51 $ 129.15 $ 120.78 $ 108.78
</TABLE>
6
<PAGE>
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
1994 Compared to 1993
The Corporation's 1994 net income was $97.3 million, down 17 percent from $117.6
million in 1993. The earnings decline is primarily caused by the one-time $33.4
million after-tax charge resulting from management's decision in the second
quarter of 1994 to absorb the impact of higher interest rates on mortgage-backed
securities held in certain customer accounts of Harris Trust and Savings Bank's
Securities Lending unit. Excluding the effect of this charge and the favorable
benefit in 1993 of a mandatory accounting change for income taxes, 1994 earnings
would have increased by approximately 13%. Returns on average assets and equity
in 1994 were .68 percent and 9.70 percent, respectively, compared to 1993
returns of .90 percent and 12.31 percent.
Fully taxable equivalent ("FTE") net interest income was $480.4 million, up 5
percent from $459.0 million in 1993. Average earning assets, led by loan growth,
rose 7 percent from $11.35 billion in 1993 to $12.17 billion in 1994. However,
the positive effects of higher earning asset levels were somewhat offset by a
narrower net interest margin, which declined to 3.95 percent in 1994 from 4.04
percent in 1993.
Average loans increased $628 million, or 9 percent, led by increases in
domestic commercial loans, installment loans and charge card outstandings.
Average portfolio securities, which include securities held to maturity and
securities available for sale, increased $239 million, or 8 percent to $3.23
billion, primarily reflecting increased holdings of U.S. Treasury securities.
Money market assets, consisting of interest-bearing deposits at banks, Federal
funds sold and reverse repurchase agreements, were up $23 million compared to
1993. Average levels of trading account assets employed decreased by $70 million
year to year.
Incremental funding for the growth in average earning assets came mainly from
a $444 million increase in interest-bearing deposits and a $323 million increase
in short-term borrowings. Foreign office time deposits grew by $292 million and
other interest-bearing time deposits were up $169 million. Average noninterest-
bearing supporting funds, primarily demand deposits and stockholder's equity,
increased $51 million compared to 1993.
The Corporation's consolidated net interest margin declined by 9 basis points
to 3.95 percent. Factors causing this decline were rate compression within
certain asset categories, the relative decline in noninterest-bearing funds, and
sales and maturities of portfolio securities where proceeds were reinvested at
slightly lower yields. Positive factors relative to a year ago included
favorable retail spreads, an enrichment in the mixture of earning assets because
of overall loan growth and a restructuring of the Corporation's long-term notes
issued to its parent company, Bankmont Financial Corp., converting them to a
floating rate structure and extending their maturities by two years.
Total noninterest income in 1994 was $314.4 million, down $22.6 million or 7
percent from 1993. The most significant factor causing this decline resulted
from sales of portfolio securities. The Corporation realized a $5.3 million net
gain on the sale of certain portfolio securities during 1994, compared to a net
gain of $13.0 million one year ago. Bond and financial instrument trading
activities reported a $.4 million loss in 1994 compared to a $5.3 million profit
in 1993. Foreign exchange income also declined from $24.3 million in 1993 to
$19.8 million at year-end 1994. Service fees and charges declined $4.2 million
or 5 percent from $77.8 million in 1993 to $73.6 million in 1994.
Noninterest expenses totaled $604.1 million in 1994, up $52.0 million or 9
percent from 1993. Current year expenses contained the one-time $51.3 million
(pretax) charge in the Securities Lending unit. Prior year expenses benefited
from the reversal of $7.2 million of reserves previously recorded for
anticipated costs of customer guarantees that were no longer necessary.
Excluding both special items, expenses would have decreased by 1 percent.
Income tax expense decreased by $13.6 million in the current year, resulting
from lower pretax income. In addition, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 109-Accounting for Income Taxes in
the first quarter of 1993. The cumulative effect of this change, approximately
$1.8 million, increased 1993 net income.
The 1994 provision for credit losses of $45.0 million was down from $62.8
million recorded in 1993. Net loan charge-offs were also down from $61.3 million
in the prior year to $52.0 million in 1994. At year-end, the allowance for
possible credit losses was $124.7 million, or 1.52 percent of total loans
outstanding, compared to the prior year-end allowance of $131.7 million, or 1.71
percent of loans. Total nonperforming assets declined to $94.8 million at
December 31, 1994, from $113.4 million one year ago.
At December 31, 1994, the Corporation's consolidated equity capital increased
$3.5 million to $1.02 billion. The increase resulted from earnings for the prior
twelve months less $59.1 million of after-tax unrealized holding losses related
to the Corporation's debt and equity securities classified as available for
sale, and reduced further by $34.7 million of dividends paid. The Corporation's
regulatory capital leverage ratio was 7.03 percent for fourth quarter 1994
compared to 7.33 percent one year earlier. Regulators require most banking
institutions to maintain capital leverage ratios of not less than 4.0 percent.
At December 31, 1994, the Corporation's Tier 1 and total risk-based capital
ratios were 8.86 percent and 12.49 percent, respectively, compared to respective
ratios of 9.00 percent and 13.00 percent at December 31, 1993. The 1994 year-end
ratios substantially exceed minimum required regulatory ratios of 4.0 percent
and 8.0 percent, respectively.
7
<PAGE>
1993 Compared to 1992
The Corporation's 1993 net income was $117.6 million, up 4 percent from $113.3
million in 1992. Return on average assets in 1993 improved to .90 percent
compared to .86 percent for 1992, while the return on average equity declined to
12.31 percent from 12.71 percent in 1992.
FTE net interest income was $459.0 million, down 4 percent from $476.9 million
in 1992, primarily reflecting a reduction in net interest margin from 4.21
percent to 4.04 percent. Average earning assets, totaling $11.35 billion in
1993, remained virtually unchanged from 1992.
While overall earning asset levels remained essentially unchanged, various
components did exhibit significant year-to-year fluctuations. Average portfolio
securities increased $212 million, or 8 percent, to $2.99 billion, reflecting
increased holdings of U.S. Treasury securities. Money market assets also grew,
up $175 million compared to 1992. Offsetting these increases were reduced levels
of loans and trading account securities. Average levels of trading account
assets employed decreased by $140 million year to year. Average loans declined
$249 million, or 3 percent compared to 1992. Loan growth, however, was very
strong during the fourth quarter of 1993, with average loans for December
increasing by more than $400 million or 6 percent from September levels.
Changes also occurred between various categories of supporting liabilities.
Average noninterest-bearing supporting funds increased $447 million compared to
1992, allowing a corresponding reduction in interest-bearing liabilities. Short-
term borrowings declined $606 million or 21 percent to $2.33 billion, while
domestic interest-bearing deposits declined by $113 million. Partially
offsetting these decreases were higher levels of foreign interest-bearing
deposits and long-term debt. Foreign office time deposits grew by $174 million
year to year while average long-term debt rose $96 million over 1992 levels,
reflecting $100 million of subordinated debt issued in the fourth quarter of
1992.
The Corporation's consolidated net interest margin declined by 17 basis points
to 4.04 percent. The narrower margin reflected competitive market conditions and
relatively higher levels of lower-yielding earning assets.
Total noninterest income in 1993 was $337.1 million, up $2.1 million or 1
percent over 1992. In 1992, the Corporation recorded a $15.8 million gain on the
sale of most of its then remaining claims in Mexico and Brazil. Excluding the
effect of this item, noninterest income would have increased by approximately 6
percent. Bond and financial instrument trading activities reported a $5.3
million profit in 1993 compared to a $4.5 million loss in 1992. Trust and
investment management fees rose $3.7 million or 3 percent, from $145.1 million
in 1992 to $148.8 million in 1993. Charge card fees of $36.5 million were
essentially unchanged from the prior year. Service fees and charges declined
$2.3 million to $77.8 million in 1993. In both 1993 and 1992, a portion of the
revenue in this category resulted from changes in the Corporation's accounting
for recognition of certain types of fees. Changes to operating systems enabled
the Corporation to recognize certain types of service charge income on an
accrual basis rather than on a cash basis as in prior periods. The incremental
revenue associated with this change was approximately $2 million in 1993 and $8
million in 1992. Excluding the effects of these changes, service charges would
have increased by approximately 5 percent in 1993. Foreign exchange income also
declined slightly from record 1992 levels to $24.3 million. The Corporation
realized a $13.0 million net gain on the sale of certain portfolio securities
during 1993, compared to a net gain of $4.2 million in 1992.
Noninterest expenses totaled $552.1 million in 1993, down $13.9 million or 2
percent from 1992. Expenses for 1993 benefited from the reversal of $7.2
million of reserves previously recorded for anticipated costs of customer
guarantees that were no longer necessary. 1992 expenses contained a special
$11.8 million charge for the writedown of land and related pre-construction
expenditures originally capitalized in connection with the previously planned
construction of a new operations center in Chicago. Excluding both special
items, expenses would have risen by about 2 percent.
Income tax expense rose by $17.8 million in 1993, resulting from higher pretax
income and the utilization in 1992 of alternative minimum tax credits carried
forward from prior periods. In addition, the Corporation adopted SFAS No. 109-
Accounting for Income Taxes in the first quarter of 1993. The cumulative effect
of this change, approximately $1.8 million, increased 1993 net income.
The 1993 provision for credit losses of $62.8 million was down from $77.6
million recorded in 1992. Net loan charge-offs were also down from $72.5 million
in 1992 to $61.3 million in 1993. At year-end, the allowance for possible credit
losses was $131.7 million, or 1.71 percent of total loans outstanding, compared
to the 1992 allowance of $130.1 million, or 1.84 percent of loans. Total
nonperforming assets declined to $113.4 million at December 31, 1993, from
$154.4 million one year earlier.
At December 31, 1993, the Corporation's consolidated equity capital totaled
$1.02 billion compared to $930 million at year-end 1992. The increase resulted
from earnings for the prior twelve months plus $26 million of unrealized holding
gains related to the Corporation's adoption of SFAS No. 115-Accounting for
Certain Investments in Debt and Equity Securities, offset by $57 million of
dividends paid. The Corporation's regulatory capital leverage ratio was 7.33
percent for fourth quarter 1993, compared to 7.20 percent one year earlier. At
December 31, 1993, the Corporation's Tier 1 and total risk-based capital ratios
were 9.00 percent and 13.00 percent, respectively, compared to respective ratios
of 8.90 percent and 13.08 percent at December 31, 1992.
8
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income Harris Bankcorp, Inc. and Subsidiaries
1994
----------------------------------------------------------------
Interest 1994 vs. 1993
------------------------
Increase (Decrease)
due to change in
Average Average Net ----------------
(Fully taxable equivalent basis, dollars in millions) Balance Interest Rate Change Volume Rate
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets/Interest Income
Domestic offices:
Loans, including fees............................... $ 7,629 $593 7.78% $ 78 $49 $ 29
Portfolio securities:
U.S. Treasury and Federal agency.................. 2,582 143 5.53 14 9 5
State and municipal............................... 480 58 12.09 (2) (1) (1)
Other............................................. 171 8 4.85 4 4 -
------- ---- ----
Total portfolio securities..................... 3,233 209 6.47 16 16 -
Trading account assets.............................. 40 3 7.02 (4) (5) 1
Interest-bearing deposits at banks.................. 12 1 8.73 - (1) 1
Federal funds sold and securities
purchased under agreement to resell............... 460 19 4.13 2 (1) 3
------- ---- ----
Total domestic earning assets/
interest income............................... 11,374 825 7.26 92 54 38
------- ---- ----
Foreign offices:
Loans, including fees............................... 43 1 1.69 - - -
Interest-bearing deposits at banks.................. 675 30 4.40 6 2 4
Federal funds sold and securities
purchased under agreement to resell............... 76 2 3.29 2 2 -
------- ---- ----
Total foreign earning assets/
interest income............................... 794 33 4.14 8 4 4
------- ---- ----
Total domestic and foreign earning
assets/interest income............................ $12,168 858 7.05 100 58 42
======= ---- ----
Supporting Liabilities/Interest Expense
Domestic offices:
Interest checking deposits.......................... $ 664 13 1.99 - - -
Money market accounts............................... 1,170 34 2.88 1 (2) 3
Savings deposits and certificates................... 2,189 82 3.78 3 1 2
Other interest-bearing time deposits................ 696 31 4.42 13 7 6
------- ---- ----
Total interest-bearing deposits................. 4,719 160 3.40 17 6 11
Short-term borrowings............................... 2,527 107 4.22 35 10 25
Long-term notes..................................... 299 20 6.53 (7) - (7)
------- ---- ----
Total domestic interest-bearing
liabilities/interest expense.................. 7,545 287 3.80 45 16 29
------- ---- ----
Foreign offices:
Time deposits....................................... 2,072 89 4.33 33 10 23
Short-term borrowings............................... 128 2 1.35 1 - 1
------- ---- ----
Total foreign interest-bearing liabilities/
interest expense.............................. 2,200 91 4.15 34 10 24
------- ---- ----
Total domestic and foreign interest-bearing
liabilities/interest expense...................... 9,745 378 3.88 79 26 53
Other noninterest-bearing supporting liabilities.... 2,423 - - - - -
------- ---- ----
Total domestic and foreign supporting
liabilities/interest expense...................... $12,168 378 3.10 79 26 53
======= ---- ----
Total net interest income from domestic and
foreign offices................................... $480 3.95% $ 21 $32 $(11)
==== ===== ==== === ====
</TABLE>
1. Fully taxable equivalent adjustment
Tax-exempt interest income has been restated to a comparable taxable level. The
combined statutory tax rate used for this purpose was 35 percent in 1994 and
1993, and 36.41 percent in 1992. The statutory Federal tax rate was 35 percent
for 1994 and 1993, and 34 percent for 1992. On July 1, 1992, the Corporation
lowered its FTE factor applied to state-exempt income in order to reflect the
lack of benefit for newly generated state net operating losses.
2. Interest income
The impact of restructured and nonaccrual loans is reflected in all average
balance, net interest income and related yield calculations. Average balances
include restructured and nonaccrual loans. Interest income and yields on these
assets reflect income recorded on a cash basis.
3. Volume and rate variances
The change in interest income/expense attributable to volume is calculated by
multiplying the annual change in volume by the prior year's rate. The rate
variance is calculated by multiplying the annual change in rate by the prior
year's volume. Any variance attributable jointly to volume and rate changes is
prorated on a weighted basis between volume and rate.
9
<PAGE>
<TABLE>
<CAPTION>
Harris Bankcorp, Inc. and Subsidiaries
1993
-----------------------------------------------------------
Interest 1993 vs. 1992
------------------------------
Increase (Decrease)
due to change in
Average Average Net ---------------------
(Fully taxable equivalent basis, dollars in millions) Balance Interest Rate Change Volume Rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets/Interest Income
Domestic offices:
Loans, including fees............................... $ 6,989 $515 7.37% $(68) $(18) $(50)
Portfolio securities:
U.S. Treasury and Federal agency.................. 2,422 129 5.33 (6) 12 (18)
State and municipal............................... 485 60 12.30 (1) - (1)
Other............................................. 87 4 5.02 - - -
------- ---- ----
Total portfolio securities...................... 2,994 193 6.46 (7) 14 (21)
Trading account assets.............................. 110 7 5.92 (14) (9) (5)
Interest-bearing deposits at banks.................. 38 1 3.72 (1) (1) -
Federal funds sold and securities
purchased under agreement to resell............... 499 17 3.36 5 6 (1)
------- ---- ----
Total domestic earning assets/
interest income............................... 10,630 733 6.90 (85) 1 (86)
------- ---- ----
Foreign offices:
Loans, including fees............................... 56 1 1.27 (2) (1) (1)
Interest-bearing deposits at banks.................. 640 24 3.72 (7) - (7)
Federal funds sold and securities
purchased under agreement to resell............... 24 1 2.76 - - -
------- ---- ----
Total foreign earning assets/
interest income............................... 720 26 3.50 (9) (1) (8)
------- ---- ----
Total domestic and foreign earning
assets/interest income............................ $11,350 759 6.68 (94) (1) (93)
======= ---- ----
Supporting Liabilities/Interest Expense
Domestic offices:
Interest checking deposits.......................... $ 639 13 1.99 (3) 1 (4)
Money market accounts............................... 1,235 33 2.64 (10) (2) (8)
Savings deposits and certificates................... 2,165 80 3.69 (26) (5) (21)
Other interest-bearing time deposits................ 528 18 3.48 (5) 8 (13)
------- ---- ----
Total interest-bearing deposits................. 4,567 144 3.14 (44) 5 (49)
Short-term borrowings............................... 2,256 72 3.18 (30) (20) (10)
Long-term notes..................................... 299 26 8.84 7 8 (1)
------- ---- ----
Total domestic interest-bearing
liabilities/interest expense.................. 7,122 242 3.39 (67) (15) (52)
------- ---- ----
Foreign offices:
Time deposits....................................... 1,780 57 3.18 (8) 8 (16)
Short-term borrowings............................... 76 1 1.73 (1) - (1)
------- ---- ----
Total foreign interest-bearing liabilities/
interest expense.............................. 1,856 58 3.12 (9) 8 (17)
------- ---- ----
Total domestic and foreign interest-bearing
liabilities/interest expense...................... 8,978 300 3.34 (76) (7) (69)
Other noninterest-bearing supporting liabilities.... 2,372 - - - - -
------- ---- ----
Total domestic and foreign supporting
liabilities/interest expense...................... $11,350 300 2.64 (76) - (76)
======= ---- ----
Total net interest income from domestic and
foreign offices................................... $459 4.04% $(18) $ (1) $(17)
==== ===== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Harris Bankcorp, Inc. and Subsidiaries
1992
-------------------------------------
Average Average
(Fully taxable equivalent basis, dollars in millions) Balance Interest Rate
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning Assets/Interest Income
Domestic offices:
Loans, including fees............................... $ 7,217 $583 8.08%
Portfolio securities:
U.S. Treasury and Federal agency.................. 2,215 135 6.10
State and municipal............................... 490 61 12.46
Other............................................. 77 4 5.54
------- ----
Total portfolio securities...................... 2,782 200 7.20
Trading account assets.............................. 251 21 8.40
Interest-bearing deposits at banks.................. 47 2 3.53
Federal funds sold and securities
purchased under agreement to resell............... 313 12 3.79
------- ----
Total domestic earning assets/
interest income............................... 10,610 818 7.71
------- ----
Foreign offices:
Loans, including fees............................... 77 3 3.36
Interest-bearing deposits at banks.................. 640 31 4.80
Federal funds sold and securities
purchased under agreement to resell............... 25 1 2.83
------- ----
Total foreign earning assets/
interest income............................... 742 35 4.59
------- ----
Total domestic and foreign earning
assets/interest income............................ $11,352 853 7.51
======= ----
Supporting Liabilities/Interest Expense
Domestic offices:
Interest checking deposits.......................... $ 603 16 2.70
Money market accounts............................... 1,295 43 3.28
Savings deposits and certificates................... 2,272 106 4.68
Other interest-bearing time deposits................ 510 23 4.54
------- ----
Total interest-bearing deposits................. 4,680 188 4.02
Short-term borrowings............................... 2,871 102 3.57
Long-term notes..................................... 202 19 9.36
------- ----
Total domestic interest-bearing
liabilities/interest expense.................. 7,753 309 3.99
------- ----
Foreign offices:
Time deposits....................................... 1,606 65 4.02
Short-term borrowings............................... 68 2 2.23
------- ----
Total foreign interest-bearing liabilities/
interest expense.............................. 1,674 67 3.95
------- ----
Total domestic and foreign interest-bearing
liabilities/interest expense...................... 9,427 376 3.98
Other noninterest-bearing supporting liabilities.... 1,925 - -
------- ----
Total domestic and foreign supporting
liabilities/interest expense...................... $11,352 376 3.30
======= ----
Total net interest income from domestic and
foreign offices................................... $477 4.21%
==== =====
</TABLE>
10
<PAGE>
Net Interest Income
Net interest income, the difference between interest and fees recognized on
earning assets and total interest expense, is the major component of operating
income for the Corporation. Since income on certain earning assets may be exempt
from Federal and/or State income taxes, the Management's Discussion and Analysis
section of this Report is prepared on an FTE basis, which, in effect, restates
all tax-advantaged income to a comparable level. In 1994, the Corporation's FTE
net interest income was $480 million, up 5 percent from $459 million in 1993.
The year-to-year change in net interest income is typically explained by
analyzing its two principal components, average earning assets and net interest
margin. Average earning assets represent the average volume of assets employed
by the Corporation during the year which generate interest income. Net interest
margin is the difference between the overall FTE yield on earning assets and the
average cost of supporting liabilities, including noninterest-bearing funds. For
1994, the Corporation's average earning assets grew 7 percent, while net
interest margin decreased 9 basis points from 4.04 percent in 1993 to 3.95
percent in 1994.
Average earning assets in 1994 totaled $12.17 billion, up $818 million, or 7
percent, from $11.35 billion in 1993. This growth is primarily the result of an
increase in average loans of $628 million, or 9 percent, to $7.67 billion, led
by increases in average commercial, charge card, and installment loan
outstandings of $360 million (7 percent), $126 million (21 percent), and $95
million (15 percent), respectively. The growth in average loans is attributable
to both a growing demand for credit in the U.S. economy and an aggressive
marketing effort by the Corporation, including the establishment of a new Small
Business Lending Rate. In January 1994, the Corporation's subsidiary banks
introduced a new Small Business Lending Rate, in effect a new "prime rate" for
small businesses with total credit facilities of $500,000 or less, which tracks
one-half percent below the Wall Street Journal prime until at least January
1996. Additional factors contributing to average loan growth were the success of
a large solicitation in June 1994 to transfer existing charge card outstandings
from other competitive charge card providers and increased auto loan volume at
Harris Bank Barrington. Average portfolio securities increased $239 million, or
8 percent, to $3.23 billion primarily as a result of increased holdings of U.S.
and Canadian Treasury securities of $256 million and $56 million, respectively.
Loans and portfolio securities, as a percent of earning assets were 63.1 percent
and 26.6 percent, respectively, compared to 62.1 percent and 26.4 percent,
respectively, in 1993. Average federal funds sold and securities purchased under
agreement to resell rose approximately 3 percent, or $13 million, year to year.
These increases were partially offset by a $70 million, or 64 percent, decrease
in average trading account assets.
Changes in the mix of total supporting funds are a function of loan demand,
consumer preferences for maintaining funds in so-called core deposits and
wholesale market spreads. The Corporation manages its wholesale funding activity
at the margin primarily by using the least expensive products given requirements
for matched funding, maturity, ability and expected cost to refund, reserve
requirements and deposit insurance costs. Secured borrowings, such as repurchase
agreements, may also depend on availability of collateral. All major categories
of supporting liabilities increased year to year. Short- term borrowings rose
$323 million or 14 percent from 1993 levels. Federal funds purchased and
securities sold under agreement to repurchase grew $242 million, representing 75
percent of the growth in short-term borrowings. Domestic interest-bearing
deposits increased $152 million, or 3 percent, from one year ago. Average
foreign office time deposits totaled $2.1 billion, up 16 percent or $292
million, compared to $1.8 billion in 1993. Noninterest-bearing funds supporting
earning assets increased $51 million, but declined year to year as a percentage
of average supporting liabilities.
The Corporation's consolidated net interest margin declined to 3.95 percent
from 4.04 percent in the prior year. This decrease reflects rate compression
within certain asset categories, the relative decline in noninterest-bearing
funds and sales and maturities of portfolio securities where proceeds were
reinvested at slightly lower yields. The decrease was partially offset by
favorable retail spreads, an enrichment in the mixture of earning assets because
of overall loan growth and a restructuring of the Corporation's long-term notes
issued to its parent company, Bankmont, converting them to a floating rate
structure and extending their maturities by two years.
11
<PAGE>
<TABLE>
<CAPTION>
Noninterest Income
Increase (Decrease) Increase (Decrease)
Years Ended December 31 1994 vs. 1993 1993 vs. 1992
---------------------------------- ------------------ -------------------
(dollars in thousands) 1994 1993 1992 Amount % Amount %
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment management fees.. $148,094 $148,809 $145,091 $ (715) - $ 3,718 3
Trading account....................... (396) 5,258 (4,499) (5,654) (108) 9,757 +
Foreign exchange...................... 19,769 24,302 25,062 (4,533) (19) (760) (3)
Charge card........................... 37,402 36,516 36,355 886 2 161 -
Service fees and charges.............. 73,621 77,774 80,056 (4,153) (5) (2,282) (3)
Gain on sales of foreign claims....... - - 15,823 - - (15,823) (100)
Securities gains...................... 5,254 13,038 4,239 (7,784) (60) 8,799 +
Other................................. 30,700 31,391 32,902 (691) (2) (1,511) (5)
-------- -------- -------- -------- --------
Total noninterest income............ $314,444 $337,088 $335,029 $(22,644) (7) $ 2,059 1
======== ======= ======== ======== ===== ======== ====
</TABLE>
Noninterest income for the year was $314.4 million in 1994, down $22.6 million
or 7 percent from 1993, primarily due to lower foreign exchange income and
trading account revenues, coupled with a $7.8 million reduction in net gains
from the sale of debt securities.
Charge card fees were $37.4 million in 1994, up $.9 million or 2 percent from
the previous year. Increases in charge card fee income were partially offset by
a change in the Corporation's accounting for assessment fees. In 1994,
assessment fees approximating $2.0 million were recorded against fee income
rather than expense. Trust and investment management fees were $148.1 million,
remaining virtually unchanged from 1993.
Trading account losses totaled $.4 million, down $5.7 million from the prior
year when these activities reported profits of $5.3 million. Financial results
from trading activities will typically exhibit greater fluctuations over time
than other business activities; accordingly, prior periods are not necessarily a
good indicator of future earnings. Foreign exchange revenues were $19.8 million,
down $4.5 million or 19 percent from 1993, reflecting a decrease in market
volatility, often a necessary ingredient for profitable foreign exchange
activities. Service fees and charges were $73.6 million, down $4.2 million or 5
percent from 1993. In 1993 and 1992, a portion of the revenue in this category
resulted from changes in the Corporation's accounting for recognition of certain
types of fees. Changes to operating systems enabled the Corporation to recognize
certain types of service charge income on an accrual basis rather than on a cash
basis as in prior periods. The incremental revenue associated with this change
was approximately $2 million in 1993 and $8 million in 1992. Excluding the
effect of this revenue, service fees and charges would have declined by 3
percent in 1994 from 1993 and increased by 5 percent in 1993 compared to 1992.
In 1994, the Corporation recorded $5.3 million of net gains from the sale of
portfolio securities compared to net gains of $13.0 million in 1993 and $4.2
million in 1992. In part, these results reflected the Corporation's desire to
realize gains in anticipation of rising interest rates.
Noninterest Expenses
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
Years Ended December 31 1994 vs. 1993 1993 vs. 1992
------------------------------- ------------------- -------------------
(dollars in thousands) 1994 1993 1992 Amount % Amount %
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation.... $246,200 $243,739 $225,788 $ 2,461 1 $ 17,951 8
Pension, profit sharing and other
employee benefits.................. 66,370 62,019 55,774 4,351 7 6,245 11
Net occupancy....................... 45,052 46,676 47,673 (1,624) (3) (997) (2)
Equipment........................... 42,284 43,396 46,460 (1,112) (3) (3,064) (7)
Deposit insurance................... 15,684 15,047 16,586 637 4 (1,539) (9)
Advertising......................... 14,991 13,528 11,667 1,463 11 1,861 16
Trust customer charge............... 51,335 - - 51,335 100 - -
Writedown of property held for
expansion.......................... - - 11,802 - - (11,802) (100)
Other............................... 122,212 127,682 150,223 (5,470) (4) (22,541) (15)
-------- -------- -------- ------- -------
Total noninterest expenses........ $604,128 $552,087 $565,973 $52,041 9 $(13,886) (2)
======== ======== ======== ======= ==== ======== ====
</TABLE>
Noninterest expenses totaled $604.1 million, up $52.0 million or 9 percent from
1993. During the 1994 second quarter, the Corporation recorded a $51.3 million
one-time charge to absorb the impact of higher interest rates on mortgage-backed
securities held in certain customer accounts of HTSB's Securities Lending unit.
In 1993, $7.2 million of reserves previously recorded for anticipated costs of
customer guarantees were reversed because they were no longer necessary.
Excluding the effect of these two items, 1994 noninterest expenses would have
decreased approximately 1 percent or $6.5 million from the previous year.
The aforementioned charge in the second quarter of 1994 resulted from
investments of cash collateral managed by HTSB as agent for certain of its
institutional trust customers in its Securities Lending Unit. The investments
consisted of floating rate mortgage-backed securities with caps on interest
ranging from 8.5 percent to 10 percent. HTSB's Securities Lending unit had
invested in these types of securities on behalf of customers since 1991, with
the total positions growing to $2.3 billion (representing about one-third of
total customer positions) by the second quarter of 1994. HTSB management
12
<PAGE>
believed that the securities satisfied customer guidelines at the time of their
acquisition. All securities were AAA rated and the interest returns were tied to
movements in LIBOR. As of March 31, 1994 and December 31, 1993, HTSB had no
reason to believe that there were either imbedded customer losses on these
securities or that they violated customer guidelines for appropriate
investments. Subsequent to March 31, 1994, rising short-term rates substantially
extended the average duration of the securities. At that point, customers had an
exposure to long-term securities in portfolios that should be kept relatively
short. Given customer expectations and a concern that further rate increases
could have a disproportionate negative impact on market values, HTSB made a
decision to eliminate all the mortgage-backed securities from these customer
accounts and absorb the full loss on behalf of customers. Of the approximately
$2.3 billion outstanding, one-third was sold into the market place while the
remaining two-thirds were sold to the Corporation's ultimate parent, Bank of
Montreal. Sales prices were determined based on available market quotations,
which resulted in a loss approximating $51.3 million ($33.4 million after-tax).
Prior to June 30, 1994 all mortgage-backed securities that had been included in
this portfolio were disposed of and neither HTSB nor its customers were at risk
for subsequent declines in the market value of those securities.
Net occupancy costs were $45.1 million, down $1.6 million or 3 percent from
1993, reflecting both lower rental expense and lower real estate taxes.
Advertising expenses were $15.0 million in 1994, an increase of $1.5 million
or 11 percent from 1993. Employment expenses were $312.6 million, up $6.8
million or 2% from the previous year, reflecting normal salary increases, and
slightly greater incentive payments, pension costs and retiree medical expenses.
In 1993, the Corporation adopted SFAS No. 106--Employer's Accounting for
Postretirement Benefits Other Than Pensions, which requires the current
recognition of future benefits, including retirement-related medical expenses,
on behalf of existing employees. Under this pronouncement, the Corporation's
retiree medical expenses totaled $7.2 million in 1994 and $6.3 million in 1993,
which was more than a three-fold increase over 1992. For additional information,
see Note 10 to Financial Statements on pages 49 and 50 of this Report.
1992 noninterest expenses included an $11.8 million charge for a writedown of
land related to pre-construction expenditures that were originally capitalized
in connection with the previously planned construction of a new operations
center in Chicago.
Income Taxes
The Corporation recorded income tax expense of $24.5 million in 1994, compared
to $39.9 million in 1993, primarily due to lower (approximately $35.5 million
FTE) pretax earnings and the recognition of prior years' Federal tax benefits in
1994, partially offset by both a reduction in the current year's tax-exempt
income and the revaluation of the Federal deferred tax asset in 1993 required by
SFAS No. 109 for changes in tax rates. The Corporation's effective tax rate
decreased to 20.1% in 1994 from 25.6% in 1993 because in 1994 tax exempt income
represented a relatively greater portion of total pretax income compared to
1993.
At December 31, 1994, the Corporation's Federal and Illinois net deferred tax
assets were $59.7 million and $13.4 million, respectively. Although the
Corporation has fully recognized both its Federal and Illinois deferred tax
assets, realization of $8.6 million of the deferred Illinois tax asset is
dependent on future Illinois taxable income. Current taxable income and taxable
income generated in the statutory carryback period is sufficient to support the
entire Federal deferred tax asset and the remaining $4.8 million of the Illinois
deferred tax asset for financial reporting purposes.
The deferred taxes reported on the Corporation's Statement of Condition at
December 31, 1994 also include a $21.5 million asset for the tax effect of
unrealized gains or losses associated with marking to market certain securities
designated as available for sale in accordance with SFAS No. 115.
In 1994, the Corporation generated an Illinois tax return net operating loss
("NOL") of $6 million. Based on the tax sharing agreement with other members of
the unitary group, a portion of the Illinois losses generated by certain
subsidiaries of the Corporation in 1992 through 1994 have been unutilized and
are carried forward. The Corporation has $14.6 million of Illinois NOLs
available for carryforward to 1995. If unused, these NOLs will expire in the
years 1996 through 2007.
Impact of New Accounting Standards
In October 1994, the FASB issued SFAS No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures. This Statement applies
to all creditors and amends SFAS No. 114--Accounting By Creditors for Impairment
of a Loan. The objective of these Statements is to eliminate the inconsistencies
in the accounting for impaired and restructured loans by requiring, in general,
that impaired loans be carried based on the present value of expected future
cash flows discounted at the loan's effective interest rate. These Statements
are applicable to all creditors and all types of loans, except for large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or lower of cost or fair value, leases
and debt securities. These Statements are effective for fiscal years beginning
after December 15, 1994. The Corporation intends to adopt these Statements in
1995 and does not expect them to have a material effect on the Corporation's
financial position or results of operations.
13
<PAGE>
Return on Assets and Stockholder's Equity
Return on assets, measured by net income as a percentage of average total
assets, was .68 percent in 1994 compared with .90 percent in 1993. The current
year's return on assets was lower than the average return on assets of .78
percent for the five-year period ended December 31, 1994. Average stockholder's
equity to average total assets provides a measure of leverage for the
Corporation. Return on stockholder's equity is computed by dividing return on
assets by this leverage ratio. The ratio of average stockholder's equity to
average total assets was 7.06 percent in 1994 compared to 7.31 percent in 1993.
For 1994, the return on stockholder's equity was 9.70 percent, down from the
12.31 percent achieved in 1993 and as compared to the 11.59 percent five-year
average return for the period ended December 31, 1994. Returns on both average
assets and stockholder's equity were adversely affected by the one-time $33.4
million after-tax charge related to HTSB's Securities Lending unit. Excluding
this charge, return on assets would have been approximately .92 percent and
return on equity would have been approximately 13.02 percent.
<TABLE>
<CAPTION>
(Based on net income and daily averages) Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets......................................................... .68% .90% .86%
Stockholder's equity as a percentage of total assets..................... 7.06 7.31 6.77
Return on stockholder's equity........................................... 9.70 12.31 12.71
Dividend payout ratio (1)................................................ 35.69 48.09 38.97
Earnings retained as a percentage of stockholder's equity (2)............ 6.24 6.39 7.76
Percentage growth in total average assets................................ 8.70 (.61) .63
(1) Dividends as a percent of net income.
(2) Earnings retained is defined as net income minus dividends.
</TABLE>
Capital Position
The Corporation's equity capital of $1.02 billion at December 31, 1994, has
increased significantly from five years earlier when equity capital amounted to
$725 million. Growth has come exclusively from the retention of earnings. During
1994, Bankcorp declared and paid $34.7 million of cash dividends. During 1993
and 1992, dividends declared and paid amounted to $56.6 million and $44.1
million, respectively. Included in 1993 dividends were cash dividends of $49.4
million and a $7.2 million dividend-in-kind related to the transfer of Harris
Futures Corporation to Bankmont. During 1994, the Corporation's equity capital
was reduced by $59.1 million of after-tax unrealized holding losses related to
the Corporation's debt and equity securities classified as available for sale.
During 1993, equity capital was increased by $26.4 million of after-tax
unrealized holding gains. Average consolidated equity capital for 1994 was $1.0
billion, compared with the 1993 average of $956 million and the 1992 average of
$891 million.
Bankcorp's double leverage ratio, which is the Bankcorp-only net equity
investment in bank and nonbank subsidiaries as a percentage of its equity
capital, was 101 percent at December 31, 1994, down from 102 percent at December
31, 1993. This ratio generally measures the extent to which holding company
equity investments are supported, in part, by parent-issued debt instruments. A
double leverage ratio greater than 100 percent indicates that parent company
equity investments are supported, in part, by parent-issued debt. In the case of
Bankcorp, outstanding long-term debt is sufficient to fund equity investments
not otherwise covered by equity capital. The year-to-year decrease in Bankcorp's
double leverage ratio reflects higher levels of year-end capital for the
Corporation.
Risk-Based Capital
U.S. banking regulators have issued risk-based capital guidelines, based on the
international "Basle Committee" agreement, which are applicable to all U.S.
banks and bank holding companies. These guidelines serve to: 1) establish a
uniform capital framework which is more sensitive to risk factors, including
off-balance-sheet exposures; 2) promote the strengthening of capital positions;
and 3) diminish a source of competitive inequality arising from differences in
supervisory requirements among countries. Bankcorp, as a U.S. bank holding
company, and HTSB, as a state-member bank, must each adhere to the guidelines of
the Federal Reserve Board (the "Board"), which are not significantly different
than those published by other U.S. banking regulators. Effective December 31,
1992, the guidelines specify minimum ratios for Tier 1 capital to risk-weighted
assets of 4 percent and total regulatory capital to risk-weighted assets of 8
percent.
Risk-based capital guidelines define total capital to consist of Tier 1 (core)
and Tier 2 (supplementary) capital. In general, Tier 1 capital is comprised of
stockholder's equity, including certain types of preferred stock, less goodwill
and certain other intangibles. Core capital must comprise at least 50 percent of
total capital. Tier 2 capital basically includes subordinated debt (less a
discount factor during the five years prior to maturity), other types of
preferred stock and the allowance for possible credit losses. At year-end 1994,
the portion of the allowance for possible credit losses includable in Tier 2
capital is limited to 1.25 percent of risk-weighted assets. The Corporation's
Tier 1 and total risk-based capital ratios were 8.86 percent and 12.49 percent,
respectively, at December 31, 1994.
The Board also requires an additional measure of capital adequacy, the Tier 1
leverage ratio, which is evaluated in conjunction with risk-based capital
ratios. The Tier 1 leverage ratio is computed by dividing period-end Tier 1
capital by adjusted quarterly average assets. The Board established a minimum
ratio of 3 percent applicable only to the strongest banking organizations
having, among other things, excellent asset quality, high liquidity, good
earnings and no undue interest rate
14
<PAGE>
risk exposure. Other institutions, including those experiencing or anticipating
significant growth, are expected to maintain a ratio which exceeds the 3 percent
minimum by at least 100 to 200 basis points. The Corporation's Tier 1 leverage
ratio was 7.03 percent for fourth quarter 1994 and 7.33 percent for fourth
quarter 1993.
The Federal Deposit Insurance Corporation Improvement Act of 1991 contains
several provisions that established five capital categories for all FDIC-insured
institutions ranging from "well capitalized" to "critically undercapitalized."
Based on those regulations effective at December 31, 1994, all of the
Corporation's subsidiary banks were designated as "well capitalized" at year-end
1994, the highest capital category.
In February 1993, the Board revised the capital adequacy guidelines by further
restricting the inclusion of intangible assets in Tier 1 capital. Purchased
mortgage servicing rights and the premium on purchased credit card relationships
are, in general, included with (i.e., not deducted from) Tier 1 capital provided
that, in the aggregate, they do not exceed a limit of 50 percent of Tier 1
capital. In addition, intangibles from purchased credit card relationships may
not exceed a sublimit of 25 percent of Tier 1 capital. All other intangibles
(including core deposit premiums), along with amounts in excess of the above
limits, are deducted from Tier 1 capital for purposes of risk-based and leverage
capital ratio calculations. Identifiable intangibles acquired before February
19, 1992 continue to be included with Tier 1 capital. The previous requirement
to deduct all goodwill from Tier 1 capital is unchanged. At December 31, 1994,
the Corporation's intangible assets totaled $47.8 million, including
approximately $1.1 million of intangibles excluded under the new rules and an
additional $19 million of goodwill excluded under 1992 guidelines. The
Corporation's tangible Tier 1 leverage ratio (which excludes all intangibles)
was 6.85 percent for the fourth quarter of 1994.
In September 1993, U.S. banking regulators proposed adding an additional
element to risk-based capital rules which would essentially require financial
institutions with levels of interest-rate risk above a specified threshold
amount to maintain higher capital levels. Based on the proposed rules,
management does not expect any of the Corporation's banking subsidiaries to be
subject to these higher capital requirements.
Effective January 17, 1995, the Board issued amendments to its risk-based
capital guidelines for state member banks regarding concentration of credit risk
and risks of nontraditional activities. The guidelines now explicitly identify
these items, as well as an institution's ability to manage them, as important
factors in assessing the institution's overall capital adequacy. The Corporation
does not expect this amendment to have a significant effect on its assessment of
capital adequacy.
The Board further amended risk-based capital guidelines relating to deferred
tax assets. Effective April 1, 1995, deferred tax assets included in Tier 1
capital are limited to the amount of taxable income that an institution expects
to realize within one year of its quarter-end report date or 10 percent of Tier
1 capital, whichever is less. Deferred tax assets that can be realized from
taxes paid in prior carryback years are generally not limited. The Corporation
does not expect this amendment to have a material impact on its risk-based
capital ratios.
As of December 31, 1993 the Corporation adopted SFAS No. 115--Accounting for
Certain Investments in Debt and Equity Securities. This pronouncement requires
an adjustment to stockholder's equity for the tax effected unrealized gain or
loss associated with marking to market securities designated as available for
sale. Effective December 31, 1994, the Board amended its risk-based capital
guidelines to exclude net unrealized holding gains (losses) from Tier 1 capital
with the exception of unrealized depreciation of marketable equity securities,
which will continue to be deducted from Tier 1 capital. Net unrealized holding
gains (losses) excluded for risk-based capital purposes amounted to $(32.7)
million and $26.4 million at December 31, 1994 and 1993, respectively.
The following table summarizes the Corporation's risk-based capital ratios and
Tier 1 leverage ratio for the past three years.
<TABLE>
<CAPTION>
(dollars in thousands) December 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ending assets..................................... $15,331,539 $13,517,834 $12,729,237
=========== =========== ===========
Average assets (fourth quarter)................... $14,668,264 $13,233,445 $12,615,177
=========== =========== ===========
Risk-based on-balance-sheet assets................ $ 9,078,759 $ 8,293,915 $ 7,819,015
Risk-based off-balance-sheet assets............... 2,580,005 2,462,117 2,366,083
----------- ----------- -----------
Total risk-based assets.......................... $11,658,764 $10,756,032 $10,185,098
=========== =========== ===========
Tier 1 capital.................................... $ 1,033,481 $ 968,386 $ 906,445
Supplementary capital............................. 423,254 430,071 425,627
----------- ----------- -----------
Total capital.................................... $ 1,456,735 $ 1,398,457 $ 1,332,072
=========== =========== ===========
Tier 1 leverage ratio............................. 7.03% 7.33% 7.20%
Risk-based ratios:
Tier 1........................................... 8.86% 9.00% 8.90%
Total............................................ 12.49% 13.00% 13.08%
</TABLE>
15
<PAGE>
Liquidity And Sources of Funds
Summary
Effective liquidity management allows a banking institution to accommodate the
changing net funds flow requirements of customers who may deposit or withdraw
funds, or modify their credit requirements. One of the principal obligations of
the banking system, and individual banks, is to provide for the legitimate
credit demands of customers. The liquidity of the banking system as a whole may
be viewed as the ability of the system to satisfy aggregate credit demand;
however, individual banks experience changes in liquidity resulting from
interbank transfers of deposits which do not affect the liquidity of the banking
system. Therefore, liquidity management within individual banks must deal with
the potential for greater volatility of net deposit flows which have little or
no impact on the banking system itself.
The Corporation manages its liquidity position through continuous
monitoring of profitability trends, asset quality, interest rate sensitivity,
maturity schedules of earning assets and supporting liabilities, the composition
of managed and other (primarily demand) liabilities, and prospective customer
credit demand based upon knowledge of major customers and overall economic
conditions. Appropriate responses to changes in these conditions preserve
customer confidence in the ability of the Corporation to continually serve their
credit and deposit withdrawal requirements.
Some level of liquidity is provided by maintaining assets which mature
within a short time-frame or could be sold quickly without significant loss. The
Corporation's liquid assets include cash and demand balances due from banks,
money market assets, portfolio securities available for sale and trading account
assets. Liquid assets represented approximately 29 percent of the Corporation's
total assets and amounted to $4.43 billion at December 31, 1994 compared to
liquid assets of $4.64 billion or approximately 34 percent of total assets one
year earlier. However, the most important source of liquidity is the ability to
raise funds, as required, in a variety of markets using multiple instruments.
This fund-raising activity involves the identification of broadly distributed
sources of funds, typically referred to as managed liabilities, which are varied
by type, maturity and geographical location of customers. The Corporation
monitors and controls the sources of these funds to avoid unwarranted market
activity or customer concentrations.
The principal sources of external funds available to the Corporation are
retail and wholesale liabilities. Retail liabilities are comprised of demand
deposits, money market accounts, NOW accounts, passbook savings and
nonnegotiable certificates of deposit, typically of small denomination.
Wholesale funding sources include Eurodollar deposits in foreign offices,
Federal funds borrowed, securities sold under agreement to repurchase,
negotiable large denomination certificates of deposit and commercial paper.
Additionally, in December 1994, HTSB distributed an offering circular which
described its capability to offer, from time to time, unsecured short-term and
medium-term bank notes in an aggregate principal amount of up to $1.5 billion
outstanding at any time. The term of each note could range from fourteen days to
fifteen years as selected by the initial purchaser and agreed to by HTSB. The
notes are being offered and sold only to institutional investors. No short-term
or medium-term notes were outstanding at 1994 year-end. As of February 28, 1995,
$416 million of notes were outstanding.
The Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and certificates, and
money market accounts increased by $171 million or 3 percent during 1994. This
growth in core deposits reflected increases in demand, passbook and savings
deposits offset by decreases in money market accounts and savings certificates.
Core deposits represented 56.6 percent of average supporting liabilities in 1994
down from 59.1 percent in 1993.
The Corporation, in connection with the issuance of commercial paper and
for other corporate purposes, has a $130 million revolving credit agreement with
five nonaffiliated banks that terminates on December 20, 1995. This agreement
allows for extensions of its termination date, if requested by the Corporation
and approved by the nonaffiliated banks. There were two such extensions in 1994.
There were no borrowings under this credit facility in 1994 or 1993.
The maintenance of an appropriate balance of maturity and interest rate
sensitivity risks between assets and liabilities is an integral component of
overall liquidity management. Mismatches of actual asset and liability
maturities, or interest rate sensitivity of assets and liabilities, will
increase the potential for profit or loss relative to changes in the general
level of interest rates. Asset and liability mismatches result in the normal
course of servicing customer credit and deposit requirements. The Corporation
uses interest rate swaps and financial futures, as appropriate, to reduce the
level of financial risk inherent in asset and liability mismatches. Gross cash
flows from the Corporation's derivative positions as an end-user were not
material to gross cash flows from financing and investing activities. The
Corporation's Asset/Liability Management Committee monitors and adjusts its
strategies in response to changing liquidity demands.
Interest Sensitivity
Interest rate sensitivity information, in the form of interest sensitivity gap
schedules and simulations reflecting exposure of earnings to future changes in
interest rates, is used in conjunction with other data by the Corporation's
banking subsidiaries to monitor and manage their individual interest rate
exposures. The Corporation uses various derivative products, including interest
rate swaps, forward rate agreements, futures, options, and forward commitments
to manage interest rate sensitivities corresponding to various balance sheet
items, thereby modifying its exposure to changing interest rates.
16
<PAGE>
<TABLE>
<CAPTION>
Repricing
Period
----------------------------------------------------------- Nonrepricing
(in millions) December 31, 1994 1-31 days 32-90 days 91-365 days 1-5 years Over 5 years Items Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans............................................. $6,101 $ 134 $ 492 $ 968 $ 458 $ 76 $ 8,229
Portfolio and trading account securities.......... 742 46 525 2,155 243 14 3,725
Interest-bearing deposits at banks................ 254 223 280 - - - 757
Federal funds sold and securities
purchased under agreement to resell.............. 404 - - - - - 404
Other assets...................................... - - - - - 2,217 2,217
------ ------- ------ ------ ------ ------- -------
Total assets....................................... 7,501 403 1,297 3,123 701 2,307 $15,332
------ ------- ------ ------ ------ ------- =======
Liabilities and Stockholder's Equity
Time deposits..................................... 1,907 1,037 732 362 15 - $ 4,053
Savings and interest checking deposits............ 2,614 - - - - - 2,614
Noninterest-bearing deposits...................... - - - - - 3,253 3,253
------ ------- ------ ------ ------ ------- -------
Total deposits..................................... 4,521 1,037 732 362 15 3,253 9,920
Federal funds purchased and securities
sold under agreement to repurchase............... 2,611 11 4 6 - - 2,632
Other interest-bearing liabilities................ 823 354 - - 99 - 1,276
Other noninterest-bearing liabilities............. - - - - - 483 483
Stockholder's equity.............................. - - - - - 1,021 1,021
------ ------- ------ ------ ------ ------- -------
Total liabilities and stockholder's equity......... 7,955 1,402 736 368 114 4,757 $15,332
------ ------- ------ ------ ------ ------- =======
Interest sensitivity gap before net interest rate
swaps, derivative products and forward
commitments...................................... (454) (999) 561 2,755 587 (2,450)
Net interest rate swaps............................ (28) 145 (6) (111) - -
Derivative products and forward commitments........ - 5 - - (5) -
------ ------- ------ ------ ------ -------
Interest sensitivity gap.......................... $ (482) $ (849) $ 555 $2,644 $ 582 $(2,450)
====== ======= ====== ====== ====== =======
Cumulative gap.................................... $(1,331) $ (776) $1,868 $2,450
======= ====== ====== ======
</TABLE>
The schedule above presents the Corporation's consolidated interest
sensitivity gap at December 31, 1994. This point-in-time analysis depicts
repricing dates for earning assets, supporting funds and related off-balance-
sheet activities. Generally, dates for repricing are included on a contractual
basis. A negative gap in a given time span indicates an excess of interest-
bearing liabilities over interest earning assets which reprice in that period.
After including interest rate swaps, derivative products and forward
commitments, at December 31, 1994, the Corporation had a cumulative negative
one-year interest rate gap of $776 million. This measure, called the
"contractual gap" position, is calculated without regard to the existence of
nonrepricing items, the behavior of which must be considered in the evaluation
of the Corporation's overall interest rate sensitivity.
In addition to gap measurements, the Corporation uses simulation modeling to
measure valuation risk, risk to earnings, assets, liabilities and equity, as a
result of various interest rate scenarios and balance sheet structures. Shifts
in the yield curve and changes in the shape of the yield curve are among the
variables considered. Limits are established for valuation risk at the
individual bank and consolidated levels and actual exposure is monitored to
ensure that these limits are not exceeded. At December 31, 1994, simulations
indicate that for an immediate 100 basis point upward movement in interest
rates, net interest income would fall by approximately $2 million over the next
year compared to what it would otherwise have been, and the change in the value
of contractual gap positions would be $107 million lower. Conversely, a decline
in rates would have approximately the same absolute impact but in the opposite
direction.
Management believes that the Corporation is well positioned with its mix of
assets and liabilities to respond to interest rate movements in either
direction.
Cash Flows
Cash flow analysis is an essential element for evaluating a company's ability to
satisfy its obligations to short- and long-term creditors, bondholders and
investors. The Corporation's Consolidated Statement of Cash Flows can be found
on page 36 of this Report. This financial statement is based on period-end
balances and does not reflect average investment or financing levels.
As a bank holding company, the Corporation regularly receives and disperses
large volumes of cash and cash equivalents. Since these gross numbers provide
little additional information to financial statement users, the FASB permits
bank holding companies to net certain cash receipts and payments in their cash
flow statements. The Corporation has adopted this net presentation for loans and
deposits.
The Corporation's Consolidated Statement of Cash Flows divides its activities
into three main categories: operating, investing and financing. Operating
activities consist of those activities not categorized as investing or financing
and generally include cash revenues and expenses associated with providing
services to customers. Investing cash flows are defined as those arising from
the acquisition or disposal of fixed assets, subsidiaries, loans, portfolio
securities and money market assets. Financing cash flows include both infusions
from and dividend payments to stockholders, along with borrowings and principal
repayments to bondholders or other creditors.
17
<PAGE>
Cash flows from operations are a significant source of operating capital.
Since applicable accounting statements require that cash transactions involving
assets held for sale and for trading purposes be included with operating cash
flows, normal year-end fluctuations in these holdings may not appropriately
portray the company's generated cash flows from operations. Excluding net
changes in loans held for sale and trading account assets, cash generated from
operations amounted to approximately $133 million in 1994 and $221 million in
1993. The change in cash flows from operations, from year to year, was mainly
due to decreases in net income before provision for credit losses and an
increase in interest receivables. Year-end trading account assets decreased $14
million year to year, while loans held for sale (primarily residential
mortgages) decreased $245 million. Accrued interest receivable rose $41 million
reflecting growth in earning assets and higher interest rates.
The Corporation invested new funds primarily in loans and portfolio
securities. In 1994, the Corporation's investing activities utilized a total of
$1.60 billion in net cash. Portfolio securities increased $611 million year to
year, while loans were up $823 million. Interest bearing deposits at banks also
increased $230 million in 1994.
Financing activities, which include accepting customer deposits, purchasing
Federal funds and issuing commercial paper and long-term notes, have
historically been the Corporation's major source of investable funds. In 1994,
financing activities provided $1.47 billion of net cash to the Corporation. The
Corporation's primary source of new funds were deposits and Federal funds, which
increased by $544 million and $771 million, respectively. Other short term
borrowings also increased by $211 million year to year. Gross cash received and
paid resulting from the Corporation's derivative positions as an end-user were
not material relative to gross cash flows from financing or investing
transactions.
The Corporation had two significant noncash transactions. On July 1, 1993, the
Corporation paid a $7.2 million dividend-in-kind to Bankmont related to the
transfer of Harris Futures Corporation. On December 31, 1993, the Corporation
adopted SFAS No. 115 --Accounting for Certain Investments in Debt and Equity
Securities. In compliance with this Statement, portfolio securities designated
as available for sale were marked to market on the Corporation's Consolidated
Statement of Condition. Non-cash portions of these transactions were excluded
from the Corporation's Consolidated Statement of Cash Flows.
Selected Loan Maturity Spread
Variable rate loans, excluding consumer loans, accounted for 57 percent of total
loans in 1994 compared to 58 percent in 1993. Excluding consumer loans, term
loans (those with a remaining contractual maturity in excess of one year)
totaled $1 billion. Of these loans, $888 million or 89 percent are due within
five years. Overall, the average FTE yield on total loans increased to 7.75
percent in 1994 from 7.32 percent in 1993. The Corporation's average prime rate
in 1994 was 7.07 percent compared to 5.88 percent in 1993.
<TABLE>
<CAPTION>
Type of loan, by maturity* Within 1 Through Over
(in thousands) December 31, 1994 1 year 5 years 5 years Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural............................. $3,868,303 $863,180 $112,641 $4,844,124
Real estate construction........................................... 151,203 24,339 - 175,542
Foreign............................................................ 267,757 - - 267,757
---------- -------- -------- ----------
$4,287,263 $887,519 $112,641 $5,287,423
========== ======== ======== ==========
Loans with:
Predetermined interest rates...................................... $ 451,887 $116,606 $ 24,146 $ 592,639
Floating interest rates........................................... 3,835,376 770,913 88,495 4,694,784
---------- -------- -------- ----------
$4,287,263 $887,519 $112,641 $5,287,423
========== ======== ======== ==========
*Excludes installment loans to individuals, real estate mortgages and lease
financing.
</TABLE>
Portfolio Securities
On December 31, 1993, the Corporation adopted SFAS No. 115--Accounting for
Certain Investments in Debt and Equity Securities, which requires debt and
marketable equity securities to be classified into three categories. Trading
account securities continue to include those securities purchased for sale in
the near term. The remaining securities have been segregated into "Held to
Maturity" and "Available for Sale" categories. Held to maturity securities
include those debt securities where a company has both the ability and positive
intent to hold to maturity. All other securities are classified as available for
sale, even if the company has no current intent to dispose of them. Held to
maturity securities are carried at amortized historical cost while available for
sale securities are carried at fair value, with net unrealized gains and losses
(after-tax) reported as a separate component of equity.
Throughout this Report the term "portfolio securities" encompasses both the
held to maturity and available for sale categories. Since SFAS No. 115 does not
permit restatement of prior-period information, all investment securities from
1992 are included under held to maturity for comparative purposes. At December
31, 1994, available for sale securities included $54.2 million of fair value
below amortized cost and stockholder's equity included $32.7 million of
unrealized (after tax effect) holding losses. Net income was not impacted by
this balance sheet adjustment.
18
<PAGE>
Portfolio securities averaged $3.23 billion in 1994. On an FTE basis, interest
income from portfolio securities increased $15.5 million to $209 million. The
overall FTE yield on the Corporation's portfolio securities averaged 6.47
percent during 1994.
<TABLE>
<CAPTION>
(Fully taxable equivalent yields)
(Daily averages, dollars in 1994 1993 1992
thousands) Years Ended December 31 Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury................................................. $1,620,059 6.04% $1,363,711 6.26% $1,156,446 7.01%
Federal agency................................................ 962,144 4.69 1,057,879 4.16 1,059,036 5.09
State and municipal........................................... 479,432 12.09 485,431 12.30 489,839 12.46
Other......................................................... 171,226 4.85 87,245 5.02 76,827 5.54
---------- ---------- ----------
Total portfolio securities................................... $3,232,861 6.47 $2,994,266 6.46 $2,782,148 7.20
========== ===== ========== ===== ========== =====
</TABLE>
The Corporation periodically repositions its investment portfolio in response
to changes in laws, in order to meet regulatory capital requirements or, as part
of asset/liability management, to enhance future net interest income levels
while maintaining an appropriate risk/reward relationship. During 1994, the
Corporation purchased $4,595 million of available for sale securities and $843
million of held to maturity securities, sold $146 million of available for sale
securities and had $4,198 million available for sale securities and $482 million
held to maturity securities mature. The aforementioned sales of portfolio
securities generated a pretax net gain of $5.3 million during 1994, compared to
net gains of $13.0 million in 1993 and $4.2 million in 1992. On an after-tax
basis, the Corporation recorded a net gain from securities sales of $3.2 million
in 1994 compared to net gains of $7.9 million in 1993 and $2.7 million in 1992.
In some cases, security gains are taken in order to realize otherwise unrealized
profits in anticipation of near-term increases in interest rates.
The estimated market value of held to maturity securities was $1,102
million at December 31, 1994, compared to a carrying value of $1,108 million. At
December 31, 1993, the estimated market value of held to maturity securities was
$798 million compared to a carrying value of $747 million. See Note 2, page 40
of this Report for details on specific types of securities.
Unrealized holding losses for available for sale securities, as of December
31, 1994, amounted to $54.2 million compared to unrealized holding gains of
$43.9 million as of December 31, 1993. The change in net unrealized gains and
losses of $98.1 million was due to temporary declines in market value as a
result of increases in interest rates during the year, primarily for U.S.
government securities.
<TABLE>
<CAPTION>
1994 1993 1992
Carrying value ------------------- ------------------ ------------------
(dollars in thousands) December 31 Amount % Amount % Amount %
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Treasury............................ $ 536,480 14.5 $ 124,340 3.9 $1,164,260 45.2
Federal agency........................... 68,278 1.9 83,824 2.7 842,579 32.7
State and municipal...................... 466,965 12.6 475,087 15.0 486,751 18.9
Other.................................... 35,936 1.0 63,969 2.0 81,945 3.2
---------- ----- ---------- ----- ---------- -----
Total held to maturity.................. 1,107,659 30.0 747,220 23.6 2,575,535 100.0
---------- ----- ---------- ----- ---------- -----
Available for Sale
U.S. Treasury............................ 1,443,169 39.1 1,121,624 35.4 - -
Federal agency........................... 1,038,460 28.2 1,239,945 39.1 - -
State and municipal...................... 11,917 .3 - - - -
Other.................................... 87,747 2.4 61,726 1.9 - -
---------- ----- ---------- ----- ---------- -----
Total available for sale................ 2,581,293 70.0 2,423,295 76.4 - -
---------- ----- ---------- ----- ---------- -----
Total portfolio securities................ $3,688,952 100.0 $3,170,515 100.0 $2,575,535 100.0
========== ===== ========== ===== ========== =====
</TABLE>
At year-end 1994, the weighted average maturity of the Corporation's
portfolio securities was 2 years and 3 months, an increase of 2 months from the
average maturity at the end of 1993. The maturity distribution of the investment
portfolio at December 31, 1994, together with the approximate taxable equivalent
yield of the portfolio, is presented in the following table. The weighted
average yields shown are computed by dividing an annualized interest income
amount, including the accretion of discounts and the amortization of premiums,
by the amortized cost of the securities outstanding at December 31, 1994. Yields
on tax-exempt securities have been calculated on an FTE basis.
19
<PAGE>
<TABLE>
<CAPTION>
State, Municipal
U.S. Treasury Federal Agency and Other
(Fully taxable Weighted Weighted Weighted Weighted
equivalent yields) Average Average Average Average
--------------------- -------------------- ------------------ --------------------
(dollars in thousands) December 31 Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
Within 1 year..................... $ 80,496 4.54% $ 20,281 6.73% $ 58,749 10.22% $ 159,526 6.91%
1 to 5 years...................... 455,984 6.16 44,466 6.07 279,267 12.00 779,717 8.25
5 to 10 years..................... - - 3,531 6.03 114,483 11.23 118,014 11.07
Over 10 years..................... - - - - 16,865 7.68 16,865 7.68
No stated maturity................ - - - - 33,537 6.68 33,537 6.68
---------- ---------- -------- ----------
Total held to maturity........... 536,480 5.91 68,278 6.27 502,901 11.12 1,107,659 8.30
---------- ---------- -------- ----------
Available for Sale
Within 1 year..................... 232,134 6.89 695,997 5.61 45,003 5.36 973,134 5.90
1 to 5 years...................... 1,208,553 6.19 213,690 5.80 - - 1,422,243 6.13
5 to 10 years..................... 39,591 6.04 29,379 5.50 2,000 6.23 70,970 5.83
Over 10 years..................... - - 116,643 7.33 10,014 6.50 126,657 7.26
No stated maturity................ - - - - 42,524 5.49 42,524 5.49
---------- ---------- -------- ----------
Total available for sale......... 1,480,278 6.13 1,055,709 5.84 99,541 5.54 2,635,528 6.08
---------- ---------- -------- ----------
1994 Total........................ $2,016,758 6.08% $1,123,987 5.86% $602,442 10.20% $3,743,187 6.74%
========== ==== ========== ==== ======== ===== ========== =====
1993 Total........................ $1,245,964 5.95% $1,323,769 4.09% $600,782 9.90% $3,170,515 5.92%
========== ==== ========== ==== ======== ===== ========== =====
1994 Average maturity.............. 2 years 0 months 1 year 11 months 3 years 9 months 2 years 3 months
====================== ===================== =================== ====================
1993 Average maturity.............. 2 years 2 months 0 years 10 months 4 years 6 months 2 years 1 month
====================== ===================== =================== ====================
</TABLE>
Other than securities of the U.S. Government and its agencies and
corporations, at December 31, 1994, there were no portfolio securities of any
one issuer aggregating more than 10 percent of stockholder's equity of the
Corporation. In the opinion of management, there were no material investments in
securities which would have constituted an unusual risk or uncertainty for the
Corporation at December 31, 1994.
Deposits
Total deposits in 1994 averaged $9.72 billion, up $433 million or 5 percent over
1993. Average total deposits in foreign offices experienced the largest growth,
up $297 million or 16 percent over 1993 levels. Foreign office time deposits
increased 16 percent to $2.07 billion, while foreign office demand deposits grew
15 percent to $38 million. The Corporation's core deposits, consisting of demand
deposits, interest checking deposits, money market accounts, passbook and
statement savings accounts and savings certificates grew $171 million or 3
percent to $6.88 billion. Increases of $187 million, $59 million and $24 million
in demand deposits, passbook and statement savings accounts and interest
checking deposits, respectively, accounted for the growth in core deposits.
Other time deposits, consisting primarily of large denomination certificates of
deposits, decreased 5 percent to $722 million. Daily averages and year-to-year
comparisons are summarized below.
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
Years Ended December 31 1994 vs. 1993 1993 vs. 1992
----------------------------------- ------------------- ------------------
(Daily averages, dollars in thousands) 1994 1993 1992 Amount % Amount %
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits........................ $2,859,643 $2,672,152 $2,346,435 $187,491 7 $ 325,717 14
Interest checking deposits............. 663,598 639,377 602,529 24,221 4 36,848 6
Money market accounts.................. 1,170,181 1,235,487 1,294,723 (65,306) (5) (59,236) (5)
Passbook and statement savings
accounts.............................. 882,507 823,193 740,184 59,314 7 83,009 11
Savings certificates................... 1,306,542 1,341,390 1,532,202 (34,848) (3) (190,812) (12)
Other time deposits.................... 722,373 756,560 718,140 (34,187) (5) 38,420 5
Deposits in foreign offices............ 2,110,342 1,813,720 1,638,363 296,622 16 175,357 11
---------- ---------- ---------- -------- ---------
Total deposits........................ $9,715,186 $9,281,879 $8,872,576 $433,307 5 $ 409,303 5
========== ========== ========== ======== == ========= ==
</TABLE>
Interest expense on deposits increased by $49.8 million or 25 percent in 1994
primarily because of higher effective interest rates. Interest expense on
domestic deposits rose 12 percent from 1993, while interest on foreign office
deposits increased by 59 percent compared to the prior year. Effective interest
rates on both domestic and foreign office interest-bearing deposits are
summarized below.
<TABLE>
<CAPTION>
Average interest rates paid Years Ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest checking deposits.............................. 1.99% 1.99% 2.70%
Money market accounts................................... 2.88 2.64 3.28
Passbook and statement savings accounts................. 2.90 2.74 3.38
Savings certificates.................................... 4.37 4.28 5.30
Other interest-bearing time deposits.................... 4.41 3.48 4.54
Time deposits in foreign offices........................ 4.33 3.18 4.02
Total interest-bearing deposits........................ 3.68 3.15 4.02
==== ==== ====
</TABLE>
20
<PAGE>
Certificates of deposit in denominations of $100,000 or more issued by
domestic offices totaled $653 million at December 31, 1994. These deposits
totaled $753 million and $607 million at December 31, 1993 and 1992,
respectively. During the past three years, virtually all time deposits in
foreign offices were in denominations of $100,000 or more.
The remaining maturity of domestic office certificates of deposit of $100,000
or more is as follows:
<TABLE>
<CAPTION>
Domestic office certificates of deposit (in millions) December 31 1994 1993 1992
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maturities:
3 months or less.................................................... $358 $419 $332
3 to 6 months....................................................... 121 171 113
6 to 12 months...................................................... 80 59 75
Over 12 months...................................................... 94 104 87
---- ---- ----
Total.............................................................. $653 $753 $607
==== ==== ====
</TABLE>
Money Market Assets and Liabilities
The Corporation conducts most of its money market activities through HTSB.
Average money market assets, consisting primarily of interest-bearing deposits
at banks, Federal funds sold and securities purchased under agreement to resell,
increased 2 percent to $1.22 billion in 1994 from $1.20 billion in 1993. The
average yield on money market assets increased from 3.55 percent in 1993 to 4.27
percent in 1994. Interest income earned on these assets increased 23 percent to
$52.3 million in 1994. At December 31, 1994, interest-bearing deposits at banks,
Federal funds sold and securities purchased under agreement to resell totaled
$757 million, $394 million and $10 million, respectively, compared to $527
million, $149 million and $353 million at year-end 1993. The decrease in
securities purchased under agreement to resell was primarily the result of
accommodating customers' borrowing requirements at the end of 1993.
Money market liabilities, consisting of Federal funds purchased, securities
sold under agreement to repurchase, commercial paper and other short-term
borrowings, represent a managed source of funds for the Corporation. During
1994, money market liabilities averaged $2.65 billion, an increase of 14 percent
from 1993, when money market liabilities averaged $2.33 billion. The average
rate paid on these borrowings increased from 3.13 percent in 1993 to 4.09
percent in 1994, reflecting generally higher short-term interest rates
experienced by the market during 1994. At December 31, 1994, repurchase
agreements totaled $1.53 billion compared to $864 million at year-end 1993,
primarily reflecting a more favorable market. Federal funds purchased and
securities sold under agreement to repurchase consist of overnight Federal
Reserve funds borrowed and securities sold to banks, brokers and corporations
under agreement to repurchase. The repurchase agreements are generally
outstanding for periods ranging from one day to six months. The following
amounts and rates applied during 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Federal funds purchased and securities sold under agreement to repurchase
(dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of year........................................................... $2,632,167 $1,861,061 $1,916,619
Average interest rate of outstanding borrowings at end of year.............................. 5.03% 2.67% 2.99%%
Highest amount outstanding as of any month-end during the year.............................. $2,632,167 $2,157,770 $2,775,175
Daily average amount outstanding during the year............................................ $1,924,373 $1,682,289 $2,194,647
Daily average annualized rate of interest................................................... 4.13% 3.14% 3.52%%%
</TABLE>
Other short-term borrowings consist primarily of term borrowings in excess of
three days, term Federal funds purchased and short sales of securities. The
following amounts and rates applied during 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Other short-term borrowings
(dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of year........................................................... $670,362 $459,192 $321,097
Average interest rate of outstanding borrowings at end of year.............................. 5.56% 3.22% 3.42%
Highest amount outstanding as of any month-end during the year.............................. $670,362 $489,737 $666,433
Daily average amount outstanding during the year............................................ $435,129 $384,087 $454,705
Daily average annualized rate of interest................................................... 4.02% 3.24% 3.69%
</TABLE>
Commercial paper has been sold directly by Bankcorp to a number of investors,
including individuals, partnerships, corporations, banks and other financial
institutions in various amounts with initial terms not exceeding 270 days. The
following amounts and rates applied during 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Commercial paper
(dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of year................................................................. $306,737 $326,268 $287,145
Average interest rate of outstanding commercial paper at end of year.............................. 5.08% 2.95% 3.03%
Highest amount outstanding as of any month-end during the year.................................... $306,737 $326,268 $358,775
Daily average amount outstanding during the year.................................................. $295,388 $265,884 $289,148
Daily average annualized rate of interest......................................................... 3.89% 2.93% 3.43%
</TABLE>
21
<PAGE>
Loans
Summary
In 1994, significant year-to-year loan growth occurred among the following loan
categories: manufacturing and processing, public and private service industries,
mortgages secured by residential property, charge card and other installment.
Distribution of Loans by Type of Borrower
<TABLE>
<CAPTION>
(in millions) December 31 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Manufacturing and processing....................... $1,065.5 $ 972.9 $ 983.0 $1,258.8 $1,298.2
Public and private service industries.............. 1,738.7 1,593.7 1,511.0 1,469.2 1,694.0
Mining (including oil and gas)..................... 8.0 25.2 41.1 25.0 11.3
Farmers............................................ 35.3 28.0 18.8 14.1 19.2
Individuals (single payment)....................... 394.3 371.1 488.2 441.0 394.7
Loans to purchase and carry securities............. 62.7 92.5 115.1 115.9 85.6
State and political subdivisions,
including industrial revenue bonds................ 37.5 53.8 77.2 110.5 140.6
Other commercial................................... 568.4 606.8 513.2 815.0 887.5
-------- -------- -------- -------- --------
Total Commercial.................................. 3,910.4 3,744.0 3,747.6 4,249.5 4,531.1
-------- -------- -------- -------- --------
Commercial banks................................... 14.7 7.8 7.6 41.6 53.9
Mortgage companies................................. 4.6 14.3 6.6 - .1
Finance companies.................................. 207.3 188.7 128.3 155.8 163.7
Investment companies............................... 66.8 64.5 64.3 296.2 329.7
Other financial institutions....................... 247.8 245.3 144.9 86.3 77.8
-------- -------- -------- -------- --------
Total Financial Institutions...................... 541.2 520.6 351.7 579.9 625.2
-------- -------- -------- -------- --------
Total Brokers and Dealers......................... 392.5 448.8 345.8 346.3 183.0
-------- -------- -------- -------- --------
Construction....................................... 175.5 197.6 193.5 199.6 205.2
Mortgages secured by residential property.......... 1,252.9 1,185.2 1,027.6 1,005.5 708.7
Mortgages secured by commercial property........... 374.6 378.3 351.3 312.8 279.0
-------- -------- -------- -------- --------
Total Real Estate................................. 1,803.0 1,761.1 1,572.4 1,517.9 1,192.9
-------- -------- -------- -------- --------
Charge card........................................ 898.3 708.2 638.4 703.4 774.0
Other installment.................................. 436.8 312.0 306.7 284.9 312.9
-------- -------- -------- -------- --------
Total Installment (to individuals)................ 1,335.1 1,020.2 945.1 988.3 1,086.9
-------- -------- -------- -------- --------
Total Lease Financing............................. - - 1.9 4.2 6.9
-------- -------- -------- -------- --------
Total Domestic Loans.............................. 7,982.2 7,494.7 6,964.5 7,686.1 7,626.0
-------- -------- -------- -------- --------
Foreign Loans:
Governments and official institutions.............. 1.0 1.0 1.0 41.6 41.5
Banks and other financial institutions............. 250.6 221.6 131.9 189.2 227.0
Other, primarily commercial and industrial......... 16.2 8.1 5.4 13.8 14.7
-------- -------- -------- -------- --------
Total Foreign Loans............................... 267.8 230.7 138.3 244.6 283.2
-------- -------- -------- -------- --------
Less unearned income................................ 20.7 21.4 19.9 23.8 26.6
-------- -------- -------- -------- --------
Loans, net of unearned income...................... $8,229.3 $7,704.0 $7,082.9 $7,906.9 $7,882.6
======== ======== ======== ======== ========
</TABLE>
Average loans increased by 9 percent during 1994 compared to 1993. Daily
average loans over the last five years were as follows:
<TABLE>
<CAPTION>
(Daily averages in thousands) Years Ended December 31 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural..................... $5,107,563 $4,762,573 $5,050,436 $5,175,816 $5,157,152
Real estate construction................................... 185,101 193,104 198,759 203,005 207,934
Real estate mortgages...................................... 1,062,828 998,256 959,411 803,447 633,258
Installment................................................ 418,166 318,405 306,786 308,980 300,273
Charge card................................................ 740,088 613,931 619,721 696,351 553,339
Foreign.................................................... 180,830 178,215 178,541 240,637 182,740
Lease financing............................................ 10 798 2,678 5,685 8,235
---------- ---------- ---------- ---------- ----------
Total loans.............................................. 7,694,586 7,065,282 7,316,332 7,433,921 7,042,931
Less unearned income....................................... 22,011 20,474 22,206 26,029 25,957
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income............................. $7,672,575 $7,044,808 $7,294,126 $7,407,892 $7,016,974
========== ========== ========== ========== ==========
</TABLE>
22
<PAGE>
Lending is diversified into several categories at the Corporation.
Concentrations to individual and related customers are monitored and risks
within specific industries are tracked in order to reduce overall expense. When
lending to specialized industries such as Agribusiness or Futures and
Securities, the risks are mitigated by following specifically developed policies
and procedures in the underwriting process as well as obtaining security for
most of these transactions. Secured and unsecured loans totaled $5.43 billion
and $2.80 billion, respectively, of total loans at 1994 year-end.
Risk Management
Summary
In a commercial banking environment, corporate personnel must identify,
quantify, evaluate and manage the risks inherent in its businesses, product
lines and other activities. Through its risk management process, which was
enhanced during 1994, the Corporation strives to diversify these risks, avoid
concentrations and earn returns commensurate with risks taken. The Corporation's
risk management process includes continuous monitoring and review of the
following classes of risk for both proprietary and fiduciary businesses,
products and activities: 1) Credit risk, which is risk of loss due to
obligors' or counterparties' inability or failure to repay an obligation,
including loans, bonds and any other receivable; 2) Position risk, defined as
risk of loss associated with taking a position or developing a concentration in
an asset, including interest rate risk embedded within asset-liability positions
and currency risk associated with foreign exchange contracts; 3) Liquidity risk,
or risk of loss due to insufficient market size resulting in a decline in market
value and/or delay in ability to liquidate an open position; 4) Operating risk,
which is risk of loss resulting from inadequate systems or environments; and 5)
Legal risk, or risk of loss resulting from not complying with laws, regulations
or contractual commitments.
The Corporation applies a comprehensive risk assessment framework to monitor
these risks by line of business, customer and product line. The roles and
relationships of the Corporation's Management Committees and of the Board of
Directors' Risk Oversight Committees were defined to ensure comprehensive risk
management and oversight. The Risk Management and Fiduciary Risk Management
Committees are manned by senior managers from various business units of the
Corporation who bring specialized expertise to bear on risk management issues.
Through this risk management structure, the Corporation evaluates risks,
establishes formal policies, sets risk/return parameters and reviews performance
versus objectives. Management believes that effective policies, procedures,
monitoring and review systems are in place to determine that risk is thoroughly
and effectively analyzed, risk is well-diversified and compensation for risk is
appropriately established and meets return objectives.
Although the majority of the Corporation's customers are located in the
Midwestern region of the United States, this risk is mitigated by a number of
factors (see Note 9 page 48 of this Report for a detailed discussion). Further,
the Corporation maintains a watch on the economic health of the region,
primarily to address risk in its consumer lending business. With the national
unemployment rate for the 1994 fourth quarter at 5.6 percent and projected to
decline to 5.2 percent in 1995, the unemployment rate in the various states of
the Midwestern region is also expected to be equal to, or lower than, the
national rate due to a resurgence of traditional manufacturing. Real estate
sales of existing housing in Illinois are expected to remain strong relative to
many other areas of the country because of the strength of the job market and
loan rates on adjustable mortgages.
The level of credit risk inherent in the Corporation's earning assets is
evidenced, in part, by nonperforming assets consisting of loans placed on
nonaccrual status when collection of interest is doubtful, restructured loans on
which interest is being accrued but which have terms that have been renegotiated
to provide for a reduction of interest or principal, and real estate or other
assets which have been acquired in full or partial settlement of defaulted
loans. These assets, as a group, are not earning at rates comparable to other
earning assets. Assets received in satisfaction of debt are recorded by the
Corporation at lower of cost or fair value. Losses of principal on nonperforming
assets are charged off when, in management's opinion, the amounts are
uncollectible. Interest on nonaccrual loans is recognized as income only at the
time cash is received, although such interest may be applied to reduce a loan's
carrying value if the collectibility of principal is in doubt. Information is
reported monthly to the Board of Directors regarding restructured loans, cash-
basis loans and other nonperforming assets owned, primarily real estate.
Management places an individual commercial or real estate credit on nonaccrual
status when the collection of interest is doubtful or when principal or interest
is 90 days past due unless the past due amounts are in process of collection and
the loan is adequately collateralized. Consumer loans, including charge card
receivables, are charged off when 180 days past due. Accrued interest on charge
card loans is reversed against interest income when principal is charged-off.
Consumer loans are not normally placed on nonaccrual status. The purpose of this
policy is to avoid excessive administrative costs for relatively insignificant
balances. Accordingly, the effect on net income was not material.
The Corporation extends credit to both commercial and retail customers.
Lending activities are centered in those industries in which it has demonstrated
expertise and specialized knowledge. All recognized risks are mitigated, to the
fullest extent possible, through loan structure and the perfection of a security
interest in collateral. The Corporation prescribes, within policy guidelines,
specific advance rates to be used in lending against readily marketable
collateral. These rates take into consideration the collateral type and the
term. Other collateral advances are set to reflect the marketability and
liquidation value of the collateral and normal advance rates are set by
corporate policy with deviations necessitating specific documentation and
approval.
23
<PAGE>
In addition to risks on earning assets, the Corporation has various
commitments and contingent liabilities outstanding that are not reflected on its
Statement of Condition. Examples of these "off-balance-sheet" items include
foreign exchange and interest rate contracts, assets held in trust, loan
commitments and letters of credit. Virtually all off-balance-sheet items must
conform to the same risk review process as loans and are subject to the
Corporation's preset limits on customer and product risk. Various hedging
strategies are employed to reduce certain types of exposure. Management reviews
the magnitude and quality of outstanding commitments and contingent liabilities.
Nonaccrual, Restructured and Past Due Loans
Management closely monitors nonperforming assets, including assets received in
satisfaction of debt. Nonperforming assets were 1.15 percent of total loans at
December 31, 1994, compared with 1.47 percent at year-end 1993. All
nonperforming loans are domestic.
Interest shortfall is the difference between the gross amount of interest that
would have been recorded if all year-end nonperforming loans had been accruing
at their original terms and the cash-basis interest income actually recognized.
Interest shortfall was $3.9 million in 1994 compared to $3.7 million a year ago.
<TABLE>
<CAPTION>
(dollars in thousands) December 31 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans......................................................... $83,803 $ 91,131 $136,340 $148,210 $154,412
Restructured loans....................................................... 2,889 3,262 - 935 8
------- -------- -------- -------- --------
Total nonperforming loans................................................ 86,692 94,393 136,340 149,145 154,420
Other assets received in satisfaction of debt............................ 8,071 19,000 18,086 17,255 9,219
------- -------- -------- -------- --------
Total nonperforming assets............................................. $94,763 $113,393 $154,426 $166,400 $163,639
======= ======== ======== ======== ========
90-day past due loans, still accruing interest (all domestic)............ $31,071 $ 33,491 $ 37,483 $ 30,918 $ 50,042
======= ======== ======== ======== ========
Gross amount of interest that would have been
recorded if all year-end nonperforming loans had
been accruing interest at their original terms.......................... $ 5,278 $ 6,292 $ 10,135 $ 13,502 $ 15,904
Interest income actually recognized...................................... 1,348 2,569 4,164 3,598 5,045
------- -------- -------- -------- --------
Interest shortfall, before consideration of any
income tax effect....................................................... $ 3,930 $ 3,723 $ 5,971 $ 9,904 $ 10,859
======= ======== ======== ======== ========
Nonperforming loans to total loans at year-end........................... 1.05% 1.23% 1.92% 1.89% 1.96%
Nonperforming assets to total loans at year-end.......................... 1.15 1.47 2.18 2.10 2.08
======= ======== ======== ======== ========
</TABLE>
Loan Concentrations
Management monitors industry loan concentrations in an effort to maintain a
well-diversified loan portfolio. Excluding total residential mortgages and
charge card outstandings, at December 31, 1994, the Corporation's loan portfolio
did not include any single industry concentration in excess of 10 percent of
total consolidated loans.
The largest category of the Corporation's loans were domestic commercial,
which totaled $3.91 billion, or 48 percent of total outstandings at year-end
1994. Most of these credits were extended to manufacturing and service-related
companies. Outstandings to primary metal and other fabricated metal industries
represented 25 percent of all manufacturing loans and 3 percent of total
consolidated loans. The largest concentration within service-related industries
was consumer wholesalers, which accounted for 39 percent of all service-related
credits and 8 percent of total loans.
Foreign loans totaled $268 million at year-end 1994, accounting for 3
percent of the Corporation's total outstandings. Further details on the
Corporation's foreign loans can be found in the Foreign Outstandings section on
page 25 of this Report.
Real estate loans, including residential mortgages, totaled $1.80 billion
at December 31, 1994, or 22 percent of total outstandings. Mortgages
collateralized by residential property totaled $1.25 billion, or 15 percent of
loans. These loans included approximately $48 million of mortgages held for
sale. Commercial real estate mortgages and construction loans totaled $550
million at the end of 1994, representing 7 percent of loans. Further details on
the Corporation's commercial real estate outstandings can be found on page 26 of
this Report.
The Corporation had $369 million of aggregate commitments (including
outstandings) to highly leveraged customers. Further details on these
transactions can be found on pages 26 and 27 of this Report.
24
<PAGE>
Foreign Outstandings
Foreign outstandings consist of loans, acceptances, interest-bearing deposits
with other financial institutions and other interest-bearing investments and
monetary assets. At December 31, 1994, substantially all foreign outstandings
represented U.S.dollar claims. Foreign outstandings of certain countries are net
of: a) written guarantees by domestic or other non-local third parties or b) the
value of tangible, liquid collateral deemed realizable by the Corporation. A
significant portion of the Corporation's foreign outstandings are placed with
major financial institutions and governments and their agencies. The Corporation
continually monitors its risk related to foreign outstandings and imposes
internal limits on its foreign exposure.
Information provided in the table on foreign outstandings is presented in
accordance with guidelines of the Securities and Exchange Commission and is not
intended to be indicative of prudent lending levels.
<TABLE>
<CAPTION>
Banks and Other, Primarily
Other Financial Commercial and
1994 (in thousands) Total Institutions Industrial
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstandings (including accrued interest) to one country in excess of 1% of total
consolidated assets at year-end:
Japan............................................................................ $268,617 $268,588 $ 29
1993 (in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Outstandings (including accrued interest) to one country in excess of 1% of total
consolidated assets at year-end:
Japan............................................................................ $306,265 $303,047 $3,218
1992 (in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Outstandings (including accrued interest) to one country in excess of 1% of total
consolidated assets at year-end:
Japan............................................................................ $403,934 $399,809 $4,125
</TABLE>
At December 31, 1994, the Corporation had no aggregate public and private
sector outstandings to any single country experiencing liquidity problems which
exceeded one percent of the Corporation's consolidated assets.
25
<PAGE>
Commercial Real Estate
The commercial real estate market in certain areas of the country has
historically experienced depressed conditions from time to time. Many banks with
loans to borrowers in this industry have reported large increases in
nonperforming assets and corresponding increases in their allowances for credit
losses resulting from commercial real estate transactions. This phenomena tends
to be cyclical and varies by location.
As of December 31, 1994, the Corporation, primarily through its banking
subsidiaries, had outstanding commercial real estate loans of approximately $550
million which included both construction loans and commercial credits
collateralized by commercial real estate. The vast majority of these loans are
collateralized by real estate located in the Chicago metropolitan area. Of the
outstanding commercial real estate loans, approximately $16.1 million were
classified as nonperforming assets representing less than 1 percent of total
consolidated loans. There were no material charge-offs related to commercial
real estate loans during 1994 or 1993. Other real estate owned and other assets
received in satisfaction of debt were $8.1 million at December 31, 1994,
compared to $19.0 million at December 31, 1993, and comprised approximately 9
percent of total nonperforming assets. Management does not currently anticipate
the need to increase its allowance for possible credit losses to reflect
potential charge-offs in its commercial real estate loan portfolio.
Highly Leveraged Transactions
The Corporation, primarily through HTSB, selectively engages in highly leveraged
transactions ("HLTs") by originating and participating in financings for highly
leveraged customers. Such financings are generally senior and collateralized.
The Corporation controls the HLT portfolio through its normal credit extension
process with the goal of not materially changing the risk profile of the
Corporation.
The Corporation internally defines and manages its HLT portfolio using a total
debt to assets ratio exceeding 75 percent as an initial indicator of high
leverage, though other facts and circumstances of a transaction, such as typical
leverage ratios in the customer's industry, may affect that judgment. All loans
and letters of credit extended to a highly leveraged customer represent HLT
exposure, regardless of their purpose. The following discussion of HLTs uses the
Corporation's internal definition.
All corporate credit policies are strictly applied to HLT credits. The credit
analysis performed on an HLT credit must indicate strong primary debt repayment
sources as well as contingency plans providing secondary sources of repayment.
The primary source of expected repayment for HLTs is typically cash flow from
operations. Most HLT loans are also fully collateralized either by a direct
pledge of operating assets or by the stock of operating subsidiaries. Cash flows
based on contingent events such as asset sales or substantial operating
improvements are not treated as primary repayment sources. If, during the course
of the credit review, sensitivity analysis reveals that the borrower's ability
to generate future cash flows would be significantly impaired by higher interest
rates, the borrower may be required to hedge a meaningful portion of its debt.
Pricing guidelines require HLT relationships to earn a premium over existing
minimum risk relationship return-on-asset standards.
The Corporation manages its HLT portfolio to obtain proper portfolio quality
and diversification and, to this end, all HLT credits are subject to monthly
review by senior management. Aggregate commitments (including outstandings) are
currently capped at $600 million. Overall, target credit outstandings are not to
exceed 10 percent of total Corporation loans. At December 31, 1994, the
Corporation had $238 million in loans outstanding to HLT customers, or
approximately 2.9 percent of consolidated loans. Unfunded commitments were
$131.2 million. Commitments, including outstandings, represented 4.5 percent of
the Corporation's outstanding loans at December 31, 1994.
26
<PAGE>
The following table summarizes selected information on the Corporation's HLT
loans and commitments.
<TABLE>
<CAPTION>
December 31
------------------------
(dollars in millions) 1994 1993
--------------------------------------------------------------------
<S> <C> <C>
Funded loans............................ $237.9 $220.6
Unfunded credit commitments............. 131.2 104.0
Largest single HLT loan................. 38.5 25.7
Number of HLT customers................. 23 22
Number of HLT industries................ 19 18
</TABLE>
The following is a distribution of the Corporation's HLT loans by industry. No
single industry exposure exceeds 1 percent of the Corporation's total loans.
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------ -----------------------
HLT distribution by industry % of HLT % of HLT
(dollars in millions) Outstandings Portfolio Outstandings Portfolio
----------------------------------------------------------------------------------------------
<S> <C>
Wholesale trade-durables................ $ 38.5 16% $ 25.7 12%
Transportation equipment................ 30.5 13 15.2 7
Automotive equipment.................... 27.6 12 19.1 9
Wholesale products...................... 25.0 11 24.8 11
Printing and publishing................. 21.2 9 21.5 10
Agricultural............................ 17.1 7 10.9 5
Railway transportation.................. 12.7 5 15.6 7
Paper products.......................... 12.5 5 23.4 11
Wine.................................... 4.3 2 9.6 4
Retail.................................. 3.1 1 3.9 2
Fabricated metal products............... 2.2 1 11.8 5
Other................................... 43.2 18 39.1 17
------ --- ------ ---
Total................................. $237.9 100% $220.6 100%
====== === ====== ===
</TABLE>
There was 1 nonperforming HLT credit at December 31, 1994, amounting to $4.3
million or 1.8 percent of total HLT loans, compared to 2 nonperforming credits
amounting to $11.7 million or 5.3 percent of HLT loans at December 31, 1993.
Charge-offs on HLT loans for the year ended December 31, 1994, were $3.0 million
or 1.3 percent of HLT loans. HLT charge-offs in 1993 totaled $1.5 million or .7
percent of year-end 1993 HLT outstandings.
The Corporation does not segregate and compute an earnings contribution
associated with the HLT portfolio; however, it estimates that this portfolio
generated net interest income plus fees, net of actual losses, amounting to
approximately $4.0 million for the year ended December 31, 1994. For 1993, the
estimated comparable income totaled approximately $3.6 million. The 1994
increase in income from HLTs is attributable to a higher volume of HLT loans and
commitments. Neither fees for unconsummated transactions nor syndication fees
were material. In general, pricing on HLTs is higher than that of other types of
commercial loans; the interest rate is generally 2.0 to 2.5 percentage points
over the reference lending rate and fees typically vary between .5 and 1.0
percent of committed principal. The effect on income of a decline in HLT
outstandings would depend in large part on how resources are redeployed. The
Corporation estimates the reallocation of HLT assets to other types of
commercial loans priced at current market prices would reduce net income by no
more than 2 percent.
While a significant increase in interest rates would increase the risk
associated with HLTs, the borrowers' hedging requirements described above
reduces this vulnerability. Management believes the Corporation's exposure to
abnormal portfolio deterioration as a result of changing economic conditions is
reduced because of the portfolio's diversification across industries and the
limitation of individual customer exposures.
Provision and Allowance for Possible Credit Losses
The provision for credit losses is based upon management's estimate of potential
credit losses and its evaluation of the adequacy of the allowance for possible
credit losses. Factors which influence management's judgment in estimating
credit losses and the adequacy of the allowance include the impact of
anticipated general economic conditions, the nature and volume of the current
loan portfolio, historical loss experience, the balance of the allowance in
relation to total loans outstanding and the evaluation of risks associated with
nonperforming loans.
In 1994, the Corporation adopted the guidelines set forth under the December
1993 "Interagency Policy Statement on the Allowance for Loan and Lease Losses"
issued by the Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation and the Federal Reserve
Board. This statement outlines a methodology management should follow in order
to properly measure the adequacy of the allowance for possible credit losses. It
includes specific quantitative measures as well as certain subjective factors
that may cause estimated credit losses to differ from historical loss
experience. The quantitative measures basically require a bank to place their
loans into "separate pools" with like characteristics and then measure the
historical loss experience of these loan pools. In the case of "non-classified
loans," it
27
<PAGE>
is sufficient to estimate credit losses for the upcoming 12 months. But in the
case of "classified loans," the losses must be projected for the remaining
effective lives of the loans. The subjective factors that should also be
considered and that could potentially modify some of the conclusions reached by
only looking at the quantitative measures are: significant changes in the
institution's lending policies and procedures; changes in national and local
business and economic conditions; changes in the nature and volume of the loan
portfolio; changes in the experience, ability, and depth of lending management
and staff; changes in the trend of the volume and severity of past due and
classified loans; changes in the quality of the institution's loan review
system; the existence and effect of any concentrations, and changes in the level
of such concentrations; and the effect of external factors such as competition
or any special legal or regulatory changes.
The Corporation's aggregate allowance for possible credit losses is derived
from the combination of allowances at its individual subsidiaries, primarily
banks. Each subsidiary has a responsibility to maintain an adequate allowance
based on an evaluation of its own loan portfolio and considering the guidelines
set forth in the aforementioned interagency credit statement. Although
allocations of the Corporation's allowance are made for reporting purposes, each
subsidiary's individual allowance for possible credit losses is available for
use against its total loan portfolio.
On a regular basis, management identifies portions of specific commercial and
real estate credits as "doubtful." These credits include loans where less than
full repayment is reasonably possible, the loan is classified as nonaccrual and
the borrower is experiencing serious financial problems. Approximately 11
percent, 23 percent, 24 percent, 27 percent and 19 percent of the consolidated
allowance for possible credit losses was represented by doubtful portions of
loans at December 31, 1994, 1993, 1992, 1991 and 1990, respectively. At December
31, 1994, the Corporation had allocated $13.6 million to loans internally
categorized as doubtful, compared to $29.6 million at year-end 1993.
At December 31, 1994, the Corporation designated approximately $3.8 million of
the total allowance to cover total foreign credit exposure, up slightly from
$3.7 million at year-end 1993.
During 1994, the provision for credit losses decreased to $45.0 million,
compared to $62.8 million in 1993. At year-end 1994, the allowance for possible
credit losses was $124.7 million, or 1.52 percent of total loans outstanding,
compared to $131.7 million or 1.71 percent of total loans one year ago. The
provision for credit losses is established and reviewed based on the following
criteria: current economic trends, current status of loan portfolio, federal
regulatory requirements, expected net charge-offs and peer group analysis. With
regard to establishing the provision and as a monitoring tool, the ratio of the
allowance for possible credit losses to total loans and the ratio of the
allowance for possible credit losses to nonperforming loans are evaluated on a
regular basis. At year-end 1994, the ratios of the allowance for possible credit
losses to total loans and to nonperforming loans were 1.52% and 144%,
respectively. Both ratios are acceptable when compared to peers and are adequate
when considered in conjunction with the previously-mentioned criteria.
Accordingly, the 1994 provision for credit losses was established, in part, to
achieve these ratios.
Net charge-offs in 1994 were $52.0 million, or .68 percent of average loans
outstanding as compared to $61.3 million, or .87 percent of average loans
outstanding in 1993. Net charge-offs of domestic commercial loans amounted to
$24.7 million in 1994, or .48 percent of average domestic commercial loans
outstanding, down from $32.9 million, or .69 percent of average domestic
commercial loans outstanding in 1993. The charge card portfolio experienced net
charge-offs of $21.3 million and $25.8 million in 1994 and 1993, respectively,
or 2.88 percent and 4.20 percent, respectively, of average outstandings.
Installment loans, including real estate mortgages, had net charge-offs of $5.9
million in 1994, or .40 percent of average outstandings, up from $2.7 million,
or .20 percent of average outstandings in 1993. Over the five-year period ending
December 31, 1994, combined net charge-offs were 1.16 percent of average total
loans outstanding.
The Board of Governors of the Federal Reserve System has established rules
requiring banking institutions to establish special reserves against the risks
presented in certain international assets, as determined by the Federal Reserve.
At December 31, 1994 and 1993, the Corporation was not required to maintain any
special reserve under the aforementioned regulation.
To comply with the Securities and Exchange Commission's requirement to provide
an allocation of the allowance, the following table sets forth the Corporation's
allocation of the allowance for possible credit losses. This allocation is based
on management's subjective estimates. The amount allocated to a particular
category should not be interpreted as the only amount available for future
charge-offs that may occur within that category; it may not be indicative of
future charge-off trends and it may change from year to year based on
management's assessment of the risk characteristics of the loan portfolio.
Allocation Of The Allowance For Possible Credit Losses
<TABLE>
<CAPTION>
Loan category
as a % of
(dollars in thousands) Year Ended December 31, 1994 Allowance Total Loans
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated Portion of Reserve:
Commercial............................................................................ $ 55,364 65.4%
Retail, including charge card......................................................... 41,523 31.4
Foreign............................................................................... 3,819 3.2
Other, primarily off-balance sheet items.............................................. 5,533 N/A
--------
Total Allocated Portion................................................................ 106,239
Unallocated Portion.................................................................... 18,495 N/A
--------
Total.................................................................................. $124,734
========
</TABLE>
28
<PAGE>
Analysis of Allowance for Possible Credit Losses
<TABLE>
<CAPTION>
(dollars in thousands) Years Ended December 31 1994 1993 1992 1991 1990
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance............................... $ 131,676 $ 130,123 $ 125,091 $ 124,829 $ 213,347
---------- ---------- ---------- ---------- ----------
Allowance related to acquired loans............. -- -- -- -- 7,573
---------- ---------- ---------- ---------- ----------
Charge-offs:
Commercial, financial and agricultural......... 31,900 43,537 54,565 43,114 35,227
Real estate construction....................... 65 -- 29 -- --
Installment and real estate mortgages.......... 7,581 3,446 3,414 3,460 2,654
Charge card **................................. 30,360 35,145 39,048 44,004 24,983
Foreign........................................ -- -- -- -- 105,341
---------- ---------- ---------- ---------- ----------
Total charge-offs............................. 69,906 82,128 97,056 90,578 168,205
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and agricultural......... 7,216 10,657 3,859 2,853 7,513
Real estate construction....................... 21 -- -- -- --
Installment and real estate mortgages.......... 1,646 783 1,136 1,135 1,327
Charge card.................................... 9,041 9,378 9,295 5,434 3,655
Foreign........................................ -- 28 10,238 2,108 1,244
---------- ---------- ---------- ---------- ----------
Total recoveries.............................. 17,924 20,846 24,528 11,530 13,739
---------- ---------- ---------- ---------- ----------
Net charge-offs............................... 51,982 61,282 72,528 79,048 154,466
---------- ---------- ---------- ---------- ----------
Provisions charged (credited) to expense:
Domestic....................................... 44,922 61,707 89,083 82,063 69,508
Foreign........................................ 118 1,128 (11,523) (2,753) (11,133)
---------- ---------- ---------- ---------- ----------
Total provisions.............................. 45,040 62,835 77,560 79,310 58,375
---------- ---------- ---------- ---------- ----------
Ending balance.................................. $ 124,734 $ 131,676 $ 130,123 $ 125,091 $ 124,829
========== ========== ========== ========== ==========
Net loans, end of period........................ $8,229,254 $7,703,957 $7,082,861 $7,906,892 $7,882,560
========== ========== ========== ========== ==========
Net loans, daily averages....................... $7,672,575 $7,044,808 $7,294,126 $7,407,892 $7,016,974
========== ========== ========== ========== ==========
Ratios:
Net charge-offs to average
loans outstanding*............................ .68% .87% .99% 1.07% 2.20%
Allowance for possible credit losses to
loans outstanding (end of period)............. 1.52 1.71 1.84 1.58 1.58
Allowance for possible credit losses to
nonperforming loans (end of period)........... 144 139 95 84 81
Allowance for possible credit losses
to nonperforming assets....................... 132 116 84 75 76
Net charge-offs to allowance for possible
credit losses (beginning of period)........... 39 47 58 63 72
========== ========== ========== ========== ==========
</TABLE>
*Note: The 1990 ratio includes approximately $104 million of net charge-offs
related to LDC credits. Excluding this item, the 1990 ratio was .72 percent.
**Prior to 1992, the Corporation charged off past-due charge card interest to
the allowance for possible credit losses. In 1994, 1993 and 1992, $2.0
million, $2.6 million and $3.0 million, respectively, of such interest was
recorded as a reduction of interest income.
International Banking
Summary
International banking services of the Corporation include extension of foreign
credits, foreign exchange trading activities and dealings in Eurocurrencies.
These services are conducted through the Chicago headquarters; the London and
Nassau branch offices; representative offices in Los Angeles and Tokyo; Bank of
Montreal Trust Company (Channel Islands), Ltd.; and Harris Bank International
Corporation, a wholly-owned Edge Act subsidiary of HTSB located in New York
City.
International banking services contributed $18.0 million, or 18 percent of the
Corporation's 1994 consolidated net income, compared to $18.9 million or 16
percent in 1993. International operating income increased $1.7 million, or 3
percent to $53.4 million in 1994 and represented 5 percent of the Corporation's
total operating income. In 1993 and 1992, international operating income also
represented 5 percent of the Corporation's total operating income. Assets and
liabilities associated with foreign domiciled customers are summarized as
follows:
29
<PAGE>
<TABLE>
<CAPTION>
Foreign assets and liabilities
(in thousands) December 31 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C>
Loans:
Governments and official
institutions............. $ 984 $ 984 $ 984
Banks and other financial
institutions............. 250,563 221,603 131,914
Commercial and industrial. 15,816 6,696 3,467
Other loans............... 394 1,378 1,903
---------- -------- ----------
Total loans.............. 267,757 230,661 138,268
---------- -------- ----------
Allowance for possible
credit losses............ (3,819) (3,701) (2,545)
---------- -------- ----------
Deposits in banks located
outside the United States:
Interest-bearing.......... 660,083 525,329 932,482
Other..................... 78,745 53,690 31,679
---------- -------- ----------
Total deposits in banks.. 738,828 579,019 964,161
---------- -------- ----------
Acceptances and other
identifiable assets....... 40,018 30,289 6,194
---------- -------- ----------
Total identifiable
foreign assets.......... $1,042,784 $836,268 $1,106,078
========== ======== ==========
Deposit liabilities:
Banks located in foreign
countries................ $ 335,370 $352,042 $ 178,752
Foreign governments and
official institutions.... 100,139 21,405 50,419
Other demand.............. 39,510 29,531 22,617
Other time and savings.... 111,524 54,419 57,134
---------- -------- ----------
Total deposit liabilities 586,543 457,397 308,922
Short-term borrowings...... 249,536 53,104 60,661
Acceptances outstanding.... 14,782 5,000 5,621
---------- -------- ----------
Total identifiable
foreign liabilities..... $ 850,861 $515,501 $ 375,204
========== ======== ==========
</TABLE>
Geographic Distribution
As of year-end 1994, substantially all international loans, interest-bearing
deposits at banks and deposits in foreign offices represented U.S. dollar
claims. The geographical distribution of international loans and interest-
bearing deposits at banks is presented in the following table:
<TABLE>
<CAPTION>
International banking by domicile International Loans Interest-Bearing
of obligor Domestic Foreign Deposits at
(dollars in thousands) Offices Offices Banks Total %
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1994
Continental Europe.............................. $ 32,157 $ 6,784 $409,375 $ 448,316 48
Pacific and Far East............................ 113,266 99,794 177,208 390,268 42
United Kingdom and Ireland...................... 1,000 218 - 1,218 -
Western Hemisphere (excluding U.S. and Canada).. 7,666 984 41,000 49,650 6
Canada.......................................... 5,888 - 32,500 38,388 4
-------- -------- -------- ---------- ---
Total international banking.................... $159,977 $107,780 $660,083 $ 927,840 100
======== ======== ======== ========== ===
December 31, 1993
Continental Europe.............................. $ 55,152 $ 1,160 $205,700 $ 262,012 35
Pacific and Far East............................ 150,985 6,920 238,629 396,534 52
United Kingdom and Ireland...................... - 3,101 10,000 13,101 2
Western Hemisphere (excluding U.S. and Canada).. 4,410 1,008 16,000 21,418 3
Canada.......................................... 7,925 - 55,000 62,925 8
-------- -------- -------- ---------- ---
Total international banking.................... $218,472 $ 12,189 $525,329 $ 755,990 100
======== ======== ======== ========== ===
December 31, 1992
Continental Europe.............................. $ 15,955 $ 5,950 $414,501 $ 436,406 41
Pacific and Far East............................ 90,434 - 450,981 541,415 51
United Kingdom and Ireland...................... - 7,877 - 7,877 1
Western Hemisphere (excluding U.S. and Canada).. - 984 67,000 67,984 6
Canada.......................................... 16,425 - - 16,425 1
Middle East..................................... 643 - - 643 -
-------- -------- -------- ---------- ---
Total international banking.................... $123,457 $ 14,811 $932,482 $1,070,750 100
======== ======== ======== ========== ===
</TABLE>
30
<PAGE>
Vision 2002
The Corporation and its parent company, Bank of Montreal, have developed a
joint, long-term strategic plan with the goal of becoming, over a period of 10
years, a North American financial services organization with comprehensive
capabilities in both Canada and the United States. This plan, called Vision
2002, envisions Harris as one of four main operating entities within the Bank of
Montreal organization, with the responsibility for serving individuals and small
to mid-sized businesses in the Midwest while providing trust, cash management
and special industries services nationally.
Vision 2002 will lead to a substantially larger Bank of Montreal presence
in the United States, principally focused in the Harris organization and its
subsidiaries. The Corporation's services to individuals, small businesses and
mid-market corporations will be expanded throughout Chicago, Illinois and
neighboring states. Additionally, trust, cash management and special industries
services will continue to grow nationwide.
Over a period of 10 years, Bank of Montreal plans to invest up to $700
million in the Corporation with the purpose of expanding, through acquisition
and de novo branching, its distribution network within the City of Chicago, Cook
County and surrounding counties. As part of this expansion, in October 1994,
Bank of Montreal and Suburban Bancorp, Inc. completed their merger. The merger
was effected using Bank of Montreal stock valued at approximately $237 million.
Suburban Bancorp, now known as Harris Bankmont, Inc., became a wholly-owned
subsidiary of Bankmont Financial Corp. The transaction added 13 banks with 30
locations in Cook and surrounding counties, thereby doubling the number of
community banks in the Chicago area and making Harris (the Corporation and
Harris Bankmont, Inc.) the area's third largest community bank network. The
Corporation and its sister company, Harris Bankmont, Inc., plan to open
approximately 25 new branches by the end of 1996. The two-to-three year process
of building a cost-effective operations and staff support infrastructure was
started in 1994. The goal is to obtain North American scale advantages and
reduce fixed costs. Building broad-based centers of competence within corporate
services and operations will eliminate duplication, create scale efficiencies
and improve quality and responsiveness. Additionally, the use of advanced
technology to automate processing activities at the point of customer contact
will lower costs and increase quality. To this end, the consolidation of
processing functions for Harris' and Bank of Montreal's U.S.-based foreign
currency operations at a single location in Montreal should be complete in 1995.
The new community bank operations center, which provides centralized customer
support functions, opened at 1994 year-end. Customer support functions include
stop payments, overdrafts, application balancing, customer account set-up and
maintenance and proofing and encoding. The center plans to consolidate all
bookkeeping and proofing functions during 1995. Management believes that new and
existing customers will have even better access to the wide range of services
that the Corporation has built over its 113 years, as well as to the additional
services it will provide in the years ahead.
Fourth Quarter 1994 Compared with Fourth Quarter 1993
Net income for the fourth quarter of 1994 was $35.6 million, up 42 percent from
fourth quarter 1993 income of $25.0 million. The earnings growth is attributable
primarily to an improvement in net interest income and a lower provision for
credit losses. The Corporation recorded returns on average assets and average
equity of .96 percent and 13.99 percent, respectively, in fourth quarter 1994,
compared to returns of .75 percent and 10.14 percent in last year's fourth
quarter.
FTE net interest income was $126.8 million during the 1994 quarter, an
increase of 13 percent from $112.5 million for the same quarter one year ago.
Average earning assets rose $995 million or 9 percent to $12.5 billion,
reflecting higher levels of portfolio securities and loans. Net interest margin,
the other principal determinant of net interest income, rose from 3.89 percent
in the fourth quarter of 1993 to 4.03 percent in the current year's fourth
quarter, reflecting an improved mix of higher-yielding assets and the
restructuring of the Corporation's borrowings from its parent, Bankmont.
Average portfolio securities increased $288 million in fourth quarter 1994
compared to fourth quarter 1993 with the largest increase in U.S. government
securities. Average loans increased $725 million in fourth quarter 1994 compared
to fourth quarter 1993, with commercial loans and charge card outstandings being
the strongest contributors to this growth.
Funding for the quarter's growing asset base came from interest-bearing
liabilities, which rose $1.13 billion from last year's fourth quarter. Average
interest-bearing deposits increased $655 million, or 10 percent to $6.98
billion, reflecting increased time deposits in foreign offices and other,
primarily wholesale, interest-bearing time deposits. Short-term borrowings were
up $470 million or 20 percent. Noninterest-bearing supporting funds fell to
$2.37 billion, representing 19 percent of supporting liabilities in fourth
quarter 1994, down from 22 percent in the 1993 fourth quarter.
The fourth quarter provision for credit losses of $10.5 million was down
from $16.6 million provided in the fourth quarter of 1993. Net loan charge-offs
during the current quarter were $12.9 million, compared to $20.0 million in the
same period last year.
Noninterest income declined $7.0 million, or 8 percent to $77.0 million.
During the 1994 fourth quarter, the Corporation realized a net loss of $.4
million from the sale of certain portfolio securities compared to a $5.5 million
gain in fourth quarter 1993. Trust and investment management fees, foreign
exchange income and service fees and charges declined $2.1 million, $1.0 million
and $.8 million, respectively. Charge card fees increased slightly quarter to
quarter.
Noninterest expenses were $139.1 million in the quarter, down 2 percent
from the 1993 fourth quarter. Management has emphasized the need to limit
expense growth by improving productivity and increasing discipline in
controlling all types of costs.
Income tax expense increased $5.7 million or 83 percent, quarter to
quarter, reflecting higher pretax income offset somewhat by the recognition of
research tax credits.
31
<PAGE>
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPLEMENTARY DATA Harris Bankcorp, Inc. and Subsidiaries
Quarterly Financial Data (unaudited)
Summary of Earnings and Net Interest Income
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Fully taxable equivalent (FTE)
basis, dollars in millions, 4th 3rd 2nd 1st 4th 3rd 2nd 1st 4th 3rd 2nd 1st
except per share data) Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
-----------------------------------------------------------------------------------------------------------------------------------
Interest income.................... $237.8 $217.8 $201.3 $177.7 $179.2 $182.4 $186.7 $185.0 $186.5 $195.6 $217.6 $219.8
Interest expense................... 117.1 101.1 87.7 72.1 72.7 74.1 77.4 75.3 77.0 86.1 104.1 108.4
------------------------------ ------------------------------ ------------------------------
Net Interest Income................ 120.7 116.7 113.6 105.6 106.5 108.3 109.3 109.7 109.5 109.5 113.5 111.4
FTE adjustment..................... 6.1 5.9 6.0 5.8 6.0 7.3 6.1 6.1 6.5 6.6 10.2 9.7
------------------------------ ------------------------------ ------------------------------
Net interest income--
FTE basis......................... 126.8 122.6 119.6 111.4 112.5 115.6 115.4 115.8 116.0 116.1 123.7 121.1
Provision for credit losses........ 10.5 9.0 12.0 13.4 16.6 15.5 15.3 15.5 18.6 15.4 21.7 21.9
------------------------------ ------------------------------ ------------------------------
Net Interest Income after
Provision for Credit Losses....... 116.3 113.6 107.6 98.0 95.9 100.1 100.1 100.3 97.4 100.7 102.0 99.2
------------------------------ ------------------------------ ------------------------------
Noninterest Income
Trust and investment
management fees.................. 36.7 36.2 37.7 37.6 38.8 36.8 37.5 35.7 40.3 35.6 35.3 34.0
Trading account................... .7 .1 (.1) (1.2) .2 1.1 .8 3.1 1.6 1.0 (3.1) (4.0)
Foreign exchange.................. 4.3 4.0 5.2 6.2 5.3 4.1 7.8 7.1 7.5 9.4 3.3 4.8
Charge card....................... 10.5 9.9 8.9 8.1 10.5 9.5 8.5 8.0 9.4 9.0 8.9 9.0
Service fees and charges.......... 17.7 18.5 18.5 19.0 18.5 19.6 18.9 20.8 20.0 18.0 19.0 23.0
Gain on sales of
foreign claims................... - - - - - - - - - - 15.8 -
Securities (losses) gains......... (.4) 2.4 .1 3.1 5.5 .3 6.9 .3 2.6 .1 .1 1.4
Other............................. 7.5 5.1 10.3 7.7 5.2 10.7 7.9 7.6 6.5 6.6 11.0 8.8
------------------------------ ------------------------------ ------------------------------
Total noninterest income......... 77.0 76.2 80.6 80.5 84.0 82.1 88.3 82.6 87.9 79.7 90.3 77.0
------------------------------ ------------------------------ ------------------------------
Noninterest Expenses
Employment........................ 74.1 77.2 79.6 81.7 74.5 74.3 83.7 73.2 68.7 72.6 69.0 71.2
Net occupancy..................... 11.7 11.0 11.3 11.1 11.4 12.5 11.8 11.0 12.3 10.3 12.6 12.5
Equipment......................... 11.2 10.4 10.0 10.7 11.5 10.6 10.9 10.4 12.5 11.5 11.5 11.0
Deposit insurance................. 3.9 3.9 3.9 3.9 3.1 3.8 3.8 4.4 4.0 4.0 4.3 4.3
Advertising....................... 4.3 3.6 3.6 3.5 4.5 3.2 2.9 2.9 2.7 3.0 3.0 3.0
Trust customer charge............. - - 51.3 - - - - - - - - -
Writedown of property
held for expansion............... - - - - - - - - - - 11.8 -
Other............................. 33.9 30.6 30.0 27.7 37.1 34.2 18.4 38.1 42.8 31.3 38.4 37.6
------------------------------ ------------------------------ ------------------------------
Total noninterest expenses....... 139.1 136.7 189.7 138.6 142.1 138.6 131.5 140.0 143.0 132.7 150.6 139.6
------------------------------ ------------------------------ ------------------------------
FTE income (loss)--
pretax........................... 54.2 53.1 (1.5) 39.9 37.8 43.6 56.9 42.9 42.3 47.7 41.7 36.6
Applicable income taxes (benefit).. 12.5 13.4 (8.0) 6.7 6.8 7.3 15.4 10.4 5.0 8.3 5.1 3.7
FTE adjustment..................... 6.1 5.9 6.0 5.8 6.0 7.3 6.1 6.1 6.5 6.6 10.2 9.7
------------------------------ ------------------------------ ------------------------------
Income before cumulative
effect of a change in
accounting principle.............. 35.6 33.8 .5 27.4 25.0 29.0 35.4 26.4 30.8 32.8 26.4 23.2
Cumulative effect on prior
years (to December 31, 1992)
of changing the accounting
method for income taxes........... - - - - - - - 1.8 - - - -
------------------------------ ------------------------------ ------------------------------
Net Income......................... $ 35.6 $ 33.8 $ .5 $ 27.4 $ 25.0 $ 29.0 $ 35.4 $ 28.2 $ 30.8 $ 32.8 $ 26.4 $ 23.2
============================== ============================== ==============================
Earnings per common
share (based on average
shares outstanding)............... $ 5.34 $ 5.07 $ .08 $ 4.11 $ 3.75 $ 4.35 $ 5.30 $ 4.24 $ 4.61 $ 4.92 $ 3.96 $ 3.49
============================== ============================== ==============================
Net Interest Margin
Yield on earning assets........... 7.75% 7.26% 6.82% 6.33% 6.40% 6.66% 6.73% 6.99% 7.10% 7.37% 7.66% 7.87%
Rate on supporting liabilities.... 3.72 3.28 2.89 2.50 2.51 2.60 2.71 2.76 2.83 3.13 3.50 3.72
------------------------------ ------------------------------ ------------------------------
Net interest margin............... 4.03% 3.98% 3.93% 3.83% 3.89% 4.06% 4.02% 4.23% 4.27% 4.24% 4.16% 4.15%
============================== ============================== ==============================
</TABLE>
Rows may not add to annual amounts because of rounding.
32
<PAGE>
FINANCIAL STATEMENTS
Consolidated Statement of Income Harris Bankcorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(in thousands except per share data) For the Years Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans, including fees..................................................... $591,532 $512,491 $581,086
Money market assets:
Deposits at banks...................................................... 30,739 25,212 32,419
Federal funds sold and securities purchased under agreement to resell.. 21,523 17,436 12,560
Trading account.......................................................... 2,190 5,671 19,101
Securities available for sale:
U.S. Treasury and Government agency.................................... 115,489 - -
Other.................................................................. 5,754 - -
Securities held to maturity:
U.S. Treasury and Government agency.................................... 27,362 129,337 129,635
State and municipal.................................................... 37,432 38,647 40,321
Other.................................................................. 2,584 4,383 4,277
-------- -------- --------
Total interest income.................................................. 834,605 733,177 819,399
-------- -------- --------
Interest Expense
Deposits................................................................. 250,002 200,172 252,626
Short-term borrowings.................................................... 108,485 73,043 103,988
Long-term notes.......................................................... 19,520 26,406 18,933
-------- -------- --------
Total interest expense................................................. 378,007 299,621 375,547
-------- -------- --------
Net Interest Income...................................................... 456,598 433,556 443,852
Provision for credit losses.............................................. 45,040 62,835 77,560
-------- -------- --------
Net Interest Income after Provision for Credit Losses.................... 411,558 370,721 366,292
-------- -------- --------
Noninterest Income
Trust and investment management fees..................................... 148,094 148,809 145,091
Trading account.......................................................... (396) 5,258 (4,499)
Foreign exchange......................................................... 19,769 24,302 25,062
Charge card.............................................................. 37,402 36,516 36,355
Service fees and charges................................................. 73,621 77,774 80,056
Gain on sales of foreign claims.......................................... - - 15,823
Securities gains......................................................... 5,254 13,038 4,239
Other.................................................................... 30,700 31,391 32,902
-------- -------- --------
Total noninterest income.............................................. 314,444 337,088 335,029
-------- -------- --------
Noninterest Expenses
Salaries and other compensation.......................................... 246,200 243,739 225,788
Pension, profit sharing and other employee benefits...................... 66,370 62,019 55,774
Net occupancy............................................................ 45,052 46,676 47,673
Equipment................................................................ 42,284 43,396 46,460
Deposit insurance........................................................ 15,684 15,047 16,586
Advertising.............................................................. 14,991 13,528 11,667
Trust customer charge.................................................... 51,335 - -
Writedown of property held for expansion................................. - - 11,802
Other.................................................................... 122,212 127,682 150,223
-------- -------- --------
Total noninterest expenses............................................. 604,128 552,087 565,973
-------- -------- --------
Income before income taxes............................................... 121,874 155,722 135,348
Applicable income taxes.................................................. 24,528 39,879 22,095
-------- -------- --------
Income before cumulative effect of a change in accounting principle.... 97,346 115,843 113,253
Cumulative effect on prior years (to December 31, 1992) of changing the
accounting method for income taxes..................................... - 1,782 -
-------- -------- --------
Net Income............................................................... $ 97,346 $117,625 $113,253
======== ======== ========
Earnings per Common Share (based on 6,667,490 average shares outstanding)
Income before cumulative effect of a change in accounting principle...... $ 14.60 $ 17.37 $ 16.99
Cumulative effect on prior years (to December 31, 1992) of changing the
accounting method for income taxes..................................... - .27 -
-------- -------- --------
Net Income............................................................... $ 14.60 $ 17.64 $ 16.99
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
33
<PAGE>
Consolidated Statement of Condition Harris Bankcorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(in thousands except share data) December 31 1994 1993
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and demand balances due from banks......................................................... $ 1,399,781 $ 1,132,891
Money market assets:
Interest-bearing deposits at banks............................................................. 757,227 527,480
Federal funds sold and securities purchased under agreement to resell.......................... 404,226 502,530
Portfolio securities:
Held to maturity (market value of $1,101,927 in 1994, $797,524 in 1993)........................ 1,107,659 747,220
Available for sale............................................................................. 2,581,293 2,423,295
Trading account assets.......................................................................... 36,067 50,061
Loans, net of unearned income of $20,724 in 1994 and $21,431 in 1993............................ 8,229,254 7,703,957
Allowance for possible credit losses............................................................ (124,734) (131,676)
Premises and equipment.......................................................................... 221,494 226,860
Customers' liability on acceptances............................................................. 125,113 58,399
Other assets.................................................................................... 594,159 276,817
----------- -----------
Total assets.................................................................................. $15,331,539 $13,517,834
=========== ===========
Liabilities
Deposits in domestic offices--noninterest-bearing............................................... $ 3,222,043 $ 3,156,815
--interest-bearing.................................................. 4,214,273 4,625,175
Deposits in foreign offices--noninterest-bearing................................................ 31,903 17,768
--interest-bearing................................................... 2,451,513 1,576,113
----------- -----------
Total deposits................................................................................ 9,919,732 9,375,871
Federal funds purchased and securities sold under agreement to repurchase....................... 2,632,167 1,861,061
Commercial paper outstanding.................................................................... 306,737 326,268
Other short-term borrowings..................................................................... 670,362 459,192
Acceptances outstanding......................................................................... 125,113 58,798
Accrued interest, taxes and other expenses...................................................... 126,723 69,398
Other liabilities............................................................................... 230,741 50,893
Long-term notes................................................................................. 298,810 298,681
----------- -----------
Total liabilities............................................................................. 14,310,385 12,500,162
----------- -----------
Stockholder's Equity
Preferred stock (no par value); authorized 1,000,000 shares; issued none........................ -- --
Common stock ($8 par value); authorized 10,000,000 shares;
issued and outstanding 6,667,490 shares........................................................ 53,340 53,340
Surplus......................................................................................... 203,897 203,897
Retained earnings............................................................................... 796,617 734,009
Unrealized holding (losses) gains, net of deferred taxes of $(21,535) in 1994 and $17,441 in
1993........................................................................................... (32,700) 26,426
----------- -----------
Total stockholder's equity.................................................................... 1,021,154 1,017,672
----------- -----------
Total liabilities and stockholder's equity.................................................... $15,331,539 $13,517,834
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
34
<PAGE>
Statement of Changes in Stockholder's Equity
Harris Bankcorp, Inc. (Consolidated and Parent Company only)
<TABLE>
<CAPTION>
Unrealized
Holding Gains
(Losses) on Total
Common Retained Available for Stockholder's
(in thousands except per share data) Stock Surplus Earnings Sale Securities Equity
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991............................. $53,340 $203,897 $603,840 $ -- $ 861,077
Net income.............................................. -- -- 113,253 -- 113,253
Dividends ($6.62 per share)............................. -- -- (44,139) -- (44,139)
------- -------- -------- -------- ----------
Balance at December 31, 1992............................. 53,340 203,897 672,954 -- 930,191
Net income.............................................. -- -- 117,625 -- 117,625
Dividends ($8.48 per share)............................. -- -- (56,570) -- (56,570)
Implementation of change in accounting for marketable
debt and equity securities, net of tax effect of
$17,441................................................ -- -- -- 26,426 26,426
------- -------- -------- -------- ----------
Balance at December 31, 1993............................. 53,340 203,897 734,009 26,426 1,017,672
Net income.............................................. -- -- 97,346 -- 97,346
Dividends ($5.21 per share)............................. -- -- (34,738) -- (34,738)
Change in unrealized loss on available for sale
securities, net of tax effect of $(38,976)............. -- -- -- (59,126) (59,126)
------- -------- -------- -------- ----------
Balance at December 31, 1994............................. $53,340 $203,897 $796,617 $(32,700) $1,021,154
======= ======== ======== ======== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
35
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Harris Bankcorp, Inc. and Subsidiaries
(in thousands) For the Years Ended December 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income............................................................................. $ 97,346 $ 117,625 $ 113,253
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses........................................................... 45,040 62,835 77,560
Depreciation and amortization, including intangibles.................................. 49,873 52,686 56,406
Deferred tax benefit.................................................................. (3,818) (12,829) (20,573)
Gain on sales of portfolio securities................................................. (5,254) (13,038) (4,239)
Trading account net cash sales (purchases)............................................ 13,994 (5,377) 32,591
(Increase) decrease in interest receivable............................................ (40,721) 15,759 28,065
Increase (decrease) in interest payable............................................... 9,403 (6,535) (13,071)
Decrease (increase) in loans held for sale............................................ 245,445 (101,287) (91,077)
Other, net............................................................................ (18,673) 4,588 35,982
----------- ----------- -----------
Net cash provided by operating activities........................................... 392,635 114,427 214,897
----------- ----------- -----------
Investing Activities:
Net (increase) decrease in interest-bearing deposits at banks......................... (229,747) 405,395 (203,974)
Net decrease (increase) in Federal funds sold and securities purchased
under agreement to resell........................................................... 98,304 (304,964) 1,025,795
Proceeds from sales of securities held to maturity.................................... - 211,371 129,982
Proceeds from maturities of securities held to maturity............................... 482,378 4,878,735 2,907,472
Purchases of securities held to maturity.............................................. (842,817) (5,628,180) (2,915,072)
Proceeds from sales of securities available for sale.................................. 146,114 - -
Proceeds from maturities of securities available for sale............................. 4,198,226 - -
Purchases of securities available for sale............................................ (4,595,187) - -
Net (increase) decrease in loans...................................................... (822,724) (581,091) 842,580
Proceeds from sales of premises and equipment......................................... 42,045 41,301 49,334
Purchases of premises and equipment................................................... (76,174) (81,479) (74,294)
Other, net............................................................................ 1,969 46,127 (27,999)
----------- ----------- -----------
Net cash (used) provided by investing activities.................................... (1,597,613) (1,012,785) 1,733,824
----------- ----------- -----------
Financing Activities:
Net increase (decrease) in deposits.................................................. 543,861 599,137 (682,144)
Net increase (decrease) in Federal funds purchased and securities sold under
agreement to repurchase............................................................ 771,106 (55,558) (1,066,383)
Net (decrease) increase in commercial paper outstanding.............................. (19,531) 39,123 14,679
Net increase (decrease) in other short-term borrowings............................... 211,170 138,095 (105,248)
Proceeds from issuance of long-term notes............................................ - - 100,000
Repayment of long-term notes......................................................... - (250) (1,580)
Cash component of dividend-in-kind of Harris Futures Corporation..................... - (1,331) -
Cash dividends paid.................................................................. (34,738) (49,355) (44,139)
----------- ----------- -----------
Net cash provided (used) by financing activities................................... 1,471,868 669,861 (1,784,815)
----------- ----------- -----------
Net increase (decrease) in cash and demand balances due from banks.................. 266,890 (228,497) 163,906
Cash and demand balances due from banks at January 1................................. 1,132,891 1,361,388 1,197,482
----------- ----------- -----------
Cash and demand balances due from banks at December 31............................... $ 1,399,781 $ 1,132,891 $ 1,361,388
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)................................................. $ 368,605 $ 319,227 $ 388,618
Income taxes......................................................................... $ 34,047 $ 35,058 $ 40,596
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
36
<PAGE>
Notes to Financial Statements
1. Summary Of Significant Accounting Policies
Principles of consolidation
Harris Bankcorp, Inc. ("Bankcorp"), a Delaware corporation, is a wholly-owned
subsidiary of Bankmont Financial Corp. ("Bankmont"), a Delaware corporation and
a wholly-owned subsidiary of Bank of Montreal. Throughout these Notes to
Financial Statements, the term "Corporation" refers to Bankcorp and
subsidiaries.
The consolidated financial statements include the accounts of Bankcorp and
its wholly-owned subsidiaries including Harris Trust and Savings Bank ("HTSB").
Significant intercompany accounts and transactions have been eliminated. Certain
reclassifications were made to conform prior years' financial statements to the
current year's presentation. See Note 17 for additional information on business
combinations and Note 18 for additional information on related party
transactions.
Basis of accounting
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles and conform to practices within the banking
industry.
Foreign currency and foreign exchange contracts
Assets and liabilities denominated in foreign currencies have been translated
into United States dollars at respective year-end rates of exchange. Monthly
translation gains or losses are computed at rates prevailing at month-end. There
were no material translation gains or losses during any of the years presented.
Foreign exchange trading positions including spot, forward, futures and options
contracts are revalued monthly using prevailing market rates. Exchange
adjustments are included with foreign exchange income in the Consolidated
Statement of Income.
Interest rate futures, forward rate agreements, options and guarantees
Interest rate futures contracts can be used in the management of the
Corporation's risk strategy or as part of its dealer and trading activities.
Open positions on such contracts not designated as hedges of existing positions
or anticipated transactions are marked to market daily and the resulting gains
and losses are recognized in noninterest income. Deferred gains and losses on
futures contracts used to hedge existing assets and liabilities are included in
the basis of the item being hedged. For hedges of anticipated transactions, the
Corporation recognizes deferred gains or losses on futures transactions as
adjustments to the cash position eventually taken. Interest rate forward rate
agreements, options and guarantees, including caps, floors and collars, are
marked to market with the resulting gains and losses recorded in trading account
profits.
Interest rate swaps
The Corporation engages in interest rate swaps in order to manage its interest
rate risk exposure, generate fee income and as a trading vehicle. Gains and
losses on swaps designated as hedges are deferred and recognized over the lives
of the related hedged positions. Contractual payments under interest rate swaps
designated as hedges are recognized in the Statement of Income. Swaps not
designated as hedges are marked to market with realized and unrealized gains and
losses included with trading account profits.
Securities
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 115-Accounting for Certain
Investments in Debt and Equity Securities, which the Corporation elected to
adopt as of December 31, 1993. As required by the Statement, securities are
classified as either trading account assets, held to maturity or available for
sale. Trading account assets include securities acquired as part of trading
activities and are typically purchased with the expectation of near-term profit.
These assets consist primarily of municipal bonds and U.S. government
securities. Securities are classified as held to maturity when the Corporation
has both the positive intent and ability to hold them to maturity. All other
securities are classified as available for sale, even if the Corporation has no
current plans to divest. Trading account assets are reported at fair value with
unrealized gains and losses included in trading account results, which also
includes realized gains and losses from closing such positions. Held-to-maturity
securities are stated at cost, adjusted for amortization of premium and
accretion of discount. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after-tax basis, in a separate
component of stockholder's equity. For comparative purposes (primarily for
periods prior to the adoption of SFAS No. 115), the Corporation considers
"portfolio securities" to include both held to maturity and available for sale
securities.
Application of SFAS No. 115 to prior periods is not permitted and,
accordingly, prior-period financial statements have not been restated to reflect
the change in accounting principle. There is no cumulative effect on the
Corporation's Consolidated Statement of Income as of December 31, 1993, from
adopting SFAS No. 115. However, the December 31, 1993 balance of stockholder's
equity was increased by $26.4 million (net of $17.4 million in deferred taxes)
to reflect the net unrealized holding gains on securities classified as
available for sale which were previously carried at amortized cost or lower of
cost or market. Previous to the adoption of SFASNo. 115, when the Corporation
had the ability and intent to hold portfolio secu-
37
<PAGE>
rities for the foreseeable future (at least one year), they were stated at cost
adjusted for amortization of premium or discount; securities purchased either as
short-term investments or in anticipation of sale in the foreseeable future,
were segregated and carried at lower of amortized cost or then current market
value, on an aggregate basis.
Interest income on securities, including amortization of discount or
premium, is included in earnings. Realized gains and losses, as a result of
portfolio securities sales, are included in securities gains and losses, with
the cost of securities sold determined on the specific identification basis.
Loans, loan fees and commitment fees
Loans not held for sale are recorded at the principal amount outstanding, net of
unearned income, deferred fees and origination costs. Origination fees collected
on commercial loans, loan commitments, mortgage loans and standby letters of
credit, which are not held for sale, are generally deferred and amortized over
the life of the related facility. Other loan-related fees that are not the
equivalent of yield adjustments are recognized as income when received or
earned. At December 31, 1994 and 1993, the Corporation's Consolidated Statement
of Condition included approximately $11.0 million and $11.5 million,
respectively, of deferred loan-related fees net of deferred origination costs.
In conjunction with its mortgage and commercial banking activities, the
Corporation will originate loans with the intention of selling them on the
secondary market. These loans are carried at the lower of original cost or
current market value, on a portfolio basis. Deferred origination fees and costs
associated with these loans are not amortized, and are included as part of the
basis of the loan at time of sale. Realized and unrealized gains and losses are
included with other noninterest income.
Commercial and real estate loans are placed on nonaccrual status when the
collection of interest is doubtful or when principal or interest is 90 days past
due, unless the credit is adequately collateralized and the past due amount is
in process of collection. When a loan is placed on nonaccrual status, all
interest accrued but not yet collected which is deemed uncollectible is charged
against interest income in the current year. Interest on nonaccrual loans is
recognized as income only when cash is received and the Corporation expects to
recover the current carrying value of the loan.
Commercial and real estate loans are charged off when, in management's
opinion, the loan is deemed uncollectible. Charge card and consumer installment
loans are charged off when 180 days past due. Accrued interest on these loans is
charged to interest income. Such loans are not normally placed on nonaccrual
status.
Loan commitments and letters of credit are executory contracts and are not
reflected on the Corporation's Consolidated Statement of Condition. Fees
collected are generally deferred and recognized over the life of the facility.
In October 1994, the FASB issued SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures. This Statement applies
to all creditors and amends SFAS No. 114-Accounting by Creditors for Impairment
of a Loan. The objective of these Statements is to eliminate the inconsistencies
in the accounting for impaired and restructured loans by requiring, in general,
that impaired loans be carried based on the present value of expected future
cash flows discounted at the loan's effective interest rate. These Statements
are applicable to all creditors and all types of loans, except for large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or lower of cost or fair value, leases
and debt securities. These Statements are effective for fiscal years beginning
after December 15, 1994, and the Corporation intends to adopt them in 1995. The
Corporation does not currently believe these Statements will have a material
effect on the Corporation's financial position or results of operations.
Allowance for possible credit losses
The allowance for possible credit losses is maintained at a level considered
adequate to provide for potential credit losses. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs. The
provision for credit losses is based on past loss experience, management's
evaluation of the loan portfolio under current economic conditions and
management's estimate of anticipated, but as yet not specifically identified,
credit losses. Such estimates are reviewed periodically and adjustments, if
necessary, are recorded during the periods in which they become known.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Interest costs associated with long-term construction projects are
capitalized and then amortized over the life of the related asset after the
project is completed. For financial reporting purposes, the provision for
depreciation and amortization is computed on the straight-line basis over the
estimated useful lives of the assets.
Other assets
The Corporation records specifically identifiable and unidentifiable (goodwill)
intangibles in connection with the acquisition of assets from unrelated parties
or the acquisition of new subsidiaries. Original lives range from 3 to 15 years.
Goodwill is amortized on the straight-line basis. Identifiable intangibles are
amortized on either an accelerated or straight-line basis depending on the
character of the acquired asset.
Property or other assets received in satisfaction of debt are included in
"Other Assets" on the Corporation's Consolidated Statement of Condition and are
recorded at the lower of remaining cost or fair value. Fair values for other
real estate owned generally are reduced by estimated costs to sell. Losses
arising from subsequent write-downs to fair value are charged directly to
expense.
38
<PAGE>
On January 1, 1994, the Corporation adopted FASB Interpretation No. 39-
Offsetting of Amounts Related to Certain Contracts. Gross unrealized gains and
losses on off-balance sheet financial instruments are now reported separately as
assets and liabilities rather than netted.
Retirement and other postemployment benefits
The Corporation has noncontributory defined benefit pension plans covering
virtually all its employees. For its primary plan, the policy of the Corporation
is to, at a minimum, fund annually an amount necessary to satisfy the
requirements under the Employee Retirement Income Security Act ("ERISA"),
without regard to prior years' contributions in excess of the minimum.
SFAS No. 106-Employers' Accounting for Postretirement Benefits Other Than
Pensions, requires that certain retiree benefit plans, including health care
plans for retirees and their dependents, be treated as a form of deferred
compensation that should be recognized on an accrual basis over the employment
period. The Corporation adopted SFAS No. 106 in the first quarter of 1993, and
elected to defer its accumulated postretirement benefit obligation of
approximately $42 million and amortize it on a straight-line basis over 20
years.
In November 1992, the FASB issued SFAS No. 112-Employers' Accounting for
Postemployment Benefits, which requires accrual of postemployment benefits for
former or inactive employees after employment but before retirement if they meet
the conditions for accrual of compensated absences (SFASNo. 43-Accounting for
Compensated Absences). Otherwise, such benefits should be disclosed or accrued
in accordance with the requirements of SFAS No. 5-Accounting for Contingencies.
This statement was adopted in 1994 and the effect of initially applying SFASNo.
112 was not material.
Cash flows
On July 1, 1993, the Corporation paid a $7.2 million dividend-in-kind to
Bankmont related to the transfer of Harris Futures Corporation. On December 31,
1993, the Corporation adopted SFAS No. 115-Accounting for Certain Investments in
Debt and Equity Securities. In compliance with this Statement, portfolio
securities designated as available for sale were marked to market on the
Corporation's Consolidated Statement of Condition. Non-cash portions of these
transactions were excluded from the Corporation's Consolidated Statement of Cash
Flows.
Income taxes
Bankmont, Bankcorp and their wholly-owned subsidiaries file a consolidated
Federal income tax return. Accordingly, no Federal income tax is applicable to
dividends received by Bankmont from Bankcorp, or to dividends received by
Bankcorp from its subsidiaries. Income tax return liabilities for the
Corporation are not materially different than they would have been if computed
on a separate return basis.
The Corporation's tax provisions for 1994 and 1993 were computed in
accordance with SFAS No. 109. The Corporation's tax provision for 1992 was
computed in accordance with Accounting Principles Board Opinion No. 11 and was
not restated.
39
<PAGE>
2. Portfolio Securities
The amortized cost and estimated market value of "held to maturity" and
"available for sale" securities were as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
---------------------------------------------- ----------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury.............. $ 536,480 $ 16 $13,163 $ 523,333 $ 124,340 $ 1,234 $ 54 $ 125,520
Federal agency............. 68,278 29 3,055 65,252 83,824 120 26 83,918
State and municipal........ 466,965 16,310 3,983 479,292 475,087 45,368 149 520,306
Other, including Federal
Reserve Bank stock........ 35,936 39 1,925 34,050 63,969 3,943 132 67,780
---------- ------- ------- ---------- ---------- ------- ------ ----------
Total securities
held to maturity....... 1,107,659 16,394 22,126 1,101,927 747,220 50,665 361 797,524
---------- ------- ------- ---------- ---------- ------- ------ ----------
Available for Sale:
U.S. Treasury.............. 1,480,278 788 37,897 1,443,169 1,081,744 40,075 195 1,121,624
Federal agency............. 1,055,709 118 17,367 1,038,460 1,236,853 3,871 779 1,239,945
State and municipal 12,114 1 198 11,917 -- -- -- --
Other...................... 87,427 843 523 87,747 60,827 938 39 61,726
---------- ------- ------- ---------- ---------- ------- ------ ----------
Total securities
available for sale..... 2,635,528 1,750 55,985 2,581,293 2,379,424 44,884 1,013 2,423,295
---------- ------- ------- ---------- ---------- ------- ------ ----------
Total portfolio securities. $3,743,187 $18,144 $78,111 $3,683,220 $3,126,644 $95,549 $1,374 $3,220,819
========== ======= ======= ========== ========== ======= ====== ==========
</TABLE>
At December 31, 1994 and 1993, portfolio and trading account securities having
a par value of $2.7 billion and $1.8 billion, respectively, were pledged as
collateral for certain liabilities, securities sold under agreement to
repurchase, public and trust deposits, trading account activities and for other
purposes where permitted or required by law. Securities carried at approximately
$1.4 billion and $572 million were sold under agreements to repurchase at
December 31, 1994 and 1993, respectively.
The amortized cost and estimated market value of held to maturity and
available for sale securities at December 31, 1994, by contractual maturity, are
shown below. Expected maturities can differ from contractual maturities since
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------- -----------------------
Amortized Fair Amortized Fair
(in thousands) December 31, 1994 Cost Value Cost Value
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturities:
Within 1 year............................ $ 159,526 $ 157,937 $ 973,134 $ 969,485
1 to 5 years............................. 779,717 780,617 1,422,243 1,379,814
5 to 10 years............................ 118,014 121,792 70,970 66,251
Over 10 years............................ 16,865 9,946 126,657 122,883
Other securities without stated maturity... 33,537 31,635 42,524 42,860
---------- ---------- ---------- ----------
Total securities......................... $1,107,659 $1,101,927 $2,635,528 $2,581,293
========== ========== ========== ==========
</TABLE>
In 1994, proceeds from the sale of securities available for sale amounted
to $146 million. There were no sales of securities held to maturity. Proceeds
from sales of portfolio securities during 1993 and 1992 were $211 million and
$130 million, respectively. Gross gains of $6,032,000 and gross losses of
$778,000 were realized on these sales in 1994, while gains of $13,204,000 and
losses of $166,000 were realized in 1993 and gains of $4,355,000 and losses of
$116,000 were realized in 1992. Net unrealized holding gain or loss on trading
securities included in earnings during 1994 changed by $105,000 from an
unrealized gain of $33,000 at December 31, 1993 to an unrealized loss of $72,000
at December 31, 1994.
40
<PAGE>
3. Loans
The following table summarizes loan balances by category:
<TABLE>
<CAPTION>
(in thousands) December 31 1994 1993
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and dealers.............................. $4,844,124 $4,713,452
Real estate construction............................................................... 175,542 197,581
Real estate mortgages.................................................................. 1,627,492 1,563,488
Installment............................................................................ 436,748 312,035
Charge card............................................................................ 898,315 708,150
Lease financing........................................................................ - 21
Foreign loans:
Governments and official institutions.................................................. 984 984
Banks and other financial institutions................................................. 250,563 221,603
Other, primarily commercial and industrial............................................. 16,210 8,074
---------- ----------
Total loans........................................................................... 8,249,978 7,725,388
Less unearned income.................................................................... 20,724 21,431
---------- ----------
Loans, net of unearned income......................................................... 8,229,254 7,703,957
Less allowance for possible credit losses............................................... 124,734 131,676
---------- ----------
Loans, net of allowance for possible credit losses................................. $8,104,520 $7,572,281
========== ==========
</TABLE>
The Corporation had approximately $82 million and $326 million of loans
classified as held for sale at December 31, 1994 and 1993, respectively.
Approximately 58 percent and 73 percent of these respective amounts
were real estate mortgages.
Nonaccrual loans, restructured loans and other nonperforming assets
are summarized below:
<TABLE>
<CAPTION>
(in thousands) December 31 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans............................................................................... $83,803 $ 91,131 $136,340
Restructured loans............................................................................. 2,889 3.262 -
------- -------- --------
Total nonperforming loans.................................................................... 86,692 94,393 136,340
Other assets received in satisfaction of debt.................................................. 8,071 19,000 18,086
------- -------- --------
Total nonperforming assets................................................................... $94,763 $113,393 $154,426
======= ======== ========
Gross amount of interest income that would have been recorded if
year-end nonperforming loans had been accruing interest at their original terms.............. $ 5,278 $ 6,292 $ 10,135
Interest income actually recognized............................................................ 1,348 2,569 4,164
------- -------- --------
Interest shortfall, before consideration of any income tax effect............................ $ 3,930 $ 3,723 $ 5,971
======= ======== ========
</TABLE>
At December 31, 1994 and 1993, the Corporation had no aggregate public and
private sector outstandings to any single country experiencing liquidity
problems which exceeded one percent of the Corporation's consolidated assets.
Additional information on foreign outstandings is provided in the Foreign
Outstandings section on page 25 of this Report.
4. Allowance For Possible Credit Losses
The changes in the allowance for possible credit losses were as follows:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of year............................... $131,676 $130,123 $125,091
-------- -------- --------
Charge-offs.............................................. (69,906) (82,128) (97,056)
Recoveries............................................... 17,924 20,846 24,528
-------- -------- --------
Net charge-offs........................................ (51,982) (61,282) (72,528)
Provisions charged to expense............................ 45,040 62,835 77,560
-------- -------- --------
Balance, end of year..................................... $124,734 $131,676 $130,123
======== ======== ========
</TABLE>
5. Premises And Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. A summary of these accounts is stated below:
<TABLE>
<CAPTION>
(in thousands) December 31 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C>
Land....................................... $ 26,148 $ 25,697
Premises................................... 260,283 255,156
Equipment.................................. 238,348 247,303
Leasehold improvements..................... 24,077 23,997
-------- --------
Total.................................. 548,856 552,153
Accumulated depreciation and amortization.. 327,362 325,293
-------- --------
Premises and equipment................. $221,494 $226,860
======== ========
</TABLE>
The provision for depreciation and amortization was $39,524,000 in 1994,
$41,018,000 in 1993, and $42,001,000 in 1992.
In 1990 and 1991, HTSB purchased a 72,000 square foot parcel of vacant land in
Chicago's downtown business district. Construction plans for a new operations
and office building complex on this site were deferred, pending strategic
clarification as to the appropriate size and functional characteristics of this
facility.
41
<PAGE>
During the second quarter of 1992, management determined that a writedown was
necessary because of the uncertainty of proceeding with this project in the near
future. Therefore, all capitalized expenditures associated with this project,
totaling $8.8 million, were written off. In addition, the land was written down
by $3.0 million, leaving the Corporation's December 31, 1994 and 1993
Consolidated Statement of Condition reflecting a value of $8.5 million for this
property.
6. Short, Medium and Long-Term Notes and Unused Lines Of Credit
The following table summarizes the Corporation's long-term notes:
<TABLE>
<CAPTION>
(in thousands) December 31 1994 1993
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed rate 9 3/8% subordinated notes due June 1, 2001 ($100,000 par value)............. $ 98,810 $ 98,681
Floating rate subordinated note to Bankmont due March 31, 2005......................... 50,000 50,000
Floating rate subordinated note to Bankmont due December 1, 2006....................... 50,000 50,000
Floating rate subordinated note to Bankmont due December 1, 2004....................... 100,000 100,000
-------- --------
Total............................................................................... $298,810 $298,681
======== ========
</TABLE>
All of the Bankcorp notes are unsecured obligations, ranking on a parity with
all unsecured and subordinated indebtedness of the Corporation and are not
subject to redemption prior to maturity.
As of January 1, 1994, the Corporation restructured all of its long-term notes
issued to Bankmont (total par value of $200 million), converting them to a
floating rate structure and extending each maturity by two years. The new
interest rate on each note reprices semiannually and floats at 50 basis points
above 180 day LIBOR. At year-end 1994, 180-day LIBOR stood at 7.0 percent.
In connection with the issuance of commercial paper and for other corporate
purposes, at December 31, 1994, Bankcorp had a $130,000,000 revolving credit
agreement with five nonaffiliated banks which matures on December 20, 1995. The
revolving credit agreement allows for extensions of its maturity date, at nine
month intervals, if requested by the Corporation and approved by the
nonaffiliated banks. There were two such extensions in 1994. There were no
borrowings under this agreement during 1994 or 1993.
In December 1994, HTSB issued an offering circular which described its
capability to offer, from time to time, unsecured short-term and medium-term
bank notes in an aggregate principal amount of up to $1.5 billion outstanding at
any time. The term of each note could range from fourteen days to fifteen years
as selected by the initial purchaser and agreed to by HTSB. No short-term or
medium-term notes were outstanding at 1994 year-end.
7. Fair Value of Financial Instruments
Generally accepted accounting principles require the disclosure of estimated
fair values for both on- and off-balance-sheet financial instruments. The
Corporation's fair values are based on quoted market prices when available. For
financial instruments not actively traded, such as certain loans, deposits, off-
balance-sheet transactions and long term borrowings, fair values have been
estimated using various valuation methods and assumptions. Although management
used its best judgement in estimating these values, there are inherent
limitations in any estimation methodology. In addition, accounting
pronouncements require that fair values be estimated on an item-by-item basis,
thereby ignoring the impact a large sale would have on a thin market and
intangible values imbedded in established lines of business. Therefore, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Corporation could realize in an actual transaction. The fair value
estimation methodologies employed by the Corporation were as follows:
The carrying amounts for cash and demand balances due from banks along with
short-term money market assets and liabilities reported on the Corporation's
Consolidated Statement of Condition were considered to be the best estimates of
fair value for these financial instruments. Fair values of trading account
assets and portfolio securities were based on quoted market prices.
A variety of methods were used to estimate the fair value of loans. Fair
values of commercial loans, including fixed and floating rate loans, were
derived using loan matrix pricing. This estimation method extrapolates a value
for the Corporation's commercial loan portfolio based on loan parameters, such
as risk rating, maturity and amount, that are determined to be drivers of value.
The pricing model employs a formula developed from industry data. Fair values of
residential mortgages were based on current prices for securities backed by
similar loans. Fair values of other short-term floating rate loans, including
broker dealer, financial institution, construction, charge card, consumer and
home equity loans, were assumed to be the same as book value. For other long-
term fixed rate loans, including consumer installment and commercial mortgage
loans, fair values were estimated based on the present value of future cash
flows with current market rates as discount rates. A fair-value discount related
to nonperforming loans included in the above categories, along with a discount
for future credit risk throughout the portfolio, was based on an analysis of
expected and unidentified future losses. Accordingly, the fair value estimate
for total loans was reduced by these discounts which in total approximated the
allowance for possible credit losses on the Corporation's Consolidated Statement
of Condition. Additionally, management considered appraisal values of collateral
when nonperforming loans were secured by real estate.
42
<PAGE>
The fair values of demand deposits, savings accounts, interest checking
deposits, and money market accounts were the amounts payable on demand at the
reporting date, or the carrying amounts. The fair value of time deposits was
estimated using a discounted cash flow calculation with current market rates
offered by the Corporation as discount rates.
The fair value of long-term notes was determined using a discounted cash flow
calculation with current rates available to the Corporation for similar debt as
discount rates.
The estimated fair values of the Corporation's financial instruments at
December 31, 1994 and 1993 are presented in the following table. See Note 8 for
additional information regarding fair values of off-balance-sheet financial
instruments.
<TABLE>
<CAPTION>
1994 1993
---------------------------- -----------------------------
Carrying Fair Carrying Fair
(in thousands) December 31 Value Value Value Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and demand balances due from banks........................ $ 1,399,781 $ 1,399,781 $ 1,132,891 $ 1,132,891
Money market assets:
Interest-bearing deposits at banks............................ 757,227 757,227 527,480 527,480
Federal funds sold and securities purchased under agreement
to resell.................................................... 404,226 404,226 502,530 502,530
Portfolio securities:
Held to maturity.............................................. 1,107,659 1,101,927 747,220 797,524
Available for sale............................................ 2,581,293 2,581,293 2,423,295 2,423,295
Trading account assets......................................... 36,067 36,067 50,061 50,061
Loans, net of unearned income and allowance for
possible credit losses........................................ 8,104,520 8,093,360 7,572,281 7,594,049
Customers' liability on acceptances............................ 125,113 125,113 58,399 58,399
----------- ----------- ----------- -----------
Total on-balance-sheet financial assets..................... $14,515,886 $14,498,994 $13,014,157 $13,086,229
=========== =========== =========== ===========
Liabilities
Deposits:
Demand deposits............................................... $ 5,849,935 $ 5,849,935 $ 6,072,629 $ 6,072,629
Time deposits................................................. 4,069,797 4,069,834 3,303,242 3,327,283
Federal funds purchased and securities sold under agreement to
repurchase.................................................... 2,632,167 2,632,167 1,861,061 1,861,061
Commercial paper outstanding................................... 306,737 306,737 326,268 326,268
Other short-term borrowings.................................... 670,362 670,362 459,192 459,192
Acceptances outstanding........................................ 125,113 125,113 58,798 58,798
Long-term notes................................................ 298,810 302,483 298,681 340,449
----------- ----------- ----------- -----------
Total on-balance-sheet financial liabilities................ $13,952,921 $13,956,631 $12,379,871 $12,445,680
=========== =========== =========== ===========
Off-Balance-Sheet Financial Instruments
Credit facilities.............................................. $ (11,013) $ (11,013) $ (11,471) $ (11,471)
Interest rate contracts:
Dealer and trading contracts.................................. 2,786 2,786 1,941 1,941
Risk management contracts..................................... (8,783) (16,448) (10,357) (39,727)
Foreign exchange contracts:
Dealer contracts.............................................. (15,656) (15,656) (4,687) (4,687)
----------- ----------- ----------- -----------
Total off-balance-sheet financial instruments............... $ (32,666) $ (40,331) $ (24,574) $ (53,944)
=========== =========== =========== ===========
</TABLE>
Note: $200 million of long-term notes were restructured to floating rates as
of January 1, 1994. The fair value obligation for long-term notes at
year-end 1993 would have been approximately $318 million had this
restructuring been in effect at that time.
8. Financial Instruments With Off-Balance-Sheet Risk
The Corporation utilizes various financial instruments with off-balance-sheet
risk in the normal course of business to a) meet its customers' financing and
risk management needs, b) reduce its own risk exposure, and c) produce fee
income and trading profits. The Corporation's major categories of financial
instruments with off-balance-sheet risk include credit facilities, interest rate
and foreign exchange contracts, and various securities-related activities. Fair
values of off-balance-sheet instruments were based on fees currently charged to
enter into similar agreements, market prices of comparable instruments, pricing
models using year-end rates and counterparty credit ratings.
Credit facilities
Credit facilities with off-balance-sheet risk include commitments to extend
credit, standby letters of credit and commercial letters of credit.
Commitments to extend credit are contractual agreements to lend to a customer
as long as contract terms have been met. They generally require payment of a fee
and have fixed expiration dates. The Corporation's commitments serve both
business and individual customer needs, and include commercial loan commitments,
credit card lines, home equity lines, commercial real estate loan commitments
and mortgage loan commitments. The Corporation's maximum risk of accounting loss
is represented by the total contractual amount of commitments which was $7.43
billion and $6.12 billion at December 31, 1994 and 1993, respectively. Since
only a portion of commitments will ultimately be drawn down, the Corporation
does not expect to provide funds for the total contractual amount. Risks
associated with certain commitments are reduced by participations to third
parties, which at December 31, 1994, totaled $217 million and at December 31,
1993, totaled $303 million.
43
<PAGE>
Standby letters of credit are unconditional commitments which guarantee the
obligation of a customer to a third party should that customer default. They are
issued to support financial and performance-related obligations including
brokers' margin maintenance, industrial revenue bond repayment, debt repayment,
construction contract performance and trade agreement performance. The
Corporation's maximum risk of accounting loss for these items is represented by
the total commitments outstanding of $1.23 billion at December 31, 1994 and
$1.30 billion at December 31, 1993. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $168 million
at December 31, 1994 and $89 million at December 31, 1993.
Commercial letters of credit are commitments to make payments on behalf of
customers when letter of credit terms have been met. Maximum risk of accounting
loss is represented by total commercial letters of credit outstanding of $148
million at December 31, 1994 and $123 million at December 31, 1993.
Credit risks associated with all of these facilities are mitigated by
reviewing customers' creditworthiness on a case-by-case basis, obtaining
collateral, limiting loans to individual borrowers, setting restrictions on
long-duration maturities and establishing stringent covenant terms outlining
performance expectations which, if not met, may cause the Corporation to
terminate the contract. Credit risks are further mitigated by monitoring and
maintaining portfolios that are well diversified.
Collateral is required to support certain of these credit facilities when they
are drawn down and may include equity and debt securities, commodities,
inventories, receivables, certificates of deposit, savings instruments, fixed
assets, real estate, life insurance policies and seats on national or regional
exchanges. Requirements are based upon the risk inherent in the credit and are
more stringent for firms and individuals with greater default risks. The
Corporation monitors collateral values and appropriately perfects its security
interest. Periodic evaluations of collateral adequacy are performed by
Corporation personnel.
The fair value of credit facilities (i.e. deferred income) is approximately
equal to their carrying value of $11.0 million at December 31, 1994 and $11.5
million at December 31, 1993.
Interest rate contracts
Interest rate contracts include futures, forward rate agreements, option
contracts, guarantees (caps, floors and collars) and swaps. The Corporation
enters into these contracts for dealer, trading and risk management purposes.
Dealer and trading activity
As dealer, the Corporation serves customers seeking to manage interest rate risk
by entering into contracts as a counterparty to their (customer) transactions.
In its trading activities, the Corporation uses interest rate contracts to
profit from expected future market movements.
These contracts may create exposure to both credit and market risk.
Replacement risk, the primary component of credit risk, is the risk of loss
should a counterparty default following unfavorable market movements and is
measured as the Corporation's cost of replacing contracts at current market
rates. The Corporation manages credit risk by establishing credit limits for
customers and products through an independent corporate-wide credit review
process and continually monitoring exposure against those limits to ensure they
are not exceeded. Credit risk is, in many cases, further mitigated by the
existence of netting agreements which provide for netting of contractual
receivables and payables in the event of default or bankruptcy.
Market risk is the risk of loss as a result of changes in interest rates. The
Corporation manages market risk by establishing limits which are based on
dollars at risk given a parallel shift in the yield curve. Limits are
established by product, maturity and volatility. Limits are approved by
management and monitored independently of the traders on a regular basis. Market
risk is further diminished by entering into offsetting positions. Senior
management oversees all dealer risk-related activities.
Futures and forward contracts are agreements in which the Corporation is
obligated to make or take delivery, at a specified future date, of a specified
instrument, at a specified price or yield. Futures contracts are exchange traded
and, because of exchange requirements that gains and losses be settled daily,
create negligible exposure to credit risk.
Forward rate agreements are arrangements between two parties to exchange
amounts, at a specified future date, based on the difference between an agreed
upon interest rate and reference rate applied to a notional principal amount.
These agreements enable purchasers and sellers to fix interest costs and
returns.
Options are contracts that provide the buyer the right (but not the
obligation) to purchase or sell a financial instrument, at a specified price,
either within a specified period of time or on a certain date. Interest rate
guarantees (caps, floors and collars) are agreements between two parties that,
in general, establish for the purchaser a maximum level of interest expense or a
minimum level of interest revenue based on a notional principal amount for a
specified term. Options and guarantees written create exposure to market risk.
As a writer of interest rate options and guarantees, the Corporation receives a
premium at the outset of the agreement and bears the risk of an unfavorable
change in the price of the financial instrument underlying the option or
guarantee. Options and guarantees purchased create exposure to credit risk and,
to the extent of the premium paid, market risk.
Interest rate swaps are contracts involving the exchange of interest payments
based on a notional amount for a specified period. Most of the Corporation's
activity in swaps is as intermediary in the exchange of interest payments
between customers, although the Corporation also uses swaps to manage its own
interest rate exposure (see discussion of risk management activity below).
44
<PAGE>
The following table summarizes the Corporation's dealer/trading interest rate
contracts and their related contractual or notional amounts and maximum
replacement costs. Contractual or notional amount gives an indication of the
volume of activity in the contract. Maximum replacement cost reflects the
potential loss resulting from customer defaults and is computed as the cost of
replacing, at current market rates, all outstanding contracts with unrealized
gains.
<TABLE>
<CAPTION>
Contractual or Maximum
Notional Replacement
Amount Cost
---------------------------------------------------
(in thousands) December 31 1994 1993 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards.................... $ 490,499 $ 279,929 $ 69 $ 2
Forward rate agreements................. 1,006,000 460,000 1,609 176
Options written......................... 275,000 20,000 -- --
Options purchased....................... 325,000 385,150 161 25
Guarantees written...................... 930,143 791,943 -- --
Guarantees purchased.................... 879,684 796,440 16,921 6,522
Swaps................................... 1,155,165 1,560,070 14,074 16,770
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading interest rate contracts for the year ended December 31, 1994 and
end of period fair value for the year ended December 31, 1993:
<TABLE>
<CAPTION>
1994 1994 1993
--------------------------------------------
End of Period Average End of Period
Assets Assets Assets
(in thousands) (Liabilities) (Liabilities) (Liabilities)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards
Unrealized gains.................. $ 69 $ 35 $ 2
Unrealized losses................. (34) (19) (3)
Forward rate agreements
Unrealized gains.................. 1,609 142 176
Unrealized losses................. (451) (303) (150)
Options
Purchased......................... 161 60 25
Written........................... (11) (28) (2)
Guarantees
Purchased......................... 16,921 11,385 6,522
Written........................... (17,623) (11,870) (6,497)
Swaps
Unrealized gains.................. 14,074 11,821 16,770
Unrealized losses................. (11,929) (10,003) (14,902)
-------- -------- --------
Total Interest Rate Contracts.. $ 2,786 $ 1,220 $ 1,941
======== ======== ========
</TABLE>
Net gains (losses) from dealer/trading activity in interest rate contracts and
nonderivative trading account assets for the years ended December 31, 1994, 1993
and 1992 are summarized below:
<TABLE>
<CAPTION>
Gains Gains Gains
(Losses) (Losses) (Losses)
(in thousands) Years Ended December 31 1994 1993 1992
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards......................... $1,020 $ (6,156) $(18,705)
Forward rate agreements...................... (628) 228 361
Options...................................... (224) (12) (26)
Guarantees................................... (134) 441 434
Swaps........................................ 279 511 (681)
Debt Instruments.............................. (709) 10,246 14,118
------ -------- --------
Total Trading Revenue....................... $ (396) $ 5,258 $ (4,499)
====== ======== ========
</TABLE>
45
<PAGE>
The following table summarizes the maturities and weighted average interest
rates paid and received on dealer/trading interest rate swaps as of December 31,
1994:
<TABLE>
<CAPTION>
1994
--------------------------------------------------------------------
Within 1 to 3 3 to 5 5 to 10
(in thousands) December 31 1 year years years years Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount.................................. $316,138 $185,969 $ 55,595 $13,201 $ 570,903
Average pay rate................................. 5.71% 6.45% 6.12% 8.06% 6.05%
Average receive rate............................. 5.77% 6.26% 6.43% 6.50% 6.01%
Receive Fixed Swaps:
Notional amount.................................. $324,523 $178,106 $ 55,633 - $ 558,262
Average pay rate................................. 5.89% 6.27% 6.43% - 6.12%
Average receive rate............................. 5.96% 6.44% 6.44% - 6.12%
Basis swaps:
Notional amount.................................. $ 10,000 $ 16,000 - - $ 26,000
Average pay rate................................. 5.48% 5.48% - - 5.48%
Average receive rate............................. 5.52% 5.53% - - 5.53%
Total notional amount.......................... $650,661 $380,075 $111,228 $13,201 $1,155,165
</TABLE>
Risk management activity
In addition to its dealer activities, the Corporation uses interest rate
contracts, primarily swaps, to reduce the level of financial risk inherent in
mismatches between the interest rate sensitivities of certain assets and
liabilities. At December 31, 1994, interest rate swaps were primarily used to
alter the character of funds supporting the municipal bond portfolio. The
Corporation had $497 million notional amount of swap contracts, used for risk
management purposes, outstanding at December 31, 1994 with a fair value of
$(16.4) million and a replacement cost of $263 thousand. At December 31, 1993,
the Corporation had $717 million notional amount of swap contracts outstanding
with a fair value of $(39.7) million and a replacement cost of $4.3 million.
Gross unrealized gains and losses, representing the difference between fair
value and carrying value (i.e. accrued interest payable or receivable) on these
contracts, totaled $134 thousand and $7.8 million, respectively, at December 31,
1994. Risk management activity, including the related cash positions, had no
material effect on the Corporation's net income for the year ended December 31,
1994. There were no deferred gains or losses on terminated contracts at December
31, 1994.
The following table summarizes swap activity for risk management purposes
during 1994 and 1993:
<TABLE>
<CAPTION>
Notional
(in thousands) Amount
-------------------------------------------------------------------------------------
<S> <C>
Amount, December 31, 1992................................................ $357,750
Additions................................................................ 405,000
Maturities............................................................... 26,000
Terminations............................................................. 20,000
--------
Amount, December 31, 1993................................................ $716,750
Additions................................................................ 66,381
Maturities............................................................... 231,278
Terminations............................................................. 55,000
--------
Amount, December 31, 1994................................................ $496,853
========
</TABLE>
The following table summarizes the maturities and weighted average interest
rates paid and received on interest rate swaps used for risk management as of
December 31, 1994:
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
Within 1 to 3 3 to 5 5 to 10
(in thousands) December 31 1 year years years years Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount..................... $165,000 $112,000 $9,703 - $286,703
Average pay rate.................... 10.16% 10.32% 6.63% - 10.10%
Average receive rate................ 6.11% 5.96% 6.33% - 6.06%
Receive Fixed Swaps:
Notional amount..................... $ 10,150 - - - $ 10,150
Average pay rate.................... 5.86% - - - 5.86%
Average receive rate................ 8.99% - - - 8.99%
Basis swaps:
Notional amount..................... $100,000 $100,000 - - $200,000
Average pay rate.................... 5.45% 5.42% - - 5.44%
Average receive rate................ 5.69% 5.63% - - 5.66%
Total notional amount.............. $275,150 $212,000 $9,703 - $496,853
</TABLE>
46
<PAGE>
Foreign exchange contracts
Dealer activity
The Corporation is also a dealer in foreign exchange, having a significant
presence in the marketplace. Foreign exchange contracts may create exposure to
market and credit risk, including replacement risk and settlement risk. Credit
risk is managed by establishing limits for customers through an independent
corporate-wide credit approval process and continually monitoring exposure
against those limits. In addition, both settlement and replacement risk are
reduced through netting by novation, agreements with counterparties to offset
certain related obligations. Market risk is managed through establishing
exposure limits by currency and monitoring actual exposure against those limits,
entering into offsetting positions, and closely monitoring price behavior.
At December 31, 1994, approximately two-thirds of the Corporation's gross
notional positions in foreign currency contracts are represented by five
currencies: English pounds, German deutsche marks, Canadian dollars, Japanese
yen and French francs.
Foreign exchange contracts include spot, future, forward and option
contracts that enable customers to manage their foreign exchange risk. Spot,
future and forward contracts are agreements to exchange currencies at a future
date, at a specified rate of exchange. Foreign exchange option contracts give
the buyer the right and the seller an obligation (if the buyer asserts his
right) to exchange currencies during a specified period (or on a certain date in
the case of "European" options) at a specified exchange rate.
The following table summarizes the Corporation's dealer/trading foreign
exchange contracts and their related contractual or notional amount and maximum
replacement cost:
<TABLE>
<CAPTION>
Contractual Maximum
or Notional Replacement
Amount Cost
-----------------------------------------------
(in thousands) December 31 1994 1993 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards $12,822,530 $19,150,816 $ 133,768 $161,943
Options written............. 769,916 1,557,366 -- --
Options purchased........... 769,916 1,543,442 13,896 30,912
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the year ended December 31, 1994
and end of period fair values for the year ended December 31, 1993:
<TABLE>
<CAPTION>
1994 1994 1993
--------------------------------------------
End of Period Average End of period
Assets Assets Assets
(in thousands) (Liabilities) (Liabilities) (Liabilities)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards
Unrealized gains............. $ 133,768 $ 225,626 $ 161,943
Unrealized losses............ (149,424) (222,408) (165,218)
Options
Purchased.................... 13,896 22,349 30,912
Written...................... (13,896) (22,043) (32,324)
--------- --------- ---------
Total Foreign Exchange.. $ (15,656) $ 3,524 $ (4,687)
========= ========= =========
</TABLE>
Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1994, 1993 and 1992 are summarized below:
<TABLE>
<CAPTION>
Gains Gains Gains
(Losses) (Losses) (Losses)
(in thousands) Years ended December 31 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C>
Spot, futures and forwards............. $19,567 $25,046 $22,551
Options................................ 202 (744) 2,511
------- ------- -------
Total Foreign Exchange................ $19,769 $24,302 $25,062
======= ======= =======
</TABLE>
Securities activities
The Corporation's securities activities that have off-balance-sheet risk include
municipal bond underwriting, short selling and indemnified lending of securities
held in trust.
Through its municipal bond underwriting activities, the Corporation commits to
buy and offer for resale newly issued bonds. The Corporation is exposed to
market risk because it may be unable to resell its inventory of bonds profitably
as a result of unfavorable market conditions. In syndicate arrangements, the
Corporation is obligated to fulfill syndicate members' commitments should they
default. The syndicates of which the Corporation was a member had underwriting
commitments totaling $14.6 million at December 31, 1994 and $ 7.4 million at
December 31, 1993.
47
<PAGE>
Security short selling, defined as selling of securities not yet owned,
exposes the Corporation to off-balance-sheet market risk because the Corporation
may be required to buy securities at higher prevailing market prices to cover
its short positions. The Corporation had a short position of $10 million on
December 31, 1994 and $25 million at December 31, 1993.
Securities lending, a service the Corporation provides to master trust and
institutional custody customers, exposes the Corporation to off-balance-sheet
credit risk when it indemnifies its customers against the risks of borrower
default. Risks are minimized by lending to approved brokers and dealers, up to a
lending limit established for each broker, and by obtaining collateral in excess
of the value of the loan. Collateral is typically cash, U.S. Government
securities or letters of credit from approved banks. The value of the collateral
is monitored daily and additional collateral is obtained when deemed necessary.
Highly liquid collateral, such as cash and U.S. Government securities, typically
represents over 95 percent of the collateral held by the Corporation. The
Corporation's maximum risk of accounting loss is represented by the amount of
securities lent under indemnification, which totaled $2.09 billion at December
31, 1994 and $2.56 billion at December 31, 1993.
9. Concentrations Of Credit Risk In Financial Instruments
The Corporation had four concentrations of credit risk arising from financial
instruments at December 31, 1994 and 1993. These concentrations were the Midwest
geographic area, individuals, brokers and dealers, and commercial banks. Each
concentration exceeded 10 percent of the Corporation's total credit exposure,
which is the total potential accounting loss should all customers fail to
perform according to contract terms and all collateral prove to be worthless.
Midwestern geographic area
A majority of the Corporation's customers are located in the Midwestern region
of the United States, defined here to include Illinois, Indiana, Iowa, Michigan,
Minnesota, Missouri and Wisconsin. The Corporation provides credit to these
customers through a broad array of banking and trade financing products
including commercial loans, commercial loan commitments, commercial real estate
loans, consumer installment loans, charge card loans and lines, mortgage loans,
home equity loans and lines, standby and commercial letters of credit and
banker's acceptances. The financial viability of customers in the Midwest is, in
part, dependent on the region's economy. Corporate customers headquartered in
the region and serving a national or international market are not included in
this concentration because their business is broad-based and not dependent on
the region's economy. The Corporation's maximum risk of accounting loss, should
all customers making up the Midwestern concentration fail to perform according
to contract terms and all collateral prove to be worthless, was approximately
$12.1 billion or 47 percent of the Corporation's total credit exposure at
December 31, 1994 and $11.3 billion or 49 percent of the Corporation's total
credit exposure at December 31, 1993.
The Corporation manages this exposure by continually reviewing local market
conditions and customers, adjusting individual and industry exposure limits
within the region and by obtaining or closely monitoring collateral values. See
Note 8 for information on collateral supporting credit facilities.
Individuals
The Corporation extends credit to individuals through credit card lines, style
lines of credit, installment and single payment loans. Credit card and style
lines are unsecured revolving lines of credit, accessed through VISA and
MasterCard, special drafts, and/or automated teller machines. The Corporation's
credit card lines represent most of its total credit exposure to individuals.
Although credit card loans are not collateralized, measures have been
implemented to reduce credit loss. These measures include strict credit approval
criteria, card use monitoring, automated authorization procedures and aggressive
collection procedures. Further, credit card customers are broad-based
geographically, although currently about 50 percent are located in the Midwest.
Installment and single payment loans are generally collateralized by personal
property and have a fixed maturity. The Corporation ensures that it has
sufficient collateral by monitoring its value and perfecting its legal rights to
the property upon default.
The Corporation's maximum risk of accounting loss, should all individual
customers fail to perform according to contract terms and all available
collateral prove to be worthless, was approximately $5.2 billion or 20 percent
of the Corporation's total credit exposure at December 31, 1994 and $3.9 billion
or 17 percent of the Corporation's total credit exposure at December 31, 1993.
Brokers and dealers
The Corporation has credit exposure to various brokers and dealers in securities
and commodities through securities lending, commercial lending and standby
letter of credit guarantees. Securities lending represents most of the total
credit exposure to this group and consists of loans of securities held by trust
customers where the Corporation has provided indemnification against borrower
default. Securities are typically used by brokers and dealers to cover their
short positions. These loans are generally collateralized by cash, U.S.
Government securities and letters of credit with values in excess of loan
amounts. Cash collateral is typically held at the Corporation while other
collateral is usually held at the depositories through which securities lending
transactions are conducted.
48
<PAGE>
Commercial loans are used by brokers and dealers to fund the purchase of
securities, while standby letters are used to maintain margins. Collateral is
typically equity and debt securities, commodities, futures and option contracts
held by the Corporation or other appropriate custodians or depositories.
Security interest is obtained to ensure access to collateral.
The Corporation's maximum risk of accounting loss, should brokers and dealers
fail to fulfill their contractual obligations and all collateral prove to be
worthless, was approximately $3.1 billion or 12 percent of the Corporation's
total credit exposure at December 31, 1994 and $3.6 billion or 15 percent of the
Corporation's total credit exposure at December 31, 1993.
Commercial banks
The Corporation has credit exposure to the domestic and international banking
industry through its participation in check clearing, international banking
transactions, foreign exchange transactions, Eurodollar investing and through
correspondent banking services including Federal fund loans and standby letter
of credit guarantees. Generally, collateral is not held to support credit
exposure to banks, although risks are mitigated since durations are short,
investments are highly liquid, and counterparties are geographically diverse.
The Corporation's maximum risk of accounting loss, should all commercial banks
fail to fulfill their contractual obligations, was approximately $2.8 billion or
11 percent of the Corporation's total credit exposure at December 31, 1994 and
$2.5 billion or 11 percent of the Corporation's total credit exposure at
December 31, 1993.
10. Retirement And Other Postemployment Plans
The Corporation has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1994. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1994. The benefit formula
for this plan is based upon length of service and an employee's highest
qualifying compensation during five consecutive years of active employment. The
plan is a multiple-employer plan covering the Corporation's employees as well as
persons employed by certain affiliated entities.
The policy for this plan is to have the participating entities, at a minimum,
fund annually an amount necessary to satisfy the requirements under ERISA,
without regard to prior years' contributions in excess of the minimum. For 1994,
the minimum and maximum deductible contribution are both zero as a result of the
full funding limitation. For 1993 and 1992, cumulative contributions were
greater than the amount recorded as pension expense for financial reporting
purposes.
In 1994, the Corporation elected to change the measurement date for plan
assets and liabilities from December 31 to September 30. The change in
accounting had no material effect on 1994 or prior years' pension expense.
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1994** 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $105,804 in
1994, $125,726 in 1993, and $108,130 in 1992............................ $ 122,357 $ 143,111 $ 123,787
========= ========= =========
Projected benefit obligation for service rendered to date................. $(172,016) $(206,048) $(178,748)
Plan assets at fair value*................................................ 187,249 211,380 189,034
--------- --------- ---------
Excess of plan assets over projected benefit obligation................... 15,233 5,332 10,286
Unrecognized net (gain) loss from past experience different from that
assumed and effects of changes in assumptions............................ (3,416) 11,331 9,406
Prior service cost not yet recognized in net periodic pension cost........ (4,221) (286) (316)
Unrecognized net asset at December 31 being recognized over 16.3 years
from January 1, 1986..................................................... (2,577) (3,045) (3,405)
--------- --------- ---------
Prepaid pension cost..................................................... $ 5,019 13,332 $ 15,971
========= ========= =========
Assumptions used:
Discount rate............................................................ 7.75% 7.25% 7.75%
Rate of increase in compensation......................................... 6.60% 6.60% 6.60%
Expected long-term asset return.......................................... 8.00% 8.00% 8.00%
</TABLE>
* Plan assets consist primarily of participating units in collective trust
funds administered by HTSB, along with U.S. Government bonds.
** Plan assets and obligations measured as of September 30, 1994.
Net pension expense included the following components for the primary plan:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period............................... $ 10,796 $ 9,453 $ 9,183
Interest cost on projected benefit obligation................................ 13,526 13,278 12,472
Actual return on plan assets................................................. 1,368 (26,778) (11,025)
Net amortization and deferral................................................ (17,460) 12,369 (2,406)
-------- -------- --------
Net periodic pension expense............................................... $ 8,230 $ 8,322 $ 8,224
======== ======== ========
</TABLE>
49
<PAGE>
Certain employees participating in the primary plan are also covered by a
supplemental unfunded retirement plan. The purpose of this plan is to extend
full retirement benefits to individuals without regard to statutory limitations
for qualified funded plans. The following table sets forth the status of this
supplemental plan:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation............................. $ 7,703 $ 8,944 $ 8,751
Projected benefit obligation for service rendered to date.. 19,573 15,425 12,452
Accrued pension liability.................................. 6,138 8,944 8,751
Net periodic pension expense............................... 6,983 5,491 3,398
Assumptions used:
Discount rate............................................ 5.75% 5.00% 7.75%
Rate of increase in compensation......................... 6.60% 6.60% 6.60%
</TABLE>
During 1994 and 1993, the Corporation's lump-sum benefit payments to retirees
resulted in settlement losses of approximately $3.1 million and $3.4 million,
respectively, reflected above as a portion of net periodic pension expense.
The total consolidated pension expense of the Corporation, including the
supplemental plan, for 1994, 1993 and 1992 was $15,222,000, $13,830,000 and
$11,776,000, respectively.
In addition to pension benefits, the Corporation provides medical care
benefits for retirees (and their dependents) who have attained age 55 and have
at least 10 years of service. In 1994, the Corporation expanded the plan to
provide medical care benefits for disabled employees and widows of former
employees. The Corporation provides these medical care benefits through a self-
insured plan. Under the terms of the plan, the Corporation contributes to the
cost of coverage based on employees' length of service. Cost sharing with
retirees is accomplished through deductibles, coinsurance and out-of-pocket
limits. Funding for the plan largely comes from the general assets of the
Corporation, although recently contributions to a trust fund have been made
under Internal Revenue Code Section 401(h).
The following table sets forth the postretirement medical care benefit plan's
status at December 31, 1994 and 1993 for the Corporation (in 1994 the
Corporation elected to change the measurement date for plan assets and
liabilities from December 31 to September 30; the change had no material effect
on 1994 or 1993 benefit expense):
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1994*** 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees........................................................................... $(28,562) $(26,792)
Fully eligible active plan participants............................................ (5,041) (5,151)
Other active plan participants..................................................... (13,637) (12,107)
-------- --------
Accumulated postretirement benefit obligation........................................ (47,240) (44,050)
Plan assets at fair value*........................................................... 6,924 4,781
-------- --------
Accumulated postretirement benefit obligation in excess of plan assets............... (40,316) (39,269)
Unrecognized net (gain) loss from past experience different from that assumed........ (949) 2,163
Prior service cost not yet recognized in net periodic postretirement benefit cost.... 3,177 -
Unrecognized transition obligation................................................... 35,396 37,448
-------- --------
Prepaid (accrued) postretirement benefit cost........................................ $ (2,692) $ 342
======== ========
Assumptions used in determining actuarial present value of benefit obligation:
Discount rate...................................................................... 7.75% 7.25%
Rate of increase in health care costs:
Initial........................................................................ 12% 12%
Ultimate....................................................................... 7% 7%
Expected long-term asset return..................................................... 8% **
</TABLE>
* Plan assets consist primarily of participating units in collective trust
funds administered by HTSB.
** For 1993 postretirement medical expense, no assets were assumed to exist.
The initial funding occurred in 1993.
*** Plan assets and obligations measured as of September 30, 1994.
Net postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1994 1993
------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits earned during the period............................ $2,003 $1,367
Interest cost on accumulated postretirement benefit obligation............ 3,399 2,969
Actual return on plan assets.............................................. 2 (76)
Amortization of transition obligation over 20 years....................... 1,763 2,047
------ ------
Net postretirement benefit expense...................................... $7,167 $6,307
====== ======
</TABLE>
The weighted average annual rate of increase in the per capita cost of covered
benefits was assumed to be 12 percent for 1994 and was assumed to decrease
gradually to 7 percent in 2001 and remain at that level thereafter. This health
care cost trend rate assumption had a significant effect on the amounts
reported. Increasing the assumed health care cost trend rates by one percentage
point each year would have increased the accumulated postretirement benefit
obligation as of September 30, 1994 and December 31, 1993 by $7.3 and $6.7
million respectively, and the aggregate service and interest cost components of
net postretirement benefit expense for 1994 by approximately $1.0 million.
50
<PAGE>
11. Lease Expense And Obligations
Rental expense for all noncapitalized leases was $16,002,000 in 1994,
$16,623,000 in 1993 and $19,229,000 in 1992. These amounts include real estate
taxes, maintenance and other rental-related operating costs of $4,151,000,
$4,712,000 and $2,916,000 for 1994, 1993 and 1992 respectively, paid under net
lease arrangements. Lease commitments are primarily for office space. Minimum
rental commitments as of December 31, 1994 for all noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
(in thousands)
------------------------------------------
<S> <C>
1995............................ $ 9,681
1996............................ 9,678
1997............................ 8,938
1998............................ 7,635
1999............................ 5,870
2000 and thereafter............. 17,075
-------
Total minimum future rentals.. $58,877
=======
</TABLE>
Occupancy expenses for 1994, 1993 and 1992 have been reduced by $13,816,000,
$13,300,000 and $12,729,000, respectively, for rental income from leased
premises.
12. Income Taxes
The 1994, 1993 and 1992 applicable income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
(in thousands) Federal State Foreign Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994: Current...... $ 27,335 $ 980 $31 $ 28,346
Deferred..... 90 (3,908) -- (3,818)
-------- ------- --- --------
Total...... $ 27,425 $(2,928) $31 $ 24,528
======== ======= === ========
1993: Current...... $ 48,639 $ 4,055 $14 $ 52,708
Deferred..... (7,331) (5,498) -- (12,829)
-------- ------- --- --------
Total...... $ 41,308 $(1,443) $14 $ 39,879
======== ======= === ========
1992: Current...... $ 39,223 $ 3,430 $15 $ 42,668
Deferred..... (18,242) (2,331) -- (20,573)
-------- ------- --- --------
Total...... $ 20,981 $ 1,099 $15 $ 22,095
======== ======= === ========
</TABLE>
Tax expense for 1994 and 1993 was computed in accordance with SFAS No. 109.
Tax expense for 1992 was computed in accordance with APB 11 and not restated
upon adoption of SFAS No. 109 in 1993.
Deferred tax liabilities (assets) are comprised of the following at December
31, 1994, and at December 31, 1993:
<TABLE>
<CAPTION>
(in thousands) December 31 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax assets:
Allowance for possible credit losses................................. $(53,765) $(55,985)
Intangible assets.................................................... (7,182) (5,573)
Deferred employee compensation....................................... (4,432) (5,174)
Deferred expense and prepaid income.................................. (7,029) (7,534)
Other real estate.................................................... (2,370) (4,383)
Pension and medical trust............................................ (3,910) -
Other assets......................................................... (1,423) (4,960)
-------- --------
Deferred tax assets................................................. (80,111) (83,609)
-------- --------
Gross deferred tax liabilities:
Depreciable assets................................................... 3,899 4,016
Other liabilities.................................................... 3,114 7,488
-------- --------
Deferred tax liabilities............................................ 7,013 11,504
Valuation allowance................................................... - 2,825
-------- --------
Net deferred tax assets.............................................. (73,098) (69,280)
-------- --------
Tax effect of adjustment related to SFAS No. 115...................... (21,535) 17,441
-------- --------
Net deferred tax assets including adjustment related to SFAS No. 115.. $(94,633) $(51,839)
======== ========
</TABLE>
At December 31, 1994, the net deferred tax asset of $73.1 million included
$59.7 million for Federal tax and $13.4 million for State tax. Although the
Corporation has fully recognized both its Federal and State deferred tax assets,
realization of $8.6 million of the deferred State tax asset is dependent on
future Illinois taxable income. Current taxable income and taxable income
generated in the statutory carryback period is sufficient to support the entire
deferred Federal tax asset and the remaining $4.8 million of the deferred State
tax asset. The deferred taxes reported on the Corporation's Consolidated
Statement of Condition at December 31, 1994 also include a $21.5 million
deferred tax asset for the tax effect of the net unrealized losses associated
with marking to market certain securities designated as available for sale.
51
<PAGE>
In 1992, deferred taxes resulted from timing differences in the recognition of
revenue and expense for tax and financial statement purposes. The sources of
these differences and the tax effect of each in 1992 were as follows:
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31 1992
-------------------------------------------------------------------------------
<S> <C>
Provision for credit losses......................................... $ (2,369)
Depreciation and amortization....................................... (4,919)
Lease financing..................................................... (1,197)
Alternative minimum tax............................................. (6,465)
State income tax.................................................... (1,457)
Other, net.......................................................... (4,166)
--------
Total........................................................... $(20,573)
========
</TABLE>
A deferred income tax debit amounting to $56,451,000 at December 31, 1992 was
included on the Corporation's Consolidated Statement of Condition.
Total income tax expense of $24,528,000 for 1994, $39,879,000 for 1993, and
$22,095,000 for 1992 reflects effective tax rates of 20.1 percent, 25.6 percent
and 16.3 percent, respectively. The reasons for the differences between actual
tax expense and the amount determined by applying the U.S. Federal income tax
rate of 35 percent (34 percent for 1992) to income before income taxes were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
(dollars in thousands) Years Ended December 31 Amount Income Amount Income Amount Income
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed tax expense.................................. $ 42,656 35.0% $ 54,503 35.0% $ 46,018 34.0%
Increase (reduction) in income tax expense due to:
Tax-exempt income from loans and investments net
of municipal interest expense disallowance........ (14,135) (11.6) (15,213) (9.7) (16,170) (12.0)
Effect of AMT....................................... -- -- -- -- (9,100) (6.7)
Reduction of deferred tax valuation allowance....... (2,825) (2.3) -- -- -- --
Other, net.......................................... (1,168) (1.0) 589 .3 1,347 1.0
-------- ----- -------- ---- -------- -----
Actual tax expense.................................... $ 24,528 20.1% $ 39,879 25.6% $ 22,095 16.3%
======== ===== ======== ==== ======== =====
</TABLE>
In 1994, the Corporation generated an Illinois tax return net operating loss
(NOL) of $6 million. Based on the tax sharing agreement with other members of
the unitary group, a portion of the Illinois losses generated by certain
subsidiaries of the Corporation in 1992 through 1994 have been unutilized and
are carried forward. The Corporation has $14.6 million of Illinois NOLs
available for carryforward to 1995. If unused, these NOLs will expire in the
years 1996 through 2007.
The tax expense from net gains on security sales amounted to $4,440,000,
$5,166,000, and $1,558,000 in 1994, 1993, and 1992, respectively.
13. Investments In Subsidiaries And Statutory Restrictions
Bankcorp's investment in the combined net assets of its wholly-owned
subsidiaries was $1,026,515,000 and $1,033,582,000 at December 31, 1994 and
1993, respectively.
Provisions of both Illinois and Federal banking laws place restrictions upon
the amount of dividends that can be paid to Bankcorp by its bank subsidiaries.
Illinois state law requires that no dividends may be paid in an amount greater
than the net profits then on hand, reduced by certain loan losses (as defined).
In addition to these restrictions, Federal Reserve member banking subsidiaries
require prior approval of Federal banking authorities if dividends declared by a
subsidiary bank, in any calendar year, will exceed its net profits (as defined
in the applicable statute) for that year, combined with its retained net
profits, as so defined, for the preceding two years. Based on these and certain
other prescribed regulatory limitations, Bankcorp subsidiaries could have
declared, without regulatory approval, $169,637,000 of dividends at December 31,
1994. Actual dividends paid, however, would be subject to prudent capital
maintenance. Cash dividends paid to Bankcorp by its subsidiaries amounted to
$49,731,000 and $83,605,000 in 1994 and 1993, respectively.
The Federal Reserve Act also places restrictions on certain transactions
between Bankcorp and its affiliates, including loans from subsidiary banks. Such
restrictions include collateralization requirements and quantitative
limitations. Essentially, a member bank's aggregate involvement in these
restricted transactions may not exceed 20 percent of its capital and surplus, as
defined by the Federal Reserve Board. In addition, restricted transactions
involving an individual affiliate are limited to 10 percent of its capital and
surplus.
The bank subsidiaries of Bankcorp are required by the Federal Reserve Act to
maintain reserves against certain of their deposits. Reserves are held either in
the form of vault cash or balances maintained with the Federal Reserve Bank.
Required reserves are essentially a function of daily average deposit balances
and statutory reserve ratios prescribed by type of deposit. During 1994 and
1993, daily average reserve balances of $206 million and $185 million,
respectively, were required for those subsidiaries of Bankcorp that must
maintain such balances. At year-end 1994 and 1993, balances on deposit at the
Federal Reserve Bank totaled $219 million and $149 million, respectively.
52
<PAGE>
14. Contingent Liabilities
Certain subsidiaries of Bankcorp are defendants in various legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these matters will not
have a material adverse effect on the Corporation's consolidated financial
position.
15. Foreign Activities (By Domicile Of Customer)
Income and expenses identifiable with foreign and domestic operations are
summarized in the table below:
<TABLE>
<CAPTION>
1994 (in thousands) Foreign Domestic Consolidated
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total operating income....................................... $ 53,416 $ 1,095,633 $ 1,149,049
Total expenses............................................... 23,584 1,003,591 1,027,175
---------- ----------- -----------
Income before taxes.......................................... 29,832 92,042 121,874
Applicable income taxes...................................... 11,857 12,671 24,528
---------- ----------- -----------
Net income................................................... $ 17,975 $ 79,371 $ 97,346
========== =========== ===========
Identifiable assets at year-end.............................. $1,042,784 $14,288,755 $15,331,539
========== =========== ===========
1993 (in thousands)
-------------------------------------------------------------------------------------------------------------
Total operating income....................................... $ 51,726 $ 1,018,539 $ 1,070,265
Total expenses............................................... 20,442 894,101 914,543
---------- ----------- -----------
Income before taxes.......................................... 31,284 124,438 155,722
Applicable income taxes...................................... 12,434 27,445 39,879
Cumulative effect on prior years (to December 31, 1992)
of changing the accounting method for income taxes......... -- 1,782 1,782
---------- ----------- -----------
Net income................................................... $ 18,850 $ 98,775 $ 117,625
========== =========== ===========
Identifiable assets at year-end.............................. $ 836,268 $12,681,566 $13,517,834
========== =========== ===========
1992 (in thousands)
-------------------------------------------------------------------------------------------------------------
Total operating income....................................... $ 56,238 $ 1,098,190 $ 1,154,428
Total expenses............................................... 16,549 1,002,531 1,019,080
---------- ----------- -----------
Income before taxes.......................................... 39,689 95,659 135,348
Applicable income taxes...................................... 9,843 12,252 22,095
---------- ----------- -----------
Net income................................................... $ 29,846 $ 83,407 $ 113,253
========== =========== ===========
Identifiable assets at year-end.............................. $1,106,078 $11,623,159 $12,729,237
========== =========== ===========
</TABLE>
Determination of rates for foreign funds generated or used are based on the
actual external costs of specific interest-bearing sources or uses of funds for
the periods. Internal allocations for certain unidentifiable income and expenses
were distributed to foreign operations based on the percentage of identifiable
foreign income to total income. As of December 31, 1994, 1993 and 1992,
identifiable foreign assets accounted for 7, 6 and 9 percent, respectively, of
total consolidated assets.
53
<PAGE>
16. Parent Company Only Condensed Financial Information
Presented below is the statement of income, balance sheet and statement of cash
flows for Harris Bankcorp, Inc. (parent company only):
Statement of Income
<TABLE>
<CAPTION>
(in thousands) For the Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Interest on securities purchased from bank subsidiary under agreement to resell..... $ 7,032 $ 3,721 $ 3,898
Interest on securities purchased from nonaffiliates under agreement to resell....... - 48 -
*Interest on advances to bank subsidiaries........................................... 13,613 20,487 12,953
*Interest on advances to nonbank subsidiaries........................................ 2 38 148
Interest on investments in Federal agency securities................................ 6,387 3,212 5,274
*Interest on deposits at bank subsidiaries........................................... 571 1,118 270
Interest on deposits at nonaffiliated banks......................................... 507 1,309 1,640
*Dividends from bank subsidiaries.................................................... 47,231 80,605 49,580
*Dividends from nonbank subsidiaries................................................. 2,500 3,000 5,050
Other operating income.............................................................. 275 1,488 39
------- -------- --------
Total operating income............................................................ 78,118 115,026 78,852
------- -------- --------
Interest expense on commercial paper................................................ 11,496 7,779 9,917
Interest expense on long-term notes................................................. 19,520 26,384 18,848
Other operating expense............................................................. 5,228 7,441 3,468
------- -------- --------
Total operating expenses.......................................................... 36,244 41,604 32,233
------- -------- --------
Income before income taxes and equity in undistributed net income of subsidiaries... 41,874 73,422 46,619
Applicable income tax benefit....................................................... (3,441) (3,827) (244)
------- -------- --------
Income before equity in undistributed net income of subsidiaries
and cumulative effect of a change in accounting principle......................... 45,315 77,249 46,863
*Equity in undistributed net income of bank subsidiaries............................. 51,960 27,373 67,687
*Equity in undistributed net income of nonbank subsidiaries.......................... 71 6,878 (1,297)**
------- -------- --------
Income before cumulative effect of a change in accounting principle ................ 97,346 111,500 113,253
Cumulative effect on prior years (to December 31, 1992) of changing
the accounting method for income taxes............................................ - 6,125 -
------- -------- --------
Net income........................................................................ $97,346 $117,625 $113,253
======= ======== ========
</TABLE>
* Eliminated in consolidation.
** Net of dividends from nonbank subsidiaries of approximately $5.1 million;
actual net income totaled approximately $3.8 million.
Balance Sheet
<TABLE>
<CAPTION>
(in thousands) December 31 1994 1993
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Demand balances due from banks.............................................................. $ 50 $ 46
Investment in U. S. Treasury and Federal agency securities.................................. 200,799 201,196
*Securities purchased from bank subsidiary under agreement to resell......................... 136,912 151,437
*Advances to bank subsidiaries............................................................... 235,000 235,000
*Advances to nonbank subsidiaries............................................................ - 500
Interest-bearing deposits at nonaffiliated banks............................................ 25,000 20,000
Equity investments in wholly-owned subsidiaries:
*Banks.................................................................................... 977,125 984,263
*Nonbanks................................................................................. 49,390 49,319
Other assets................................................................................ 6,451 6,098
---------- ----------
Total assets........................................................................... $1,630,727 $1,647,859
========== ==========
Liabilities and Stockholder's Equity
Commercial paper outstanding................................................................ $ 306,737 $ 326,268
Other liabilities........................................................................... 4,026 5,238
Long-term notes............................................................................. 298,810 298,681
---------- ----------
Total liabilities...................................................................... 609,573 630,187
Stockholder's equity........................................................................ 1,021,154 1,017,672
---------- ----------
Total liabilities and stockholder's equity............................................. $1,630,727 $1,647,859
========== ==========
</TABLE>
*Eliminated in consolidation
54
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
(in thousands) For the Years Ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income........................................................................... $ 97,346 $ 117,625 $ 113,253
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income of subsidiaries............................................ (52,031) (34,251) (66,390)
Accretion and amortization.......................................................... (5,037) (3,173) (4,547)
Deferred income tax provision (benefit)............................................. 30 (1,418) (3,416)
Net (increase) decrease in interest receivable...................................... (344) 143 (418)
Other, net.......................................................................... (1,172) (6,484) 13,018
----------- --------- ---------
Net cash provided by operating activities......................................... 38,792 72,442 51,500
----------- --------- ---------
Investing Activities:
Net (increase) decrease in interest-bearing deposits at banks....................... (5,000) 145,000 (150,000)
Net decrease (increase) in securities purchased under agreement to resell........... 14,525 (27,462) (29,396)
Proceeds from maturities of portfolio securities.................................... 1,102,363 674,893 937,504
Purchases of portfolio securities................................................... (1,096,928) (862,929) (775,849)
Net decrease (increase) in advances to subsidiaries................................. 500 1,100 (94,800)
Return of capital from (capital infusions to) subsidiaries.......................... - 8,261 (9,350)
Other, net.......................................................................... 21 (1,073) 183
----------- --------- ---------
Net cash provided (used) by investing activities................................... 15,481 (62,210) (121,708)
----------- --------- ---------
Financing Activities:
Net (decrease) increase in commercial paper outstanding............................. (19,531) 39,123 14,679
Proceeds from issuance of long-term notes........................................... - - 100,000
Repayment of long-term notes........................................................ - - (330)
Cash dividends paid................................................................. (34,738) (49,355) (44,139)
----------- --------- ---------
Net cash (used) provided by financing activities.................................. (54,269) (10,232) 70,210
----------- --------- ---------
Net increase in demand balances due from banks........................................ 4 - 2
Demand balances due from banks at January 1........................................... 46 46 44
----------- --------- ---------
Demand balances due from banks at December 31......................................... $ 50 $ 46 $ 46
=========== ========= =========
</TABLE>
17. Business Combinations/Intangibles
At December 31, 1994 and 1993, intangible assets, including goodwill resulting
from business combinations, amounted to $47,757,000 and $57,924,000,
respectively. Intangible assets are included in "Other Assets" on the
Consolidated Statement of Condition. Amortization of these intangibles amounted
to $10,266,000 in 1994, $11,785,000 in 1993 and $13,898,000 in 1992. The impact
of purchase accounting adjustments, other than amortization of intangibles, was
not material to the Corporation's reported results.
18. Related Party Transactions
Bankcorp is a wholly-owned subsidiary of Bankmont, a Delaware corporation.
Bankmont is a wholly-owned subsidiary of Bank of Montreal. Unamortized goodwill
of $25 million at December 31, 1994 associated with the acquisition of Bankcorp
in 1984 is reflected on the accounting records of Bankmont and has not been
"pushed down" to the Corporation.
During 1994, 1993 and 1992, the Corporation engaged in various transactions
with Bank of Montreal and its subsidiaries. These transactions included the
payment and receipt of service fees and occupancy expenses, and purchasing and
selling Federal funds, repurchase and reverse repurchase agreements, long-term
borrowings and interest rate and foreign exchange contracts. The purpose of
these transactions was to facilitate a more efficient use of combined resources
and to better serve customers. These related party transactions were completed
on terms approximating those for similar ones completed on an arms-length basis.
Management fees were determined in accordance with applicable banking
regulations. In the aggregate, net revenues and expenses from related party
transactions were not material to the Corporation's results of operations.
In October 1991, the Corporation announced that certain U.S. corporate banking
units of HTSB and Bank of Montreal were to be merged into a single
organizational unit in order to better accommodate the requirements of certain
customers in the large corporate market. The transition was expected to take
place over several months. During the 1991 fourth quarter, a total of 38
employees had transferred from HTSB to Bank of Montreal's payroll, although all
related customer business remained with the Corporation at that time. During
1992, 75 customers representing approximately $214 million in outstanding
credits and $2.3 billion in unused commitments were transferred to Bank of
Montreal. In 1993, an additional 31 customers representing approximately $22
million in outstanding credits and $533 million in commitments were also
transferred. Bank of Montreal was compensated for expenses incurred on behalf of
HTSB's customers through December 31, 1993. No material transfers occurred in
1994.
55
<PAGE>
Explanation of Joint Independent Auditors' Reports
-------------------------------------------------------------------------------
The Board of Directors of Harris Bankcorp, Inc. engaged the firms of KPMG Peat
Marwick LLP and Coopers & Lybrand L.L.P. to serve as joint auditors for the year
ended December 31, 1994. KPMG Peat Marwick LLP and Coopers & Lybrand L.L.P. also
served as joint auditors for the year ended December 31, 1993, while KPMG Peat
Marwick LLP and Deloitte & Touche LLP served as joint auditors for the year
ended December 31, 1992.
Bankmont Financial Corp., a wholly-owned subsidiary of Bank of Montreal, owns
all outstanding shares of Harris Bankcorp, Inc. Canadian bank shareholders had
been required by the Canadian Bank Act to appoint each year two firms of
independent public accountants to be auditors of their bank and all significant
subsidiaries. In prior years, the change in the Corporation's independent public
accountants reflected identical changes made by Bank of Montreal. The Canadian
Bank Act was revised during 1992; accordingly, the Corporation no longer expects
a planned rotation of independent auditors.
56
<PAGE>
Independent Auditors' Reports
-------------------------------------------------------------------------------
To the Stockholder and Board
of Directors of Harris Bankcorp, Inc.:
We have audited the accompanying consolidated statements of condition of Harris
Bankcorp, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholder's equity and
cash flows for the years ended December 31, 1994 and 1993. These consolidated
financial statements are the responsibility of Harris Bankcorp, Inc.'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 Harris
Bankcorp, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for the years ended December
31, 1994 and 1993 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements,
Harris Bankcorp, Inc. and Subsidiaries changed their method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" at December 31, 1993. As
discussed in Notes 1 and 10, Harris Bankcorp, Inc. and Subsidiaries also adopted
the provisions of the Financial Accounting Standards Board's SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" as of
January 1, 1993. As discussed in Notes 1 and 12, Harris Bankcorp, Inc. and
Subsidiaries also adopted the provisions of the Financial Accounting Standards
Board's SFAS No. 109, "Accounting for Income Taxes" as of January 1, 1993.
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
January 27, 1995
To the Stockholder and Board
of Directors of Harris Bankcorp, Inc.:
We have audited the accompanying consolidated statements of income, changes in
stockholder's equity and cash flows of Harris Bankcorp, Inc. and Subsidiaries
for the year ended December 31, 1992. These consolidated financial statements
are the responsibility of Harris Bankcorp, Inc.'s and Subsidiaries management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows for Harris Bankcorp, Inc. and Subsidiaries for the year ended December 31,
1992 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP Deloitte & Touche LLP
Chicago, Illinois
January 29, 1993
57
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements between the Corporation and its independent auditors
related to accounting matters and/or financial disclosures. See the Explanation
of Joint Independent Auditors' Reports on page 56 of this Report for information
concerning changes in the Corporation's independent auditors.
58
<PAGE>
--------------------------------------------------------------------------------
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Bankcorp's Board of Directors consists of fifteen members. Directors are elected
annually. Each present director, except Mrs. Congalton and Ms. Decyk (both of
whom are attorneys), has been employed in an executive capacity by his or her
employer for more than five years. Set forth below is certain biographical
information concerning each director, including principal occupation, age, the
year first elected a director of Bankcorp and HTSB and other directorships.
Matthew W. Barrett, age 50, Chairman and Chief Executive Officer of Bank of
Montreal. Elected in 1988.
F. Anthony Comper, age 49, President and Chief Operating Officer and a Director
of Bank of Montreal. Elected in 1990.
Susan T. Congalton, age 48, Managing Director, Lupine Partners (private
investments). Elected in 1988.
Roxanne J. Decyk, age 42, Vice President, Planning, Amoco Corp. (petroleum
products) and a Director of Material Sciences Corporation and Snap-On
Incorporated. Elected in 1990.
Wilbur H. Gantz, age 57, President and Chief Executive Officer of PathoGenesis
Corporation (diagnostic health care) and a Director of W.W. Grainger, Gillette
Corporation and Bank of Montreal. Elected in 1984.
James J. Glasser, age 60, Chairman, President and Chief Executive Officer of
GATX Corporation (capital equipment and services for extracting, processing and
distributing dry and liquid bulk commodities) and a Director of The B. F.
Goodrich Company, Stone Container Corporation and Bank of Montreal. Elected in
1980.
Daryl F. Grisham, age 68, President and Chief Executive Officer of Parker House
Sausage Company (meat processor). Elected in 1983.
Dr. Leo M. Henikoff, age 55, President and Chief Executive Officer of Rush-
Presbyterian-St. Luke's Medical Center (health care and related services).
Elected in 1986.
Donald S. Hunt, age 56, President and Chief Operating Officer of Bankcorp and
Harris Trust and Savings Bank. Elected in 1991.
Dr. Stanley O. Ikenberry, age 60, President of the University of Illinois and a
Director of Franklin Life Insurance Company and Pfizer, Inc. Elected in 1985.
Alan G. McNally, age 49, Chief Executive Officer and Vice Chairman of the Board
of Bankcorp and Harris Trust and Savings Bank. Elected in 1993.
Charles H. Shaw, age 62, Chairman, The Charles H. Shaw Company (real estate
development). Elected in 1990.
Richard E. Terry, age 57, Chairman and Chief Executive Officer, Peoples Energy
Corporation (public utility) and a Director of Amsted Industries. Elected in
1992.
William J. Weisz, age 68, Chairman of the Board, Motorola, Inc. (manufacturer of
electronic equipment). Elected in 1988.
B. Kenneth West, age 61, Chairman of the Board of Bankcorp and Harris Trust and
Savings Bank and a Director of Motorola, Inc. Elected in 1979.
In addition to Messrs. McNally and Hunt, the Corporation had twelve
executive officers at December 31, 1994-Senior Executive Vice Presidents Edward
W. Lyman, Jr., age 52, and Maribeth S. Rahe, age 46, and Executive Vice
Presidents Richard J. Brown, age 50, Jeffrey D. Butterfield, age 48, Charles H.
Davis, age 52, Gerald F. Fitzgerald, Jr., age 44, James G. Fitzgerald, age 43,
Kenneth R. Keck, age 56, Louis F. Lanwermeyer, age 46, Charles R. Tonge, age 45,
Edward J. Williams, age 52, and Nancy B. Wolcott, age 40. With the exception of
Gerald F. Fitzgerald, Jr. and James G. Fitzgerald who were elected in 1994, each
officer has held executive positions with HTSB for many years.
59
<PAGE>
ITEM 11-OMITTED PURSUANT TO GENERAL INSTRUCTION (J) (2) (c) OF FORM 10-K.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Bank of Montreal, through its subsidiary, Bankmont Financial Corp., a U.S. bank
holding company chartered in Delaware, owns all 6,667,490 issued and outstanding
shares of Bankcorp's common stock.
ITEM 13-OMITTED PURSUANT TO GENERAL INSTRUCTION (J)(2) (c) OF FORM 10-K.
Part IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with Report:
(l) Financial Statements (See page 1 for a listing of all financial
statements included in Item 8)
(2) Financial Statement Schedules
All Schedules normally required by Form 10-K are omitted since they are
either not applicable or the required information is shown in the
financial statements or the notes thereto.
(3) Exhibits:
3. Articles of Incorporation and By-laws
a) Restated Certificate of Incorporation (filed as an Exhibit to
Bankcorp's 1987 Form 10-K and incorporated herein by reference)
b) By-laws of Harris Bankcorp, Inc. (filed as an Exhibit to
Bankcorp's 1993 Form 10-K and incorporated herein by reference)
4. Indenture dated as of June 1, 1989 relating to Bankcorp's 9 3/8%
Subordinated Notes Due 2001 (filed as an Exhibit to Bankcorp's May
24, 1989 Registration Statement on Form S-3 and incorporated herein
by reference). In addition, Bankcorp has issued three Floating Rate
Subordinated Notes to its parent company, Bankmont. The principal
amount of these notes totals $200 million. They mature in 2004,
2005 and 2006, respectively. Bankcorp hereby agrees to file a copy
of the agreement relating to any such notes with the Commission
upon request.
10. Material Contracts and Compensatory Plans
a) Managerial Participation Fund (filed as an Exhibit to
Bankcorp's 1987 Form 10-K and incorporated herein by reference)
b) Harris Growth Incentive Plan (filed as an Exhibit to
Bankcorp's 1991 Form 10-K and incorporated herein by reference)
c) Employees' Savings and Profit Sharing Plan (filed as an Exhibit
to Bankcorp's 1993 Form 10-K and incorporated herein by
reference)
d) Consulting Agreement between the Corporation and Mr. B. Kenneth
West dated August 30, 1993 (filed as an Exhibit to Bankcorp's
1993 Form 10-K and incorporated herein by reference)
e) Harris Retirement Benefit Replacement Plan (filed as an Exhibit
to Bank of Montreal's August 3, 1994 Registration Statement on
Form F-4, File No. 33-82358, and incorporated herein by
reference)
23. Consents of experts and counsel (consents of Independent Auditors)
24. Power of Attorney
(b) No reports on Form 8-K were filed during the last quarter of 1994.
--------------------------------------------------------------------------------
*Copies of Exhibits (a) (3) 3, 4, 10, 23 and 24, not contained herein, may be
obtained at a cost of 25 cents per page upon written request to the Secretary of
Harris Bankcorp, Inc.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Harris Bankcorp, Inc. has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
March 1995.
/s/ Alan G. McNally
--------------------
Alan G. McNally Chief Executive Officer
/s/ Pierre O. Greffe
--------------------
Pierre O. Greffe Chief Financial Officer
/s/ Paul R. Skubic
--------------------
Paul R. Skubic Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by Alan G. McNally Chief Executive Officer of the Corporation,
as attorney-in-fact for the following Directors on behalf of Harris Bankcorp,
Inc. on the 28th day of March 1995.
F. Anthony Comper
Susan T. Congalton Daryl F. Grisham Charles H. Shaw
Roxanne J. Decyk Leo M. Henikoff Richard E. Terry
Wilbur H. Gantz Donald S. Hunt William J. Weisz
James J. Glasser Stanley O. Ikenberry B. Kenneth West
/s/ Alan G. McNally
--------------------
Alan G. McNally
Attorney-In-Fact
Supplemental Information
No annual report or proxy statement will be sent to security holders in 1995.
61
<PAGE>
EXHIBIT 23: CONSENT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors of Harris Bankcorp, Inc.
We consent to incorporation by reference in Registration Statement No. 33-28909
on Form S-3 of Harris Bankcorp, Inc. of our report dated January 27, 1995,
relating to the consolidated statements of condition of Harris Bankcorp, Inc.
and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in stockholder's equity, and cash flows for the
years then ended, which report appears on page 57 of the December 31, 1994
Annual Report on Form 10-K of Harris Bankcorp, Inc.
Coopers & Lybrand L.L.P. KPMG Peat Marwick LLP
Chicago, Illinois
March 28, 1995
<PAGE>
EXHIBIT 23: CONSENT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors of Harris Bankcorp, Inc.
We consent to incorporation by reference in Registration Statement No. 33-28909
on Form S-3 of Harris Bankcorp, Inc. and Subsidiaries of our report dated
January 29, 1993, relating to the consolidated statements of income, changes in
stockholder's equity, and cash flows of Harris Bankcorp, Inc. and Subsidiaries,
for the year ended December 31, 1992, which report appears on page 57 of the
December 31, 1994 Annual Report on Form 10-K of Harris Bankcorp, Inc. and
Subsidiaries.
KPMG Peat Marwick LLP Deloitte & Touche LLP
Chicago, Illinois
March 28, 1995
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Each person whose signature appears below authorizes Alan G. McNally, Chief
Executive Officer, or Donald S. Hunt, President, to execute in the name of each
such person who is then an officer or director of the registrant, and to file,
the 1994 Harris Bankcorp, Inc. Annual Report to the Securities and Exchange
Commission on Form 10-K pursuant to the requirements of the Securities Exchange
Act of 1934.
/s/ Donald S. Hunt
------------------------------------
Donald S. Hunt
President and Director
/s/ F. Anthony Comper /s/ Stanley O. Ikenberry
------------------------------------ ------------------------------------
F. Anthony Comper Stanley O. Ikenberry
Director Director
/s/ Susan T. Congalton /s/ Alan G. McNally
------------------------------------ ------------------------------------
Susan T. Congalton Alan G. McNally
Director Vice Chairman of the Board,
Chief Executive Officer,
and Director
/s/ Roxanne J. Decyk /s/ Charles H. Shaw
------------------------------------ ------------------------------------
Roxanne J. Decyk Charles H. Shaw
Director Director
/s/ Wilbur H. Gantz /s/ Richard E. Terry
------------------------------------ ------------------------------------
Wilbur H. Gantz Richard E. Terry
Director Director
/s/ James J. Glasser /s/ William J. Weisz
------------------------------------ ------------------------------------
James J. Glasser William J. Weisz
Director Director
/s/ Daryl F. Grisham /s/ B. Kenneth West
------------------------------------ ------------------------------------
Daryl F. Grisham B. Kenneth West
Director Chairman of the Board and Director
/s/ Leo M. Henikoff
------------------------------------
Leo M. Henikoff
Director
Dated: February 15, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,399,781
<INT-BEARING-DEPOSITS> 757,227
<FED-FUNDS-SOLD> 404,226
<TRADING-ASSETS> 36,067
<INVESTMENTS-HELD-FOR-SALE> 2,581,293
<INVESTMENTS-CARRYING> 1,107,659
<INVESTMENTS-MARKET> 1,101,927
<LOANS> 8,229,254
<ALLOWANCE> 124,734
<TOTAL-ASSETS> 15,331,539
<DEPOSITS> 9,919,732
<SHORT-TERM> 3,609,266
<LIABILITIES-OTHER> 357,464
<LONG-TERM> 298,810
<COMMON> 53,340
0
0
<OTHER-SE> 967,814
<TOTAL-LIABILITIES-AND-EQUITY> 15,331,539
<INTEREST-LOAN> 591,532
<INTEREST-INVEST> 188,621
<INTEREST-OTHER> 52,262
<INTEREST-TOTAL> 834,605
<INTEREST-DEPOSIT> 250,002
<INTEREST-EXPENSE> 378,007
<INTEREST-INCOME-NET> 456,598
<LOAN-LOSSES> 45,040
<SECURITIES-GAINS> 5,254
<EXPENSE-OTHER> 604,128
<INCOME-PRETAX> 121,874
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,346
<EPS-PRIMARY> 14.60
<EPS-DILUTED> 14.60
<YIELD-ACTUAL> 3.95
<LOANS-NON> 83,803
<LOANS-PAST> 31,071
<LOANS-TROUBLED> 2,889
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<ALLOWANCE-OPEN> 131,676
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<ALLOWANCE-CLOSE> 124,734
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<ALLOWANCE-FOREIGN> 3,819
<ALLOWANCE-UNALLOCATED> 18,495
</TABLE>
