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Securities And Exchange Commission
Washington, D.C. 20549
1995
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, 1995 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.
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(Exact name of registrant as specified in its charter)
Delaware 36-2722782
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
111 West Monroe Street, Chicago, Illinois 60603
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(Address of principal executive offices) (Zip Code)
312/461-2121
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(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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<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 1995) 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............................................................... 33
Consolidated Statement of Income....................................................... 34
Consolidated Statement of Condition.................................................... 35
Statement of Changes in Stockholder's Equity........................................... 36
Consolidated Statement of Cash Flows................................................... 37
Notes to Financial Statements.......................................................... 38
Explanation of Joint Independent Auditors' Reports..................................... 57
Independent Auditors' Reports.......................................................... 58
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 59
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Part III Item 10 Directors and Executive Officers of the Registrant..................................... 60
Item 12 Security Ownership of Certain Beneficial Owners and Management......................... 61
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Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 61
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Signatures.................................................................................................... 62
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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
("BMO"). 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, three 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.
Effective April 3, 1995, HTSB and BMO agreed to combine their U.S. foreign
exchange activities ("FX"). Under this arrangement, FX net profit will be shared
by HTSB and BMO in accordance with a specific formula set forth in the
agreement.
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. On January 11, 1996, HTSB
announced the sale of its securities custody and related trustee services
business for large institutions to Citibank.
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 53 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
generally limits the activities of 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. 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.
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 5,749 and 4,256,
respectively, at December 31, 1995.
3
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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 56 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 page 43 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 1995.
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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 1995, Bankcorp
declared and paid approximately $262.7 million in cash dividends to Bankmont,
including a $205 million special dividend in connection with the capital
restructuring described below. Dividends amounting to approximately $34.7
million and $56.6 million were declared and paid to Bankmont in 1994 and 1993,
respectively. The 1993 dividend included a $7.2 million dividend-in-kind related
to the transfer of Harris Futures Corporation to Bankmont.
Effective December 27, 1995, Bankcorp increased its capital base by $40
million. At the same time, Bankcorp adjusted its capital structure to mirror the
capital mix of BMO and more closely resemble its peer group comprising other
major U.S. and Chicago bank holding companies. Bankcorp issued $180 million of
Series A non-voting, callable, perpetual preferred stock and an additional $65
million of long-term subordinated debt, both purchased by Bankmont. The 180
shares of preferred stock have no par value and a stated value of $1.0 million
per share. The dividend rate per annum is 7.25 percent of the stated value per
share. No dividends were accrued or paid on the preferred stock in 1995.
Concurrently, common equity was reduced by $205 million through the declaration
of a special dividend. These actions resulted in a total capital base, including
long-term subordinated debt, of approximately $1.5 billion at December 31, 1995,
and a reduced overall cost of capital for the Corporation.
4
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Comparative Consolidated Statement of Income Harris Bankcorp, Inc. and Subsidiaries
(Fully taxable equivalent (FTE) basis, dollars in thousands
except per share data)
For the Years Ended December 31 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
Interest Income
Loans, including fees.................................... $ 778,770 $594,265 $515,994 $586,000 $ 727,671
Money market assets:
Deposits at banks....................................... 38,617 30,739 25,212 32,419 51,327
Federal funds sold and securities purchased
under agreement to resell.............................. 19,330 21,523 17,436 12,560 32,030
Trading account.......................................... 4,556 2,796 6,537 21,056 16,790
Securities held to maturity.............................. 77,820 87,740 193,487 200,393 210,068
Securities available for sale............................ 162,867 121,372 -- -- --
---------- -------- --------- -------- ----------
Total interest income................................... 1,081,960 858,435 758,666 852,428 1,037,886
---------- -------- --------- -------- ----------
Interest Expense
Domestic deposits........................................ 215,276 160,357 143,614 188,082 289,040
Foreign deposits......................................... 143,310 89,645 56,558 64,544 117,289
Short-term borrowings.................................... 168,993 108,485 73,043 103,988 152,253
Senior notes............................................. 31,125 - - - -
Long-term notes.......................................... 23,005 19,520 26,406 18,933 13,693
---------- -------- --------- -------- ----------
Total interest expense.................................. 581,709 378,007 299,621 375,547 572,275
---------- -------- --------- -------- ----------
Net Interest Income...................................... 500,251 480,428 459,045 476,881 465,611
Provision for credit losses.............................. 42,995 45,040 62,835 77,560 79,310
---------- -------- --------- -------- ----------
Net Interest Income after Provision for
Credit Losses........................................... 457,256 435,388 396,210 399,321 386,301
---------- -------- --------- -------- ----------
Noninterest Income
Trust and investment management fees..................... 149,979 148,094 148,809 145,091 131,149
Trading account.......................................... 5,110 (396) 5,258 (4,499) 8,403
Foreign exchange......................................... 14,248 19,769 24,302 25,062 14,718
Charge card.............................................. 41,788 37,402 36,516 36,355 41,397
Service fees and charges................................. 69,333 73,621 77,774 80,056 60,940
Gain on sales of foreign claims.......................... -- -- -- 15,823 --
Securities gains......................................... 23,379 5,254 13,038 4,239 2,578
Other.................................................... 34,436 30,700 31,391 32,902 36,254
---------- -------- --------- -------- ----------
Total noninterest income................................ 338,273 314,444 337,088 335,029 295,439
---------- -------- --------- -------- ----------
Noninterest Expenses
Employment............................................... 318,302 312,570 305,758 281,562 261,098
Net occupancy............................................ 46,099 45,052 46,676 47,673 49,415
Equipment................................................ 42,541 42,284 43,396 46,460 42,994
Marketing................................................ 25,583 24,632 22,613 20,114 18,810
Communication and delivery............................... 20,251 17,732 17,916 17,970 18,369
Deposit insurance........................................ 8,124 15,684 15,047 16,586 15,101
Trust customer charge.................................... -- 51,335 -- -- --
Writedown of property held for expansion................. -- -- -- 11,802 --
Other.................................................... 99,203 94,839 100,681 123,806 111,788
---------- -------- --------- -------- ----------
Total noninterest expenses.............................. 560,103 604,128 552,087 565,973 517,575
---------- -------- --------- -------- ----------
FTE pretax income........................................ 235,426 145,704 181,211 168,377 164,165
Applicable income taxes.................................. 70,175 24,528 39,879 22,095 20,773
FTE adjustment........................................... 17,700 23,830 25,489 33,029 39,324
---------- -------- --------- -------- ----------
Income before cumulative effect of a change in
accounting principle................................... 147,551 97,346 115,843 113,253 104,068
Cumulative effect on prior years (to December 31, 1992)
of changing the accounting method for income taxes...... -- -- 1,782 -- --
---------- -------- --------- -------- ----------
Net Income.............................................. $ 147,551 $ 97,346 $ 117,625 $113,253 $ 104,068
========== ======== ========= ======== ==========
Per Common Share Statistics
Net income............................................... $ 22.13 $ 14.60 $ 17.64 $ 16.99 $ 15.61
Dividends................................................ 39.40 5.21 8.48 6.62 7.24
Average common shares outstanding (in thousands)......... 6,667 6,667 6,667 6,667 6,667
Profitability Ratios
Net income:
% Average total assets.................................. .95% .68% .90% .86% .80%
% Average common stockholder's equity................... 13.61 9.70 12.31 12.71 12.70
Number of Employees at Year-End
(full-time equivalent basis)............................ 5,749 5,655 5,792 5,528 5,401
</TABLE>
5
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<TABLE>
<CAPTION>
Comparative Consolidated Statement of Condition
Harris Bankcorp, Inc. and Subsidiaries
(Daily averages, dollars in thousands
except per share data) Years Ended December 31 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
Assets
Cash and demand balances due from banks............ $ 1,206,234 $ 1,173,266 $ 1,191,748 $ 1,142,354 $ 1,046,818
Money market assets:
Interest-bearing deposits at banks................ 566,072 686,995 677,565 687,311 699,271
Federal funds sold and securities
purchased under agreement to resell.............. 330,783 536,185 522,757 338,027 560,936
Portfolio securities:
Held to maturity.................................. 962,245 963,690 2,987,053 2,782,148 2,478,347
Available for sale................................ 2,611,707 2,269,171 7,213 - -
Trading account assets............................. 64,777 39,812 110,493 250,578 189,622
Domestic loans, net of unearned income............. 8,735,388 7,629,399 6,988,838 7,217,339 7,297,607
Foreign office loans, net of unearned income....... 50,183 43,176 55,970 76,787 110,285
----------- ----------- ----------- ----------- -----------
Total loans...................................... 8,785,571 7,672,575 7,044,808 7,294,126 7,407,892
Allowance for possible credit losses............... (126,041) (129,377) (131,243) (129,739) (124,618)
Premises and equipment............................. 224,205 223,538 228,992 239,676 240,511
Customers' liability on acceptances................ 104,994 80,813 71,844 104,498 112,204
Other assets....................................... 784,524 700,675 367,954 450,640 465,729
----------- ----------- ----------- ----------- -----------
Total assets..................................... $15,515,071 $14,217,343 $13,079,184 $13,159,619 $13,076,712
=========== =========== =========== =========== ===========
Liabilities
Demand deposits.................................... $ 2,808,747 $ 2,859,643 $ 2,672,152 $ 2,346,435 $ 2,115,781
Interest checking deposits......................... 629,448 663,598 639,377 602,529 533,783
Money market accounts.............................. 1,037,963 1,170,181 1,235,487 1,294,723 1,202,721
Savings deposits and certificates.................. 2,442,101 2,189,049 2,164,583 2,272,386 2,411,959
Other time deposits................................ 682,320 722,373 756,560 718,140 883,854
Deposits in foreign offices........................ 2,435,124 2,110,342 1,813,720 1,638,363 1,931,611
----------- ----------- ----------- ----------- -----------
Total deposits................................... 10,035,703 9,715,186 9,281,879 8,872,576 9,079,709
Short-term borrowings.............................. 3,010,753 2,654,891 2,332,260 2,938,501 2,757,009
Senior notes....................................... 512,204 - - - -
Acceptances outstanding............................ 105,064 80,818 73,711 104,501 112,395
Other liabilities.................................. 465,145 463,736 136,862 150,854 166,244
Long-term notes.................................... 299,771 298,745 298,807 202,350 141,711
----------- ----------- ----------- ----------- -----------
Total liabilities................................ 14,428,640 13,213,376 12,123,519 12,268,782 12,257,068
Stockholder's equity............................... 1,086,431 1,003,967 955,665 890,837 819,644
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's equity........ $15,515,071 $14,217,343 $13,079,184 $13,159,619 $13,076,712
=========== =========== =========== =========== ===========
Ratios (Percentage of total average assets)
Money market assets................................ 5.8% 8.6% 9.2% 7.8% 9.6%
Portfolio securities and trading account assets.... 23.5 23.0 23.7 23.0 20.4
Loans, net of unearned income...................... 56.6 54.0 53.9 55.4 56.6
Deposits........................................... 64.7 68.3 71.0 67.4 69.4
Short-term borrowings.............................. 19.4 18.7 17.8 22.3 21.1
Common stockholder's equity........................ 7.00 7.06 7.31 6.77 6.27
Selected Year-End Data
Loans, net of unearned income...................... $ 9,517,797 $ 8,229,254 $ 7,703,957 $ 7,082,861 $ 7,906,892
Allowance for possible credit losses............... 129,259 124,734 131,676 130,123 125,091
Total assets....................................... 15,676,201 15,331,539 13,517,834 12,729,237 14,480,907
Deposits........................................... 10,228,782 9,919,732 9,375,871 8,776,734 9,458,878
Long-term notes.................................... 363,952 298,810 298,681 298,813 200,287
Preferred stock.................................... 180,000 - - - -
Common stockholder's equity........................ 965,776 1,021,154 1,017,672 930,191 861,077
Year-End Common Stockholder's
Equity per Common Share........................... $ 144.85 $ 153.15 $ 152.63 $ 139.51 $ 129.15
</TABLE>
6
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ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Summary
1995 Compared to 1994
The Corporation's 1995 net income was $147.6 million, up 52 percent from $97.3
million in 1994. For 1995, the return on average common equity was 13.6 percent
and the return on average assets was 0.95 percent, compared to returns of 9.70
percent and 0.68 percent, respectively, a year ago. Year to year earnings
comparisons were significantly affected by a one-time $33.4 million after-tax
charge in 1994 resulting from management's decision to absorb the impact of
higher interest rates on mortgage-backed securities held in certain customer
accounts of HTSB's Securities Lending unit. Excluding the effect of the
securities lending charge, returns on average common equity and average assets
were, respectively, 13.0 percent and 0.92 percent in 1994, compared to 13.6
percent and 0.95 percent in 1995; and 1995 earnings increased by 13 percent
compared to 1994. The earnings gain is attributable to strong growth and
business momentum broadly across the Corporation--and in particular loan growth
in corporate banking, community banking and the credit card business; sustained
cost control, overhead reduction and operations consolidation; gains from
securities transactions; and reduced FDIC premiums.
Net interest income on a fully taxable equivalent ("FTE") basis was $500.3
million in 1995, up $19.9 million or 4 percent from $480.4 million in 1994.
Average earning assets rose 10 percent to $13.33 billion from $12.17 billion in
1994, attributable to an increase of 15 percent or $1.11 billion in average
loans. Net interest margin declined to 3.75 percent in 1995 from 3.95 percent
the previous year, reflecting rate compression in certain asset categories, a
lower mix of noninterest-bearing deposits, and the relationship which existed in
the markets between short and longer term rates.
Noninterest income increased $23.8 million or 8 percent in 1995, to $338.3
million. In 1995, net gains from the sale of debt securities amounted to $23.4
million, compared to $5.3 million in the prior year. Most of these 1995 gains
were recognized in the second quarter when conditions in the U.S. bond market
led to significant price rallies. This enabled the Corporation to sell certain
U.S. government agency securities and reinvest the proceeds to reposition its
portfolio, taking advantage of profit opportunities not typically available.
Money market and bond trading profits increased by $5.5 million in 1995, while
charge card fees increased $4.4 million, and trust and investment management
revenue rose $1.9 million. Other sources of non-interest income, which include
fees for letters of credit, corporate finance income and gains on asset sales,
increased $3.7 million year to year. Service charges declined by $4.3 million
due to the higher interest rate environment and to customer refunds with respect
to FDIC insurance. Foreign exchange revenue decreased by $5.5 million. This
revenue is now reported net of expenses under a new profit sharing arrangement
with BMO effective April 3, 1995.
Noninterest expenses in 1995 declined to $560.1 million from $604.1 million
a year ago, reflecting the one-time $51.3 million (pretax) charge in the
securities lending unit in 1994 and lower FDIC insurance premiums in 1995.
Excluding the effect of these two events, noninterest expenses increased by 3
percent.
Income taxes increased by $45.6 million in 1995, reflecting substantially
higher pretax income and a smaller tax-exempt municipal bond portfolio.
The 1995 provision for credit losses was $43.0 million, down from $45.0
million in 1994. Net loan charge-offs for the current year were $38.5 million,
down from $52.0 million a year ago, resulting primarily from lower write-offs in
the commercial loan, installment loan and real estate mortgage loan portfolios.
Nonperforming assets at December 31, 1995 totaled $55 million or 0.6
percent of total loans, down from $94.8 million or 1.15 percent of loans a year
ago. At December 31, 1995, the allowance for possible credit losses was $129
million or 1.4 percent of total loans outstanding, compared with $125 million or
1.5 percent of loans at the end of 1994. As a result, the ratio of the allowance
for possible credit losses to nonperforming assets increased from 132 percent at
December 31, 1994 to 235 percent at December 31, 1995. During the first quarter
of 1995, the Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 114--Accounting by Creditors for Impairment of a Loan and SFAS No.
118--Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures. SFAS No. 114 addresses accounting by creditors for impairment of
certain loans. It requires that impaired loans within the scope of the statement
(primarily commercial credits) be measured based on the present value of
expected future cash flows (discounted at the loan's effective interest rate)
or, alternatively, at the loan's observable market price or the fair value of
supporting collateral. The Corporation determines loan impairment when assessing
the adequacy of the allowance for possible credit losses. SFAS No. 118 permits
existing income recognition practices to continue. The adoption of these
Statements did not have a material impact on the Corporation's net income or
financial position.
At December 31, 1995, the Corporation's consolidated equity capital
increased $124.6 million from the prior year-end to $1.15 billion. The increase
resulted from the issuance of $180 million of preferred stock, earnings for the
prior twelve months and $59.8 million of after-tax unrealized holding gains
related to the Corporation's debt and equity securities classified as available
for sale. Also, the Corporation paid $262.7 million of dividends. To support
continued business growth and expansion, Bankcorp increased its capital base by
$40 million, effective December 27, 1995. At the same time, Bankcorp adjusted
its capital structure to mirror the capital mix of BMO and more closely resemble
the Corporation's peer group comprising other major U.S. and Chicago bank
holding companies. Bankcorp issued $180 million of preferred stock and an
7
<PAGE>
additional $65 million of long-term subordinated debt, purchased by Bankmont.
Concurrently, common equity was reduced by $205 million through the declaration
of a special dividend. These actions resulted in a total capital base, including
long-term subordinated debt, of approximately $1.5 billion at December 31, 1995,
and a reduced overall cost of capital for the Corporation. On a proforma basis,
had these changes to the Corporation's capital mix occurred on January 1, 1995,
they would have increased the Corporation's 1995 return on average common equity
by approximately 1.4 percent, from 13.6 percent to 15.0 percent.
The Corporation's regulatory capital leverage ratio was 6.77 percent for
fourth quarter 1995 compared to 7.03 percent one year earlier. Regulators
require most banking institutions to maintain capital leverage ratios of not
less than 4.0 percent. At December 31, 1995, the Corporation's Tier 1 and Total
Risk-based capital ratios were 8.14 percent and 11.79 percent, respectively,
compared to respective ratios of 8.86 percent and 12.49 percent at December 31,
1994. The 1995 year-end ratios substantially exceeded minimum required
regulatory ratios of 4.0 percent and 8.0 percent, respectively.
8
<PAGE>
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 was 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 HTSB'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 percent. Returns on average assets and equity in 1994 were
0.68 percent and 9.70 percent, respectively, compared to 1993 returns of 0.90
percent and 12.31 percent.
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 1993 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 Bankmont, 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 in 1993. 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. Expenses in 1994 contained the one-time $51.3 million
(pretax) charge in the Securities Lending unit. Expenses in 1993 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 1994, resulting from lower
pretax income. 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 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 1993 to $52.0 million in 1994. At December 31, 1994, the allowance for
possible credit losses was $125 million, or 1.5 percent of total loans
outstanding, compared to the December 31, 1993 allowance of $132 million, or 1.7
percent of loans. Total nonperforming assets declined to $95 million at December
31, 1994, from $113 million at December 31, 1993.
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.
9
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income Harris Bankcorp, Inc. and Subsidiaries
1995
-----------------------------------------------------------
Interest 1995 vs. 1994
----------------------------
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................................................ $ 8,735 $ 777 8.89% $184 $ 92 $ 92
Portfolio securities:
U.S. Treasury and Federal agency.................................... 3,049 189 6.20 46 27 19
State and municipal................................................. 379 42 11.27 (16) (12) (4)
Other............................................................... 154 9 5.74 1 (1) 2
------- ------ ----
Total portfolio securities....................................... 3,582 240 6.72 31 23 8
Trading account assets............................................... 65 5 7.03 2 2 -
Interest-bearing deposits at banks................................... 9 1 3.92 - 1 (1)
Federal funds sold and securities purchased under agreement
to resell.......................................................... 276 17 6.01 (2) (9) 7
------- ------ ----
Total domestic earning assets/interest income.................... 12,667 1,040 8.22 215 99 116
------- ------ ----
Foreign offices:
Loans, including fees................................................ 50 2 3.91 1 - 1
Interest-bearing deposits at banks................................... 557 38 6.37 8 (5) 13
Federal funds sold and securities purchased under agreement
to resell.......................................................... 55 2 5.00 - (1) 1
------- ------ ----
Total foreign earning assets/interest income..................... 662 42 6.07 9 (5) 14
------- ------ ----
Total domestic and foreign earning assets/interest income............ $13,329 $1,082 8.12 224 87 137
======= ------ ----
Supporting Liabilities/Interest Expense
Domestic offices:
Interest checking deposits........................................... $ 629 14 2.24 1 (1) 2
Money market accounts................................................ 1,038 40 3.87 6 (4) 10
Savings deposits and certificates.................................... 2,442 122 4.98 40 10 30
Other interest-bearing time deposits................................. 665 40 5.91 9 (1) 10
------- ------ ----
Total interest-bearing deposits.................................. 4,774 216 4.51 56 4 52
Short-term borrowings................................................ 2,909 165 5.66 58 18 40
Senior notes......................................................... 512 31 6.08 31 31 -
Long-term notes...................................................... 300 23 7.67 3 - 3
------- ------ ----
Total domestic interest-bearing liabilities/interest expense..... 8,495 435 5.11 148 40 108
------- ------ ----
Foreign offices:
Time deposits........................................................ 2,400 143 5.97 54 16 38
Short-term borrowings................................................ 101 4 4.31 2 - 2
------- ------ ----
Total foreign interest-bearing liabilities/interest expense...... 2,501 147 5.90 56 14 42
------- ------ ----
Total domestic and foreign interest-bearing liabilities/interest
expense............................................................ 10,996 582 5.29 204 53 151
Other noninterest-bearing supporting liabilities..................... 2,333 - - - - -
------- ------ ----
Total domestic and foreign supporting liabilities/interest
expense............................................................ $13,329 582 4.37 204 53 151
======= ------ ----
Total net interest income from domestic and foreign offices.......... $ 500 3.75% $ 20 $ 34 $(14)
====== ==== ==== ==== ====
</TABLE>
1. Fully taxable equivalent adjustment
Tax-exempt interest income (for Federal purposes) has been restated to a
comparable taxable level. The statutory tax rate used for this purpose was 35
percent in 1995, 1994, and 1993.
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.
4. Average rate on portfolio securities
Yields on the portion of average portfolio securities classified as available
for sale are based on amortized cost.
10
<PAGE>
<TABLE>
<CAPTION>
Harris Bankcorp, Inc. and Subsidiaries
1994 1993
--------------------------------------------------------- -----------------------------
Interest 1994 vs. 1993
---------------------------
Increase (Decrease)
(Fully taxable equivalent due to change in
basis, dollars in Average Average Net ------------------ Average Average
millions) Balance Interest Rate Change Volume Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets/Interest
Income
Domestic offices:
Loans, including fees....... $ 7,629 $593 7.78% $ 78 $49 $ 29 $ 6,989 $515 7.37%
Portfolio securities:
U.S. Treasury and Federal
agency.................... 2,582 143 5.53 14 9 5 2,422 129 5.33
State and municipal........ 480 58 12.09 (2) (1) (1) 485 60 12.30
Other...................... 171 8 4.85 4 4 - 87 4 5.02
------- ---- ---- ------- ----
Total portfolio
securities............... 3,233 209 6.47 16 16 - 2,994 193 6.46
Trading account assets...... 40 3 7.02 (4) (5) 1 110 7 5.92
Interest-bearing deposits
at banks................... 12 1 8.73 - (1) 1 38 1 3.72
Federal funds sold and
securities purchased
under agreement to resell.. 460 19 4.13 2 (1) 3 499 17 3.36
------- ---- ---- ------- ----
Total domestic earning
assets/interest
income................... 11,374 825 7.26 92 54 38 10,630 733 6.90
------- ---- ---- ------- ----
Foreign offices:
Loans, including fees....... 43 1 1.69 - - - 56 1 1.27
Interest-bearing deposits
at banks................... 675 30 4.40 6 2 4 640 24 3.72
Federal funds sold and
securities purchased
under agreement to resell.. 76 2 3.29 2 2 - 24 1 2.76
------- ---- ---- ------- ----
Total foreign earning
assets/interest income... 794 33 4.14 8 4 4 720 26 3.50
------- ---- ---- ------- ----
Total domestic and foreign
earning assets/interest
income..................... $12,168 858 7.05 100 58 42 $11,350 759 6.68
======= ---- ---- ======= ----
Supporting Liabilities/
Interest Expense
Domestic offices:
Interest checking deposits.. $ 664 13 1.99 - - - $ 639 13 1.99
Money market accounts....... 1,170 34 2.88 1 (2) 3 1,235 33 2.64
Savings deposits and
certificates............... 2,189 82 3.78 3 1 2 2,165 80 3.69
Other interest-bearing
time deposits.............. 696 31 4.42 13 7 6 528 18 3.48
------- ---- ---- ------- ----
Total interest-bearing
deposits................. 4,719 160 3.40 17 6 11 4,567 144 3.14
Short-term borrowings....... 2,527 107 4.22 35 10 25 2,256 72 3.18
Long-term notes............. 299 20 6.53 (7) - (7) 299 26 8.84
------- ---- ---- ------- ----
Total domestic
interest-bearing
liabilities/interest
expense.................. 7,545 287 3.80 45 16 29 7,122 242 3.39
------- ---- ---- ------- ----
Foreign offices:
Time deposits............... 2,072 89 4.33 33 10 23 1,780 57 3.18
Short-term borrowings....... 128 2 1.35 1 - 1 76 1 1.73
------- ---- ---- ------- ----
Total foreign
interest-bearing
liabilities/
interest expense......... 2,200 91 4.15 34 10 24 1,856 58 3.12
------- ---- ---- ------- ----
Total domestic and foreign
interest-bearing
liabilities/interest
expense.................... 9,745 378 3.88 79 26 53 8,978 300 3.34
Other noninterest-bearing
supporting liabilities..... 2,423 - - - - - 2,372 - -
------- ---- ---- ------- ----
Total domestic and foreign
supporting liabilities/
interest expense........... $12,168 378 3.10 79 26 53 $11,350 300 2.64
======= ---- ---- ======= ----
Total net interest income
from domestic and
foreign offices............ $480 3.95% $ 21 $32 $(11) $459 4.04%
==== ===== ==== === ==== ==== =====
</TABLE>
11
<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
tax-advantaged income to a comparable level. In 1995, the Corporation's FTE net
interest income was $500.3 million, up 4 percent from $480.4 million in 1994.
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
1995, the Corporation's average earning assets grew 10 percent, while net
interest margin decreased 20 basis points from 3.95 percent in 1994 to 3.75
percent in 1995.
Average earning assets in 1995 totaled $13.33 billion, up $1.16 billion, or
10 percent, from $12.17 billion in 1994. This growth is primarily the result of
an increase in average loans of $1.11 billion, or 15 percent, to $8.79 billion,
led by increases in average commercial, charge card, real estate and installment
loan outstandings of $608 million (12 percent), $232 million (31 percent), $174
million (14 percent), and $85 million (20 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. Average portfolio
securities increased $349 million, or 11 percent, to $3.58 billion primarily as
a result of increased holdings of Federal agency securities of $542 million.
Loans and portfolio securities, as a percent of earning assets, were 65.9
percent and 26.9 percent, respectively, compared to 63.1 percent and 26.6
percent, respectively, in 1994. Average federal funds sold and securities
purchased under agreement to resell decreased approximately 38 percent, or $206
million, year to year.
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. Nearly all major
categories of supporting liabilities increased year to year. The issuance of new
senior notes totaling $512 million accounted for the largest increase in
supporting liabilities. Short-term borrowings rose $356 million or 13 percent
from 1994 levels. Federal funds purchased and securities sold under agreement to
repurchase grew $329 million, representing 93 percent of the growth in short-
term borrowings. Domestic interest-bearing deposits increased $56 million, or 1
percent, from one year ago. Average foreign office time deposits totaled $2.4
billion, up 16 percent or $328 million, compared to $2.1 billion in 1994.
Noninterest-bearing funds supporting earning assets decreased $90 million, and
declined from 20 percent to 18 percent year to year as a percentage of average
supporting liabilities.
The Corporation's consolidated net interest margin declined to 3.75 percent
from 3.95 percent in the prior year. This decrease reflects rate compression
within certain asset categories, the maturity of certain higher-yielding
municipal bond holdings, the narrowed relationship which existed in the market
between short and longer term rates (i.e. flattened yield curve), the relative
decline in noninterest-bearing funds and sales and maturities of portfolio
securities where proceeds were reinvested at slightly lower yields. This was
somewhat offset by an improved mix of earning assets resulting from the
aforementioned loan growth.
12
<PAGE>
<TABLE>
<CAPTION>
Noninterest Income
Increase (Decrease) Increase (Decrease)
Years Ended December 31 1995 vs. 1994 1994 vs. 1993
-------------------------------- ------------------- ---------------------
(dollars in thousands) 1995 1994 1993 Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment management fees $149,979 $148,094 $148,809 $ 1,885 1 $ (715) --
Trading account....................... 5,110 (396) 5,258 5,506 + (5,654) (108)
Foreign exchange...................... 14,248 19,769 24,302 (5,521) (28) (4,533) (19)
Charge card........................... 41,788 37,402 36,516 4,386 12 886 2
Service fees and charges.............. 69,333 73,621 77,774 (4,288) (6) (4,153) (5)
Securities gains...................... 23,379 5,254 13,038 18,125 + (7,784) (60)
Other................................. 34,436 30,700 31,391 3,736 12 (691) (2)
-------- -------- -------- -------- --------
Total noninterest income............ $338,273 $314,444 $337,088 $ 23,829 8 $(22,644) (7)
======== ======== ======== ======== ==== ======== ====
</TABLE>
Noninterest income for the year was $338.3 million in 1995, up $23.8 million or
8 percent from 1994, primarily due to an $18.1 million increase in net gains
from the sale of debt securities. During the second quarter of 1995, conditions
in the U.S. bond market led to significant price rallies, enabling the
Corporation to sell certain U.S. government agency securities and reinvest the
proceeds to reposition its portfolio and take advantage of profit opportunities
not typically available.
Trading account gains, primarily from municipal bond trading, totaled $5.1
million up $5.5 million from the prior year when these activities reported
losses of $.4 million. Financial results from trading activities will typically
exhibit greater fluctuations over time than other business activities. Charge
card fees were $41.8 million in 1995, up $4.4 million or 12 percent from the
previous year as a result of charge card loan volume increases. Trust and
investment management fees were $150.0 million up $1.9 million or 1 percent from
the prior year. On January 11, 1996 the Corporation announced the sale of its
securities custody and related trustee services business for large institutions
to Citibank. After restructuring charges, it is estimated that the net gain on
the sale will approximate $4.0 million in 1996. The sale of the custody business
for large institutions is not expected to have a material impact on 1996
earnings.
Foreign exchange revenues were $14.2 million, down $5.5 million or 28
percent from 1994. Effective April 3, 1995, the Corporation and BMO agreed to
combine their U.S. foreign exchange activities ("FX"). Under this arrangement,
FX net profit will be shared by the Corporation and BMO in accordance with a
specific formula set forth in the agreement. This agreement expires in April
2002 but may be extended at that time. Either party may terminate the
arrangement at its option. Beginning with second quarter 1995, FX revenues were
reported net of expenses. This agreement did not have a material impact on the
Corporation's 1995 net income or financial position as of December 31, 1995.
Service fees and charges were $69.3 million, down $4.3 million or 6 percent from
last year due to the higher interest rate environment and customer refunds with
respect to FDIC insurance.
<TABLE>
<CAPTION>
Noninterest Expense
Increase (Decrease) Increase (Decrease)
Years Ended December 31 1995 vs. 1994 1994 vs. 1993
--------------------------------- ------------------ -------------------
(dollars in thousands) 1995 1994 1993 Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation..... $260,539 $246,200 $243,739 $ 14,339 6 $ 2,461 1
Pension, profit sharing and other
employee benefits.................. 57,763 66,370 62,019 (8,607) (13) 4,351 7
Net occupancy....................... 46,099 45,052 46,676 1,047 2 (1,624) (3)
Equipment........................... 42,541 42,284 43,396 257 1 (1,112) (3)
Marketing........................... 25,583 24,632 22,613 951 4 2,019 9
Communication and delivery.......... 20,251 17,732 17,916 2,519 14 (184) (1)
Deposit insurance................... 8,124 15,684 15,047 (7,560) (48) 637 4
Trust customer charge............... -- 51,335 -- (51,335) (100) 51,335 100
Other............................... 99,203 94,839 100,681 4,364 5 (5,842) (6)
-------- -------- -------- -------- ---------
Total noninterest expenses........ $560,103 $604,128 $552,087 $(44,025) (7) $ 52,041 9
======== ======== ======== ========= === ========= ==
</TABLE>
Noninterest expenses totaled $560.1 million, down $44.0 million or 7 percent
from 1994. In 1994, the Corporation recorded a one-time $51.3 million pretax
charge to absorb the impact of higher interest rates on mortgage-backed
securities held in certain customer accounts of HTSB's Securities Lending unit.
Excluding the effect of this item, 1995 noninterest expenses would have
increased $7.3 million or 1 percent from 1994 and 1994 noninterest expenses
would have approximated 1993 levels.
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
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 con-
13
<PAGE>
cern 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, BMO. Sales prices were determined based on
available market quotations, which resulted in a loss approximating $51.3
million ($33.4 million after-tax). At 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.
Deposit insurance was $8.1 million, down $7.6 million or 48 percent from
1994, reflecting lower FDIC insurance premiums in 1995, primarily in the latter
half of the year. These premiums, assessed at individual bank subsidiaries, were
reduced for U.S. banks with favorable risk characteristics.
Employment expenses were $318.3 million, up $5.7 million or 2 percent from
the previous year, reflecting normal salary increases, greater incentive
payments attributable to substantially stronger earnings performance partially
offset by reduced pension and retiree medical expenses. Communication and
delivery expenses were $20.3 million, an increase of $2.5 million or 14 percent
over 1994 due primarily to postage and printing for promotions and increased use
of communications technology. Net occupancy costs were $46.1 million, up $1.0
million or 2 percent from 1994 reflecting increased rental expenses partially
offset by lower real estate taxes and building maintenance.
1993 noninterest expenses included the reversal of $7.2 million of reserves
previously recorded for anticipated costs of customer guarantees that were no
longer necessary.
Income Taxes
The Corporation recorded income tax expense of $70.2 million in 1995, compared
to $24.5 million in 1994, primarily due to higher (approximately $89.7 million
FTE) pretax earnings and a reduction in the current year's tax-exempt income.
The Corporation's effective tax rate increased to 32.2% in 1995 from 20.1% in
1994.
At December 31, 1995, the Corporation's Federal and Illinois net deferred
tax assets were $62.4 million and $12.1 million, respectively. The Corporation
has fully recognized both its Federal and Illinois deferred tax assets. Current
taxable income and taxable income generated in the statutory carryback period is
sufficient to support the entire Federal and Illinois deferred tax assets.
The deferred taxes reported on the Corporation's Statement of Condition at
December 31, 1995 also include a $17.8 million liability 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.
Impact of New Accounting Standards
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement
applies to long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and to long-lived assets and certain
identifiable intangibles to be disposed of. The Statement requires that long-
lived assets to be held and used be reviewed for impairment when events indicate
that the carrying value of an asset may not be recoverable and that impairment
be measured based on the fair value of the asset. The Statement requires that
long-lived assets to be disposed of be reported at the lower of carrying value
or fair value less cost to sell, except for assets covered by APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. This Statement is effective for fiscal years beginning
after December 15, 1995. The Corporation intends to adopt the Statement in 1996
and does not expect it to have a material effect on the Corporation's financial
position or results of operations.
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. This Statement amends SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. The Statement applies to transactions in which a
mortgage banking enterprise acquires mortgage servicing rights through the
purchase or origination of mortgage loans and then sells or securitizes those
loans with servicing rights retained by the seller. The Statement requires that
the rights to service mortgage loans for others be recognized as separate assets
by allocating the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. The Statement also requires that the capitalized mortgage
servicing rights be periodically evaluated for impairment based on the fair
value of those rights. The Statement applies prospectively in fiscal years
beginning after December 15, 1995. The Corporation intends to adopt the
Statement in 1996 and does not expect it to have a material effect on the
Corporation's financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement applies to transactions in which an employer issues
shares of its stock or other equity instruments to employees or incurs
liabilities to employees based on the price of its stock or other equity
instruments. The Statement also applies to transactions in which an entity
issues shares of its stock or other equity instruments to nonemployees in
exchange for goods or services. The Statement establishes a fair value based
method of accounting for stock-based compensation plans and proposes the use of
that method rather than an intrinsic value based method as prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees. The Statement is
effective for fiscal years beginning after December 15, 1995. At 1995 year-end,
the Corporation had no stock options outstanding. During the first quarter of
1996, options were issued to certain executives of the Corporation's
subsidiaries enabling them to acquire Bank of Montreal shares under specific
circumstances. The Corporation is currently evaluating the alternatives
available under SFAS No. 123 but does not believe that the impact of adopting
the Statement will be material.
14
<PAGE>
On November 15, 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. As described in detail in Question 61 of that report, an
enterprise was allowed to conduct a one-time reassessment of the classifications
of securities held. Any reclassifications from the held-to-maturity category
made in conjunction with that reassessment will not call into question an
enterprise's intent to hold other debt securities to maturity in the future and
must be accounted for as transfers in accordance with paragraph 15 of Statement
115 and disclosed in accordance with Paragraph 22. The FASB intended that any
resulting one-time reclassifications would occur on a single date between
November 15, 1995 and December 31, 1995. The Corporation reclassified all held-
to-maturity securities to available-for-sale on December 29, 1995. The
transaction did not have a material effect on the Corporation's financial
position. For additional information, see Note 2 to Financial Statements on page
41 of this Report.
Return on Assets and Common Stockholder's Equity
Return on assets, measured by net income as a percentage of average total
assets, was .95 percent in 1995 compared with .68 percent in 1994. The current
year's return on assets was higher than the average return on assets of .84
percent for the five-year period ended December 31, 1995. Average common
stockholder's equity to average total assets provides a measure of leverage for
the Corporation. Return on common stockholder's equity is computed by dividing
return on assets by this leverage ratio. The ratio of average common
stockholder's equity to average total assets was 6.99 percent in 1995 compared
to 7.06 percent in 1994. For 1995, the return on common stockholder's equity was
13.61 percent, up from the 9.70 percent achieved in 1994 and greater than the
12.21 percent five-year average return for the period ended December 31, 1995.
Returns on both average assets and common stockholder's equity in 1994 were
adversely affected by the one-time $33.4 million after-tax charge related to
HTSB's Securities Lending unit. Excluding this charge, in 1994 return on assets
would have been approximately .92 percent and return on common equity would have
been approximately 13.02 percent.
<TABLE>
<CAPTION>
(Based on net income and daily averages) Years Ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on assets (1)........................................................................... .95% .68% .90%
Common stockholder's equity as a percentage of total assets (1)................................ 6.99 7.06 7.31
Return on common stockholder's equity (1)...................................................... 13.61 9.70 12.31
Dividend payout ratio (2)...................................................................... 178.04 35.69 48.09
Earnings retained as a percentage of common stockholder's equity (3)........................... (10.62) 6.24 6.39
Percentage growth (decline) in total average assets............................................ 9.13 8.70 (.61)
</TABLE>
(1) Total average assets and average common equity used in these calculations
include average gross and net unrealized gains or losses on available for sale
securities, respectively.
(2) Dividends as a percent of net income. 1995 ratio includes the impact of a
$205 million special dividend as part of a capital restructuring. Excluding the
payment of the special dividend, the dividend payout ratio would have been 39.11
percent.
(3) Earnings retained is defined as net income minus dividends. 1995 includes
the impact of a $205 million special dividend as part of a capital
restructuring. Excluding the payment of the special dividend, earnings retained
as a percentage of common stockholder's equity would have been 8.29 percent.
Capital Position
The Corporation's equity capital of $1.15 billion at December 31, 1995, has
increased significantly from five years earlier when equity capital amounted to
$805 million. Growth has come primarily from the of earnings and the recent
issuance of preferred stock. During 1995, Bankcorp declared and paid $262.7
million of cash dividends, including a $205 million special dividend as part of
a capital restructuring. For additional information see the Summary of 1995
Compared to 1994 section of this Report. During 1994 and 1993, dividends
declared and paid amounted to $34.7 million and $56.6 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 1995, the Corporation's equity capital was increased by
$59.8 million of after-tax unrealized holding gains related to the Corporation's
debt and equity securities classified as available for sale. During 1994, equity
capital was reduced by $59.1 million of after-tax unrealized holding losses.
Average consolidated equity capital for 1995 was $1.1 billion, compared with the
1994 average of $1.0 billion and the 1993 average of $956 million.
Bankcorp's double leverage ratio, which is the Bankcorp parent company-only
net equity investment in bank and nonbank subsidiaries and other equity
investments as a percentage of its equity capital, was 103 percent at December
31, 1995, up from 101 percent at December 31, 1994. 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.
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 cer-
15
<PAGE>
tain 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 1995, 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 8.14 percent and 11.79 percent, respectively, at
December 31, 1995.
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 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 6.77 percent for fourth quarter 1995
and 7.03 percent for fourth quarter 1994.
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, 1995, all of the
Corporation's subsidiary banks were designated as "well capitalized" at year-end
1995, 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, 1995, the Corporation's intangible assets totaled
$38.4 million, including approximately $1.0 million of intangibles excluded
under the new rules and an additional $16.5 million of goodwill excluded under
1992 guidelines. The Corporation's tangible Tier 1 leverage ratio (which
excludes all intangibles) was 6.65 percent for the fourth quarter of 1995.
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 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. This
amendment did not 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 $27.1 million and $(32.7) million at December 31, 1995 and 1994,
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 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ending assets...................................... $15,676,201 $15,331,539 $13,517,834
=========== =========== ===========
Average assets (fourth quarter).................... $16,325,680 $14,668,264 $13,233,445
=========== =========== ===========
Risk-based on-balance-sheet assets................. $10,336,569 $ 9,078,759 $ 8,293,915
Risk-based off-balance-sheet assets................ 3,203,701 2,580,005 2,462,117
----------- ----------- -----------
Total risk-based assets........................... $13,540,270 $11,658,764 $10,756,032
=========== =========== ===========
Tier 1 capital..................................... $ 1,100,899 $ 1,033,481 $ 968,386
Supplementary capital.............................. 492,911 423,254 430,071
----------- ----------- -----------
Total capital..................................... $ 1,593,810 $ 1,456,735 $ 1,398,457
=========== =========== ===========
Tier 1 leverage ratio.............................. 6.77% 7.03% 7.33%
Risk-based ratios:
Tier 1............................................ 8.14% 8.86% 9.00%
Total............................................. 11.79% 12.49% 13.00%
============ ============ ===========
</TABLE>
16
<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 36 percent of the Corporation's
total assets and amounted to $5.65 billion at December 31, 1995 compared to
liquid assets of $5.18 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. HTSB
offers to institutional investors 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. The notes are subordinated to deposits and rank pari passu with
all other senior unsecured indebtedness of HTSB. As of December 31, 1995, $478
million of short-term notes were outstanding with maturities and interest rates
ranging from 29 to 180 days and 5.50 to 5.79 percent, respectively. There were
no outstandings under this program at December 31, 1994.
The Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and certificates, and
money market accounts remained consistent with 1994. Core deposits represented
51.9 percent of average supporting liabilities in 1995 down from 56.6 percent in
1994. Average money market liabilities increased 13 percent to $3.01 billion
from $2.65 billion for 1994, primarily as a result of increases in Federal funds
borrowed and securities sold under repurchase agreements slightly offset by a
decrease in commercial paper. Average money market assets decreased $326.3
million or 26.7 percent from 1994 mainly as a result of the increase in loans
and portfolio securities. These assets represented 7 percent of average earning
assets in 1995 compared to 10 percent one year ago.
The Corporation, in connection with the issuance of commercial paper and
for other corporate purposes, has a $150 million revolving credit agreement with
five nonaffiliated banks and BMO that terminates on December 18, 1999. There
were no borrowings under this credit facility in 1995 or 1994.
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.
17
<PAGE>
<TABLE>
<CAPTION>
Repricing
Period
--------------------------------------------
1-31 32-90 91-365 1-5 Over 5 Nonrepricing
(in millions) December 31, 1995 days days days years years Items Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans.......................................... $7,334 $ 81 $ 495 $1,109 $ 482 $ 17 $ 9,518
Portfolio and trading account securities....... 569 72 879 971 948 5 3,444
Interest-bearing deposits at banks.............. 252 187 19 -- -- -- 458
Federal funds sold and securities purchased
under agreement to resell..................... 180 -- -- -- -- -- 180
Other assets................................... 1 1 2 20 21 2,031 2,076
------ ------ ------ ------ ------ ------- -------
Total assets.................................... 8,336 341 1,395 2,100 1,451 2,053 $15,676
------ ------ ------ ------ ------ ------- =======
Liabilities and Stockholder's Equity
Time deposits.................................. 2,394 1,038 770 408 21 -- 4,631
Savings and interest checking deposits......... 2,554 -- -- -- -- -- 2,554
Noninterest-bearing deposits................... -- -- -- -- -- 3,044 3,044
------ ------ ------ ------ ------ ------- -------
Total deposits.................................. 4,948 1,038 770 408 21 3,044 10,229
Federal funds purchased and securities sold
under agreement to repurchase................. 1,869 10 9 7 2 -- 1,897
Other interest-bearing liabilities............. 1,316 297 200 -- 164 -- 1,977
Other noninterest-bearing liabilities.......... -- -- -- -- -- 427 427
Stockholder's equity........................... -- -- -- -- -- 1,146 1,146
------ ------ ------ ------ ------ ------- -------
Total liabilities and stockholder's equity...... 8,133 1,345 979 415 187 4,617 $15,676
------ ------ ------ ------ ------ ------- =======
Interest sensitivity gap before net interest
rate swaps, derivative products and forward
commitments................................... 203 (1,004) 416 1,685 1,264 (2,564)
Net interest rate swaps......................... -- 26 14 (40) -- --
Derivative products and forward commitments..... -- 44 -- -- (44) --
------ ------ ------ ------ ------ -------
Interest sensitivity gap....................... $ 203 $ (934) $ 430 $1,645 $1,220 $(2,564)
====== ====== ====== ====== ====== =======
Cumulative gap................................. $ (731) $ (301) $1,344 $2,564
====== ====== ====== ======
</TABLE>
The schedule above presents the Corporation's consolidated interest
sensitivity gap at December 31, 1995. 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, 1995, the Corporation had a cumulative negative
one-year interest rate gap of $301 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, 1995, simulations
indicate that for an immediate 100 basis point upward movement in interest
rates, net interest income would increase by approximately $8 million over the
next year compared to what it would otherwise have been, and the change in the
value of all gap positions, contractual and non-contractual, would be $55
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 37 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 loans, portfolio securities, money
market assets, subsidiaries, and fixed assets. Financing cash flows include
both infusions from and dividend payments to stockholders, along with borrowings
and principal repayments to bondholders or other creditors.
18
<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 $266 million in 1995 and $133 million in
1994. The change in cash flows from operations, from year to year, was mainly
due to increases in net income before provision for credit losses and gains on
sales of portfolio securities. Year-end trading account assets increased $63
million year to year, while loans held for sale (primarily residential
mortgages) increased $21 million.
In 1995, the Corporation's investing activities utilized a total of $252
million in net cash. Loans, the primary use of new funds, increased $1.31
billion. Interest-bearing deposits at banks decreased $300 million, Federal
funds sold and securities purchased under agreement to resell decreased $225
million, and portfolio securities decreased $421 million in 1995.
In 1995, the Corporation's financing activities included accepting customer
deposits, purchasing Federal funds and issuing long-term notes, short-term
senior notes and preferred stock. Financing activities provided $192 million of
net cash to the Corporation in 1995. Deposits increased $309 million. In
addition, net new short-term senior notes and preferred stock of $478 million
and $180 million, respectively, were issued. 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.
Since 1992, the Corporation has had three significant noncash transactions.
On December 29, 1995, all held to maturity securities were reclassified to
available for sale. See Portfolio Securities section below for further
information. 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 are
marked to market on the Corporation's Consolidated Statement of Condition. On
July 1, 1993, the Corporation paid a $7.2 million dividend-in-kind to Bankmont
related to the transfer of Harris Futures Corporation. 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 55 percent of total
loans in 1995 compared to 57 percent in 1994. Excluding consumer loans, term
loans (those with a remaining contractual maturity in excess of one year)
totaled $1.035 billion. Of these loans, $893 million or 86 percent are due
within five years. Overall, the average FTE yield on total loans increased to
8.89 percent in 1995 from 7.75 percent in 1994. The Corporation's average prime
rate in 1995 was 8.83 percent compared to 7.07 percent in 1994.
<TABLE>
<CAPTION>
Type of loan, by maturity* Within 1 Through Over
(in thousands) December 31, 1995 1 year 5 years 5 years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural................. $4,588,448 $836,911 $139,130 $5,564,489
Real estate construction............................... 136,222 55,919 3,558 195,699
Foreign................................................ 202,692 -- -- 202,692
---------- -------- -------- ----------
$4,927,362 $892,830 $142,688 $5,962,880
========== ======== ======== ==========
Loans with:
Predetermined interest rates.......................... $ 441,967 $223,317 $ 62,116 $ 727,400
Floating interest rates............................... 4,485,395 669,513 80,572 5,235,480
---------- -------- -------- ----------
$4,927,362 $892,830 $142,688 $5,962,880
========== ======== ======== ==========
*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. At December 31, 1995,
available for sale securities included $44.9 million of fair value above
amortized cost, and stockholder's equity included $27.1 million of unrealized
(after tax effect) holding gains.
19
<PAGE>
Portfolio securities averaged $3.57 billion in 1995. On an FTE basis,
interest income from portfolio securities increased $31.6 million to $241
million. The overall FTE yield on the Corporation's portfolio securities
averaged 6.72 percent during 1995. Yields on the portion of average portfolio
securities classified as available for sale are based on amortized cost.
<TABLE>
<CAPTION>
1995 1994 1993
(Fully taxable equivalent yields) ---------------------- ---------------------- --------------------
(Daily balance sheet averages,
dollars in thousands) Years Ended December 31 Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury............................................. $1,536,686 6.10% $1,620,059 6.04% $1,363,711 6.26%
Federal agency............................................ 1,504,096 6.31 962,144 4.69 1,057,879 4.16
State and municipal....................................... 379,337 11.27 479,432 12.09 485,431 12.30
Other..................................................... 153,833 5.74 171,226 4.85 87,245 5.02
---------- ---------- ----------
Total portfolio securities............................... $3,573,952 6.72 $3,232,861 6.47 $2,994,266 6.46
========== ===== ========== ===== ========== =====
</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 1995,
the Corporation purchased $7.09 billion of available for sale securities and
$445 million of held to maturity securities, sold $2.03 billion of available for
sale securities and had $5.22 billion available for sale securities and $714
million held to maturity securities mature. The aforementioned sales of
portfolio securities generated a pretax net gain of $23.4 million during 1995
compared to a net gain of $5.3 million during 1994 and $13.0 million in 1993.
$16.8 million of net gain was realized in the second quarter of 1995 when
conditions in the U.S. bond market led to significant price rallies. These
events enabled the Corporation to sell certain U.S. government agency securities
and reinvest the proceeds to reposition its portfolio and take advantage of
profit opportunities not typically available. On an after-tax basis, the
Corporation recorded a net gain from securities sales of $14.3 million in 1995
compared to $3.2 million in 1994 and $7.9 million in 1993. In some cases,
security gains are taken in order to realize otherwise unrealized profits in
anticipation of near-term increases in interest rates.
On November 15, 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with that report, the Corporation conducted
a one-time reassessment of the classifications of all securities held. As a
result, the Corporation reclassified all held to maturity securities to
available for sale on December 29, 1995. The amortized cost of the transferred
securities was $839 million and the related unrealized gross holding gain was
$20 million.
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.
See Note 2 to Financial Statements, page 41 of this Report for details on
specific types of securities.
Unrealized holding gains for available for sale securities, as of December
31, 1995, amounted to $44.9 million compared to unrealized holding losses of
$54.2 million as of December 31, 1994. The change in net unrealized gains and
losses of $99.1 million was due to gains in market value as a result of declines
in interest rates during the year, a change in the mix of the portfolio and the
aforementioned reclassification of all held to maturity securities.
<TABLE>
<CAPTION>
1995 1994 1993
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
Federal agency................................. -- -- 68,278 1.9 83,824 2.7
State and municipal............................ -- -- 466,965 12.6 475,087 15.0
Other.......................................... -- -- 35,936 1.0 63,969 2.0
---------- ----- ---------- ----
Total held to maturity........................ -- -- 1,107,659 30.0 747,220 23.6
---------- ----- ---------- ----
Available for Sale
U.S. Treasury.................................. 1,205,167 35.6 1,443,169 39.1 1,121,624 35.4
Federal agency................................. 1,740,578 51.3 1,038,460 28.2 1,239,945 39.1
State and municipal............................ 308,805 9.1 11,917 .3 -- --
Other.......................................... 135,417 4.0 87,747 2.4 61,726 1.9
---------- ----- ---------- ----- ---------- -----
Total available for sale...................... 3,389,967 100.0 2,581,293 70.0 2,423,295 76.4
---------- ----- ---------- ----- ---------- -----
Total portfolio securities...................... $3,389,967 100.0 $3,688,952 100.0 $3,170,515 100.0
========== ===== ========== ===== ========== =====
</TABLE>
At year-end 1995, the weighted average maturity of the Corporation's
portfolio securities was 3 years and 3 months, an increase of 1 year from the
average maturity at the end of 1994. The maturity distribution of the investment
portfolio at December 31, 1995, 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, 1995. Yields
on tax-exempt securities have been calculated on an FTE basis.
20
<PAGE>
<TABLE>
<CAPTION>
State, Municipal
U.S.Treasury Federal Agency and Other Total
Weighted Weighted Weighted Weighted
(Fully taxable Average Average Average Average
equivalent yields) -------------------- ------------------- ------------------ -------------------
(dollars in thousands) December 31 Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
Within 1 year......................... $ 509,718 6.21% $ 691,439 5.70% $ 94,911 8.57% $1,296,068 6.14%
1 to 5 years.......................... 600,339 6.35 261,447 6.62 155,696 9.99 1,017,482 7.03
5 to 10 years......................... 79,548 6.42 314,317 6.64 65,789 8.40 459,654 6.87
Over 10 years......................... -- -- 459,491 7.22 19,103 9.24 478,594 7.35
No stated maturity.................... -- -- -- -- 93,311 5.76 93,311 5.76
---------- ---- --------- ---- -------- ---- --------- ----
1995 Total............................ $1,189,605 6.29% $1,726,694 6.42% $428,810 8.48% $3,345,109 6.64%
========== ==== ========== ==== ======== ==== ========== ====
1994 Total............................ $2,016,758 6.08% $1,123,987 5.86% $602,442 10.20% $3,743,187 6.74%
========== ==== ========== ==== ======== ===== ========== ====
1995 Average maturity.................. 1 year 11 months 4 years 3 months 2 years 9 months 3 years 3 months
==================== ==================== ================== ===================
1994 Average maturity.................. 2 years 0 months 1 year 11 months 3 years 9 months 2 years 3 months
==================== ==================== ================== ===================
</TABLE>
Other than securities of the U.S. Government and its agencies and
corporations, at December 31, 1995, 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, 1995.
Deposits
Total deposits in 1995 averaged $10.04 billion, up $321 million or 3 percent
from 1994. Average total deposits in foreign offices experienced the largest
growth, up $325 million or 15 percent over 1994 levels. The growth was
attributed primarily to foreign office time deposits which increased by $328
million to $2.40 billion, up 16 percent from 1994. The Corporation's core
deposits, consisting of demand deposits, interest checking deposits, money
market accounts, passbook and statement savings accounts and savings
certificates grew $36 million or 1 percent to $6.92 billion. Savings
certificates increased by $259 million while money market accounts decreased by
$132 million and demand deposits decreased $51 million, accounting for the net
increase in core deposits. Other time deposits decreased $40 million or 6% from
1994 levels. Daily averages and year to year comparisons are summarized below.
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
Years Ended December 31 1995 vs. 1994 1994 vs. 1993
--------------------------------------- ------------------- -------------------
(Daily averages, dollars in thousands) 1995 1994 1993 Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits................................. $ 2,808,747 $2,859,643 $2,672,152 $ (50,896) (2) $187,491 7
Interest checking deposits...................... 629,448 663,598 639,377 (34,150) (5) 24,221 4
Money market accounts........................... 1,037,963 1,170,181 1,235,487 (132,218) (11) (65,306) (5)
Passbook and statement savings accounts......... 876,412 882,507 823,193 (6,095) (1) 59,314 7
Savings certificates............................ 1,565,689 1,306,542 1,341,390 259,147 20 (34,848) (3)
Other time deposits............................. 682,320 722,373 756,560 (40,053) (6) (34,187) (5)
Deposits in foreign offices..................... 2,435,124 2,110,342 1,813,720 324,782 15 296,622 16
----------- ---------- ---------- --------- --------
Total deposits................................. $10,035,703 $9,715,186 $9,281,879 $ 320,517 3 $433,307 5
=========== ========== ========== ========= == ======== ==
</TABLE>
Interest expense on deposits increased by $109 million or 43 percent in
1995 primarily due to higher effective interest rates. Interest expense on
domestic deposits rose 34 percent from 1994, while interest on foreign office
deposits increased by 60 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 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest checking deposits.................................................................................. 2.24% 1.99% 1.99%
Money market accounts....................................................................................... 3.87 2.88 2.64
Passbook and statement savings accounts..................................................................... 3.71 2.90 2.74
Savings certificates........................................................................................ 5.69 4.37 4.28
Other interest-bearing time deposits........................................................................ 5.91 4.41 3.48
Time deposits in foreign offices............................................................................ 5.97 4.33 3.18
Total interest-bearing deposits............................................................................ 5.00 3.68 3.15
==== ==== ====
</TABLE>
Certificates of deposit in denominations of $100,000 or more issued by
domestic offices totaled $1.12 billion at December 31, 1995. These deposits
totaled $653 million and $753 million at December 31, 1994 and 1993,
respectively. During the past three years, virtually all time deposits in
foreign offices were in denominations of $100,000 or more.
21
<PAGE>
The remaining maturity of domestic office certificates of deposit of
$100,000 or more is as follows:
<TABLE>
<CAPTION>
Domestic office certificates of deposit (in millions) December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maturities:
3 months or less....................................................$ 813 $358 $419
3 to 6 months....................................................... 134 121 171
6 to 12 months...................................................... 76 80 59
Over 12 months...................................................... 100 94 104
------ ---- ----
Total.............................................................$1,123 $653 $753
====== ==== ====
</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,
decreased 27 percent to $897 million in 1995 from $1.22 billion in 1994. The
average yield on money market assets increased from 4.27 percent in 1994 to 6.46
percent in 1995. Interest income earned on these assets increased 11 percent to
$57.9 million in 1995. At December 31, 1995, interest-bearing deposits at banks,
Federal funds sold and reverse repurchase agreements totaled $458 million, $100
million and $79 million, respectively, compared to $757 million, $394 million
and $10 million at year-end 1994. The decrease in money market assets was
primarily the result of accommodating customers' borrowing requirements at the
end of 1995, thereby increasing loan volume.
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
1995, money market liabilities averaged $3.01 billion, an increase of 13 percent
from 1994, when money market liabilities averaged $2.65 billion. The average
rate paid on these borrowings increased from 4.09 percent in 1994 to 5.61
percent in 1995, reflecting generally higher short-term interest rates
experienced by the market during 1995. At December 31, 1995, repurchase
agreements totaled $1.18 billion compared to $1.53 billion at year-end 1994.
Federal funds purchased and securities sold under agreement to repurchase
consist of overnight Federal 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 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Federal funds purchased and securities sold under agreement to repurchase
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of year........................................................... $1,896,817 $2,632,167 $1,861,061
Average interest rate of outstanding borrowings at end of year.............................. 5.14% 5.03% 2.67%
Highest amount outstanding as of any month-end during the year.............................. $2,894,321 $2,632,167 $2,157,770
Daily average amount outstanding during the year............................................ $2,253,142 $1,924,373 $1,682,289
Daily average annualized rate of interest................................................... 5.65% 4.13% 3.14%
</TABLE>
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 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Short-term borrowings
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of year........................................................... $843,049 $670,362 $459,192
Average interest rate of outstanding borrowings at end of year.............................. 5.77% 5.56% 3.22%
Highest amount outstanding as of any month-end during the year.............................. $843,049 $670,362 $489,737
Daily average amount outstanding during the year............................................ $488,042 $435,129 $384,087
Daily average annualized rate of interest................................................... 5.44% 4.02% 3.24%
</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 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Commercial paper
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of year........................................................... $292,022 $306,737 $326,268
Average interest rate of outstanding commercial paper at end of year........................ 5.32% 5.08% 2.95%
Highest amount outstanding as of any month-end during the year.............................. $295,629 $306,737 $326,268
Daily average amount outstanding during the year............................................ $269,569 $295,388 $265,884
Daily average annualized rate of interest................................................... 5.58% 3.89% 2.93%
</TABLE>
22
<PAGE>
Loans
Summary
In 1995, significant year-to-year loan growth occurred among the following loan
categories: manufacturing and processing, public and private service industries,
other financial institutions, mortgages secured by commercial and residential
property, charge card and other installment.
Distribution of Loans by Type of Borrower
<TABLE>
<CAPTION>
(in millions) December 31 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Manufacturing and processing........................................... $1,437.7 $1,065.5 $ 972.9 $ 983.0 $1,258.8
Public and private service industries.................................. 1,968.4 1,738.7 1,593.7 1,511.0 1,469.2
Mining (including oil and gas)......................................... 27.8 8.0 25.2 41.1 25.0
Farmers................................................................ 35.5 35.3 28.0 18.8 14.1
Individuals (single payment)........................................... 344.5 394.3 371.1 488.2 441.0
Loans to purchase and carry securities................................. 76.4 62.7 92.5 115.1 115.9
State and political subdivisions, including industrial revenue bonds... 28.5 37.5 53.8 77.2 110.5
Other commercial....................................................... 607.5 568.4 606.8 513.2 815.0
-------- -------- -------- -------- --------
Total Commercial.................................................... 4,526.3 3,910.4 3,744.0 3,747.6 4,249.5
-------- -------- -------- -------- --------
Commercial banks....................................................... 15.8 14.7 7.8 7.6 41.6
Mortgage companies..................................................... 5.1 4.6 14.3 6.6 -
Finance companies...................................................... 215.4 207.3 188.7 128.3 155.8
Investment companies................................................... 77.4 66.8 64.5 64.3 296.2
Other financial institutions........................................... 393.1 247.8 245.3 144.9 86.3
-------- -------- -------- -------- --------
Total Financial Institutions........................................ 706.8 541.2 520.6 351.7 579.9
-------- -------- -------- -------- --------
Total Brokers and Dealers........................................... 331.4 392.5 448.8 345.8 346.3
-------- -------- -------- -------- --------
Construction........................................................... 195.7 175.5 197.6 193.5 199.6
Mortgages secured by residential property.............................. 1,511.8 1,252.9 1,185.2 1,027.6 1,005.5
Mortgages secured by commercial property............................... 485.0 374.6 378.3 351.3 312.8
-------- -------- -------- -------- --------
Total Real Estate................................................... 2,192.5 1,803.0 1,761.1 1,572.4 1,517.9
-------- -------- -------- -------- --------
Charge card............................................................ 1,095.8 898.3 708.2 638.4 703.4
Other installment...................................................... 478.4 436.8 312.0 306.7 284.9
-------- -------- -------- -------- --------
Total Installment (to individuals).................................. 1,574.2 1,335.1 1,020.2 945.1 988.3
-------- -------- -------- -------- --------
Total Lease Financing............................................... - - - 1.9 4.2
-------- -------- -------- -------- --------
Total Domestic Loans................................................ 9,331.2 7,982.2 7,494.7 6,964.5 7,686.1
-------- -------- -------- -------- --------
Foreign Loans:
Governments and official institutions.................................. 1.0 1.0 1.0 1.0 41.6
Banks and other financial institutions................................. 160.8 250.6 221.6 131.9 189.2
Other, primarily commercial and industrial............................. 40.9 16.2 8.1 5.4 13.8
-------- -------- -------- -------- --------
Total Foreign Loans................................................. 202.7 267.8 230.7 138.3 244.6
-------- -------- -------- -------- --------
Less unearned income.................................................... 16.1 20.7 21.4 19.9 23.8
-------- -------- -------- -------- --------
Loans, net of unearned income.......................................... $9,517.8 $8,229.3 $7,704.0 $7,082.9 $7,906.9
======== ======== ======== ======== ========
</TABLE>
Average loans increased by 15 percent during 1995 compared to 1994. Daily
average loans over the last five years were as follows:
<TABLE>
<CAPTION>
(Daily averages in thousands) Years Ended December 31 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural................................ $5,716,282 $5,107,563 $4,762,573 $5,050,436 $5,175,816
Real estate construction.............................................. 164,575 185,101 193,104 198,759 203,005
Real estate mortgages................................................. 1,257,370 1,062,828 998,256 959,411 803,447
Installment........................................................... 503,073 418,166 318,405 306,786 308,980
Charge card........................................................... 971,565 740,088 613,931 619,721 696,351
Foreign............................................................... 190,816 180,830 178,215 178,541 240,637
Lease financing....................................................... - 10 798 2,678 5,685
---------- ---------- ---------- ---------- ----------
Total loans....................................................... 8,803,681 7,694,586 7,065,282 7,316,332 7,433,921
Less unearned income.................................................. 18,110 22,011 20,474 22,206 26,026
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income........................................ $8,785,571 $7,672,575 $7,044,808 $7,294,126 $7,407,892
========== ========== ========== ========== ==========
</TABLE>
23
<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 $5.87 billion
and $3.65 billion, respectively, of total loans at 1995 year-end.
Risk Management
Summary
In a commercial banking environment, corporate personnel must identify,
quantify, monitor, evaluate and manage the risks inherent in its businesses,
product lines and other activities. Through its risk management framework which
continued to be enhanced during 1995, the Corporation: 1) maintains a clear
philosophy, approach and accountabilities towards risk taking activities in well
documented policies, directives and procedures; 2) fosters an environment where
risks incurred are commensurate with an individual's qualifications, skills and
expertise; 3) implements risk measures and limits to contain, diversify, or
otherwise mitigate certain risks the Corporation faces; and 4) continuously
enhances information flows and reporting to monitor exposures and ensure timely
responses to any change in risk profiles. The risk management framework helps to
ensure the Corporation employs its capital efficiently and achieves returns
commensurate with the risk undertaken.
The Corporation's risk management process includes continuous monitoring
and review of the following classes of risk: 1) Credit risk, which is risk of
loss of principal, interest or revenues due to the obligor's inability or
failure to repay a financial obligation. This includes loan loss risk,
replacement risk, and settlement risk. 2) Position risk, which is risk of loss
associated with taking a position in an asset and is inclusive of interest rate
risk, foreign exchange risk and liquidity risk. 3) Operating risk, which is risk
that systems and control environments do not accurately or safely process
transactions or assets. Legal and regulatory risks are included in this
category. 4) Fiduciary risk, which arises when the Corporation, or its employees
acting purportedly on its behalf, take actions which violate the trust and
confidence properly placed in the Corporation by the client.
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 the Board
Oversight Committees are well defined and 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, any exceptions are dealt with in a timely
manner 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 to Financial Statements on page 49 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 1995 fourth quarter at 5.6
percent and projected to increase to 5.9 percent in 1996, 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 less estimated sales costs. 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
nonperforming loans and other nonperforming assets owned, primarily real estate.
During the first quarter of 1995, the Corporation adopted SFAS No. 114-
Accounting by Creditors for Impairment of a Loan and SFAS No. 118-Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures. For
additional information see Notes 1 and 4 to Financial Statements on pages 39 and
42 of this Report.
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 and charge
card receivables are charged off when 180 and 150 days past due, respectively.
Accrued interest on charge card loans is reversed against interest income when
principal is charged-off. Consumer loans and charge card loans are not normally
placed on nonaccrual status. The purpose of this policy is to avoid excessive
administrative costs for relatively insignificant balances.
24
<PAGE>
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.
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 .58 percent of total loans at
December 31, 1995, compared with 1.15 percent at year-end 1994. 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 $2.9 million in 1995 compared to $3.9 million
a year ago.
<TABLE>
<CAPTION>
(dollars in thousands) December 31 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.......................................................... $50,503 $83,803 $ 91,131 $136,340 $148,210
Restructured loans........................................................ 2,059 2,889 3,262 - 935
------- ------- -------- -------- --------
Total nonperforming loans................................................. 52,562 86,692 94,393 136,340 149,145
Other assets received in satisfaction of debt............................. 2,470 8,071 19,000 18,086 17,255
------- ------- -------- -------- --------
Total nonperforming assets............................................ $55,032 $94,763 $113,393 $154,426 $166,400
======= ======= ======== ======== ========
90-day past due loans, still accruing interest (all domestic)............. $28,302 $31,071 $ 33,491 $ 37,483 $ 30,918
======= ======= ======== ======== ========
Gross amount of interest that would have been
recorded if all year-end nonperforming loans had
been accruing interest at their original terms.......................... $ 4,500 $ 5,278 $ 6,292 $ 10,135 $ 13,502
Interest income actually recognized....................................... 1,572 1,348 2,569 4,164 3,598
------- ------- -------- -------- --------
Interest shortfall, before consideration of any
income tax effect....................................................... $ 2,928 $ 3,930 $ 3,723 $ 5,971 $ 9,904
======= ======= ======== ======== ========
Nonperforming loans to total loans at year-end............................ .55% 1.05% 1.23% 1.92 % 1.89%
Nonperforming assets to total loans at year-end........................... .58 1.15 1.47 2.18 2.10
======= ======= ======== ======== ========
</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, 1995 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 was domestic commercial,
which totaled $4.53 billion, or 48 percent of total outstandings at year-end
1995. Most of these credits were extended to manufacturing and service-related
companies. Outstandings to machinery industries represented 22 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 38 percent of all service-related credits and 8 percent of total
loans.
Foreign loans totaled $203 million at year-end 1995, accounting for 2
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 26 of this Report.
Real estate loans, including residential mortgages, totaled $2.19 billion
at December 31, 1995, or 23 percent of total outstandings. Mortgages
collateralized by residential property totaled $1.51 billion, or 16 percent of
loans. Commercial real estate mortgages and construction loans totaled $681
million at the end of 1995, representing 7 percent of loans. Further details on
the Corporation's commercial real estate outstandings can be found on page 27 of
this Report.
25
<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, 1995, 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
1995 (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............................................................................ $253,987 $246,000 $7,987
1994 (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
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
</TABLE>
At December 31, 1995, 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.
26
<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 phenomenon tends
to be cyclical and varies by location.
As of December 31, 1995, the Corporation, primarily through its banking
subsidiaries, had outstanding commercial real estate loans of approximately $681
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 $6.4 million were
classified as nonperforming assets representing less than 1% of total
consolidated loans. There were no material charge-offs related to commercial
real estate loans during 1995 or 1994. Other real estate owned and other assets
received in satisfaction of debt were $2.5 million at December 31, 1995,
compared to $8.1 million at December 31, 1994, and comprised approximately 4% 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
periodic 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.
Commitments, including outstandings, represented less than 3 percent of the
Corporation's outstanding loans at December 31, 1995.
27
<PAGE>
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 its
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 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 12
percent, 11 percent, 23 percent, 24 percent and 27 percent of the consolidated
allowance for possible credit losses was represented by doubtful portions of
loans at December 31, 1995, 1994, 1993, 1992, and 1991, respectively. At
December 31, 1995, the Corporation had allocated $14.9 million to loans
internally categorized as doubtful, compared to $13.6 million at year-end 1994.
At December 31, 1995, the Corporation designated all of the allocated
portion of the allowance to cover total domestic credit exposure, compared to
$102.4 million and $3.8 million for domestic and foreign, respectively, at
December 31, 1994 due to declining foreign credit exposure.
During 1995, the provision for credit losses decreased to $43.0 million,
compared to $45.0 million in 1994. At year-end 1995, the allowance for possible
credit losses was $129.3 million, or 1.36 percent of total loans outstanding,
compared to $124.7 million or 1.52 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 1995, the ratios of the allowance for possible credit
losses to total loans and to nonperforming loans were 1.36% and 246%,
respectively. Both ratios are acceptable when compared to peers and are adequate
when considered in conjunction with the previously-mentioned criteria.
Accordingly, the 1995 provision for credit losses was established, in part, to
achieve these ratios.
Net charge-offs in 1995 were $38.5 million, or .44 percent of average loans
outstanding as compared to $52.0 million, or .68 percent of average loans
outstanding in 1994. Net charge-offs of domestic commercial loans amounted to
$9.9 million in 1995, or .17 percent of average domestic commercial loans
outstanding, down from $24.7 million, or .48 percent of average domestic
commercial loans outstanding in 1994. The charge card portfolio experienced net
charge-offs of $27.4 million and $21.3 million in 1995 and 1994, respectively,
or 2.82 percent and 2.88 percent, respectively, of average outstandings.
Installment loans, including real estate mortgages, had net charge-offs of $1.3
million in 1995, or 0.8 percent of average outstandings, down from $5.9 million,
or .40 percent of average outstandings in 1994. Over the five-year period ending
December 31, 1995, combined net charge-offs were .81 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
Board. At December 31, 1995 and 1994, the Corporation was not required to
maintain any special reserve under the aforementioned regulation.
28
<PAGE>
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.
<TABLE>
<CAPTION>
Allocation Of The Allowance For Possible Credit Losses
1995 1994
------------------------ ------------------------
Loan category Loan category
as a % of as a % of
(dollars in thousands) December 31 Allowance Total Loans Allowance Total Loans
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allocated Portion:
Commercial.......................................... $ 59,255 65.5% $ 60,897 65.4%
Retail, including charge card....................... 39,227 32.4 41,523 31.4
Foreign............................................. - 2.1 3,819 3.2
-------- ----- -------- -----
Total Allocated Portion.............................. 98,482 100.0% 106,239 100.0%
===== =====
Unallocated Portion.................................. 30,777 N/A 18,495 N/A
-------- --------
Total................................................ $129,259 $124,734
======== ========
</TABLE>
<TABLE>
<CAPTION>
Analysis of Allowance for Possible Credit Losses
(dollars in thousands) Years Ended December 31 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance.................................. $ 124,734 $ 131,676 $ 130,123 $ 125,091 $ 124,829
---------- ---------- ---------- ---------- ----------
Charge-offs:
Commercial, financial and agricultural............ 20,967 31,900 43,537 54,565 43,114
Real estate construction.......................... 2,644 65 - 29 -
Installment and real estate mortgages............. 2,442 7,581 3,446 3,414 3,460
Charge card*...................................... 35,914 30,360 35,145 39,048 44,004
Foreign........................................... - - - - -
---------- ---------- ---------- ---------- ----------
Total charge-offs................................ 61,967 69,906 82,128 97,056 90,578
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and agricultural............ 11,063 7,216 10,657 3,859 2,853
Real estate construction.......................... 2,867 21 - - -
Installment and real estate mortgages............. 1,093 1,646 783 1,136 1,135
Charge card....................................... 8,474 9,041 9,378 9,295 5,434
Foreign........................................... - - 28 10,238 2,108
---------- ---------- ---------- ---------- ----------
Total recoveries................................. 23,497 17,924 20,846 24,528 11,530
---------- ---------- ---------- ---------- ----------
Net charge-offs.................................. 38,470 51,982 61,282 72,528 79,048
---------- ---------- ---------- ---------- ----------
Provisions charged (credited) to expense:
Domestic.......................................... 46,814 44,922 61,707 89,083 82,063
Foreign........................................... (3,819) 118 1,128 (11,523) (2,753)
---------- ---------- ---------- ---------- ----------
Total provisions................................. 42,995 45,040 62,835 77,560 79,310
---------- ---------- ---------- ---------- ----------
Ending balance..................................... $ 129,259 $ 124,734 $ 131,676 $ 130,123 $ 125,091
========== ========== ========== ========== ==========
Net loans, end of period........................... $9,517,797 $8,229,254 $7,703,957 $7,082,861 $7,906,892
========== ========== ========== ========== ==========
Net loans, daily averages.......................... $8,785,571 $7,672,575 $7,044,808 $7,294,126 $7,407,892
========== ========== ========== ========== ==========
Ratios:
Net charge-offs to average
loans outstanding................................ .44% .68% .87% .99% 1.07%
Allowance for possible credit losses to
loans outstanding (end of period)................ 1.36 1.52 1.71 1.84 1.58
Allowance for possible credit losses to
nonperforming loans (end of period).............. 246 144 139 95 84
Allowance for possible credit losses
to nonperforming assets.......................... 235 132 116 84 75
Net charge-offs to allowance for possible
credit losses (beginning of period).............. 31 39 47 58 63
========== ========== ========== ========== ==========
</TABLE>
*Prior to 1992, the Corporation charged off past-due charge card interest to
the allowance for possible credit losses. In 1995, 1994, 1993, and 1992,
$1.9 million, $2.0 million, $2.6 million and $3.0 million, respectively, of
such interest was recorded as a reduction of interest income.
29
<PAGE>
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 $15.3 million, or 10 percent, of
the Corporation's 1995 consolidated net income, compared to $18.0 million or 18
percent in 1994. International operating income decreased $4.1 million, or 8
percent, to $49.3 million in 1995 and represented 4 percent of the Corporation's
total operating income. In 1994 and 1993, international operating income
represented 5 percent of the Corporation's total operating income. Assets and
liabilities associated with foreign domiciled customers are summarized as
follows:
<TABLE>
<CAPTION>
Foreign assets and liabilities
(in thousands) December 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans:
Governments and official institutions................. $ 984 $ 984 $ 984
Banks and other financial institutions................ 160,808 250,563 221,603
Other, primarily commercial and industrial............ 40,900 16,210 8,074
-------- ---------- --------
Total loans.......................................... 202,692 267,757 230,661
-------- ---------- --------
Allowance for possible credit losses.................. - (3,819) (3,701)
-------- ---------- --------
Deposits in banks located outside the United States:
Interest-bearing...................................... 447,700 660,083 525,329
Other................................................. 64,499 78,745 53,690
-------- ---------- --------
Total deposits in banks.............................. 512,199 738,828 579,019
-------- ---------- --------
Acceptances and other identifiable assets.............. 102,337 40,018 30,289
-------- ---------- --------
Total identifiable foreign assets.................... $817,228 $1,042,784 $836,268
======== ========== ========
Deposit liabilities:
Banks located in foreign countries.................... $346,832 $ 335,370 $352,042
Foreign governments and official institutions......... 15,000 100,139 21,405
Other demand.......................................... 72,145 39,510 29,531
Other time and savings................................ 176,466 111,524 54,419
-------- ---------- --------
Total deposit liabilities............................ 610,443 586,543 457,397
Short-term borrowings.................................. 107,645 249,536 53,104
Acceptances outstanding................................ 55,898 14,782 5,000
-------- ---------- --------
Total identifiable foreign liabilities............... $773,986 $ 850,861 $515,501
======== ========== ========
</TABLE>
30
<PAGE>
Geographic Distribution
As of year-end 1995, 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 Loans
International banking by domicile -------------------- Interest-Bearing
of obligor Domestic Foreign Deposits at
(dollars in thousands) Offices Offices Banks Total %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1995
Continental Europe.............................. $ 24,468 $ 14,289 $152,700 $191,457 29
Pacific and Far East............................ 114,082 - 270,000 384,082 59
United Kingdom and Ireland...................... 537 702 25,000 26,239 4
Western Hemisphere (excluding U.S. and Canada).. 27 10,479 - 10,506 2
Canada.......................................... 38,108 - - 38,108 6
-------- -------- -------- -------- ---
Total international banking.................... $177,222 $ 25,470 $447,700 $650,392 100
======== ======== ======== ======== ===
December 31, 1994
Continental Europe.............................. $ 32,157 $ 6,784 $409,375 $484,316 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
======== ======== ======== ======== ===
</TABLE>
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,
investment 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, investment 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 with 86
locations opened or announced at year end 1995. The Corporation and its sister
company, Harris Bankmont, Inc., plan to open approximately 10 new branches in
1996. The two-to-three year process of building a cost-effective operations and
staff support infrastructure, started in 1994, continued in 1995, with over $20
million in infrastructure costs reduced and redeployed into marketing, sales,
and service. 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 auto-
31
<PAGE>
mate 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 was completed in 1995 as was the consolidation of
credit card remittance processing in suburban Chicago. 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 consolidated all bookkeeping and proofing functions during
1995. Bank of Montreal and Harris loan administration functions will be
consolidated in 1996. 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 114 years, as well as to the additional services it will provide
in the years ahead.
Fourth Quarter 1995 Compared with Fourth Quarter 1994
Net income for the fourth quarter of 1995 was $38.8 million, up 9 percent from
fourth quarter 1994 earnings of $35.6 million. The earnings growth is
attributable primarily to an improvement in net interest income, securities
gains, increased other income and lower FDIC insurance premiums. The Corporation
recorded returns on average assets and average common equity of 0.94 percent and
13.7 percent, respectively, in fourth quarter 1995, compared to returns of 0.96
percent and 14.0 percent in last year's fourth quarter.
FTE net interest income was $127.7 million during the 1995 fourth quarter,
an increase of 1 percent from $126.8 million for the same quarter one year ago.
Net interest margin fell from 4.03% to 3.62%, reflecting rate compression in
certain asset categories, a lower mix of noninterest-bearing deposits, and the
relationship which existed in the markets between short and longer term rates.
Average earning assets rose 12% from $12.5 billion to $14.0 billion and average
loans increased by $1.5 billion or 19% with commercial loans, real estate loans
and charge card outstandings being the strongest contributors to this growth.
Average portfolio securities increased $226 million in fourth quarter 1995
compared to 1994, offset by a $227 million decrease in money market assets and
interest bearing deposits at banks.
Funding for the quarter's asset growth came from interest-bearing
liabilities, which rose $1.6 billion from last year's fourth quarter. Average
interest-bearing deposits increased $334 million, or 5 percent to $7.31 billion,
reflecting increased savings and certificates of deposits as well as time
deposits in foreign offices. Short-term borrowings were up $503 million or 18
percent and senior notes increased $739 million from the prior year as described
in the "Liquidity and Sources of Funds" section of this Report. Noninterest-
bearing supporting funds were virtually unchanged, representing 16 percent of
supporting liabilities in fourth quarter 1995, down from 19 percent in the 1994
fourth quarter.
The fourth quarter provision for credit losses of $11.6 million was up from
$10.5 million provided in the fourth quarter of 1994. Net loan charge-offs
during the current quarter were $11.7 million, compared to $12.9 million in the
same period last year.
In the fourth quarter of 1995, noninterest revenue increased $9.3 million
or 12% to $86.3 million. Net gains from the sale of debt securities amounted to
$2.8 million compared to a $0.4 million loss in the fourth quarter of 1994.
Money market and bond trading profits rose $1.4 million, while other sources of
noninterest income increased $4.9 million.
Noninterest expenses for the fourth quarter of 1995 of $141.7 million were
2% higher than the comparable quarter a year ago, primarily reflecting normal
salary increases and higher variable compensation attributable to substantially
stronger earnings performance. FDIC insurance premiums declined by $3.1 million
while other expense categories approximated last year's levels.
Income tax expense increased $6.0 million or 48 percent, quarter to
quarter, attributable to higher pretax income and a smaller tax-exempt municipal
bond portfolio.
32
<PAGE>
<TABLE>
<CAPTION>
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Harris Bankcorp, Inc. and Subsidiaries
SUPPLEMENTARY DATA
Quarterly Financial Data (unaudited)
Summary of Earnings and Net Interest Income
(Fully taxable equivalent 1995 1994 1993
(FTE) basis, dollars in ------------------------------ ------------------------------ ------------------------------
millions, except per 4th 3rd 2nd 1st 4th 3rd 2nd 1st 4th 3rd 2nd 1st
share data) Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............ $279.8 $272.1 $260.0 $252.3 $237.8 $217.8 $201.3 $177.7 $179.2 $182.4 $186.7 $185.0
Interest expense........... 155.5 151.1 140.2 134.9 117.1 101.1 87.7 72.1 72.7 74.1 77.4 75.3
------------------------------ ------------------------------ ------------------------------
Net Interest Income........ 124.3 121.0 119.8 117.4 120.7 116.7 113.6 105.6 106.5 108.3 109.3 109.7
FTE adjustment............. 3.4 3.9 5.0 5.4 6.1 5.9 6.0 5.8 6.0 7.3 6.1 6.1
------------------------------ ------------------------------ ------------------------------
Net interest income--
FTE basis................. 127.7 124.9 124.8 122.8 126.8 122.6 119.6 111.4 112.5 115.6 115.4 115.8
Provision for credit losses 11.6 11.0 11.8 8.6 10.5 9.0 12.0 13.4 16.6 15.5 15.3 15.5
------------------------------ ------------------------------ ------------------------------
Net Interest Income after
Provision for Credit
Losses.................... 116.1 113.9 113.0 114.2 116.3 113.6 107.6 98.0 95.9 100.1 100.1 100.3
------------------------------ ------------------------------ ------------------------------
Noninterest Income
Trust and investment
management fees.......... 36.9 38.0 36.3 38.7 36.7 36.2 37.7 37.6 38.8 36.8 37.5 35.7
Trading account........... 2.1 .4 .7 1.9 .7 .1 (.1) (1.2) .2 1.1 .8 3.1
Foreign exchange.......... 4.1 2.4 3.2 4.6 4.3 4.0 5.2 6.2 5.3 4.1 7.8 7.1
Charge card............... 11.2 10.9 10.5 9.2 10.5 9.9 8.9 8.1 10.5 9.5 8.5 8.0
Service fees and charges.. 17.9 16.2 17.5 17.7 17.7 18.5 18.5 19.0 18.5 19.6 18.9 20.8
Securities (losses) gains. 2.8 1.7 16.8 2.1 (.4) 2.4 .1 3.1 5.5 .3 6.9 .3
Other..................... 11.3 10.4 6.4 6.4 7.5 5.1 10.3 7.7 5.2 10.7 7.9 7.6
------------------------------ ------------------------------ ------------------------------
Total noninterest
income................. 86.3 80.0 91.4 80.6 77.0 76.2 80.6 80.5 84.0 82.1 88.3 82.6
------------------------------ ------------------------------ ------------------------------
Noninterest Expenses
Employment................ 79.8 78.9 79.3 80.2 74.1 77.2 79.6 81.7 74.5 74.3 83.7 73.2
Net occupancy............. 11.0 11.7 12.0 11.4 11.7 11.0 11.3 11.1 11.4 12.5 11.8 11.0
Equipment................. 11.4 10.9 10.4 9.8 11.2 10.4 10.0 10.7 11.5 10.6 10.9 10.4
Marketing................. 6.5 6.6 6.7 5.8 6.9 5.8 6.4 5.5 7.5 5.1 5.3 4.7
Communication and
delivery................ 5.3 5.1 5.2 4.7 4.6 4.7 4.3 4.2 4.5 4.2 4.4 4.8
Deposit insurance......... .8 (.3) 3.8 3.8 3.9 3.9 3.9 3.9 3.1 3.8 3.8 4.4
Trust customer charge..... - - - - - - 51.3 - - - - -
Other..................... 26.9 24.3 25.6 22.6 26.7 23.7 22.9 21.5 29.6 28.1 11.6 31.5
------------------------------ ------------------------------ ------------------------------
Total noninterest
expenses............... 141.7 137.2 143.0 138.3 139.1 136.7 189.7 138.6 142.1 138.6 131.5 140.0
------------------------------ ------------------------------ ------------------------------
FTE income (loss)--
pretax.................... 60.7 56.7 61.4 56.5 54.2 53.1 (1.5) 39.9 37.8 43.6 56.9 42.9
Applicable income taxes
(benefit)................. 18.5 17.0 18.2 16.4 12.5 13.4 (8.0) 6.7 6.8 7.3 15.4 10.4
FTE adjustment............. 3.4 3.9 5.0 5.4 6.1 5.9 6.0 5.8 6.0 7.3 6.1 6.1
------------------------------ ------------------------------ ------------------------------
Income before cumulative
effect of a change in
accounting principle...... 38.8 35.8 38.2 34.7 35.6 33.8 .5 27.4 25.0 29.0 35.4 26.4
Cumulative effect on prior
years (to December 31,
1992) of changing the
accounting method for
income taxes.............. - - - - - - - - - - - 1.8
------------------------------ ------------------------------ ------------------------------
Net Income................. $ 38.8 $ 35.8 $ 38.2 $ 34.7 $ 35.6 $ 33.8 $ .5 $ 27.4 $ 25.0 $ 29.0 $ 35.4 $ 28.2
============================== ============================== ==============================
Earnings per common
share (based on average
shares outstanding)....... $ 5.83 $ 5.36 $ 5.72 $ 5.21 $ 5.34 $ 5.07 $ .08 $ 4.11 $ 3.75 $ 4.35 $ 5.30 $ 4.24
============================== ============================== ==============================
Net Interest Margin
Yield on earning assets... 8.02% 8.02% 8.27% 8.18% 7.75% 7.26% 6.82% 6.33% 6.40% 6.66% 6.73% 6.99%
Rate on supporting
liabilities.............. 4.40 4.37 4.38 4.28 3.72 3.28 2.89 2.50 2.51 2.60 2.71 2.76
------------------------------ ------------------------------ ------------------------------
Net interest margin....... 3.62% 3.65% 3.89% 3.90% 4.03% 3.98% 3.93% 3.83% 3.89% 4.06% 4.02% 4.23%
============================== ============================== ==============================
</TABLE>
Rows may not add to annual amounts because of rounding.
33
<PAGE>
FINANCIAL STATEMENTS
Consolidated Statement of Income Harris Bankcorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(dollars in thousands except per share data) For the Years Ended December 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans, including fees.............................................................. $ 776,226 $591,532 $512,491
Money market assets:
Deposits at banks................................................................. 38,617 30,739 25,212
Federal funds sold and securities purchased under agreement to resell............. 19,330 21,523 17,436
Trading account.................................................................... 3,842 2,190 5,671
Securities available for sale:
U.S. Treasury and federal agency.................................................. 152,508 115,489 -
Other............................................................................. 9,671 5,754 -
Securities held to maturity:
U.S. Treasury and federal agency.................................................. 36,641 27,362 129,337
State and municipal............................................................... 27,072 37,432 38,647
Other............................................................................. 353 2,584 4,383
---------- -------- --------
Total interest income............................................................. 1,064,260 834,605 733,177
---------- -------- --------
Interest Expense
Deposits........................................................................... 358,586 250,002 200,172
Short-term borrowings.............................................................. 168,993 108,485 73,043
Senior notes....................................................................... 31,125 - -
Long-term notes.................................................................... 23,005 19,520 26,406
---------- -------- --------
Total interest expense............................................................ 581,709 378,007 299,621
---------- -------- --------
Net Interest Income................................................................ 482,551 456,598 433,556
Provision for credit losses........................................................ 42,995 45,040 62,835
---------- -------- --------
Net Interest Income after Provision for Credit Losses.............................. 439,556 411,558 370,721
---------- -------- --------
Noninterest Income
Trust and investment management fees............................................... 149,979 148,094 148,809
Trading account.................................................................... 5,110 (396) 5,258
Foreign exchange................................................................... 14,248 19,769 24,302
Charge card........................................................................ 41,788 37,402 36,516
Service fees and charges........................................................... 69,333 73,621 77,774
Securities gains................................................................... 23,379 5,254 13,038
Other.............................................................................. 34,436 30,700 31,391
---------- -------- --------
Total noninterest income.......................................................... 338,273 314,444 337,088
---------- -------- --------
Noninterest Expenses
Salaries and other compensation.................................................... 260,539 246,200 243,739
Pension, profit sharing and other employee benefits................................ 57,763 66,370 62,019
Net occupancy...................................................................... 46,099 45,052 46,676
Equipment.......................................................................... 42,541 42,284 43,396
Marketing.......................................................................... 25,583 24,632 22,613
Communication and delivery......................................................... 20,251 17,732 17,916
Deposit insurance.................................................................. 8,124 15,684 15,047
Trust customer charge.............................................................. - 51,335 -
Other.............................................................................. 99,203 94,839 100,681
---------- -------- --------
Total noninterest expenses........................................................ 560,103 604,128 552,087
---------- -------- --------
Income before income taxes......................................................... 217,726 121,874 155,722
Applicable income taxes............................................................ 70,175 24,528 39,879
---------- -------- --------
Income before cumulative effect of a change in accounting principle............... 147,551 97,346 115,843
Cumulative effect on prior years (to December 31, 1992) of changing the
accounting method for income taxes................................................ - - 1,782
---------- -------- --------
Net Income......................................................................... $ 147,551 $ 97,346 $117,625
========== ======== ========
Earnings per Common Share (based on 6,667,490 average shares outstanding)
Income before cumulative effect of a change in accounting principle................ $ 22.13 $ 14.60 $ 17.37
Cumulative effect on prior years (to December 31, 1992) of changing the
accounting method for income taxes................................................ - - .27
---------- -------- --------
Net Income......................................................................... $ 22.13 $ 14.60 $ 17.64
========== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
34
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Condition Harris Bankcorp, Inc. and Subsidiaries
(in thousands except share data) December 31 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and demand balances due from banks................................................................. $ 1,522,418 $ 1,399,781
Money market assets:
Interest-bearing deposits at banks.................................................................... 457,702 757,227
Federal funds sold and securities purchased under agreement to resell................................. 179,692 404,226
Portfolio securities:
Held to maturity (market value of $1,101,927 in 1994)................................................. -- 1,107,659
Available for sale.................................................................................... 3,389,967 2,581,293
Trading account assets.................................................................................. 98,638 36,067
Loans, net of unearned income of $16,091 in 1995 and $20,724 in 1994.................................... 9,517,797 8,229,254
Allowance for possible credit losses.................................................................... (129,259) (124,734)
Premises and equipment.................................................................................. 225,540 221,494
Customers' liability on acceptances..................................................................... 95,326 125,113
Other assets............................................................................................ 318,380 594,159
----------- -----------
TOTAL ASSETS.......................................................................................... $15,676,201 $15,331,539
=========== ===========
LIABILITIES
Deposits in domestic offices--noninterest-bearing....................................................... $ 3,003,088 $ 3,222,043
--interest-bearing.......................................................... 4,859,939 4,214,273
Deposits in foreign offices--noninterest-bearing........................................................ 41,004 31,903
--interest-bearing........................................................... 2,324,751 2,451,513
----------- -----------
Total deposits.................................................................................... 10,228,782 9,919,732
Federal funds purchased and securities sold under agreement to repurchase............................... 1,896,817 2,632,167
Commercial paper outstanding............................................................................ 292,022 306,737
Short-term borrowings................................................................................... 843,049 670,362
Senior notes............................................................................................ 478,000 --
Acceptances outstanding................................................................................. 95,326 125,113
Accrued interest, taxes and other expenses.............................................................. 143,580 126,723
Other liabilities....................................................................................... 188,897 230,741
Long-term notes......................................................................................... 363,952 298,810
----------- -----------
TOTAL LIABILITIES................................................................................... 14,530,425 14,310,385
----------- -----------
STOCKHOLDER'S EQUITY
Series A Non-voting Preferred stock (no par value); authorized 1,000,000 shares;
issued and outstanding 180 shares ($1,000,000 stated value)........................................... 180,000 --
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....................................................................................... 681,468 796,617
Unrealized holding gains (losses), net of deferred taxes of $17,787 in 1995 and $(21,535) in 1994....... 27,071 (32,700)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY.......................................................................... 1,145,776 1,021,154
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.......................................................... $15,676,201 $15,331,539
=========== ===========
The accompanying notes to financial statements are an integral part of this statement.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Stockholder's Equity Harris Bankcorp, Inc. (Consolidated and Parent Company only)
Unrealized Total
Preferred Common Retained Holding Gains Stockholders
(in thousands except per share data) Stock Stock Surplus Earnings (Losses) Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 holding gains
(losses) 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
Issuance of preferred stock............ 180,000 -- -- -- -- 180,000
Net income............................. -- -- -- 147,551 -- 147,551
Dividends ($39.40 per common share).... -- -- -- (262,700) -- (262,700)
Change in unrealized holding gains
(losses) on available for sale
securities, net of tax effect of
($39,322).............................. -- -- -- -- 59,771 59,771
-------- ------- -------- --------- -------- ----------
Balance at December 31, 1995............ $180,000 $53,340 $203,897 $ 681,468 $ 27,071 $1,145,776
======== ======= ======== ========= ======== ==========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows Harris Bankcorp, Inc. and Subsidiaries
(in thousands) For the Years Ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income....................................................................... $ 147,551 $ 97,346 $ 117,625
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses..................................................... 42,995 45,040 62,835
Depreciation and amortization, including intangibles............................ 48,492 49,873 52,686
Deferred tax benefit............................................................ (1,380) (3,818) (12,829)
Gain on sales of portfolio securities........................................... (23,379) (5,254) (13,038)
Trading account net cash (purchases) sales...................................... (62,571) 13,994 (5,377)
(Increase) decrease in interest receivable...................................... (243) (40,721) 15,759
Increase (decrease) in interest payable......................................... 8,270 9,403 (6,535)
(Increase) decrease in loans held for sale...................................... (21,314) 245,445 (101,287)
Other, net...................................................................... 43,912 (18,673) 4,588
----------- ----------- -----------
Net cash provided by operating activities..................................... 182,333 392,635 114,427
----------- ----------- -----------
Investing Activities:
Net decrease (increase) in interest-bearing deposits at banks.................... 299,525 (229,747) 405,395
Net decrease (increase) in Federal funds sold and securities purchased
under agreement to resell...................................................... 224,534 98,304 (304,964)
Proceeds from sales of securities held to maturity............................... - - 211,371
Proceeds from maturities of securities held to maturity.......................... 713,897 482,378 4,878,735
Purchases of securities held to maturity......................................... (445,371) (842,817) (5,628,180)
Proceeds from sales of securities available for sale............................. 2,025,099 146,114 -
Proceeds from maturities of securities available for sale........................ 5,219,361 4,198,226 -
Purchases of securities available for sale....................................... (7,091,515) (4,595,187) -
Net increase in loans............................................................ (1,305,639) (822,724) (581,091)
Proceeds from sales of premises and equipment.................................... 28,270 42,045 41,301
Purchases of premises and equipment.............................................. (72,501) (76,174) (81,479)
Other, net....................................................................... 152,672 1,969 46,127
----------- ----------- -----------
Net cash used by investing activities............................................ (251,668) (1,597,613) (1,012,785)
----------- ----------- -----------
Financing Activities:
Net increase in deposits......................................................... 309,050 543,861 599,137
Net (decrease) increase in Federal funds purchased and securities sold under
agreement to repurchase......................................................... (735,350) 771,106 (55,558)
Net (decrease) increase in commercial paper outstanding.......................... (14,715) (19,531) 39,123
Net increase in other short-term borrowings...................................... 172,687 211,170 138,095
Proceeds from issuance of senior notes........................................... 2,978,345 - -
Repayment of senior notes........................................................ (2,500,345) - -
Proceeds from issuance of long-term notes........................................ 65,000 - -
Repayment of long-term notes..................................................... - - (250)
Proceeds from issuance of preferred stock........................................ 180,000 - -
Cash component of dividend-in-kind of Harris Futures Corporation................. - - (1,331)
Cash dividends paid on common stock.............................................. (262,700) (34,738) (49,355)
----------- ----------- -----------
Net cash provided by financing activities...................................... 191,972 1,471,868 669,861
----------- ----------- -----------
Net increase (decrease) in cash and demand balances due from banks.............. 122,637 266,890 (228,497)
Cash and demand balances due from banks at January 1............................. 1,399,781 1,132,891 1,361,388
----------- ----------- -----------
Cash and demand balances due from banks at December 31........................... $ 1,522,418 $ 1,399,781 $ 1,132,891
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)............................................. $ 573,439 $ 368,605 $ 319,227
Income taxes..................................................................... 74,269 34,047 $ 35,058
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
37
<PAGE>
Notes to Financial Statements
1. Summary Of Significant Accounting Policies
Principles of consolidation and nature of operations
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 ("BMO"). 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.
The Corporation provides banking, trust and other services domestically and
internationally through 14 bank and 17 active nonbank subsidiaries. HTSB and the
Corporation's other banking and non-bank subsidiaries provide 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., primarily the Midwest, and abroad. Services rendered and
products sold to customers include demand and time deposit accounts and
certificates; various types of loans; sales and purchases of foreign currencies;
interest rate management products; cash management services; underwriting of
municipal bonds; and financial consulting.
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.
38
<PAGE>
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. On December 29, 1995, the Corporation transferred all held-to-
maturity securities to available for sale. See Note 2 on page 41 for further
information.
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, 1995 and 1994, the Corporation's Consolidated Statement
of Condition included approximately $13.8 million and $11.0 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 in 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 gains and unrealized 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
collect the entire principal balance of the loan. Interest income on
restructured loans is accrued according to the most recently agreed upon
contractual terms.
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 150 and 180 days past due, respectively. 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.
During the first quarter of 1995, the Corporation adopted SFAS No. 114-
Accounting by Creditors for Impairment of a Loan and SFAS No. 118-Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures. SFAS No.
114 addresses accounting by creditors for impairment of certain loans. It
requires that impaired loans within the scope of the statement (primarily
commercial credits) be measured based on the present value of expected future
cash flows (discounted at the loan's effective interest rate) or, alternatively,
at the loan's observable market price or the fair value of supporting
collateral. Impaired loans are defined as those where it is probable that
amounts due according to contractual terms, including principal and interest,
will not be collected. Both nonaccrual and certain restructured loans meet this
definition. Large groups of smaller-balance, homogeneous loans, primarily charge
card, residential real estate and consumer installment loans, are excluded from
the scope of these Statements. The Corporation determines loan impairment when
assessing the adequacy of the allowance for possible credit losses. SFAS No. 118
permits existing income recognition practices to continue. The adoption of these
Statements did not have a material impact on the Corporation's net income or
financial position.
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. Known
losses of principal on impaired loans are charged off. 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.
39
<PAGE>
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.
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.
The Corporation adopted SFAS No. 112, Employers' Accounting for
Postemployment Benefits, in the first quarter of 1994. As required by the
Statement, postemployment benefits provided to former or inactive employees
after employment but before retirement are accrued in accordance with SFAS No.
43, Accounting for Compensated Absences, if they meet the conditions for accrual
of compensated absences. Otherwise, postemployment benefits are accrued or
disclosed in accordance with SFAS No. 5, Accounting for Contingencies. The
effect of initially adopting SFAS No. 112 was not material.
Cash flows
On December 29, 1995, the Corporation transferred all held to maturity
securities to available for sale. See Note 2 on page 41 for further information.
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. On July 1,
1993, the Corporation paid a $7.2 million dividend-in-kind to Bankmont related
to the transfer of Harris Futures Corporation. 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.
Management's estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accounts within the
consolidated financial statements of the Corporation requiring significant
management judgment include: provision and allowance for possible credit losses,
income taxes, pension cost, post employment benefits, fair values and temporary
- - vs - other than temporary impairment.
40
<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, 1995 December 31, 1994
----------------------------------------------- -----------------------------------------------
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
Federal agency............. - - - - 68,278 29 3,055 65,252
State and municipal........ - - - - 466,965 16,310 3,983 479,292
Other, including Federal
Reserve Bank stock........ - - - - 35,936 39 1,925 34,050
Total securities ---------- ------- ------- ----------
held to maturity....... - - - - 1,107,659 16,394 22,126 1,101,927
---------- ------- ------- ----------
Available for Sale:
U.S. Treasury.............. 1,189,605 15,967 405 1,205,167 1,480,278 788 37,897 1,443,169
Federal agency............. 1,726,694 15,968 2,084 1,740,578 1,055,709 118 17,367 1,038,460
State and municipal........ 294,120 14,973 288 308,805 12,114 1 198 11,917
Other...................... 134,690 929 202 135,417 87,427 843 523 87,747
---------- ------- ------ ---------- ---------- ------- ------- ----------
Total securities
available for sale..... 3,345,109 47,837 2,979 3,389,967 2,635,528 1,750 55,985 2,581,293
---------- ------- ------ ---------- ---------- ------- ------- ----------
Total portfolio securities. $3,345,109 $47,837 $2,979 $3,389,967 $3,743,187 $18,144 $78,111 $3,683,220
========== ======= ====== ========== ========== ======= ======= ==========
</TABLE>
At December 31, 1995 and 1994, portfolio and trading account securities having
a par value of $1.7 billion and $2.7 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
$1.1 billion and $1.4 billion were sold under agreement to repurchase at
December 31, 1995 and 1994, respectively.
On November 15, 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with that report, the Corporation conducted
a one-time reassessment of the classifications of securities held. As a result,
the Corporation reclassified all held-to-maturity securities to available-for-
sale on December 29, 1995. The amortized cost of the transferred securities was
$839 million and the related unrealized holding gain was $20 million.
The amortized cost and estimated market value of available-for-sale securities
at December 31, 1995, 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>
Amortized Fair
(in thousands) December 31, 1995 Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Maturities:
Within 1 year.......................................... $1,296,068 $1,297,331
1 to 5 years........................................... 1,017,482 1,037,136
5 to 10 years.......................................... 459,654 470,801
Over 10 years.......................................... 478,594 488,555
Other securities without stated maturity................ 93,311 96,144
---------- ----------
Total securities.................................... $3,345,109 $3,389,967
========== ==========
</TABLE>
In 1995 and 1994, proceeds from the sale of securities available for sale
amounted to $2,025 million and $146 million. Proceeds from sales of portfolio
securities during 1993 were $211 million. Gross gains of $26,284,000 and gross
losses of $2,905,000 were realized on these sales in 1995, while gains of
$6,032,000 and losses of $778,000 were realized in 1994, and gains of
$13,204,000 and losses of $166,000 were realized in 1993. Net unrealized holding
gain or loss on trading securities included in earnings during 1995 changed by
$833,000 from an unrealized loss of $72,000 at December 31, 1994 to an
unrealized gain of $761,000 at December 31, 1995.
41
<PAGE>
3. Loans
The following table summarizes loan balances by category:
<TABLE>
<CAPTION>
(in thousands) December 31 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and dealers.............................................. $5,564,489 $4,844,124
Real estate construction.............................................................................. 195,699 175,542
Real estate mortgages................................................................................. 1,996,670 1,627,492
Installment........................................................................................... 478,441 436,748
Charge card........................................................................................... 1,095,897 898,315
Foreign loans:
Governments and official institutions................................................................. 984 984
Banks and other financial institutions................................................................ 160,808 250,563
Other, primarily commercial and industrial............................................................ 40,900 16,210
---------- ----------
Total loans......................................................................................... 9,533,888 8,249,978
Less unearned income.................................................................................... 16,091 20,724
---------- ----------
Loans, net of unearned income....................................................................... 9,517,797 8,229,254
Less allowance for possible credit losses............................................................... 129,259 124,734
---------- ----------
Loans, net of allowance for possible credit losses................................................ $9,388,538 $8,104,520
========== ==========
</TABLE>
The Corporation had approximately $103 million and $82 million of loans
classified as held for sale at December 31, 1995 and 1994, respectively.
Approximately 80 percent and 58 percent of these respective amounts were real
estate mortgages
Nonaccrual loans, restructured loans and other nonperforming assets are
summarized below:
<TABLE>
(in thousands) December 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans................................................................................... $50,503 $83,803 $ 91,131
Restructured loans................................................................................. 2,059 2,889 3,262
------- ------- --------
Total nonperforming loans...................................................................... 52,562 86,692 94,393
Other assets received in satisfaction of debt...................................................... 2,470 8,071 19,000
------- ------- --------
Total nonperforming assets..................................................................... $55,032 $94,763 $113,393
======= ======= ========
Gross amount of interest income that would have been recorded if year-end nonperforming
loans had been accruing interest at their original terms.......................................... $ 4,500 $ 5,278 $ 6,292
Interest income actually recognized................................................................ 1,572 1,348 2,569
------- ------- --------
Interest shortfall, before consideration of any income tax effect................................ 2,928 $ 3,930 $ 3,723
======= ======= ========
</TABLE>
At December 31, 1995 and 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.
Additional information on foreign outstandings is provided in the Foreign
Outstandings section on page 26 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 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year................................................. $124,734 $131,676 $130,123
-------- -------- --------
Charge-offs................................................................ (61,967) (69,906) (82,128)
Recoveries................................................................. 23,497 17,924 20,846
-------- -------- --------
Net charge-offs........................................................... (38,470) (51,982) (61,282)
Provisions charged to operations........................................... 42,995 45,040 62,835
-------- -------- --------
Balance, end of year...................................................... $129,259 $124,734 $131,676
======== ======== ========
Details on impaired loans and related allowance are as follows:
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total Impaired
(in thousands) December 31, 1995 A Related Allowance No Related Allowance Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance......................................................... $19,820 $30,683 $50,503
Related allowance............................................... 12,967 - 12,967
------- ------- -------
Balance, net of allowance....................................... $ 6,853 $30,683 $37,536
======= ======= =======
(in thousands) Year Ended December 31 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Average impaired loans............................................................................................. $67,874
=======
Total interest income on impaired loans............................................................................ $ 1,572
=======
Interest income on impaired loans recorded on a cash basis......................................................... $ 1,572
=======
</TABLE>
42
<PAGE>
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 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Land $ 28,039 $ 26,148
Premises............................................... 266,815 260,283
Equipment.............................................. 255,271 238,348
Leasehold improvements................................. 27,731 24,077
-------- --------
Total.............................................. 577,856 548,856
Accumulated depreciation and amortization.............. 352,316 327,362
-------- --------
Premises and equipment............................. $225,540 $221,494
======== ========
</TABLE>
The provision for depreciation and amortization was $39,142,000 in 1995,
$39,524,000 in 1994, and $41,018,000 in 1993.
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.
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, 1995 and
1994 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 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed rate 9 3/8% subordinated notes due June 1, 2001 ($100,000 par value).. $ 98,952 $ 98,810
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
Fixed rate 6 1/2% subordinated note to Bankmont due December 27, 2007....... 65,000 --
-------- --------
Total.................................................................... $363,952 $298,810
======== ========
</TABLE>
On December 27, 1995 in connection with a capital restructuring, Bankcorp
issued a $65 million par value 6-1/2% subordinated note to Bankmont that matures
on December 27, 2007. 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 at the election
of the debtholders. The interest rate on the floating rate notes reprices
semiannually and floats at 50 basis points above 180 day LIBOR. At year-end
1995, 180 day LIBOR stood at 5.51 percent.
In connection with the issuance of commercial paper and for other corporate
purposes, Bankcorp has a revolving credit agreement with a group of five
nonaffiliated banks and BMO. On December 18, 1995, this revolving credit
agreement was amended to increase the credit limit from $130 million to $150
million and to extend the maturity date to December 18, 1999. There were no
borrowings under this credit agreement during 1995 or 1994.
HTSB offers to institutional investors 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. The notes are subordinated to deposits and rank pari
passu with all other unsecured senior indebtedness of HTSB. As of December 31,
1995, $478 million of short-term notes were outstanding with maturities and
interest rates ranging from 29 to 180 days and 5.50 to 5.79 percent,
respectively. There were no outstandings under this program at December 31,
1994.
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.
43
<PAGE>
A variety of methods were used to estimate the fair value of loans. Changes
in estimated fair value of loans reflect changes in credit risk and general
interest rates which have occurred since the loans were originated. Fair values
of floating rate loans, including commercial, broker dealer, financial
institution, construction, charge card, consumer and home equity, were assumed
to be the same as book value as the loans' interest rates automatically reprice
to market. Fair values of residential mortgages were based on current prices for
securities backed by similar loans. For 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.
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, 1995 and 1994 are presented in the following table. See Note 8 for
additional information regarding fair values of off-balance-sheet financial
instruments.
<TABLE>
<CAPTION>
1995 1994
------------------------ -------------------------
Carrying Fair Carrying Fair
(in thousands) December 31 Value Value Value Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and demand balances due from banks.... $ 1,522,418 $ 1,522,418 $ 1,399,781 $ 1,399,781
Money market assets:
Interest-bearing deposits at banks........ 457,702 457,702 757,227 757,227
Federal funds sold and securities
purchased under agreement to resell...... 179,692 179,692 404,226 404,226
Portfolio securities:
Held to maturity.......................... - - 1,107,659 1,101,927
Available for sale........................ 3,389,967 3,389,967 2,581,293 2,581,293
Trading account assets..................... 98,638 98,638 36,067 36,067
Loans, net of unearned income and
allowance for possible credit losses...... 9,388,538 9,391,070 8,104,520 8,093,360
Customers' liability on acceptances........ 95,326 95,326 125,113 125,113
----------- ----------- ----------- -----------
Total on-balance-sheet financial assets. $15,132,281 $15,134,813 $14,515,886 $14,498,994
=========== =========== =========== ===========
Liabilities
Deposits:
Demand deposits........................... $ 5,638,268 $ 5,638,268 $ 5,849,935 $ 5,849,935
Time deposits............................. 4,590,514 4,596,441 4,069,797 4,069,834
Federal funds purchased and securities sold
under agreement to repurchase............. 1,896,817 1,896,817 2,632,167 2,632,167
Commercial paper outstanding............... 292,022 292,022 306,737 306,737
Other short-term borrowings................ 843,049 843,049 670,362 670,362
Acceptances outstanding.................... 95,326 95,326 125,113 125,113
Senior notes............................... 478,000 478,000 - -
Long-term notes............................ 363,952 379,819 298,810 302,483
Total on-balance-sheet financial ----------- ----------- ----------- -----------
liabilities............................ $14,197,948 $14,219,743 $13,952,921 $13,956,631
=========== =========== =========== ===========
Off-Balance-Sheet Financial Instruments
(positive positions/(obligations))
Credit facilities.......................... $ (13,753) $ (13,753) $ (11,013) $ (11,013)
Interest rate contracts:
Dealer and trading contracts 1,041 1,041 2,786 2,786
Risk management contracts................. (5,521) (11,784) (8,783) (16,448)
Foreign exchange contracts:
Dealer contracts.......................... - - (15,656) (15,656)
Total off-balance-sheet financial ----------- ----------- ----------- -----------
instrument............................. $ (18,233) $ (24,496) $ (32,666) $ (40,331)
=========== =========== =========== ===========
</TABLE>
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.
44
<PAGE>
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 $8.20 billion and $7.43 billion at December 31, 1995 and 1994,
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, 1995, totaled $244 million and at
December 31, 1994, totaled $217 million.
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 $1.59 billion at December 31, 1995 and
$1.23 billion at December 31, 1994. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $270 million
at December 31, 1995 and $168 million at December 31, 1994.
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 $131
million at December 31, 1995 and $148 million at December 31, 1994.
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 $13.8 million at December 31, 1995 and $11.0
million at December 31, 1994.
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
45
<PAGE>
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).
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 1995 1994 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards..... $ 56,175 $ 490,499 $ - $ 69
Forward rate agreements.. 5,000 1,006,000 2 1,609
Options written.......... - 275,000 - -
Options purchased........ - 325,000 - 161
Guarantees written....... 1,632,121 930,143 - -
Guarantees purchased..... 1,638,157 879,684 5,801 16,921
Swaps.................... 876,320 1,155,165 12,585 14,074
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1995 1994 1994
-------------------------------------------------------------
End of Period Average End of Period Average
Assets Assets Assets Assets
(in thousands) (Liabilities) (Liabilities) (Liabilities) (Liabilities)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards
Unrealized gains................... $ - $ - $ 69 $ 35
Unrealized losses.................. - - (34) (19)
Forward rate agreements
Unrealized gains................... 2 357 1,609 142
Unrealized losses.................. - (284) (451) (303)
Options
Purchased.......................... - 228 161 60
Written............................ - (164) (11) (28)
Guarantees
Purchased.......................... 5,801 7,867 16,921 11,385
Written............................ (5,789) (7,987) (17,623) (11,870)
Swaps
Unrealized gains................... 12,585 9,806 14,074 11,821
Unrealized losses.................. (11,558) (8,624) (11,929) (10,003)
-------- ------- -------- --------
Total Interest Rate Contracts... $ 1,041 $ 1,199 $ 2,786 $ 1,220
======== ======= ======== ========
</TABLE>
Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31, 1995,
1994 and 1993 are summarized below:
<TABLE>
<CAPTION>
Gains Gains Gains
(Losses) (Losses) (Losses)
(in thousands) Years Ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards................... $(1,462) $1,020 $(6,156)
Forward rate agreements................ (285) (628) 228
Options................................ (545) (224) (12)
Guarantees............................. 988 (134) 441
Swaps.................................. 603 279 511
Debt Instruments........................ 5,811 (709) 10,246
------- ------ -------
Total Trading Revenue............... $ 5,110 $ (396) $ 5,258
======= ====== =======
</TABLE>
46
<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,
1995:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
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..................... $ 98,153 $200,914 $123,100 $ 5,723 $427,890
Average pay rate.................... 6.24% 6.11% 6.47% 7.10% 6.26%
Average receive rate................ 4.15% 5.64% 5.79% 5.97% 5.35%
Receive Fixed Swaps:
Notional amount..................... $104,493 $199,114 $123,100 $ 5,723 $432,430
Average pay rate.................... 4.16% 5.67% 5.79% 5.97% 5.34%
Average receive rate................ 6.05% 6.21% 6.58% 7.16% 6.29%
Basis swaps:
Notional amount..................... $ 16,000 - - - $ 16,000
Average pay rate.................... 6.12% - - - 6.12%
Average receive rate................ 6.24% - - - 6.24%
Total notional amount............ $218,646 $400,028 $246,200 $11,446 $876,320
</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. During 1995 and 1994, interest rate swaps were primarily used to
alter the character of funds supporting the municipal bond portfolio and the
senior note program. The Corporation had $281 million notional amount of swap
contracts, used for risk management purposes, outstanding at December 31, 1995
with a fair value of $(11.8) million and a replacement cost of zero. At December
31, 1994, the Corporation had $497 million notional amount of swap contracts
outstanding with a fair value of $(16.4) million and a replacement cost of $263
thousand. 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 zero and $6.3 million, respectively, at December 31,
1995 and $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, 1995 or
1994. There were no deferred gains or losses on terminated contracts at December
31, 1995 or 1994.
The following table summarizes swap activity for risk management purposes
during 1995 and 1994:
<TABLE>
<CAPTION>
Notional
(in thousands) Amount
- -------------------------------------------------------------------------------
<S> <C>
Amount, December 31, 1993........................................... $ 716,750
Additions........................................................... 66,381
Maturities.......................................................... (231,278)
Terminations........................................................ (55,000)
---------
Amount, December 31, 1994........................................... 496,853
Additions........................................................... 609,406
Maturities.......................................................... (475,226)
Terminations........................................................ (350,000)
---------
Amount, December 31, 1995........................................... $ 281,033
=========
</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, 1995:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
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..................... $ 80,000 $31,000 $35,357 $34,676 $181,033
Average pay rate.................... 9.96% 10.60% 6.32% 7.05% 8.80%
Average receive rate................ 5.82% 5.76% 5.71% 5.81% 5.79%
Basis swaps:
Notional amount..................... $100,000 - - - $100,000
Average pay rate.................... 6.43% - - - 6.43%
Average receive rate................ 5.94% - - - 5.94%
Total notional amount.............. $180,000 $31,000 $35,357 $34,676 $281,033
</TABLE>
47
<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.
Effective April 3, 1995, the Corporation and BMO agreed to combine their U.S.
foreign exchange activities ("FX"). Under this arrangement, FX net profit will
be shared by the Corporation and BMO in accordance with a specific formula set
forth in the agreement. This agreement expires in April 2002 but may be extended
at that time. Either party may terminate the arrangement at its option.
Beginning with second quarter 1995, FX revenues were reported net of expenses.
This agreement did not have a material impact on the Corporation's 1995 net
income or financial position at December 31, 1995.
At December 31, 1995, 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 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards............... $4,786,883 $12,822,530 $ 45,100 $133,768
Options written.......................... 85,551 769,916 -- --
Options purchased........................ 85,551 769,916 1,386 13,896
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the years ended December 31, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1995 1994 1994
------------------------------------------------------------------
End of Period Average End of period Average
Assets Assets Assets Assets
(in thousands) (Liabilities) (Liabilities) (Liabilities) (Liabilities)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards
Unrealized gains......................... $ 45,100 $ 137,511 $ 133,768 $ 225,626
Unrealized losses........................ (45,100) (139,447) (149,424) (222,408)
Options
Purchased................................ 1,386 6,301 13,896 22,349
Written.................................. (1,386) (6,301) (13,896) (22,043)
-------- --------- --------- ---------
Total Foreign Exchange.................... $ -- $ (1,936) $ (15,656) $ 3,524
======== ========= ========= =========
</TABLE>
Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1995, 1994 and 1993 are summarized below. 1995 net
foreign exchange gains include $8.8 million of net profit under the
aforementioned agreement with BMO.
<TABLE>
<CAPTION>
Gains Gains Gains
(Losses) (Losses) (Losses)
--------------------------------------------
(in thousands) Years ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Spot, futures and forwards............................. $14,290 $19,567 $25,046
Options................................................ (42) 202 (744)
------- ------- -------
Total Foreign Exchange................................ $14,248 $19,769 $24,302
======= ======= =======
</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 $15.5 million at December 31, 1995
and $14.6 million at December 31, 1994.
48
<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 no short position at December 31, 1995
and a short position of $10 million at December 31, 1994.
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 $1.04 billion at December
31, 1995 and $2.09 billion at December 31, 1994.
9. Concentrations Of Credit Risk In Financial Instruments
The Corporation had four concentrations of credit risk arising from financial
instruments at December 31, 1995 and 1994. 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
$12.8 billion or 49 percent of the Corporation's total credit exposure at
December 31, 1995 and $12.1 billion or 47 percent of the Corporation's total
credit exposure at December 31, 1994.
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 $5.7 billion or 22 percent
of the Corporation's total credit exposure at December 31, 1995 and $5.2 billion
or 20 percent of the Corporation's total credit exposure at December 31, 1994.
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.
49
<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 $1.8 billion or 7 percent of the
Corporation's total credit exposure at December 31, 1995 and $3.1 billion or 12
percent of the Corporation's total credit exposure at December 31, 1994.
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 $2.0 billion or
8 percent of the Corporation's total credit exposure at December 31, 1995 and
$2.8 billion or 11 percent of the Corporation's total credit exposure at
December 31, 1994.
10. Retirement And Other Postemployment Plans
The Corporation has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1995. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1995. 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. In 1995, the Corporation
prospectively expanded the definition of qualifying compensation and reduced the
rate used to compute retirement benefits. The estimated net cost savings
generated by these changes is $2.28 million in 1995.
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 were both zero as a
result of the full funding limitation. For 1995 and 1993, cumulative
contributions were greater than the amount recorded as pension expense for
financial reporting purposes.
In 1995, the Corporation changed mortality rates from the 1984 Unisex
Pensioner Mortality Table to the 1983 Group Annuity Mortality Table in
accordance with the Retirement Protection Act of 1994. In addition, the
assumption regarding future annual increases were modified as follows: the wage
base was decreased from 6% to 5% and the Consumer Price Index was reduced by 1%
at each age. These changes had no material effect on 1995 pension expense. 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 prior years' pension expense.
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1995*** 1994** 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $145,430 in 1995,
$105,804 in 1994, and $125,726 in 1993......................................... $ 162,325 $ 122,357 $ 143,111
========= ========= =========
Projected benefit obligation for service rendered to date....................... $(212,772) $(172,016) $(206,048)
Plan assets at fair value*...................................................... 206,539 187,249 211,380
--------- --------- ---------
Excess of plan assets over projected benefit obligation......................... (6,233) 15,233 5,332
Unrecognized net (gain) loss from past experience different from that assumed
and effects of changes in assumptions.......................................... 17,401 (3,416) 11,331
Prior service cost not yet recognized in net periodic pension cost.............. (8,797) (4,221) (286)
Unrecognized net asset at December 31 being recognized over 16.3 years
from January 1, 1986........................................................... (2,222) (2,577) (3,045)
Contributions made between measurement date (September 30) and end of year...... 7,827 - -
--------- --------- ---------
Prepaid pension cost........................................................... $ 7,976 $ 5,019 $ 13,332
========= ========= =========
Assumptions used:
Discount rate.................................................................. 7.25% 7.75% 7.25%
Rate of increase in compensation............................................... 5.70% 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.
***Plan assets and obligations measured as of September 30, 1995.
Net pension expense included the following components for the primary plan:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period.................................... $ 7,659 $ 10,796 $ 9,453
Interest cost on projected benefit obligation..................................... 13,718 13,526 13,278
Actual return on plan assets...................................................... (32,128) 1,368 (26,778)
Net amortization and deferral..................................................... 16,271 (17,460) 12,369
-------- -------- --------
Net periodic pension expense..................................................... $ 5,520 $ 8,230 $ 8,322
======== ======== ========
</TABLE>
50
<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 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation............................. $ 5,871 $ 7,703 $ 8,944
Projected benefit obligation for service rendered to date.. 14,543 19,573 15,425
Accrued pension liability.................................. 7,599 6,138 8,944
Net periodic pension expense............................... 4,256 6,983 5,491
Assumptions used:
Discount rate............................................ 5.25% 5.75% 5.00%
Rate of increase in compensation......................... 5.70% 6.60% 6.60%
</TABLE>
During 1995, 1994 and 1993, the Corporation's lump-sum benefit payments to
retirees resulted in settlement losses of approximately $.8 million, $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 1995, 1994 and 1993 was $9,770,000, $15,222,000, and
$13,830,000, 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 (and their dependents). 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 plan participants 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).
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 benefit expense. The following table sets forth the
postretirement medical care benefit plan's status at December 31, 1995, 1994 and
1993 for the Corporation:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1995*** 1994** 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Retirees.............................................. $(22,104) $(28,562) $(26,792)
Fully eligible active plan participants............... (3,744) (5,041) (5,151)
Other active plan participants........................ (13,418) (13,637) (12,107)
-------- -------- --------
Accumulated postretirement benefit obligation.......... (39,266) (47,240) (44,050)
Plan assets at fair value*............................. 8,350 6,924 4,781
-------- -------- --------
Accumulated postretirement benefit obligation in
excess of plan assets................................. (30,916) (40,316) (39,269)
Unrecognized net (gain) loss from past experience
different from that assumed........................... (11,385) (949) 2,163
Prior service cost not yet recognized in net periodic
postretirement benefit cost........................... 2,982 3,177 -
Unrecognized transition obligation..................... 33,430 35,396 37,448
-------- -------- --------
Prepaid (accrued) postretirement benefit cost.......... $ (5,889) $ (2,692) 342
======== ======== ========
Assumptions used in determining actuarial present
value of benefit obligation:
Discount rate......................................... 7.25% 7.75% 7.25%
Rate of increase in health care costs:
Initial........................................... 9% 12% 12%
Ultimate.......................................... 6% 7% 7%
Expected long-term asset return....................... 8% 8% ****
</TABLE>
*Plan assets consist primarily of participating units in collective trust
funds administered by HTSB.
**Plan assets and obligations measured as of September 30, 1994.
***Plan assets and obligations measured as of September 30, 1995.
****For 1993 postretirement medical expense, no assets were assumed to exist.
The initial funding occurred in 1993.
Net postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period....... $ 1,260 $2,003 $1,367
Interest cost on accumulated postretirement benefit
obligation.......................................... 2,634 3,399 2,969
Actual return on plan assets......................... (1,426) 2 (76)
Amortization of transition obligation over 20 years.. 2,623 1,763 2,047
------- ------ ------
Net postretirement benefit expense.............. $ 5,091 $7,167 $6,307
======= ====== ======
</TABLE>
For 1995, the weighted average annual rate of increase in the per capita
cost of covered benefits was assumed to be 9 percent and was assumed to decrease
gradually to 6 percent in 2001 and remain level thereafter. For 1994 and 1993,
the weighted average annual rate of increase in the per capita cost of covered
benefits was assumed to be 12 percent and was assumed to decrease gradually to 7
percent in 2001 and remain 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
51
<PAGE>
year would have increased the accumulated postretirement benefit obligation as
of September 30, 1995, September 30, 1994 and December 31, 1993 by $6.3 million,
$7.3 million and $6.7 million, respectively, and the aggregate service and
interest cost components of net postretirement benefit expense for 1995 by
approximately $.7 million.
11. Lease Expense And Obligations
Rental expense for all operating leases was $18,144,000 in 1995, $16,002,000 in
1994, and $16,623,000 in 1993. These amounts include real estate taxes,
maintenance, and other rental-related operating costs of $3,992,000, $4,151,000,
and $4,712,000 for 1995, 1994, and 1993 respectively, paid under net lease
arrangements. Lease commitments are primarily for office space. Minimum rental
commitments as of December 31, 1995 for all noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------------------------
<S> <C>
1996.................................................................. $15,863
1997.................................................................. 14,246
1998.................................................................. 13,753
1999.................................................................. 9,683
2000.................................................................. 6,293
2001 and thereafter................................................... 10,166
-------
Total minimum future rentals..................................... $70,004
=======
</TABLE>
Occupancy expenses for 1995, 1994 and 1993 have been reduced by
$13,200,000, $13,816,000 and $13,300,000, respectively, for rental income from
leased premises.
12. Income Taxes
The 1995, 1994 and 1993 applicable income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
(in thousands) Federal State Foreign Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995: Current $68,348 $ 3,178 $29 $ 71,555
Deferred........................... (2,683) 1,303 - (1,380)
------- ------- --- --------
Total.............................. $65,665 $ 4,481 $29 $ 70,175
======= ======= === ========
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
======= ======= === ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1995, and at December 31, 1994:
<TABLE>
<CAPTION>
(in thousands) December 31 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax assets:
Allowance for possible credit losses...................... $ 51,179 $ 53,765
Intangible assets......................................... 8,023 7,182
Deferred employee compensation............................ 5,116 4,432
Deferred expense and prepaid income....................... 7,467 7,029
Other real estate......................................... 800 2,370
Pension and medical trust................................. 4,917 3,910
Other assets.............................................. 2,093 1,423
-------- --------
Deferred tax assets.................................... 79,595 80,111
-------- --------
Gross deferred tax liabilities:
Depreciable assets........................................ (3,200) (3,899)
Other liabilities......................................... (1,917) (3,114)
-------- --------
Deferred tax liabilities............................... (5,117) (7,013)
Valuation allowance......................................... - -
-------- --------
Net deferred tax assets................................... 74,478 73,098
-------- --------
Tax effect of adjustment related to SFAS No. 115............ (17,787) 21,535
-------- --------
Net deferred tax assets including adjustment related to SFAS
No. 115.................................................... $ 56,691 $ 94,633
======== ========
</TABLE>
At December 31, 1995, the net deferred tax asset of $74.5 million included
$62.4 million for Federal tax and $12.1 million for Illinois tax. The
Corporation has fully recognized both its Federal and Illinois deferred tax
assets. Current taxable income and taxable income generated in the statutory
carryback period is sufficient to support the entire deferred tax asset. The
deferred taxes reported on the Corporation's Consolidated Statement of Condition
at December 31, 1995 also include a $17.8 million deferred tax liability for the
tax effect of the net unrealized gains associated with marking to market certain
securities designated as available for sale.
52
<PAGE>
Total income tax expense of $70,175,000 for 1995, $24,528,000 for 1994, and
$39,879,000 for 1993 reflects effective tax rates of 32.2 percent, 20.1 percent
and 25.6 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 to income before income taxes were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------ ------------------ ------------------
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................................... $76,204 35.0% $42,656 35.0% $54,503 35.0%
Increase (reduction) in income tax expense due to:
Tax-exempt income from loans and investments net of
municipal interest expense disallowance............. (10,463) (4.8) (14,135) (11.6) (15,213) (9.7)
Reduction of deferred tax valuation allowance........ - - (2,825) (2.3) - -
Other, net........................................... 4,434 2.0 (1,168) (1.0) 589 .3
------- ---- ------- ---- ------- ----
Actual tax expense..................................... $70,175 32.2% $24,528 20.1% $39,879 25.6%
======= ==== ======= ==== ======= ====
</TABLE>
The tax expense from net gains on security sales amounted to $9,094,000,
$4,440,000, and $5,166,000 in 1995, 1994, and 1993, respectively.
13. Investments In Subsidiaries And Statutory Restrictions
Bankcorp's investment in the combined net assets of its wholly-owned
subsidiaries was $1,175,037,000 and $1,026,515,000 at December 31, 1995 and
1994, 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, $235,622,000 of dividends at
December 31, 1995. Actual dividends paid, however, would be subject to prudent
capital maintenance. Cash dividends paid to Bankcorp by its subsidiaries
amounted to $63,265,000 and $49,731,000 in 1995 and 1994, 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 1995 and
1994, daily average reserve balances of $198 million and $206 million,
respectively, were required for those subsidiaries of Bankcorp that must
maintain such balances. At year-end 1995 and 1994, balances on deposit at the
Federal Reserve Bank totaled $441 million and $219 million, respectively.
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 financial position.
53
<PAGE>
15. Foreign Activities (By Domicile Of Customer)
Income and expenses identifiable with foreign and domestic operations are
summarized in the table below:
<TABLE>
<S> <C> <C> <C>
1995 (in thousands) Foreign Domestic Consolidated
- ---------------------------------------------------------------------------
Total operating income........... $ 49,329 $ 1,353,204 $ 1,402,533
Total expenses................... 23,922 1,160,885 1,184,807
---------- ----------- -----------
Income before taxes.............. 25,407 192,319 217,726
Applicable income taxes.......... 10,098 60,077 70,175
---------- ----------- -----------
Net income....................... 15,309 132,242 147,551
========== =========== ===========
Identifiable assets at year-end.. $ 817,228 $14,858,973 $15,676,201
========== =========== ===========
1994 (in thousands)
- ---------------------------------------------------------------------------
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
========== =========== ===========
</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, 1995, 1994 and 1993,
identifiable foreign assets accounted for 5, 7 and 6 percent, respectively, of
total consolidated assets.
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):
<TABLE>
<CAPTION>
Statement of Income
(in thousands) For the Years Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Interest on securities purchased from bank subsidiary under
agreement to resell................................................ $ 8,820 $ 7,032 $ 3,721
Interest on securities purchased from nonaffiliates under
agreement to resell................................................ - - 48
*Interest on advances to bank subsidiaries........................... 17,081 13,613 20,487
*Interest on advances to nonbank subsidiaries........................ 1 2 38
Interest on investments in Federal agency securities................ 7,442 6,387 3,212
Interest on investments in foreign securities...................... 1,367 217 -
*Interest on deposits at bank subsidiaries........................... 916 571 1,118
Interest on deposits at nonaffiliated banks......................... 463 507 1,309
*Dividends from bank subsidiaries.................................... 61,765 47,231 80,605
*Dividends from nonbank subsidiaries................................. 1,500 2,500 3,000
Other operating income.............................................. 20 58 1,488
-------- ------- --------
Total operating income.......................................... 99,375 78,118 115,026
-------- ------- --------
Interest expense on commercial paper................................ 15,054 11,496 7,779
Interest expense on long-term notes................................. 23,005 19,520 26,384
Other operating expense............................................. 6,870 5,228 7,441
-------- ------- --------
Total operating expenses........................................ 44,929 36,244 41,604
-------- ------- --------
Income before income taxes and equity in undistributed net income
of subsidiaries.................................................... 54,446 41,874 73,422
Applicable income tax benefit....................................... (4,323) (3,441) (3,827)
-------- ------- --------
Income before equity in undistributed net income of subsidiaries
and cumulative effect of a change in accounting principle.......... 58,769 45,315 77,249
*Equity in undistributed net income of bank subsidiaries............. 86,317 51,960 27,373
*Equity in undistributed net income of nonbank subsidiaries.......... 2,465 71 6,878
-------- ------- --------
Income before cumulative effect of a change in accounting principle. 147,551 97,346 111,500
Cumulative effect on prior years (to December 31, 1992) of changing
the accounting method for income taxes............................. - - 6,125
-------- ------- --------
Net income...................................................... $147,551 $97,346 $117,625
======== ======= ========
</TABLE>
*Eliminated in consolidation.
54
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet
<S> <C> <C>
(in thousands) December 31 1995 1994
---------------------------------------------------------------------------------------------
Assets
Demand balances due from banks....................................... $ 50 $ 50
Investment in U. S. Treasury and Federal agency securities........... 138,511 200,799
*Investment in foreign securities..................................... 24,754 -
*Securities purchased from bank subsidiary under agreement to resell.. 138,475 136,912
Advances to bank subsidiaries........................................ 295,000 235,000
Interest-bearing deposits at nonaffiliated banks..................... 25,000 25,000
Equity investments in wholly-owned subsidiaries:
*Banks............................................................. 1,123,183 977,125
*Nonbanks.......................................................... 51,854 49,390
Other assets......................................................... 9,115 6,451
---------- ----------
Total assets..................................................... $1,805,942 $1,630,727
========== ==========
Liabilities and Stockholder's Equity
Commercial paper outstanding......................................... $ 292,022 $ 306,737
Other liabilities.................................................... 4,192 4,026
Long-term notes...................................................... 363,952 298,810
---------- ----------
Total liabilities................................................. 660,166 609,573
Stockholder's equity................................................. 1,145,776 1,021,154
---------- ----------
Total liabilities and stockholder's equity...................... $1,805,942 $1,630,727
========== ==========
</TABLE>
*Eliminated in consolidation
Statement of Cash Flows
<TABLE>
<CAPTION>
(in thousands) For the Years Ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income....................................................................... $147,551 $ 97,346 $117,625
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income of subsidiaries........................................ (88,782) (52,031) (34,251)
Accretion and amortization...................................................... (7,069) (5,037) (3,173)
Deferred income tax (benefit) provision......................................... (52) 30 (1,418)
Net (increase) decrease in interest receivable.................................. (812) (344) 143
Other, net...................................................................... (268) (1,172) (6,484)
-------- ---------- --------
Net cash provided by operating activities....................................... 50,568 38,792 72,442
-------- ---------- --------
Investing Activities:
Net (increase) decrease in interest-bearing deposits at banks................... - (5,000) 145,000
Net (increase) decrease in securities purchased under agreement to resell....... (1,563) 14,525 (27,462)
Proceeds from maturities of portfolio securities................................ 774,155 1,102,363 674,893
Purchases of portfolio securities............................................... (729,552) (1,096,928) (862,929)
Net (increase) decrease in advances to subsidiaries............................. (60,000) 500 1,100
Return of capital from subsidiaries............................................. - - 8,261
Other, net...................................................................... (1,193) 21 (1,073)
-------- ---------- --------
Net cash (used) provided by investing activities.............................. (18,153) 15,481 (62,210)
-------- ---------- --------
Financing Activities:
Net (decrease) increase in commercial paper outstanding......................... (14,715) (19,531) 39,123
Proceeds from issuance of long-term notes....................................... 65,000 - -
Proceeds from issuance of preferred stock....................................... 180,000 - -
Cash dividends paid............................................................. (262,700) (34,738) (49,355)
-------- ---------- --------
Net cash used by financing activities......................................... (32,415) (54,269) (10,232)
-------- ---------- --------
Net increase in demand balances due from banks.................................... - 4 -
Demand balances due from banks at January 1....................................... 50 46 46
-------- ---------- --------
Demand balances due from banks at December 31..................................... $ 50 $ 50 $ 46
======== ========== ========
</TABLE>
17. Business Combinations/Intangibles
At December 31, 1995 and 1994, intangible assets, including goodwill resulting
from business combinations, amounted to $38,407,000 and $47,757,000,
respectively. Intangible assets are included in "Other Assets" on the
Consolidated Statement of Condition. Amortization of these intangibles amounted
to $9,350,000 in 1995, $10,266,000 in 1994, and $11,785,000 in 1993. The impact
of purchase accounting adjustments, other than amortization of intangibles, was
not material to the Corporation's reported results.
55
<PAGE>
18. Related Party Transactions
Bankcorp is a wholly-owned subsidiary of Bankmont, a Delaware corporation.
Bankmont is a wholly-owned subsidiary of BMO. Unamortized goodwill of $16.5
million at December 31, 1995 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 1995, 1994 and 1993, the Corporation engaged in various transactions
with BMO 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. Management fees were determined in accordance
with applicable banking regulations. During 1995, 1994 and 1993, the Corporation
received from BMO approximately $15.7 million, $12.8 million and $8.0 million
respectively, primarily for trust services, data processing and other operations
support provided by the Corporation.
Effective April 3, 1995, the Corporation and BMO agreed to combine their
U.S. foreign exchange activities. Under this arrangement, FX net profit will be
shared by the Corporation and BMO in accordance with a specific formula set
forth in the agreement. This agreement expires in April 2002 but may be extended
at that time. Either party may terminate the arrangement at its option.
Beginning with second quarter 1995, FX revenues were reported net of expenses.
1995 foreign exchange revenues included $8.8 million of net profit under this
agreement. This agreement did not have a material impact on the Corporation's
1995 net income or financial position at December 31, 1995.
In October 1991, the Corporation announced that certain U.S. corporate
banking units of HTSB and BMO 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 BMO'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 BMO. In 1993, an additional 31 customers
representing approximately $22 million in outstanding credits and $533 million
in commitments were also transferred. BMO was compensated for expenses incurred
on behalf of HTSB's customers through December 31, 1993. No material transfers
occurred in 1995 or 1994.
19. Subsequent Event
On January 11, 1996, the Corporation announced the sale of its securities
custody and related trustee services business for large institutions to
Citibank. After restructuring charges, it is estimated that the net gain on the
sale will approximate $4.0 million. The sale of the custody business for large
institutions is not expected to have a material impact on 1996 earnings.
56
<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
three years ended December 31, 1995, 1994 and 1993.
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.
57
<PAGE>
Independent Auditors' Report
- -------------------------------------------------------------------------------
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, 1995 and 1994, and the
related consolidated statements of income, changes in stockholder's equity and
cash flows for each of the years in the three year period ended December 31,
1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
January 26, 1996
58
<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. There were no
changes in independent auditors since December 31, 1993.
59
<PAGE>
- -------------------------------------------------------------------------------
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Bankcorp's Board of Directors consists of seventeen 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 51, Chairman and Chief Executive Officer of Bank of
Montreal. Elected in 1988.
F. Anthony Comper, age 50, President and Chief Operating Officer and a Director
of Bank of Montreal. Elected in 1990.
Susan T. Congalton, age 49, Managing Director, Lupine Partners (private
investments). Elected in 1988.
Roxanne J. Decyk, age 43, 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 58, 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 61, Chairman 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 69, President and Chief Executive Officer of Parker House
Sausage Company (meat processor). Elected in 1983.
Dr. Leo M. Henikoff, age 56, President and Chief Executive Officer of Rush-
Presbyterian-St. Luke's Medical Center (health care and related services).
Elected in 1986.
Dr. Stanley O. Ikenberry, age 61, Regent Professor and President Emeritus of the
University of Illinois and a Director of Franklin Life Insurance Company and
Pfizer, Inc. Elected in 1985.
Richard M. Jaffee, age 60, Chairman and Chief Executive Officer, Oil-Dri
Corporation of America (a developer, manufacturer and marketer of sorbent
products). Elected in 1995.
Edward W. Lyman, Jr., age 53, Vice Chair of the Board of Bankcorp and Harris
Trust and Savings Bank. Elected in 1995.
Alan G. McNally, age 50, Chairman of the Board and Chief Executive Officer of
Bankcorp and Harris Trust and Savings Bank. Elected in 1993.
Maribeth S. Rahe, age 47, Vice Chair of the Board of Bankcorp and Harris Trust
and Savings Bank. Elected in 1995.
Charles H. Shaw, age 63, Chairman, The Charles H. Shaw Company (real estate
development). Elected in 1990.
Richard E. Terry, age 58, Chairman and Chief Executive Officer, Peoples Energy
Corporation (public utility) and a Director of Amsted Industries. Elected in
1992.
James O. Webb, age 64, President, James O. Webb & Associates, Inc. (consultant
in new ventures and business development). Elected in 1995.
William J. Weisz, age 69, Chairman of the Board, Motorola, Inc. (manufacturer of
electronic equipment). Elected in 1988.
In addition to Messrs. McNally and Lyman and Ms. Rahe, the Corporation had
nine executive officers at December 31, 1995--Richard J. Brown, age 51, Jeffrey
D. Butterfield, age 49, Charles H. Davis, age 53, Pierre O. Greffe, age 43,
Kenneth R. Keck, age 57, Louis F. Lanwermeyer, age 47, Charles R. Tonge, age 46,
Edward J. Williams, age 53 and Nancy B. Wolcott, age 41. Each officer has held
executive positions with the Corporation or an affiliate for many years.
60
<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 Bankcorp
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 and one Fixed Rate Subordinated
Note to its parent company, Bankmont. The principal amount of
these notes totals $200 million for the floating rate notes and
$65 million for the fixed rate note, respectively. The floating
rate notes mature in 2004, 2005 and 2006, respectively. The fixed
rate note matures in 2007. 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) 1995 Managerial Incentive Plan
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
d) 1995 Stock Appreciation Rights Plan
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 1995.
- -------------------------------------------------------------------------------
*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.
61
<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 25th day of
March 1996.
Alan G. McNally Chairman of the Board and
Chief Executive Officer
Pierre O. Greffe Chief Financial Officer
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, Chairman of the Board and Chief Executive
Officer of the Corporation, as attorney-in-fact for the following Directors on
behalf of Harris Bankcorp, Inc. on the 25th day of March 1996.
F. Anthony Comper Daryl F. Grisham Maribeth S. Rahe
Susan T. Congalton Leo M. Henikoff Charles H. Shaw
Roxanne J. Decyk Stanley O. Ikenberry Richard E. Terry
Wilbur H. Gantz Richard M. Jaffee James O. Webb
James J. Glasser Edward W. Lyman, Jr. William J. Weisz
Alan G. McNally
Attorney-In-Fact
Supplemental Information
No annual report or proxy statement will be sent to security holders in 1996.
62
<PAGE>
BYLAWS HARRIS BANKCORP, INC.
[LOGO OF HARRIS BANKCORP, INC.]
<PAGE>
BYLAWS
JULY, 1995
<PAGE>
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be established and
maintained as prescribed in the Certificate of Incorporation of the Corporation.
SECTION 2. OTHER OFFICES. The Corporation may have other offices, either
within or outside of the State of Delaware, at such place or places as the
Board of Directors of the Corporation may from time to time appoint or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. LOCATION. Meetings of stockholders of the Corporation shall be held
at such place or places as shall be designated by the Board of Directors of the
Corporation as set forth in the notice thereof.
SECTION 2. ANNUAL ELECTION OF DIRECTORS. The annual meeting of stockholders
for the election of members of the Board of Directors and the transaction of
other business shall be held in each year on the third Wednesday of April. If
the date of the annual meeting shall fall upon a legal holiday, the meeting
shall be held on the next succeeding business day. At each annual meeting, the
stockholders entitled to vote shall elect a Board of Directors and they may
transact such other corporate business as may properly come before the meeting.
SECTION 3. VOTING. Each stockholder entitled to vote in accordance with the
terms of the Certificate of Incorporation of the Corporation and in accordance
with the provisions of these bylaws shall be entitled to vote, in person or by
proxy, the shares of stock of the Corporation entitled to vote held by such
stockholder, but no proxy shall be voted after one year from its date, unless
such proxy provides for a longer period. Stockholders may cumulate their votes
for election of directors as prescribed in the Certificate of Incorporation of
the Corporation, and taking into account the number of votes cast on a
cumulative basis, the election of directors shall be determined by a plurality
vote. All other questions shall be decided by the vote of the holders of a
majority of the stock present in person or represented by proxy at the meeting
concerned, except as otherwise provided by the Certificate of Incorporation or
by applicable law.
SECTION 4. QUORUM. Except as otherwise required by applicable law, by the
Certificate of Incorporation of the Corporation or by these bylaws, the
presence, in person or by proxy, of stockholders holding a majority of the stock
of the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders. In case a quorum shall not be present at any meeting thereof,
a majority in interest of the stockholders entitled to vote thereat and present
in person or by proxy shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting (or as otherwise required
by law) until the requisite amount of stock entitled to vote shall be present.
At any such adjourned meeting at which the requisite amount of stock entitled to
vote shall be represented, any business may be transacted which might have been
transacted at the meeting as originally noticed.
SECTION 5. SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the Board of Directors or by
the Chairman of the Board, a Vice Chair of the Board or the President. It shall
be the duty of the Chairman of the Board to call such meetings upon a request in
writing therefor, stating the purpose or purposes thereof and delivered to the
Secretary, signed by a majority of the members of the Board of Directors or by a
majority in interest of the stockholders entitled to vote, or by resolution of
the directors.
1
<PAGE>
SECTION 6. NOTICE OF MEETINGS. Written or printed notice, stating the place
and time of the meeting of the stockholders (and, in the case of a special
meeting thereof, the purpose or purposes for which the meeting is called), shall
be given by the Secretary to each stockholder entitled to vote thereat at his
last known post office address, not less than ten days nor more than sixty days
before each such meeting.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. The Board of Directors shall consist of such
number of members as shall be fixed from time to time by vote of the
stockholders or the Board of Directors pursuant to and subject to the
limitations of Article Seventh of the Certificate of Incorporation of the
Corporation. The directors shall be elected at the annual meeting, or at an
adjournment thereof, of the stockholders of the Corporation and each director
shall be elected to serve until his successor shall be elected and shall
qualify. Directors need not be stockholders.
SECTION 2. VACANCIES. Vacancies on the Board of Directors and newly created
directorships resulting from an increase in the authorized number of directors
may be filled at a special meeting of the stockholders called for that purpose.
Additionally, as provided in Article Seventh of the Certificate of Incorporation
of the Corporation, the Board of Directors, by the affirmative vote of a
majority of the Board of Directors at any regular meeting of the Board or (if
notice of the proposed action is contained in the notice of such special
meeting) at any special meeting of the Board, may during the interval between
annual meetings of stockholders elect not more than a total of three persons as
directors to fill vacancies or newly created directorships.
SECTION 3. RESIGNATIONS. Any director of the Corporation may resign at any
time. Such resignation shall be made by written notice to the Corporation, and
shall take effect at the time specified therein, and if no time be specified, at
the time of its receipt by the Chairman of the Board or Secretary of the
Corporation. The acceptance of a resignation shall not be necessary to make it
effective.
SECTION 4. REMOVAL. Any director or directors may be removed either for or
without cause at any time, by the affirmative vote of the holders of a majority
of all the shares of stock outstanding and entitled to vote, at a special
meeting of the stockholders called for the purpose; provided, however, that no
director may be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire membership of the Board of Directors.
SECTION 5. POWERS. The Board of Directors shall exercise all of the powers of
the Corporation except such as are by law, or by the Certificate of
Incorporation of the Corporation, or by these bylaws, conferred upon or reserved
to the stockholders.
SECTION 6. COMMITTEES. The Board of Directors may, by resolution or
resolutions passed by majority of the whole Board, designate an Executive
Committee, and one or more other committees, each committee to consist of two or
more of the directors of the Corporation, which, to the extent provided in said
resolution or resolutions or in these bylaws, shall have and may exercise the
powers of the Board of Directors in the management of the business and affairs
of the Corporation, and may have power to authorize the Seal of the Corporation
to be affixed to all papers which may require it. The committees shall keep
regular minutes of their proceedings and report the same to the Board of
Directors when required. The Chairman of the Board, a Vice Chair of the Board,
the President or the member or members of any Board committee present at any
duly called meeting and not disqualified from voting, whether or not such member
or members constitute a quorum, may designate another member or other members of
the Board of
2
<PAGE>
Directors to act at such meeting, and any director or directors so designated
shall have the same powers, duties and compensation as regular members. The
presence at the meeting of any director or directors so designated shall be
considered in determining whether a quorum is present.
SECTION 7. MEETINGS. All meetings of the Board of Directors shall be held at
the offices of Harris Trust and Savings Bank in the City of Chicago, Illinois,
or at such other place as the Chairman of the Board, a Vice Chair of the Board
or President may designate.
Regular meetings of the Board of Directors shall be held, as soon as may be
practicable after the adjournment of the regular meetings of the Board of
Directors of said Bank scheduled by its bylaws (as the same may be amended from
time to time) on the third Wednesday of each month. In the event the Chairman
of the Board, a Vice Chair of the Board or President shall designate an
alternate meeting place for any regular meeting, notice of the alternate meeting
place shall be given by mailing the same to each director not later than five
business days preceding the date of the meeting, or by telegraphing the same to
him or delivering the same to him personally not later than the day previous to
such meeting, but save for any such required notice of alternate meeting place,
such regular meeting shall be held without other notice than by this bylaw.
Special meetings of the Board may be called by the Chairman of the Board, a Vice
Chair of the Board or the President or on the written request of any three
directors. Except to the extent the time or method of giving notice is
regulated by statute, notice of any such meeting and of any alternate meeting
place shall be given by mailing the same to each director not later than five
business days preceding the date of the meeting, or by telegraphing the same to
him or delivering the same to him personally not later than the day previous to
such meeting. Except as otherwise required by statute or these bylaws, neither
the business to be transacted at nor the purpose of any meeting need be
specified in the notice or any waiver thereof.
SECTION 8. QUORUM. A majority of the directors shall constitute a quorum for
the transaction of business. If at any meeting of the Board there shall be less
than a quorum present, a majority of those present may adjourn the meeting from
time to time until a quorum is obtained, and no further notice thereof need be
given other than by announcement at the meeting which shall be so adjourned.
SECTION 9. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting if all members of the Board or of such committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of the Board or committee.
SECTION 10. MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of
Directors or any committee designated by the Board, may participate in the
meeting of the Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in such meeting shall constitute
presence in person at such meeting.
3
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be chosen by the
Board of Directors and may include a Chairman of the Board, one or more Vice
Chairs of the Board, and a President, one of whom shall be designated the Chief
Executive Officer, one or more Vice Presidents (one or more of whom may be
designated Senior Executive Vice President, Executive Vice President or Senior
Vice President), a Treasurer and a Secretary, and such Assistant Treasurers and
Assistant Secretaries as the Board of Directors may deem proper. All of such
officers shall be elected by the Board of Directors. None of the officers except
the Chairman of the Board, a Vice Chair of the Board and the President need be
directors. The officers shall be elected at the first meeting of the Board of
Directors after each annual meeting of the stockholders. Any number of offices
may be held by the same person.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such
other officers and agents as it may deem advisable, who shall hold their offices
for such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Board of Directors.
SECTION 3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall exercise
general control and supervision of the business and affairs of the Corporation,
shall see to it that all resolutions and orders of the Board of Directors are
effected and shall have such other powers and duties as the directors may
specify. He may appoint persons to hold office as Senior Vice President or
below. During any absence or disability to act of the Chief Executive Officer,
his powers and duties shall be exercised and performed by a Vice Chair of the
Board or by an officer designated by the Board of Directors for that purpose. He
shall be an ex-officio member of all Board committees.
SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at
all meetings of the Board of Directors and of the stockholders. He shall have
general responsibility for all Board matters, including without limitation, the
development of corporate governance policies and processes, committee
assignments, and meeting agendas. He shall have such other powers and duties as
the Board of Directors may specify. He shall be an ex-officio member of all
Board committees.
SECTION 5. PRESIDENT. The President shall have such powers and duties as the
Board of Directors or the Chief Executive Officer may specify. During any
absence or disability to act of the President, his powers and duties shall be
performed and exercised by an officer designated in writing by the Chief
Executive Officer, or in the absence of such designation, by an officer
designated by the Board of Directors for that purpose.
SECTION 6. CHIEF OPERATING OFFICER. The Chief Operating Officer shall manage
or supervise the management of the day-to-day operations of the Corporation and
shall have such powers and duties as the Chief Executive Officer or the Board
of Directors may specify.
SECTION 7. VICE CHAIR OF THE BOARD. A Vice Chair of the Board shall have such
powers and duties as the Board of Directors may specify. During any absence or
disability to act of the Chairman of the Board, a Vice Chair of the Board shall
preside at all meetings of the Board of Directors and of the stockholders and
have and exercise his powers and duties.
SECTION 8. VICE PRESIDENTS. Each Vice President, including any Senior
Executive Vice President, Executive Vice President or Senior Vice President,
shall have such powers and shall perform such duties as shall be assigned to him
by the Board of Directors, the Executive Committee or the Chief Executive
Officer.
4
<PAGE>
SECTION 9. TREASURER. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the Corporation. He shall deposit all moneys
and other valuables in the name and to the credit of the Corporation in such
depositaries as may be designated by the Board of Directors. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Chairman of the
Board, a Vice Chair of the Board or the President or by the Board of Directors,
taking proper vouchers for such disbursements . He shall render to the Chief
Executive Officer and to the Board of Directors at the regular meetings of the
Board of Directors, or whenever either of them may request it, an account of all
his transactions as Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, he shall give the Corporation a bond for
the faithful discharge of his duties in such amount and with such surety as the
Board of Directors shall prescribe.
SECTION 10. SECRETARY. The Secretary shall give, or cause to be given, notice
of all meetings of stockholders or the Board of Directors, and all other notices
required by law or by these bylaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman of the Board, a Vice Chair of the Board or the President, or by
the Board of Directors or (as the case may be) the stockholders, upon whose
request the meeting is called as provided in these bylaws.
He shall record all the proceedings of the meetings of the stockholders, or the
Board of Directors in appropriate books to be kept for that purpose, and shall
perform such other duties as may be assigned to him by the Chairman of the Board
or by the Board of Directors, or the Executive Committee. He shall have the
custody of the Seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the Chairman of the Board, a Vice
Chair of the Board or the President or by the Board of Directors or the
Executive Committee, and attest the same.
SECTION 1 1. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the Board of Directors, the Executive Committee or the Chief
Executive Officer.
SECTION 12. SECRETARY OF THE BOARD. The Board of Directors may appoint a
Secretary of the Board other than the Secretary of the Corporation as provided
for in Section 10 of this Article IV, who may or may not be a member of the
Board and who shall give or cause to be given notice of all meetings of
stockholders and the Board of Directors. He shall record all the proceedings of
the meetings of the stockholders and of the Board of Directors in appropriate
books to be kept for that purpose, and perform such other duties as may be
assigned to him by the Chairman of the Board, the Board of Directors or the
Executive Committee.
5
<PAGE>
ARTICLE V CERTIFICATES OF STOCK
SECTION 1. FORM. Every holder of stock in the Corporation shall be entitled
to have a certificate, signed by, or in the name of the Corporation, by the
Chairman of the Board, or the President, or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation, certifying the number of shares owned by him in the
Corporation. Each such certificate shall be countersigned by a transfer agent
and registered by a registrar approved by the Board of Directors for such
purpose. If any such certificate is manually countersigned on behalf of a
registrar other than the Corporation or its employee, any or all of the other
signatures on such certificate on behalf of the Corporation or on behalf of a
transfer agent may be facsimile. In case any officer or any transfer agent who
has signed or countersigned, or whose facsimile signature or signatures have
been used on any such certificate shall cease to be such officer or transfer
agent, whether because of death, resignation or otherwise, before such
certificate shall have been issued, such certificate may nevertheless be
adopted by the Corporation and be issued and delivered with the same effect as
if the officer or transfer agent concerned had not ceased to be such officer or
transfer agent (as the case may be). The Seal of the Corporation or a
facsimile thereof may, but need not, be affixed to certificates of stock of the
Corporation.
SECTION 2. REPLACEMENT. The Board of Directors may (by a general resolution
or otherwise) authorize or direct a new stock certificate or certificates to be
issued in place of any stock certificate or certificates theretofore issued by
the Corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person or persons claiming the certificate of
stock to be lost or destroyed. When so authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or the legal representative or
representatives thereof, to give the Corporation a bond in such sum as the
Board of Directors (by a general resolution or otherwise) may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost or destroyed.
SECTION 3. TRANSFER. Upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares of capital stock of the
Corporation duly endorsed (or accompanied by proper evidence of succession,
assignment or authority to transfer) and otherwise in compliance with applicable
law, the Certificate of Incorporation of the Corporation and these bylaws with
respect to such transfer, the Corporation shall issue, or cause to be issued, a
new stock certificate or certificates to the person or persons entitled thereto
and cause the old stock certificate or certificates surrendered therefor to be
appropriately canceled.
6
<PAGE>
ARTICLE VI MISCELLANEOUS
SECTION 1. STOCKHOLDERS' RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of any such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 2. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation of the Corporation and any resolutions adopted by the Board of
Directors pursuant to Part 1 of Article Fourth of the Certificate of
Incorporation of the Corporation with respect to any series of Preferred Stock
of the Corporation, the Board of Directors may, at any regular or special
meeting thereof and out of funds legally available therefor, declare dividends
upon the capital stock of the Corporation as and when the Board of Directors
deems expedient.
SECTION 3. SEAL. The corporate Seal shall be circular in form and shall
contain the name of the Corporation, the year of its creation and the words and
figures "CORPORATE SEAL DELAWARE". Said Seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall be determined
by the Board of Directors.
SECTION 5. CHECKS. All checks, drafts or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such officer or officers, agent or agents of the
Corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
SECTION 6. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by
these bylaws to be given, personal notice is not meant unless expressly so
stated, and any notice so required shall be deemed to be sufficient if given by
depositing the same in a post office box in a sealed post-paid wrapper,
addressed to the person entitled thereto at his last known post office address,
and such notice shall be deemed to have been given on the day of such mailing.
Stockholders not entitled to vote shall not be entitled to receive notice of any
meetings except as otherwise provided by law.
Whenever any notice whatever is required to be given under the provisions of any
law, or under the provisions of the Certificate of Incorporation of the
Corporation or these bylaws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
7
<PAGE>
ARTICLE VII AMENDMENTS
These bylaws may be amended at any annual meeting of the stockholders or (if
notice of the proposed alteration or repeal, or bylaw or bylaws to be made, be
contained in the notice of such special meeting) at any special meeting thereof,
by the affirmative vote of the holders of a majority of the stock issued and
outstanding and entitled to vote thereat, or these bylaws may be amended by the
affirmative vote of a majority of the Board of Directors, at a regular meeting
of the Board, or (if notice of the proposed amendment or bylaw or bylaws to be
made, be contained in the notice of such special meeting) at any special meeting
of the Board.
******
I, ________________ hereby certify that I am the __________________ Secretary
of Harris Bankcorp, Inc., a Delaware corporation, that the foregoing is a true
and correct copy of the bylaws of said Corporation, and that the same are in
full force and effect this _______ day of _________________, 19__.
_____________________
Secretary
8
<PAGE>
INDEX
<TABLE>
<S> <C>
A
Amendments of Bylaws................. 8
Annual Meeting of
Stockholders........................ 1
Assistant Secretaries................ 5
Assistant Treasurers................. 5
B
Board of Directors................... 2
Board action without
meeting............................. 3
C
Chairman of the Board................ 4
Chief Executive Officer.............. 4
Chief Operating Officer.............. 4
Committees appointed by
Board............................... 2
D
Directors:
Election of...................... 1
General powers................... 2
Removal of....................... 2
Resignation of................... 2
Dividends............................ 7
E
Executive Committee.................. 2
F
Fiscal year.......................... 7
M
Meetings:
Annual Stockholders.............. 1
Special Stockholders............. 1
Regular Board.................... 3
Special Board.................... 3
N
Notice of:
Annual Meeting of Stockholders... 2
Special Meeting of Stockholders.. 2
Regular Board Meetings........... 3
Special Board Meetings........... 3
General.......................... 7
Waiver of notice................. 7
O
Officers............................. 4
P
Place of Meetings:
Board............................ 3
Stockholders..................... 1
President............................ 4
Q
Quorum:
Directors' Meetings.............. 3
Stockholders' Meetings........... 1
R
Record dates......................... 7
Registrar of stock................... 6
S
Seal................................. 7
Secretary............................ 5
Stock certificates................... 6
T
Transfer agent....................... 6
Treasurer............................ 5
V
Vice Chair of the Board.............. 4
Vice Presidents...................... 4
W
Waiver of notice..................... 7
</TABLE>
<PAGE>
[LOGO OF HARRIS BANKCORP]
Harris Bankcorp, Inc.
111 West Monroe Street . Chicago, Illinois 60603
<PAGE>
1995 HARRIS BANK MANAGERIAL INCENTIVE PLAN
Approvals: CALVIN S. STOWELL, JR.
_________________________
Calvin S. Stowell, Jr.
Executive
Human Resources
ALAN G. MCNALLY
_________________________
Alan G. McNally
Chairman / CEO
Harris Bankcorp
Compensation Division
July, 1995
<PAGE>
1995 HARRIS BANK MANAGERIAL INCENTIVE PLAN
I. PURPOSE
The 1995 Harris Bank Managerial Incentive Plan is designed to link
employee rewards to the achievement of Harris Bank and Bank of Montreal
(BMO) objectives.
II. OBJECTIVES
1. Facilitate the achievement of the goals and objectives for the Harris
Bank and the BMO "Family of Companies".
2. Motivate employees to achieve consistently high levels of performance
by directly linking rewards to performance.
3. Promote teamwork and cross functional efforts.
4. Attract and retain qualified employees.
5. Assist in communicating management strategies for the Harris Bank and
BMO.
III. EFFECTIVE DATE
January 1, 1995 to December 31, 1995
IV. ELIGIBILITY
Members of the office of the Chairman, Executive Vice-Presidents, Senior
Vice-Presidents, and selected Senior managers are eligible to participate
in the plan.
Eligible positions corresponding incentive targets are listed in Exhibit
A. If an employee is promoted or transferred from one eligible position
and/or incentive plan to another, the incentive opportunity will be pro-
rated based on the time spent in each position and/or incentive plan. New
hires may be eligible for pro-rated awards based on the date of hire
during the plan year.
V. PLAN DESIGN
A. DESIGN SUMMARY
1. Actual incentive compensation will be based on a maximum of three
weighted performance measurement groupings:
a. Total Harris Bank - Net Income (NI)
b. BMO consolidated ROE divided by a weighted average peer bank ROE
c. Individual employee - Performance Planning and Review (PPR)
rating
1
<PAGE>
1995 HARRIS BANK MANAGERIAL INCENTIVE PLAN
Plan payout multipliers for the above three performance groupings are
described in Exhibits B, C and D, respectively.
2. The BMO multiplier will be calculated based on the consolidated ROE of the
BMO, divided by the weighted average ROE of the five largest Canadian banks.
a. Multiplier will be set to zero if BMO's ROE is below the threshold
level (i.e. five percentage points higher than the equivalent of a
risk-free rate of return -- defined as the tax-adjusted yield of
10-year Government of Canada bonds, averaged over the calendar year)
b. 1995 threshold level has been set at 12%
3. Target awards, which are based on a percentage of base salary, are
established for all participants.
4. Total Harris Bank performance is linked to plan funding:
a. Harris Bank performance must meet threshold of 90% of annual target
b. Managerial plan funding adjusted to reflect both Harris Bank and BMO
performance above/below annual target.
B. FORMULA
Award = Position Target x Team Performance x Individual Performance
(Harris + BMO Rating Multiplier
Multiplier Multiplier)
C. PLAN FUNDING
1. Target Pool
The Target Pool is the sum of individual incentive targets awards weighted by
the expected distribution of performance rating levels. For 1995, the incentive
pool is projected to be $4,733,036.
2. Final Pool
The Final Pool will be calculated following the completion of the plan year
and will be determined by adjusting the target pool to reflect actual
performance of Harris Bank and BMO and the actual distribution of PPR
ratings.
2
<PAGE>
1995 HARRIS BANK MANAGERIAL INCENTIVE PLAN
D. PARTICIPANT AWARD COMPUTATION
1. Target Award
The target award varies by position for each participant (see Exhibit A).
2. Individual Awards
The individual awards will be determined based upon a weighted combination
of Harris Bank and BMO performance, as well as each individual's
performance. The following equation will be used:
Award = Position Target x Team Performance x Individual Performance
(Harris + BMO Rating Multiplier
Multiplier Multiplier)
The incentive payout multipliers associated with Harris performance, BMO
performance and individual performance are shown in Exhibits B, C & D,
respectively.
Participants will be placed in one of the following categories to set the
relative weight for Harris Bank and BMO performance:
CATEGORY HARRIS BANK BMO
---------- ----------- ---
CEO 50% 50%
Category A 50% 50%
Category B 60% 40%
Category C 70% 30%
Category D 80% 20%
The category will be assigned and communicated to each participant at the
beginning of each plan year. See Exhibit A for each individual's
category and target assignment.
VI. TIMING
Awards are paid on an annual basis, following the end of the Plan year.
3
<PAGE>
1995 HARRIS BANK MANAGERIAL INCENTIVE PLAN
ADMINISTRATIVE PROVISIONS
1. CONTINUED EMPLOYMENT AS A CONDITION TO EARN INCENTIVE COMPENSATION
------------------------------------------------------------------
A. Except as provided herein, participants must be employed by the Bank on the
service dates set forth below in order to earn incentive compensation.
B. The service date for incentive compensation is December 31 of the Plan year
in which the compensation was generated.
C. When the employment of a participant terminates:
1. A participant whose employment terminates before a service date for any
reason other than disability, retirement, job elimination or death shall
earn no incentive compensation generated in the year of termination.
2. A participant whose employment terminates by reason of:
* Permanent disability
* Retirement (i.e., age 55 or older and 10 or more years service),
* Job elimination, or
* The participant's death
shall receive a pro-rated award payable following completion of the plan
year.
D. A participant who transfers from an incentive eligible position for
reasons not related to below standard performance and who remains in the
employ of Harris Bank shall receive a pro-rated award payable following
completion of the plan year.
E. Incentive Awards for Harris Bank employees who transfer to Bank of
Montreal will be pro-rated based upon the number of months that they were
in the Harris Plan, assuming a PPR rating for Harris service of level 3 or
better.
2. ANNUAL GOALS
------------
A. For the purpose of accruing incentive compensation, target goals will be
set and approved on at least an annual basis by the Harris Bank Board of
Directors.
3. INCENTIVE AWARDS NOT DISTRIBUTED TO PARTICIPANTS
------------------------------------------------
Any portion of incentive compensation not earned and disbursed will be
retained by the Bank.
4. PAYMENT OF AWARDS TO PARTICIPANTS
---------------------------------
4
<PAGE>
1995 HARRIS BANK MANAGERIAL INCENTIVE PLAN
Incentive compensation will be determined by the provisions of the plan.
Beyond the provisions of the Plan, normal management discretion by the
Office of the Chairman will apply.
5. WITHHOLDING AND BENEFITS
------------------------
All incentive payments are subject to the payroll and other withholding as
required by law, as well as United Way withholding.
6. MODIFICATION AND CONTINUATION OF THE PROGRAM
--------------------------------------------
The Bank reserves the right to revise or terminate the Plan at any time.
The Bank is not committed to the indefinite existence of the same or a
similar Plan, the participation of any employee in the Plan or the terms or
manner in which compensation is calculated under the Plan.
7. CONTRACT OF EMPLOYMENT
----------------------
Nothing in the Plan is intended or should be construed as creating a
contract of employment for a fixed term.
5
<PAGE>
Exhibit A
1995 Harris Bank Managerial Incentive Plan
Target Incentive Summary by Category
CIFS, PCFS, Community Affairs and Risk Management
-------------------------------------------------
<TABLE>
<CAPTION>
No. Of Incentive
Category Participants Target $'s
-------- ------------ ----------
<S> <C> <C>
CEO 1 $351,000
A 2 $313,500
B 8 $686,000
C 30 $1,293,147
D 11 $287,459
-------------------------------------------------------
Totals 52 $2,931,106
=======================================================
Provision for net PPR multiplier = 12.5% -----> $366,388
Total Managerial Fund at Target --------------> $3,297,494
Percentage of fund dependent upon Harris weight---> 64.1%
Percentage of fund dependent upon BMO weight------> 35.9%
</TABLE>
<PAGE>
Exhibit A (Cont'd)
1995 Harris Bank Managerial Incentive Plan
Target Incentive Summary by Category
Operations
----------
<TABLE>
<CAPTION>
No. Of Incentive
Category Participants Target $'s
-------- ------------ ----------
<S> <C> <C>
A 0 $0
B 0 $0
C 5 $230,712
D 16 $307,266
--------------------------------------------------------
Totals 21 $537,978
========================================================
Provision for net PPR multiplier = 12.5% -----> $67,247
Total Managerial Fund at Target ----------> $605,226
Percentage of fund dependent upon Harris weight--> 75.7%
Percentage of fund dependent upon BMO weight----> 24.3%
</TABLE>
<PAGE>
Exhibit A (Cont'd)
1995 Harris Bank Managerial Incentive Plan
Target Incentive Summary by Category
Corporate Services
------------------
<TABLE>
<CAPTION>
No. Of Incentive
Category Participants Target $'s
-------- ------------ ----------
<S> <C> <C>
A 0 $0
B 1 $92,000
C 4 $195,855
D 20 $450,203
---------------------------------------------------------
Totals 25 $738,058
=========================================================
Provision for net PPR multiplier = 12.5% ------> $92,257
Total Managerial Fund at Target -------------> $830,316
Percentage of fund dependent upon Harris weight--> 74.9%
Percentage of fund dependent upon BMO weight-----> 25.1%
</TABLE>
<PAGE>
Exhibit B
Harris Bank Performance Leverage Table
Measurement: Net Income
Target: $161.5 MM (Business Plan Target)
<TABLE>
<CAPTION>
Incentive Plan
Performance Multiplier
------------------------------- --------------
$'s % of plan %
------ --------- -----
<S> <C> <C>
... ... ...
$177.6 110% 130%
$174.4 108% 124%
$171.1 106% 118%
$167.9 104% 112%
$164.7 102% 106%
$161.5 TARGET 100% 100%
$158.2 98% 96%
$155.0 96% 92%
$151.8 94% 88%
$148.5 92% 84%
$145.3 Threshold 90% 80%
(less-than) $145.3 0% 0%
</TABLE>
Multiplier Formula:
Above Target Performance: Incentive plan mulitiplier increases by 3% for
every 1% by which Actual Net Income exceeds
Target Net Income
Below Target Performance: Incentive plan mulitiplier decreases by 2% for
every 1% by which Actual Net Income achieved is
below Target Net Income down to a minimum
threshold multiplier of 80%.
<PAGE>
Exhibit C
Bank of Montreal Performance Leverage Table
Measurement: Return On Equity (ROE)
Target: "Big 5" Canadian Banks' Average ROE
<TABLE>
<CAPTION>
Incentive Plan
Performance Multiplier *
-------------------- --------------
% of plan %
--------- --------------
<S> <C> <C>
... ...
110% 110%
108% 108%
106% 106%
104% 104%
102% 102%
TARGET 100% 100%
98% 98%
96% 96%
94% 94%
92% 92%
90% 90%
... ...
</TABLE>
* Multiplier Formula:
The incentive plan mulitiplier is the result of dividing the Bank of
Montreal ROE for the year by the average ROE of the Canadian Imperial Bank
of Commerce, Bank of Nova Scotia, Toronto Dominion Bank, National Bank, and
Royal Bank.
If BMO ROE is less than 12%, the incentive plan multiplier is 0.
<PAGE>
Exhibit D
Individual Performance Rating Table
Measurement: 1995 PPR Rating
<TABLE>
<CAPTION>
-------------------------------------------------------------
Performance Level Multiplier Distribution
-------------------------------------------------------------
<S> <C> <C>
Level 1 1.7 0 - 5%
Level 2 1.4 30 - 35%
Level 3 1.0 60 - 65%
Level 4 0 0 - 5%
=============================================================
</TABLE>
<PAGE>
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
(As Amended and Restated Effective January 1, 1995)
<PAGE>
McDermott, Will & Emery
Chicago
C E R T I F I C A T E
---------------------
I, _________________________, ___________________ of Harris Trust
and Savings Bank, hereby certify that the attached document is a correct copy of
Employees' Savings and Profit Sharing Plan of Bank of Montreal/Harris, as
amended and restated effective January 1, 1995.
Dated this ____ day of __________________, 19___.
-2-
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SECTION l 1
Introduction 1
Purpose 1
Effective Date, Plan Year 1
Employers 1
Administration of the Plan 2
Funding of Benefits 2
Plan Supplements 3
SECTION 2 4
Eligibility 4
Participation 4
Credited Service 6
Notice of Participation 6
Controlled Group Member 7
Leased Employees 7
SECTION 3 9
Participant Contributions 9
Participant 401(k) Contributions 9
Participant After-Tax Contributions 9
Payment of Participant Contributions 9
Variation, Discontinuance and Resumption
of Participant Contributions 10
Earnings for Year Ending December 31, 1995 10
Earnings for Years Ending After December 31, 1995 11
Profit Sharing Earnings 12
Maximum Amount of Participant 401(k) Contributions 12
Limitation on Participant 401(k) Contributions 12
Highly Compensated Employee 13
SECTION 4 15
Employer Contributions 15
Employer Matching Contributions 15
Aggregate Employer Profit Sharing Contribution 15
</TABLE>
<PAGE>
PAGE
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Individual Employer Profit Sharing Contribution 15
Limitations on Employer Contributions 16
Payment of Employer Contributions 16
Verification of Employer Contributions 17
No Interest in Employers 17
SECTION 5 19
The Trust Fund and the Investment Funds 19
The Trust Fund 19
The Investment Funds 19
Investment Fund Elections 20
Investment Fund Transfers 20
SECTION 6 21
Period of Participation 21
Normal Retirement 21
Settlement Date 21
Restricted Participation 22
SECTION 7 23
Accounting 23
Separate Accounts 23
Accounting Dates 23
When Employer Contributions Considered Made 24
Adjustment of Participants' Accounts 24
Allocation of Employer Contributions 25
Crediting of Participant Contributions 25
Charging Distributions 26
Rollovers 26
Statement of Account 26
Contribution Limitations 27
Combined Benefit Limitations 27
Limitation on Allocation of Contributions 28
Allocation of Earnings to Distributions of Excess Contributions 29
Multiple Use of Alternative Limitation 30
SECTION 8 31
Withdrawals and Loans During Employment 31
Withdrawal of Participant Contributions 31
General Account Withdrawals 31
-ii-
<PAGE>
PAGE
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Charging of Withdrawals 32
Loans to Participants 32
SECTION 9 35
Payment of Account Balances 35
Nonforfeitability 35
Manner of Distribution 35
Commencement of Distributions 37
Designation of Beneficiary 38
Missing Participants or Beneficiaries 40
Facility of Payment 41
Direct Transfer of Eligible Rollover Distributions 42
Distribution to Alternate Payees 42
SECTION 10 43
Absence and Reemployment 43
Breaks in Service 43
Resumption of Participation 43
Leave of Absence 44
Maternity and Paternity Absence 44
SECTION 11 46
The Benefits Administration Committee 46
Membership 46
Committee's General Powers, Rights and Duties 46
Manner of Action 48
Interested Committee Member 48
Resignation or Removal of Committee Members 49
Committee Expenses 49
Information Required by Committee 49
Uniform Rules 50
Review of Benefit Determinations 50
Committee's Decision Final 50
SECTION 12 52
General Provisions 52
Additional Employers 52
Action by Employers 52
Waiver of Notice 52
Gender and Number 52
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<PAGE>
PAGE
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Controlling Law 53
Employment Rights 53
Litigation by Participants 53
Interests Not Transferable 53
Absence of Guaranty 54
Evidence 54
SECTION 13 55
Amendment and Termination 55
Amendment 55
Termination 55
Vesting and Distribution on Termination 57
Notice of Amendment or Termination 57
Plan Merger, Consolidation, etc. 57
Supplement A - Voluntary Life Insurance for Participants A-1
Supplement B - Special Rules for Top-Heavy Plans B-1
Supplement C - Money Purchase Pension Plan for Employees C-1
Supplement D - Deductible Deposits D-1
Supplement E - Adoption by Argo State Bank E-1
Supplement F - Adoption by Roselle State Bank and Trust Company F-1
Supplement G - Adoption by Harris Trust Company of New York G-1
Supplement H - Adoption by Bank of Montreal H-1
Supplement I - Coverage of Former Employees of National
Westminster Bank USA I-1
Supplement J - Adoption by Derivitive Markets Management, Inc. J-1
Supplement K - Adoption by Harris Bank Wilmette, N.A. K-1
Supplement L - Coverage of Former Employees of Marine
Midland Bank, N.A. L-1
Supplement M - Adoption by Harris Bank Barrington, N.A. M-1
Supplement N - Adoption by Harris Bank Libertyville N-1
Supplement O - Adoption by Harris Bank Hinsdale, N.A. O-1
Supplement P - Adoption by Harris Bank Batavia, N.A. P-1
Supplement Q - Adoption by Harris Bank Frankfort Q-1
Supplement R - Adoption by Harris Bank Naperville R-1
Supplement S - Adoption by Harris Bank St. Charles S-1
Supplement T - Adoption by Harris Bank Winnetka, N.A. T-1
Supplement U - Adoption by Harris Bank Glencoe-Northbrook, N.A. U-1
-iv-
<PAGE>
PAGE
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Supplement V - Adoption by Harris Nesbitt Thomson
Securities Inc. V-1
Supplement W - Adoption by Suburban Banks W-1
-v-
<PAGE>
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
(As Amended and Restated Effective January 1, 1995)
SECTION l
---------
Introduction
------------
1.1. Purpose. Employees' Savings and Profit Sharing Plan of Bank of
Montreal/Harris (the "plan") is maintained by Harris Trust and Savings Bank (the
"bank") and Harris Bankcorp, Inc. (the "company") to enable eligible employees
to provide for their future security by accumulating funds and sharing in the
contributions of their employer. The plan is intended to constitute a profit
sharing plan which meets the requirements of Section 401(a) of the Internal
Revenue Code.
1.2. Effective Date, Plan Year. The plan was established as of
January 1, 1916. The effective date of the amendment and restatement of the
plan as set forth herein is January 1, 1995. A "plan year" is the 12-month
period beginning on January 1 and ending on the next following December 31.
1.3. Employers. Any subsidiary or affiliate of the company may adopt
the plan with the bank's consent, as de-
-1-
<PAGE>
scribed in subsection 12.1. A "subsidiary" of the company is any corporation or
national banking association more than 50% of the voting stock of which is
owned, directly or indirectly, by the company. An "affiliate" of the company is
any entity which owns more than 50 percent of the voting stock of the company,
and any corporation or national banking association more than 50 percent of the
voting stock of which is owned, directly or indirectly, by the owner or owners
of more than 50 percent of the voting stock of the company. The company and any
subsidiaries or affiliates of the company which adopt the plan are referred to
below collectively as the "employers" and sometimes individually as an
"employer".
1.4. Administration of the Plan. The plan is administered by the
Harris Benefits Administration Committee (the "committee"), as described in
Section 11. Participants will be notified of the identity of the members of the
committee, and of any change in committee membership. Any notice or document
required to be given to or filed with the committee will be properly given or
filed if delivered or mailed, by certified mail, postage prepaid, to the
committee, in care of the bank, at Chicago, Illinois.
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<PAGE>
1.5. Funding of Benefits. Funds contributed under the plan are held
and invested, until distribution, by a trustee (the "trustee") appointed by the
bank, in accordance with the terms of a trust agreement between the company and
the trustee which implements and forms a part of the plan. Copies of the plan
and trust agreement, and any amendments thereto, will be on file at the
principal office of each employer which adopts the plan where they may be
examined by any participant or other person entitled to benefits under the plan.
The provisions of and benefits under the plan are subject to the terms and
provisions of the trust agreement.
1.6. Plan Supplements. The provisions of the plan may be modified by
supplements to the plan. The terms and provisions of each supplement are a part
of the plan and supersede the provisions of the plan to the extent necessary to
eliminate inconsistencies between the plan and the supplement.
-3-
<PAGE>
SECTION 2
---------
Eligibility
-----------
2.1. Participation. Subject to the conditions and limitations of the
plan, each employee of an employer who is a participant in the plan immediately
preceding January 1, 1995 will continue as a participant on and after that date.
Beginning January 1, 1995, each other employee of an employer will become a
participant in the plan on the first entry date (as defined below) coincident
with or next following the date he meets all of the following requirements:
(a) He is either:
(i) a citizen or resident of the United States of America; or
(ii) a nonresident alien designated by the bank;
(b) He is either:
(i) a salaried employee (as defined below); or
(ii) a regular hourly employee (as defined below);
(c) He is not a reserve force or work study employee;
(d) He is not a member of a group of employees covered by a
collective bargaining agree-
-4-
<PAGE>
ment unless and to the extent the plan has been and continues to
be extended to such group by such agreement; and
(e) He has completed one year of credited service.
A "salaried employee" means an employee who receives a salary computed on an
annual, monthly or semi-monthly basis. A "regular hourly employee" means an
employee whose compensation is computed on an hourly basis and who either (i) is
regularly scheduled to work 20 or more hours per week, or (ii) has completed
1,000 or more hours of service during any 12-month period commencing on his date
of hire or any anniversary thereof. An "entry date" means the first day of each
calendar quarter and, effective as of such date as may be established by the
committee, the first day of each month. An "hour of service" means each hour
for which an employee is directly or indirectly paid or entitled to payment by
an employer or controlled group member for the performance of duties and for
reasons other than the performance of duties (but no more than 501 hours for any
single continuous period during which no duties are performed), including each
hour for which back pay, irrespective of mitigation of damages, has been either
awarded
-5-
<PAGE>
or agreed to by an employer or controlled group member, determined and
credited in accordance with Department of Labor Reg. Sec. 2530.200b-2. If an
employee who fails to meet the requirements of subparagraphs 2.1(a) through (d)
above has satisfied the requirement of subparagraph 2.1(e) above as of an entry
date, he will become a participant in the plan on the date he subsequently meets
the requirements of subparagraphs 2.1(a) through (d). If an employee satisfies
the requirements of subparagraphs 2.1(a) through (e) above as of his date of
employment by an employer, he will become a participant in the plan as of that
date.
2.2. Credited Service. An employee's "credited service" means the
total of his years of service computed in accordance with the following rules:
(a) An employee shall be entitled to 1/12th of a year of credited
service for each calendar month (or portion thereof) during which
he is employed by an employer or controlled group member.
(b) A period of concurrent employment with two or more employers or
controlled group members will be considered as employment with
only one of them during the period.
(c) Termination of employment of an employee with one employer or a
controlled group
-6-
<PAGE>
member will not interrupt his credited service for purposes of
the plan, if concurrently with or immediately after such
termination, he is employed by one or more other employers or
controlled group members.
(d) A period of unpaid leave of absence shall be considered a period
of credited service unless the employee fails to return to active
employment with the employer which granted the leave at the
termination thereof for any reason except death or termination of
employment at or after age 55 years, in which case the employee
will be considered as having resigned from the employ of his
employer on the first anniversary of the date his leave of
absence began (or the date his leave of absence ended, if
earlier).
2.3. Notice of Participation. The committee will notify each
employee of the date on which he becomes a participant in the plan and will
furnish each participant and each beneficiary receiving benefits under the plan
with a copy of a summary plan description.
2.4. Controlled Group Member. A "controlled group member" means:
(a) any corporation which is not an employer but is a member of a
controlled group of corporations (within the meaning of Section
1563(a) of the Internal Revenue Code, determined without regard
to Sections
-7-
<PAGE>
1563(a)(4) and 1563(e)(3)(C) thereof) which contains
an employer; or
(b) any trade or business (whether or not incorporated) which is not
an employer but is under common control with an employer (within
the meaning of Section 414(c) of the Internal Revenue Code).
2.5. Leased Employees. A leased employee (as defined below) shall
not be eligible to participate in the plan. A "leased employee" means any
person who is not an employee of an employer, but who has provided services to
an employer of a type which have historically (within the business field of the
employers) been provided by employees, on a substantially full-time basis for a
period of at least one year, pursuant to an agreement between an employer and a
leasing organization. The period during which a leased employee performs
services for an employer shall be taken into account for purposes of subsection
2.2 of the plan if such leased employee becomes an employee of an employer;
unless (i) such leased employee is a participant in a money purchase pension
plan maintained by the leasing organization which provides a non-integrated
employer contribution rate of at least 10 percent of compensation, immediate
participation for all employees and full and immediate
-8-
<PAGE>
vesting, and (ii) leased employees do not constitute more than 20 percent of the
employers' nonhighly compensated workforce.
-9-
<PAGE>
SECTION 3
---------
Participant Contributions
-------------------------
3.1. Participant 401(k) Contributions. Under the terms stated below,
and subject to any limitations contained in the plan, a participant, if he so
desires, may elect "401(k) contributions" under the plan for any plan year,
beginning with the plan year in which he becomes a participant, in an amount not
more than the maximum percentage of his earnings for that year established by
the committee. Each election by a participant under this subsection must be
filed with his employer at such time and in such way as the committee
determines.
3.2. Participant After-Tax Contributions. Under the terms stated
below, and subject to any limitations contained in the plan, a participant, if
he so desires, may elect to make "after-tax contributions" under the plan for
any plan year, beginning with the plan year in which he becomes a participant,
in an amount not more than the maximum percentage of his earnings for that year
established by the committee. Each election by a participant under this
subsection must be filed with his
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<PAGE>
employer at such time and in such way as the committee determines.
3.3. Payment of Participant Contributions. A participant's 401(k)
contributions shall be made by his employer on behalf of the participant, and
shall reduce the participant's compensation at the time of payment of such
compensation. A participant's after-tax contributions shall be deducted by his
employer from his compensation at the time of payment of such compensation.
Amounts so deducted (or by which a participant's compensation has been so
reduced) for any accounting period under the plan shall be paid to the trustee
as soon as practicable thereafter, but no later than thirty days after the
accounting date which ends that accounting period.
3.4. Variation, Discontinuance and Resumption of Participant
Contributions. A participant may elect to change his contribution rate (but not
retroactively) within the limits specified above, to discontinue contributions
or to resume contributions. Each such election by a participant shall be made
at such time and in such manner as the committee shall deter-
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<PAGE>
mine, and shall be effective only in accordance with such rules as shall be
established from time to time by the committee.
3.5. Earnings for Year Ending December 31, 1995. For the year ending
December 31, 1995, a participant's "earnings" means the total compensation paid
to the participant for services rendered to the employers while actively
participating in the plan, before any reduction for 401(k) contributions he had
elected under this Section 3 or payments made on his behalf under Cafeteria Plan
of Bank of Montreal/Harris; but excluding departmental and similar incentive
compensation, compensation in lieu of vacation, shift differential, moving
allowance, expatriate payments, payments under the Bank's Managerial
Participation Plan, compensation paid in a form other than cash, any other
special payment, bonus award or commmission for or on account of specific items,
and compensation for any year in excess of $150,000 (or such greater amount as
may be determined by the Commissioner of Internal Revenue for that year).
3.6. Earnings for Years Ending After December 31, 1995. Beginning
January 1, 1996, a participant's "earnings" means the basic compensation paid to
the participant for
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<PAGE>
services rendered to the employers while actively participating in the plan,
including overtime, shift differential, and amounts paid to the participant
under the bank's Managerial Participation Plan and any business unit incentive
compensation plan, before any reduction for 401(k) contributions he had elected
under this Section 3 or payments made on his behalf under Cafeteria Plan of Bank
of Montreal/Harris; but excluding compensation for any year in excess of
$150,000, or such greater amount as may be determined by the Commissioner of
Internal Revenue for that year. The aggregate amount paid under the bank's
Managerial Participation Plan and business unit incentive compensation plans
which is included in a participant's earnings for any year shall not exceed the
greater of $100,000 or the annual rate of the participant's base salary as of
January 1 of that year.
3.7. Profit Sharing Earnings. A participant's "profit sharing
earnings" for any year means that portion, if any, of his earnings for that year
which is paid on or after the first day of the month next following his
completion of two years of credited service.
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<PAGE>
3.8. Maximum Amount of Participant 401(k) Contributions. In no event
shall the amount of 401(k) contributions by a participant for any calendar year
exceed $7,000 (or such greater amount as may be determined by the Commissioner
of Internal Revenue for that calendar year). If, because of the foregoing
limitation, a portion of the 401(k) contributions made by a participant may not
be credited to his account for a calendar year, such portion (and the earnings
thereon) shall be distributed to the participant by April 15 of the following
calendar year.
3.9. Limitation on Participant 401(k) Contributions. Notwithstanding
the foregoing provisions of this Section 3, in no event shall the average
deferral percentage (as defined below) for any plan year of the highly
compensated employees (as defined in subsection 3.10) who are plan participants
exceed the greater of:
(a) the average deferral percentage of all other participants for
such plan year multiplied by 1.25; or
(b) the average deferral percentage of all other participants for
such plan year multiplied by 2.0; provided that the average
deferral percentage of such highly compensated employees does not
exceed that of all
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<PAGE>
other participants by more than 2 percentage
points.
The "average deferral percentage" of a group of participants for a plan year
means the average of the ratios (determined separately for each participant in
such group) of: (i) the 401(k) contributions made by such participant for such
plan year; to (ii) the participant's compensation (as defined in subsection
3.10) for such plan year. For purposes of this subsection 3.9, a participant
means any employee who is eligible to make 401(k) contributions under the plan.
The 401(k) contributions made by the highly compensated employees will be
reduced (in the order of their contribution percentages beginning with the
highest percentage) to the extent necessary to meet the requirements of this
subsection 3.9. If, because of the foregoing limitations, a portion of the
401(k) contributions made by a highly compensated employee may not be credited
to his account for a plan year, such portion (and the earnings thereon) shall be
distributed to such employee within two and one-half months after the end of
that plan year.
-15-
<PAGE>
3.10. Highly Compensated Employee. A "highly compensated employee"
means any present or former employee who, during the current or immediately
preceding plan year:
(a) was a 5 percent owner of an employer;
(b) received annual compensation from the employers of more than
$75,000 (or such greater amount as may be determined by the
Commissioner of Internal Revenue for that year);
(c) received annual compensation from the employers of more than
$50,000 (or such greater amount as may be determined by the
Commissioner of Internal Revenue for that year) and was in the
top-paid 20% of the employees; or
(d) was an officer of an employer receiving annual compensation
greater than 50% of the limitation in effect under Section
415(b)(1)(A) of the Internal Revenue Code; provided, that for
purposes of this subparagraph (d), no more than 50 employees of
the employers (or if lesser, the greater of 3 employees or 10
percent of the employees) shall be treated as officers.
For purposes of subsections 3.9, 3.10 and 7.12, an employee's compensation means
his total cash compensation for services rendered to the employers as an
employee, determined in accordance with Section 415(c)(3) of the Internal
Revenue Code
-16-
<PAGE>
and the regulations thereunder, but without regard to Sections 125 and 402(e)(3)
of the Internal Revenue Code.
-17-
<PAGE>
SECTION 4
---------
Employer Contributions
----------------------
4.1. Employer Matching Contributions. For each calendar quarter (or
such other period as the committee may establish), each employer will make a
"matching contribution" to the trustee in an amount equal to 25 percent of the
first 4 percent of the 401(k) contributions made during such period by those
participants employed by it and entitled to share in the employer matching
contribution for that period.
4.2. Aggregate Employer Profit Sharing Contribution. For each plan
year, the bank, in its discretion, may specify either the employers' aggregate
profit sharing contribution to be made under the plan for that year or a
definite basis or formula by which such aggregate profit sharing contribution
can be determined within a reasonable time after the end of that plan year.
4.3. Individual Employer Profit Sharing Contribution. For each plan
year, each employer will contribute to the trustee that portion of the aggregate
profit sharing contribution, if any, established by the bank for such plan year
under
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<PAGE>
subsection 4.2 which the profit sharing earnings paid by such employer during
such plan year to participants employed by it and entitled to share in its
profit sharing contribution for such year bears to the total of the profit
sharing earnings paid by all employers during such plan year to participants
entitled to share in the employers' profit sharing contributions for the year.
4.4. Limitations on Employer Contributions. Each employer's total
contribution for a plan year is conditioned on its deductibility under Section
404 of the Internal Revenue Code in that year, shall comply with the
contribution limitations set forth in subsection 7.10 and the allocation
limitations contained in subsection 7.12, and shall not exceed an amount equal
to the maximum amount deductible on account thereof by the employer for that
year for purposes of federal taxes on income.
4.5. Payment of Employer Contributions. Each employer's profit
sharing contribution under subsection 4.3 of the plan for any plan year shall be
due on the last day of that plan year and, if not paid by the end of that year,
shall be
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<PAGE>
payable to the trustee as soon as practicable thereafter, without interest, but
no later than the time prescribed by law for filing the employer's federal
income tax return for such year, including extensions thereof. Each employer's
matching contribution under subsection 4.1 of the plan for any period shall be
due on the last day of that period and, if not paid by the end of that period,
shall be payable as soon as practicable thereafter, without interest, but no
later than thirty days after the end of the period.
4.6. Verification of Employer Contributions. If for any reason the
bank decides to verify the correctness of any amount or calculation relating to
an employer's contribution for any plan year, the certificate of an independent
accountant selected by the bank as to the correctness of any such amount or
calculation shall be conclusive on all persons.
4.7. No Interest in Employers. The employers shall have no right,
title or interest in the trust fund, nor shall any part of the trust fund revert
or be repaid to an employer, directly or indirectly, unless:
(a) the Internal Revenue Service initially determines that
the plan, as applied to
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<PAGE>
such employer, does not meet the requirements of Section 401(a)
of the Internal Revenue Code, in which event the contributions
made to the plan by such employer shall be returned to it within
one year after such adverse determination;
(b) a contribution is made by such employer by mistake of fact and
such contribution is returned to the employer within one year
after payment to the trustee; or
(c) a contribution conditioned on the deductibility thereof is
disallowed as an expense for federal income tax purposes and such
contribution (to the extent disallowed) is returned to the
employer within one year after the disallowance of the deduction.
Contributions may be returned to an employer pursuant to subparagraph (a) above
only if they are conditioned upon initial qualification of the plan, and an
application for determination was made by the time prescribed by law for filing
the employer's Federal income tax return for the taxable year in which the plan
was adopted (or such later date as the Secretary of the Treasury may prescribe).
The amount of any contribution that may be returned to an employer pursuant to
subparagraph (b) or (c) above must be reduced by any portion thereof previously
distributed from the trust fund and by any losses of the trust fund allocable
thereto, and in no event may the re-
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<PAGE>
turn of such contribution cause any participant's account balances to be less
than the amount of such balances had the contribution not been made under the
plan.
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<PAGE>
SECTION 5
---------
The Trust Fund and the Investment Funds
---------------------------------------
5.1. The Trust Fund. The "trust fund" will consist of all money,
stocks, bonds, securities and other property held or acquired by the trustee in
accordance with the plan and the trust agreement.
5.2. The Investment Funds. The trust fund shall consist of such
investment funds as the committee shall determine from time to time. Pending
investment, reinvestment or distribution as provided in the plan, the trustee
may temporarily retain the assets of any one or more of the investment funds in
cash, commercial paper, short-term obligations, or undivided interests or
participations in common or collective short-term investment funds. Any
investment fund may be partially or entirely invested in any common or
commingled fund or in any group annuity, deposit administration or separate
account contract issued by a legal reserve life insurance company which is
invested generally in property of the kind specified for the investment fund.
The committee, in its discretion, may direct the trustee to establish such
investment
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<PAGE>
funds or to terminate any of the investment funds as it shall from
time to time consider appropriate and in the best interests of the participants.
The funds established hereunder may be referred to collectively as the
"investment funds" and individually as an "investment fund."
5.3. Investment Fund Elections. A participant from time to time may
elect one or more of the investment funds for the investment of all or a portion
of his contributions and the employer contributions on his behalf. Each such
election shall be made at such time, in such manner, and with respect to such
investment funds as the committee shall determine, and shall be effective only
in accordance with such rules as the committee shall establish. If a
participant fails to make an election under this subsection 5.3, his
contributions and his share of the employer contributions will be invested in
such investment fund as shall be designated by the committee.
5.4. Investment Fund Transfers. A participant may elect that all or
a part of his interest in an investment fund shall be liquidated and the
proceeds thereof transferred to one or more of the other investment funds. Each
such election
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<PAGE>
shall be made at such time, in such manner, and with respect to such investment
funds as the committee shall determine, and shall be effective only in
accordance with such rules as shall be established from time to time by the
committee.
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<PAGE>
SECTION 6
---------
Period of Participation
-----------------------
6.1. Normal Retirement. A participant's "normal retirement date"
will be the last day of the month in which he attains age sixty-five years (his
"normal retirement age"). A participant's right to his account balances shall
be nonforfeitable on and after his normal retirement age. A participant may be
retired on or after his normal retirement date if:
(a) He was employed by an employer in a bona fide executive or high
policy-making position for the 2-year period immediately
preceding his retirement date; and
(b) He is then entitled to an immediate nonforfeitable retirement
benefit from all pension and profit sharing plans of the
employers (adjusted in accordance with rules and regulations
issued by the Secretary of Labor) which is equivalent to an
annual life annuity of at least $44,000.
6.2. Settlement Date. A participant's "settlement date" will be the
accounting date coincident with or next following the date on which his
employment with all of the employers is terminated for any reason. If a
participant is transferred from employment with an employer to employment with a
controlled group member then, for the purpose of determining
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<PAGE>
when his settlement date occurs under this subsection 6.2, his employment with
such controlled group member (or any controlled group member to which he is
subsequently transferred) shall be considered as employment with the employers.
6.3. Restricted Participation. If (i) payment of all of a
participant's account balances is not made at his settlement date; or (ii) a
participant transfers to a controlled group member or no longer meets the
requirements of subparagraphs 2.1(a) through (d); the participant or his
beneficiary will be treated as a participant for all purposes of the plan,
except as follows:
(a) The participant will not share in employer contributions after
his settlement date, or during any period he is either employed
by a controlled group member or fails to meet the requirements of
subparagraphs 2.1(a) through (d); except as provided in
subsection 7.5.
(b) The participant may not make contributions under Section 3 after
his settlement date or during any period he is either employed by
a controlled group member or fails to meet the requirements of
subparagraphs 2.1 (a) through (d).
(c) The beneficiary of a deceased participant cannot designate a
beneficiary under subsection 9.4.
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<PAGE>
(d) Neither the participant nor his beneficiary shall be permitted to
approve or disapprove any amendment of the plan or the trust
agreement.
If a participant whose participation in the plan is restricted for the reason
specified in (ii) above subsequently is employed by an employer or meets the
requirements of subparagraphs 2.1 (a) through (d), he will again become an
active participant in the plan on the date he is reemployed or satisfies such
requirements.
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SECTION 7
---------
Accounting
----------
7.1. Separate Accounts. The committee will maintain the following
accounts in the name of each participant:
(a) a "401(k) contribution account" which will reflect his 401(k)
contributions, if any, under the plan, and the income, losses,
appreciation and depreciation attributable thereto;
(b) an "after-tax contribution account" which shall consist of two
sub-accounts -- one to reflect his after-tax contributions, if
any, made prior to January 1, 1987 and the income, losses,
appreciation and depreciation attributable thereto, and the other
to reflect his after-tax contributions, if any, made after
December 31, 1986 and the income, losses, appreciation and
depreciation attributable thereto; and
(c) an "employer contribution account" which will reflect his share
of employer contributions under the plan, and the income, losses,
appreciation and depreciation attributable thereto.
The committee also may maintain such other accounts in the names of participants
or otherwise as it considers advisable. Unless the context indicates otherwise,
references in the plan to a participant's "account" or "accounts" means all
accounts maintained in his name under the plan.
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7.2. Accounting Dates. A "regular accounting date" is the last day
of any plan year. A "special accounting date" is each March 31, June 30 and
September 30, any other date designated as such by the committee and a special
accounting date occurring under subsection 13.3. The term "accounting date"
includes both a regular accounting date and a special accounting date.
7.3. When Employer Contributions Considered Made. For purposes of
this Section 7, each employer's matching contributions for any accounting period
under the plan will be considered to have been made on the last day of that
period, and each employer's profit sharing contributions for any plan year will
be considered to have been made on the last day of that year, regardless of when
paid to the trustee.
7.4. Adjustment of Participants' Accounts. As of each accounting
date the committee shall:
(a) First, charge to the proper accounts all payments or
distributions made since the last preceding accounting date that
have not been charged previously;
(b) Next, credit participants' accounts with their pro rata share of
any increase or
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charge such accounts with their pro rata share of any decrease in
the value of the adjusted net worth (as defined below) of each
investment fund in which such accounts have an interest as of
that date;
(c) Next, allocate and credit employer contributions, if any, that
are to be credited as of that date in accordance with subsection
7.5; and
(d) Finally, credit participant's contributions, if any, that are to
be credited as of that date in accordance with subsection 7.6.
The "adjusted net worth" of an investment fund as at any date means the then net
worth of such investment fund as determined by the trustee, less an amount equal
to the sum of employer and participant contributions deposited in such fund but
not yet allocated to the accounts of participants.
7.5. Allocation of Employer Contributions. Subject to subsections
7.10 and 7.12, each employer's contributions to the plan will be allocated and
credited to the accounts of participants as follows:
(a) As of each accounting date, the employer's matching contribution
for the period ending on that date shall be allocated and
credited to the employer contribution accounts of those
participants who were employed by that employer during that
period, pro rata, according to the 401(k)
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<PAGE>
contributions (up to 4%) made by them, respectively, during that
period.
(b) As of each regular accounting date, the employer's profit sharing
contribution, if any, for the plan year ending on that date shall
be allocated and credited to the employer contribution accounts
of those participants who were employed by that employer during
that year (excluding participants who terminated employment
during the year before age 55 years for a reason other than
death), pro rata, according to the profit sharing earnings (as
defined in subsection 3.5) paid to them, respectively, by such
employer during that plan year.
7.6. Crediting of Participant Contributions. Subject to subsections
3.9 and 7.12, each participant's 401(k) contributions will be credited to his
401(k) contribution account, and each participant's after-tax contributions will
be credited to his after-tax contribution account, as of the accounting date
which ends the accounting period of the plan for which such contributions were
made.
7.7. Charging Distributions. All payments or distributions made to a
participant or his beneficiary will be charged to the appropriate accounts of
such participant.
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<PAGE>
7.8. Rollovers. At the direction of the committee, and in accordance
with such rules as the committee may establish from time to time, rollovers
described in Section 402(c) of the Internal Revenue Code, rollover contributions
described in Section 408(d)(3) of the Internal Revenue Code and benefits of an
employee under another plan which meets the requirements of Section 401(a) of
the Internal Revenue Code may be received by the trustee, and will be credited
to an account established in the name of the employee. Any amount received by
the trustee for an employee in accordance with the preceding sentence shall be
adjusted from time to time in accordance with subparagraph 7.4(b) and shall be
fully vested in the employee for whom it is held under the plan.
7.9. Statement of Account. As soon as practicable after the last day
of each plan year, each participant will be furnished with a statement
reflecting the condition of his accounts in the trust fund as of that date. No
participant, except one authorized by the committee, shall have the right to
inspect the records reflecting the accounts of any other participant.
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<PAGE>
7.10. Contribution Limitations. For each plan year, the annual
addition (as defined below) to a participant's accounts under the plan shall not
exceed the lesser of $30,000 (or, if greater, 1/4 of the dollar limitation in
effect under Section 415(b)(1)(A) of the Internal Revenue Code for the calendar
year which begins with or within that plan year) or 25 percent of the
participant's Section 415 compensation (as defined below) during that plan year.
The term "annual addition" for any plan year means the sum of the employer
contributions, participant contributions and forfeitures credited to a
participant's accounts for that year. Any participant contributions which
cannot be allocated to a participant because of the foregoing limitations (and
any gains attributable thereto) shall be returned to him. Any employer
contributions which cannot be allocated to a participant because of the
foregoing limitations shall be applied to reduce employer contributions in
succeeding plan years, in order of time. A participant's "Section 415
compensation" means his total cash compensation for services rendered to the
employers as an employee, determined in accordance with Section 415(c)(3) of the
Internal Revenue Code and the regulations thereunder.
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<PAGE>
7.11. Combined Benefit Limitations. If a participant in this plan
also is a participant in a defined benefit plan maintained by an employer, the
aggregate benefits payable to, or on account of, him under both plans will be
determined in a manner consistent with Section 415 of the Internal Revenue Code
and Section 1106 of the Tax Reform Act of 1986. Accordingly, there will be
determined with respect to the participant a defined contribution plan fraction
and a defined benefit plan fraction in accordance with said Sections 415 and
1106. The benefits provided for the participant under the defined benefit plan
will be adjusted to the extent necessary so that the sum of such fractions
determined with respect to the participant does not exceed 1.0.
7.12. Limitation on Allocation of Contributions. Notwithstanding the
foregoing provisions of this Section 7, in no event shall the contribution
percentage (as defined below) of the highly compensated employees (as defined in
subsection 3.10) who are plan participants for any plan year exceed the greater
of:
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(a) the contribution percentage of all other participants for such
plan year multiplied by 1.25; or
(b) the contribution percentage of all other participants for such
plan year multiplied by 2.0; provided that the contribution
percentage of the highly compensated employees does not exceed
that of all other participants by more than 2 percentage points.
The "contribution percentage" of a group of participants for a plan year means
the average of the ratios (determined separately for each participant in such
group) of: (i) the sum of employer matching contributions and participant
after-tax contributions allocated to such participant for such plan year; to
(ii) the participant's compensation (as defined in subsection 3.10) for such
plan year. For purposes of this subsection 7.12, a participant means any
employee who is eligible to receive employer matching contributions or to make
participant after-tax contributions under the plan. The employer matching
contributions allocated to and participant after-tax contributions made by the
highly compensated employees will be reduced (in the order of their contribution
percentages beginning with the highest percentage) to the extent necessary to
meet the requirements of this subsection 7.12. If, because
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<PAGE>
of the foregoing limitations, a portion of the matching contributions allocated
to or the after-tax contributions made by a highly compensated employee may not
be credited to his account for a plan year, such portion (and the earnings
thereon) shall be distributed to such employee within two and one-half months
after the end of that plan year.
7.13. Allocation of Earnings to Distributions of Excess
Contributions. The earnings allocable to distributions of 401(k) contributions
exceeding the limits of subsection 3.8, 401(k) contributions exceeding the
limits of subsection 3.9 and after-tax contributions exceeding the limits of
subsection 7.12 shall be determined by multiplying the earnings attributable to
the participant's 401(k) and/or after-tax contributions for the year by a
fraction, the numerator of which is the applicable excess amount, and the
denominator of which is the balance in the appropriate account of the
participant on the last day of such year reduced by gains (or increased by
losses) attributable to such account for the year.
7.14. Multiple Use of Alternative Limitation. In accordance with
Treasury Regulation 1.401(m)-2(c), multiple use
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<PAGE>
of the alternative limitation which occurs as a result of testing under the
limitations described in subsections 3.9 and 7.12 will be corrected in the
manner described in Treasury Regulation 1.401(m)-1(e). The term "alternative
limitation" as used above means the alternative methods of compliance with
Sections 401(k) and 401(m) of the Internal Revenue Code contained in Sections
401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) thereof, respectively.
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<PAGE>
SECTION 8
---------
Withdrawals and Loans During Employment
---------------------------------------
8.1. Withdrawal of Participant Contributions. A participant may
elect to withdraw all or any portion of the after-tax contributions then
credited to his account. A participant who has attained age 59- 1/2 may elect
to withdraw all or any portion of the balance then credited to his 401(k)
contribution account. Each election by a participant under this subsection 8.1
shall be made at such time, in such manner, and in accordance with such rules as
the committee shall establish. A former employee who terminated employment
before attaining age 55 years may not make a withdrawal under this subsection.
8.2. General Account Withdrawals. A participant may elect to
withdraw any portion of his account (in excess of an amount equal to the
rollover amounts received under subsection 7.8 or employer contributions paid to
the trustee on his behalf within two years of the date payment is made to him).
Each request for withdrawal by a participant under this subsection 8.2 shall be
made at such time, in such manner, and in accordance with such rules as the
committee shall establish.
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<PAGE>
Each such withdrawal shall be paid to the participant as soon as practicable
after the date as of which it is effective after all plan accounting required on
or before such withdrawal is completed. A former employee who terminated
employment before attaining age 55 years may not make a withdrawal under this
subsection. In no event may a participant withdraw any portion of the balance
in his 401(k) contribution account under this subsection 8.2.
8.3. Charging of Withdrawals. All withdrawals by a participant under
subsection 8.1 or 8.2 shall be charged to the interest of the participant's
account in the investment funds on a proportionate basis. Any withdrawal by a
participant under subsection 8.2 shall be deemed to apply first to his after-tax
contributions, and then to employer contributions and trust fund earnings
allocated to his account. In determining the amount any participant may
withdraw hereunder, any unpaid loan or loans theretofore made to the participant
as permitted under subsection 8.4 shall be taken into account.
8.4. Loans to Participants. While it is the primary purpose of the
plan to accumulate funds for the participants
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<PAGE>
when they retire, it is recognized that under some circumstances it is in the
best interests of participants to permit loans to be made to them while they
continue in the active service of the employers. Accordingly, the committee,
pursuant to such rules as it may from time to time establish, and upon written
application by a participant supported by such evidence as the committee
requests, may direct the trustee to make a loan from the trust fund to a
participant subject to the following:
(a) The principal amount of any loan made to a participant, when
added to the outstanding balance of all other loans made to the
participant from all qualified plans maintained by the employers,
shall not exceed the lesser of:
(i) $50,000, reduced by the excess (if any) of the highest
outstanding balance during the one-year period ending
immediately preceding the date of the loan, over the
outstanding balance on the date of the loan, of all such
loans from all such plans; or
(ii) one-half of the participant's vested account balances under
the plan.
(b) Each loan must be evidenced by a written note in a form approved
by the committee, shall bear interest at a reasonable rate, and
shall require substantially level amor-
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<PAGE>
tization (with payments at least quarterly) over the term of the
loan.
(c) Each loan shall specify a repayment period that shall not extend
beyond five years.
(d) A participant may not borrow any employer contributions paid to
the trustee on his behalf within two years of the date the loan
is made.
(e) A participant may not borrow any portion of the balance in his
Supplement D account or, unless authorized by the committee, his
401(k) contribution account.
If a participant fails to make a loan payment (including interest) when due, the
amount of such payment shall be charged to the participant's account in
accordance with subparagraph 7.4(a) as though it were a distribution from the
plan. If on a participant's settlement date, any loan or portion of a loan made
to him under the plan, together with the accrued interest thereon, remains
unpaid, the total of the unpaid balance and accrued interest will be considered
as a payment to the participant as of his settlement date for purposes of the
plan, and will be charged to the participant's account balance as otherwise
adjusted as of that date.
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<PAGE>
SECTION 9
---------
Payment of Account Balances
---------------------------
9.1. Nonforfeitability. A participant's right to his account
balances shall be fully vested and nonforfeitable at all times.
9.2. Manner of Distribution. Subject to the conditions set forth
below, after each participant's settlement date, distribution of the net credit
balances in the participant's accounts as at his settlement date (after all
adjustments required under the plan as of that date have been made) will be made
to or for the benefit of the participant, or in the case of his death to or for
the benefit of his beneficiary, by either or both of the following methods:
(a) By payment in a lump sum.
(b) Beginning on his required commencement date (as defined in
subsection 9.3), by payment in a series of annual or more
frequent installments over a period not exceeding the life
expectancy of the participant or the joint life expectancy
of the participant and his designated beneficiary; provided
that, if such beneficiary is not the participant's spouse
and is more than 10 years younger than the participant, the
installments shall be paid over a period not exceeding the
joint life expectancy of the
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participant and a beneficiary 10 years younger than the
participant. Each installment distribution to a participant or
his beneficiary in accordance with this subparagraph 9.2(b) shall
be made as of an accounting date and shall be charged to the
participant's account as of such accounting date after all other
required adjustments have been made.
The life expectancy of a participant, his spouse or his designated beneficiary
shall be determined by use of the expected return multiples contained in the
regulations under Section 72 of the Internal Revenue Code. The life expectancy
of the participant and his spouse shall not be recalculated annually. If a
participant dies after his required commencement date (as defined in subsection
9.3), the remaining portion of his benefits must be distributed over a period
not exceeding the period over which payments were being made to the participant.
If a participant dies before his required commencement date, his benefits must
be distributed over a period not exceeding the greatest of: (i) five years from
the death of the participant; (ii) in the case of payments to a designated
beneficiary other than the
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participant's spouse, the life expectancy of such beneficiary, provided payments
begin within one year of the participant's death; or (iii) in the case of
payments to the participant's spouse, the life expectancy of such spouse,
provided payments begin by the date the participant would have attained age
70-1/2. If a participant's settlement date occurs because of resignation or
dismissal prior to attaining age 55 years, the balance in his account as at his
settlement date (after all adjustments required under the plan as of that date
have been made) shall be distributed to the participant as soon as practicable
thereafter (subject to the provisions of subsection 9.3) by payment in a lump
sum. In all other cases, a participant may select, in accordance with such
rules as the committee may establish, the method of distributing his benefits to
him; a participant, if he so desires, may direct how his benefits are to be paid
to his beneficiary; and the committee shall select the method of distributing
the participant's benefits to his beneficiary if the participant has not filed a
direction with the committee. The trustee may make distributions in cash or
property, or partly in each, provided property is distributed at its fair market
value as at the date of distribution as determined by the trustee. All
distributions under the plan shall comply with the requirements of Sec-
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<PAGE>
tion 401(a)(9) of the Internal Revenue Code and the regulations thereunder.
9.3. Commencement of Distributions. Except as provided below in this
subsection, payment of a participant's benefits will be made (or installment
payments will commence) within a reasonable time after his settlement date, but
not later than 60 days after (a) the end of the plan year in which his
settlement date occurs, or (b) such later date on which the amount of the
payment can be ascertained by the committee. If a participant's account
balances exceed $3,500, distributions may not be made to the participant before
age 65 without his consent. Distribution of a participant's benefits shall be
made (or installment payments shall commence) by April 1 of the calendar year
next following the calendar year in which the participant attains age 70-1/2
(his "required commencement date"). If a participant's account balance
determined at the time of a distribution exceeds $3,500, then, for purposes of
this subsection 9.3, the account balance at any subsequent time shall be deemed
to exceed $3,500.
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9.4. Designation of Beneficiary. Each participant from time to time,
by signing a form furnished by the committee, may designate any person or
persons (who may be designated concurrently, contingently or successively) to
whom his benefits are to be paid if he dies before he receives all of his
benefits. A beneficiary designation form will be effective only when the form
is filed with the committee while the participant is alive and will cancel all
beneficiary designation forms previously filed with the committee. If a
participant designates someone other than (or in addition to) his spouse as his
primary beneficiary, his spouse must consent in writing to the designation.
Such a consent will be effective only if it acknowledges the specific
beneficiary and the effect of the beneficiary designation, is witnessed by a
plan representative or a notary public, and may not be changed without further
spousal consent (unless the consent expressly permits subsequent beneficiary
designations without spousal consent). If a participant designates someone
other than (or in addition to) his spouse as his primary beneficiary, and his
spouse does not (or cannot) consent and is living at his death, the
participant's beneficiary designation shall be ineffective, and his
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benefits shall be distributed to his spouse. If a deceased participant failed to
designate a beneficiary as provided above, or if all of the designated
beneficiaries die before the participant, the participant's benefits shall be
distributed to his spouse or, if there is none, the committee, in its
discretion, may direct the trustee to pay the participant's benefits as follows:
(a) To or for the benefit of any one or more of the participant's
relatives by blood, adoption or marriage who are living at his
death, and in such proportions as the committee determines; or
(b) To the legal representative or representatives of the estate of
the participant.
If a beneficiary who is living at the participant's death dies before complete
payment of the participant's benefits, the participant's benefits shall be
distributed to the legal representative or representatives of the estate of such
beneficiary. The term "designated beneficiary" as used in the plan means the
person or persons (including a trustee or other legal representative acting in a
fiduciary capacity) designated by a participant as his beneficiary in the last
effective beneficiary designation form filed with the committee under this
subsection
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<PAGE>
and to whom a deceased participant's benefits are payable under the
plan. The term "beneficiary" as used in the plan means the natural or legal
person or persons to whom a deceased participant's benefits are payable under
this subsection. The term "spouse" as used in this subsection means the spouse
to whom the participant was married at the earlier of the date of his death or
the date payment of his benefits commenced, and who is living at the date of the
participant's death.
9.5. Missing Participants or Beneficiaries. Each participant and
each designated beneficiary must file with the committee from time to time in
writing his post office address and each change of post office address. Any
communication, statement or notice addressed to a participant or beneficiary at
his last post office address filed with the committee, or if no address is filed
with the committee then, in the case of a participant, at his last post office
address as shown on the employers' records, will be binding on the participant
and his beneficiary for all purposes of the plan. Neither the employers nor the
committee will be required to search for or locate a participant or beneficiary.
If the committee notifies a participant or beneficiary that he is entitled to a
payment and
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also notifies him of the provisions of this subsection, and the participant or
beneficiary fails to claim his benefits or make his whereabouts known to the
committee within three years after the notification, the benefits of the
participant or beneficiary will be disposed of, to the extent permitted by
applicable law, as follows:
(a) If the whereabouts of the participant then is unknown to the
committee but the whereabouts of the participant's spouse then is
known to the committee, payment will be made to the spouse;
(b) If the whereabouts of the participant and his spouse, if any,
then is unknown to the committee but the whereabouts of the
participant's designated beneficiary then is known to the
committee, payment will be made to the designated beneficiary;
(c) If the whereabouts of the participant, his spouse and the
participant's designated beneficiary then is unknown to the
committee but the whereabouts of one or more relatives by blood,
adoption or marriage of the participant is known to the
committee, the committee may direct the trustee to pay the
participant's benefits to one or more of such relatives and in
such proportions as the committee decides; or
(d) If the whereabouts of such relatives and the participant's
designated beneficiary then is unknown to the committee, the
benefits of such participant or beneficiary will be disposed of
in an equitable manner
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<PAGE>
permitted by law under rules adopted by the
committee.
9.6. Facility of Payment. When a person entitled to benefits under
the plan is under legal disability, or, in the committee's opinion, is in any
way incapacitated so as to be unable to manage his financial affairs, the
committee may direct the trustee to pay the benefits to such person's legal
representative, or to a relative or friend of such person for such person's
benefit, or the committee may direct the application of such benefits for the
benefit of such person. Any payment made in accordance with the preceding
sentence shall be a full and complete discharge of any liability for such
payment under the plan.
9.7. Direct Transfer of Eligible Rollover Distributions. If payment
of a participant's benefits constitutes an eligible rollover distribution under
Section 402(c)(4) of the Internal Revenue Code, then the participant or other
eligible distributee may elect to have such distribution paid directly to an
eligible retirement plan described in Section 402(c)(8)(B) of the Internal
Revenue Code. Each election under this subsection 9.7 shall be made at such
time and in such
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manner as the committee shall determine, and shall be effective only in
accordance with such rules as shall be established from time to time by the
committee.
9.8. Distribution to Alternate Payees. If a qualified domestic
relations order so provides, the committee shall direct the trustee to
distribute benefits to an alternate payee as of an accounting date specified in
such qualified domestic relations order, without regard to whether such
distribution is made or commences prior to the participant's earliest retirement
age (as defined in Section 414(p)(4)(B) of the Internal Revenue Code) or the
earliest date that the participant could commence receiving benefits under the
plan.
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SECTION 10
----------
Absence and Reemployment
------------------------
10.1. Breaks in Service. If an employee's employment with an
employer or controlled group member should terminate and such employee is
subsequently reemployed by an employer or controlled group member and meets the
requirements of subparagraphs 2.1(a) through (d), the following shall apply:
(a) If an employee is reemployed before he has a one year break in
service (as defined below), his participation in the plan will be
immediately reinstated upon reemployment, the credited service to
which he was entitled at the time of termination shall also be
reinstated, and for purposes of subparagraph 2.2(a) the period of
his employment termination (but not to exceed 12 months) shall be
taken into account in determining his credited service.
(b) An employee shall incur a "one year break in service" if he is
not in the employ of one or more employers or controlled group
members for a period of 12 consecutive months following his
termination of employment with the employers and controlled group
members.
10.2. Resumption of Participation. If a participant's employment
with all of the employers should terminate and such participant is subsequently
reemployed by an employer,
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he shall again become a participant as of his date of rehire if he then meets
the requirements of subparagraphs 2.1(a) through (d), and the years of credited
service to which he was then entitled shall be reinstated. If an employee who is
not participating in the plan should terminate employment and then subsequently
be reemployed by an employer, his eligibility for participation shall be
determined in accordance with subsection 2.1, and he shall become a participant
as of his date of rehire if he then meets the requirements of subparagraphs
2.1(a) through (d) and had met the requirement of subparagraph 2.1(e) prior to
his termination.
10.3. Leave of Absence. A leave of absence will not interrupt
continuity of service or participation in the plan. A "leave of absence" for
plan purposes means an absence from work which is not treated by the employers
as a termination of employment or which is required by law to be treated as a
leave of absence. Leaves of absence will be granted under employer rules
applied uniformly to all employees similarly situated.
10.4. Maternity and Paternity Absence. In the case of a maternity or
paternity absence (as defined below), the one
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year periods beginning on the first day of such absence and the first
anniversary thereof shall not constitute a one-year break in service. A
"maternity or paternity absence" means an employee's absence from work because
of the pregnancy of the employee or birth of a child of the employee, the
placement of a child with the employee in connection with the adoption of such
child by the employee, or for purposes of caring for the child immediately
following such birth or placement. The committee may require the employee to
furnish such information as the committee considers necessary to establish that
the employee's absence was for one of the reasons specified above.
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SECTION 11
----------
The Benefits Administration Committee
-------------------------------------
11.1. Membership. The Harris Benefits Administration Committee
consisting of seven persons has been appointed by the bank as "plan
administrator" to administer the plan on behalf of the bank. Additional members
may be appointed to the committee by the bank in its discretion. The Secretary
of the bank shall certify to the trustee from time to time each member of the
committee, the person who is designated by the bank as the Chairperson of the
committee and the person who is selected as Secretary of the committee.
11.2. Committee's General Powers, Rights and Duties. Except as
otherwise specifically provided and in addition to the powers, rights and duties
specifically given to the committee elsewhere in the plan and the trust
agreement, the committee shall have the following discretionary powers, rights
and duties:
(a) To select a secretary, if it believes it advisable, who may but
need not be a committee member.
(b) To construe and interpret the provisions of the plan and make
factual determinations
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thereunder, including the power to determine the rights or
eligibility of employees or participants and any other persons,
and the amounts of their benefits under the plan, and to remedy
ambiguities, inconsistencies or omissions, and such
determinations shall be binding on all parties.
(c) To adopt such rules of procedure and regulations as in its
opinion may be necessary for the proper and efficient
administration of the plan and as are consistent with the plan
and trust agreement.
(d) To enforce the plan in accordance with the terms of the plan and
the trust agreement and the rules and regulations adopted by the
committee as above.
(e) To direct the trustee as respects payments or distributions from
the trust fund in accordance with the provisions of the plan.
(f) To direct the trustee to receive funds or other property in
accordance with the provisions of the plan and trust agreement.
(g) To direct the trustee to establish additional investment funds or
to terminate any of the investment funds as it shall from time to
time consider appropriate and in the best interests of the
participants in the plan.
(h) To furnish the employers with such information as may be required
by them for tax or other purposes in connection with the plan.
(i) To maintain and adjust participants' accounts in accordance with
the provisions of the plan and trust agreement.
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(j) To select and employ agents, attorneys, accountants or other
persons (who also may be employed by the employers) and to
allocate or delegate to them such powers, rights and duties as
the committee may consider necessary or advisable to properly
carry out administration of the plan, provided that such
allocation or delegation and the acceptance thereof by such
agents, attorneys, accountants or other persons, shall be in
writing.
(k) To review and recommend plan modifications and improvements.
(l) To supervise and direct the preparation and distribution of
employee communications and reports regarding the plan.
11.3. Manner of Action. The following provisions apply where the
context admits:
(a) A committee member by writing may delegate any or all of his
rights, powers, duties and discretions to any other member, with
the consent of the latter.
(b) The committee members may act by meeting or by writing signed
without meeting, and may sign any document by signing one
document or concurrent documents.
(c) An action or a decision of a majority of the members of the
committee as to a matter shall be as effective as if taken or
made by all members of the committee.
(d) If, because of the number qualified to act, there is an even
division of opinion among
-58-
<PAGE>
the committee members as to a matter, a disinterested party
selected by the committee shall decide the matter and his
decision shall control.
(e) Except as otherwise provided by law, no member of the committee
shall be liable or responsible for an act or omission of the
other committee members in which the former has not concurred.
(f) The certificate of the Chairperson or of the Secretary of the
committee or of a majority of the committee members that the
committee has taken or authorized any action shall be conclusive
in favor of any person relying on the certificate.
11.4. Interested Committee Member. If a member of the committee is
also a participant in the plan, he may not decide or determine any matter or
question concerning distributions of any kind to be made to him or the nature or
mode of settlement of his benefits unless such decision or determination could
be made by him under the plan if he were not serving on the committee.
11.5. Resignation or Removal of Committee Members. A member of the
committee may be removed by the bank at any time by ten days' prior written
notice to him and the other members of the committee. A member of the committee
may resign
-59-
<PAGE>
at any time by giving ten days' prior written notice to the bank and the other
members of the committee. The bank may fill any vacancy in the membership of the
committee; provided, however, that if a vacancy reduces the membership of the
committee to less than five, such vacancy shall be filled as soon as
practicable. The bank shall give prompt written notice thereof to the other
members of the committee. Until any such vacancy is filled, the remaining
members may exercise all of the powers, rights and duties conferred on the
committee.
11.6. Committee Expenses. All costs, charges and expenses reasonably
incurred by the committee will be paid by the employers in such proportions as
the bank may direct. No compensation will be paid to a committee member as
such.
11.7. Information Required by Committee. Each person entitled to
benefits under the plan shall furnish the committee with such documents,
evidence, data or information as the committee considers necessary or desirable
for the purpose of administering the plan. The employers shall furnish the
committee with such data and information as the committee may deem necessary or
desirable in order to administer the plan.
-60-
<PAGE>
The records of the employers as to an employee's or participant's period of
employment, termination of employment and the reason therefor, leave of absence,
reemployment and earnings will be conclusive on all persons unless determined to
the committee's satisfaction to be incorrect.
11.8. Uniform Rules. The committee shall administer the plan on a
reasonable and nondiscriminatory basis and shall apply uniform rules to all
persons similarly situated.
11.9. Review of Benefit Determinations. The committee will provide
notice in writing to any participant or beneficiary whose claim for benefits
under the plan is denied and the committee shall afford such participant or
beneficiary a full and fair review of its decision if so requested.
11.10. Committee's Decision Final. Subject to applicable law, any
interpretation of the provisions of the plan and any decisions on any matter
within the discretion of the committee made by the committee in good faith shall
be binding on all persons. A misstatement or other mistake of fact shall be
corrected when it becomes known and the committee
-61-
<PAGE>
shall make such adjustment on account thereof as it considers equitable and
practicable.
-62-
<PAGE>
SECTION 12
----------
General Provisions
------------------
12.1. Additional Employers. Any subsidiary or affiliate of the
company may adopt the plan and become a party to the trust agreement by:
(a) Filing with the trustee a written instrument executed by an
officer to that effect; and
(b) Filing with the trustee a written instrument executed by an
officer of the bank consenting to such action.
A subsidiary or affiliate of the company may, with the consent of the bank,
provide in the instrument by which it adopts the plan that only certain groups
or classifications of its employees shall be included, and be considered as
employees, under the plan.
12.2. Action by Employers. Any action required or permitted to be
taken by an employer under the plan shall be by resolution of its Board of
Directors, by resolution of a duly authorized committee of its Board of
Directors, or by a person or persons authorized by resolution of its Board of
Directors or such committee.
-63-
<PAGE>
12.3. Waiver of Notice. Any notice required under the plan may be
waived by the person entitled to such notice.
12.4. Gender and Number. Where the context admits, words in the
masculine gender shall include the feminine and neuter genders, the singular
shall include the plural, and the plural shall include the singular.
12.5. Controlling Law. Except to the extent superseded by laws of
the United States, the laws of Illinois shall be controlling in all matters
relating to the plan.
12.6. Employment Rights. The plan does not constitute a contract of
employment, and participation in the plan will not give any employee the right
to be retained in the employ of an employer, nor any right or claim to any
benefit under the plan, unless such right or claim has specifically accrued
under the terms of the plan.
12.7. Litigation by Participants. If a legal action begun against
the trustee, an employer or the committee or any member thereof by or on behalf
of any person results adversely to that person, or if a legal action arises
because of con-
-64-
<PAGE>
flicting claims to a participant's or other person's benefits, the cost to the
trustee, the employers or the committee or any member thereof of defending the
action will be charged to the extent permitted by law to the sums, if any, which
were involved in the action or were payable to the person concerned.
12.8. Interests Not Transferable. The interests of persons entitled
to benefits under the plan are not subject to their debts or other obligations
and, except as may be required by the tax withholding provisions of the Internal
Revenue Code or any state's income tax act or pursuant to a qualified domestic
relations order as defined in Section 414(p) of the Internal Revenue Code, may
not be voluntarily or involuntarily sold, transferred, alienated, assigned or
encumbered.
12.9. Absence of Guaranty. Neither the committee nor the employers
in any way guarantee the trust fund from loss or depreciation. The liability of
the trustee or the committee to make any payment under the plan will be limited
to the assets held by the trustee which are available for that purpose.
-65-
<PAGE>
12.10. Evidence. Evidence required of anyone under the plan may be
by certificate, affidavit, document or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
-66-
<PAGE>
SECTION 13
----------
Amendment and Termination
-------------------------
13.1. Amendment. While the employers expect and intend to continue
the plan, the bank reserves the right to amend the plan (in accordance with the
procedures set forth in subsection 12.2) from time to time, except as follows:
(a) The duties and liabilities of the committee cannot be changed
substantially without its consent;
(b) No amendment shall reduce the value of a participant's benefits
to less than the amount he would be entitled to receive if he had
resigned from the employ of all of the employers on the date of
the amendment;
(c) Except as provided in subsection 4.7, under no condition shall an
amendment result in the return or repayment to any employer of
any part of the trust fund or the income from it or result in the
distribution of the trust fund for the benefit of anyone other
than persons entitled to benefits under the plan; and
(d) No amendment to change the method of allocating any employer's
contributions to participants' accounts, require a change in the
vesting or distribution provisions or reduce amounts then
credited to participants' accounts shall be effective as applied
to the bank unless and until approved by employee-participants
employed by the bank and representing not less than fifty-one
percent of the total amount contributed
-67-
<PAGE>
by the bank and allocated to the accounts of employee-
participants employed by the bank on the last day of the
preceding calendar year.
13.2. Termination. The plan will terminate as to all employers on
any date specified by the company (in accordance with the procedures set forth
in subsection 10.2) if thirty days' advance written notice of the termination is
given to the committee, the trustee and the other employers. The plan will
terminate as to an individual employer on the first to occur of the following:
(a) The date it is terminated by that employer (in accordance with
the procedures set forth in subsection 10.2) if 30 days' advance
written notice of the termination is given to the committee, the
trustee and the other employers.
(b) The date that employer is judicially declared bankrupt or
insolvent.
(c) The date that employer completely discontinues its contributions
under the plan.
(d) The dissolution, merger, consolidation or reorganization of that
employer, or the sale by that employer of all or substantially
all of its assets, except that:
(i) in any such event arrangements may be made with the consent
of the company whereby the plan will be continued by any
successor to
-68-
<PAGE>
that employer or any purchaser of all or substantially all
of its assets, in which case the successor or purchaser will
be substituted for that employer under the plan and the
trust agreement; and
(ii) if an employer is merged, dissolved, or in any other way
reorganized into, or consolidated with, any other employer,
the plan as applied to the former employer will
automatically continue in effect without a termination
thereof.
13.3. Vesting and Distribution on Termination. On termination or
partial termination of the plan, the date of termination will be a "special
accounting date" and, after all adjustments then required have been made, each
affected participant's benefits will be nonforfeitable and will be distributable
to the participant or his beneficiary in accordance with the provisions of
Section 9.
13.4. Notice of Amendment or Termination. Participants will be
notified of an amendment or termination of the plan within a reasonable time.
-69-
<PAGE>
13.5. Plan Merger, Consolidation, etc. In the case of any merger or
consolidation with, or transfer of assets or liabilities to, any other plan,
each participant's benefits if the plan terminated immediately after such
merger, consolidation or transfer shall be equal to or greater than the benefits
he would have been entitled to receive if the plan had terminated immediately
before the merger, consolidation or transfer.
-70-
<PAGE>
SUPPLEMENT A
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Voluntary Life Insurance for Participants
-----------------------------------------
A-1. Elections. Subject to the conditions and limitations set forth
below in this Supplement A, a Participant may elect to have part of his account
balance invested in one or more permanent life insurance policies issued on the
life of the Participant, his spouse and/or his children and held by the Trustee.
A Participant may elect to discontinue premium payments on any such policy, or
to have any such policy surrendered for cash and the cash proceeds thereof
credited to his account. Unless waived by the Committee, each election by a
Participant under this paragraph A-1 must be in writing and filed with the
Committee at such time, in such manner, and in accordance with such rules as the
Committee shall establish. Each life insurance policy purchased on the life of
the Participant, his spouse and/or his children shall be issued by such
insurance company, and shall contain such provisions, as the Committee may
determine. Notwithstanding the foregoing, participants are no longer permitted
to purchase life insurance policies under the plan.
A-2. Premium Payments. The following rules shall apply with respect
to any premium payments on life insurance policies purchased under this
Supplement A:
(a) The Trustee shall not make any premium payment if it exceeds an
amount equal to that portion of the Participant's account balance
which he would be entitled to receive (after any charges required
under the Plan) if his termination occurred on the premium
payment date.
<PAGE>
(b) Except as provided in subparagraph (c) below, any premium payment
made by the Trustee on a life insurance policy for or on behalf
of a Participant will be limited so that the total amount of such
premium payment and the aggregate of such premium payments
theretofore made by the Trustee for or on behalf of the
Participant will be less than an amount equal to the sum of: (i)
the total unwithdrawn contributions made by the Participant under
the Plan (other than contributions made under Supplement C and
D); and (ii) 25% of the total of the Employer contributions and
Forfeitures theretofore credited to the Participant's account
under the Plan.
(c) The limitations contained in subparagraph (b) above shall not
apply if the premium payment will not reduce the Participant's
account balance to less than an amount equal to the Employer
contributions credited to the Participant's account in the 24-
month period ending on the premium payment date.
A-3. Accounting. Premium payments made by the Trustee in accordance
with an election under paragraph A-1 will be charged in accordance with
subparagraph 7.4(a) of the Plan to the respective accounts of the Participants
as of the first day of the valuation period during which the premium payment is
made; provided, however, that if at a Participant's termination date premium
payments have been made by the Trustee but not charged to the Participant's
account, the such premium payments shall be charged to the Participant's account
before any other adjustments required under the Plan as of that date.
A-4. Manner of Distributing Life Insurance Benefits. Subject to
the provisions of subsection 9.3 of the Plan,
<PAGE>
after each Participant's termination date any life insurance policy issued on
the life of the Participant, his spouse and/or his children and held by the
Trustee shall be assigned to the Participant. In the event of the death of the
insured under such a policy, the policy may be assigned to the beneficiary
thereunder, or the proceeds thereof may be paid to such beneficiary or, if the
Trustee is the beneficiary, credited to the Participant's account.
<PAGE>
SUPPLEMENT B
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Special Rules for Top-Heavy Plans
---------------------------------
B-1. Purpose and Effect. The purpose of this Supplement B is to
comply with the requirements of Section 416 of the Internal Revenue Code of
1954. The provisions of this Supplement B shall be effective for each plan year
beginning after December 31, 1983 in which the Plan is a "top-heavy plan" within
the meaning of Section 416(g) of the Internal Revenue Code.
B-2. Top-Heavy Plan. In general, the Plan will be a top-heavy plan
for any plan year if, as of the last day of the preceding plan year (the
"determination date"), the aggregate account balances of Participants who are
key employees (as defined in Section 416(i)(1) of the Internal Revenue Code)
exceed 60 percent of the aggregate account balances of all Participants. In
making the foregoing determination, the following special rules shall apply:
(a) A Participant's account balances shall be increased by the
aggregate distributions, if any, made with respect to the
Participant during the 5-year period ending on the determination
date.
(b) The account balances of a Participant who was previously a key
employee, but who is no longer a key employee, shall be
disregarded.
(c) The accounts of a beneficiary of a Participant shall be
considered accounts of the Participant.
B-1
<PAGE>
(d) The account balances of a Participant who did not perform any
services for an Employer during the 5-year period ending on the
determination date shall be disregarded.
B-3. Key Employee. In general, a "key employee" is an Employee who,
at any time during the 5-year period ending on the determination date, is:
(a) an officer of an Employer receiving annual compensation greater
than 50% of the limitation in effect under Section 415(b)(1)(A)
of the Internal Revenue Code; provided, that for purposes of this
subparagraph (a), no more than 50 Employees of the Employers (or
if lesser, the greater of 3 Employees or 10 percent of the
Employees) shall be treated as officers.
(b) one of the ten Employees receiving annual compensation from the
Employers of more than the limitation in effect under Section
415(c)(1)(A) of the Internal Revenue Code and owning both more
than a 1/2 percent interest and the largest interests in the
Employers;
(c) a 5 percent owner of an Employer; or
(d) a 1 percent owner of an Employer receiving annual compensation
from the Employers of more than $150,000.
B-4. Minimum Employer Contribution. For any plan year in which the
Plan is a top-heavy plan, the Employer contribution credited to each Participant
who is not a key employee shall not be less than 3 percent of such Participant's
compensation for that year. In no event, however, shall the Employer
contribution credited in any year to a Participant who
B-2
<PAGE>
SUPPLEMENT C
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Money Purchase Pension Plan for Employees
-----------------------------------------
C-1. Purpose. The purpose of this Supplement C is to establish a
money purchase pension plan to allow certain Employees of the Employers who are
not Participants in the Plan to make voluntary contributions under this
Supplement C.
C-2. Effective Date. The effective date of this Supplement C is
January 1, 1981. This Supplement C shall cease to be effective after December
31, 1994.
C-3. Participation. Each Employee of an Employer who is a
Participant in this Supplement C (a "Supplement C Participant") on January 1,
1982 will continue as a Supplement C Participant, subject to the provisions of
paragraph C-11 below, after that date. Each other Employee of an Employer who
is not a Participant in the Plan shall become a Supplement C Participant on the
last day of the month, beginning January 31, 1982, coincident with or next
following the date he meets all of the following requirements:
(a) He is either a citizen or resident of the United States of
America;
(b) His salary from his Employer is computed on an annual, monthly or
semi-monthly basis; and
(c) He has completed one year of credited service.
C-1
<PAGE>
C-4. Amount of Contributions. Under the terms stated below, and
subject to any limitations contained in the Plan or this Supplement C, a
Supplement C Participant, if he so desires, may elect to make contributions
under this Supplement C for any calendar year, beginning with the later of the
calendar year ending December 31, 1981 or the calendar year in which he becomes
a Supplement C Participant, in an amount not more than ten percent of his
compensation (as defined in subsection 3.2 of the Plan) for that year. Each
such election by a Supplement C Participant under this paragraph C-4 must be in
writing and filed with his Employer at such time and in such way as the
Committee determines, and shall be deemed to be an irrevocable designation that
such contributions are not to be treated as "qualified voluntary employee
contributions" under Section 219 of the Internal Revenue Code of 1954.
C-5. Changes in Contributions. A Supplement C Participant may elect
to vary his contributions under this Supplement C within the limits specified in
paragraph C-4, or he may elect to discontinue such contributions effective as of
the beginning of any pay period. If a Supplement C Participant discontinues his
contributions, he may resume such contributions only as of a date specified for
that purpose by the Committee. Each such election shall be made at such time,
in such manner, and in accordance with such rules as the Committee shall
establish.
C-6. Payment of Contributions. A Supplement C Participant's
contributions may be made by regular payroll deductions or in any other way
approved by the Committee. Supplement C Participant contributions deducted by
an Employer shall be paid by such Employer to the Trustee.
C-7. Withdrawal of Contributions. A Supplement C Participant may
elect to withdraw all or any portion of the contributions made under this
Supplement C and then credited to his Supplement C account, provided that no
withdrawal under this Paragraph C-7 shall be for less than $200, unless approved
C-2
<PAGE>
by the Committee. Each election by a Participant under this paragraph C-7 shall
be permitted only at such time, in such manner, and in accordance with such
rules as the Committee shall establish.
C-8. Investment of Contributions. Contributions under this
Supplement C normally will be invested in the Guaranteed Fund. However, a
Supplement C Participant may elect to have all or a portion of his contributions
under this Supplement C invested in one or more of the other Investment Funds
(other than the Employer Stock Fund). Subject to the foregoing limitations of
this paragraph, a Supplement C Participant may also elect that all or a part of
his interest in an Investment Fund shall be liquidated and the proceeds thereof
transferred to one or more of the other Investment Funds. Each election by a
Participant under this paragraph C-8 shall be permitted only at such time, in
such manner, and in accordance with such rules as the Committee shall establish.
C-9. Accounting. If a Supplement C Participant elects to make
contributions, the Committee shall maintain a "Supplement C account" in his name
which will reflect his contributions under this Supplement C and the income,
losses, appreciation and depreciation attributable thereto. As of each
valuation date, the Committee shall:
(a) First, charge to each Supplement C account all payments or
distributions made from such account since the last preceding
valuation date that have not been charged previously;
(b) Next, credit each Supplement C account with its pro rata share of
any increase or charge such account with its pro rata share of
any decrease in the value of the "adjusted net worth" of each
Investment Fund in which it has an interest as of that date; and
C-3
<PAGE>
(c) Finally, credit each Supplement C Participant's contributions
made since the last preceding valuation date to his Supplement C
account.
Contributions not yet allocated to Supplement C accounts will be excluded in
determining the adjusted net worth of an Investment Fund.
C-10. Vesting. The right of a Supplement C Participant to the
balance in his Supplement C account, as adjusted under paragraph C-9 above,
shall be nonforfeitable at all times.
C-11. Transfer of Accounts. If a Supplement C Participant becomes a
Participant in the Plan, he shall cease to be a Supplement C Participant, and
the balance in his Supplement C account shall be transferred to the account
maintained in his name under the Plan and thereafter shall be held and
distributed in accordance with the terms of the Plan.
C-12. Distribution. If a Supplement C Participant should terminate
employment with all of the Employers for any reason before he becomes a
Participant in the Plan, the balance in his Supplement C account shall be paid
to him, or in the event of his death to his beneficiary, in a lump sum.
C-13. Use of Terms. All terms and provisions of the Plan shall apply
to this Supplement C, except that where the terms and provisions of the Plan and
this Supplement C conflict, the terms and provisions of this Supplement C shall
govern.
C-4
<PAGE>
SUPPLEMENT D
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Deductible Deposits
-------------------
D-1. Purpose. The purpose of this Supplement D is to allow certain
Employees of the Employers to make deductible employee contributions
("deposits") under this Supplement D. All deposits made under this Supplement D
will be treated as "qualified voluntary employee contributions" under Section
219 of the Internal Revenue Code of 1954. Voluntary contributions made under
Section 3 or Supplement C of the Plan may not be treated as qualified voluntary
employee contributions.
D-2. Effective Date. The effective date of this Supplement D is
January 1, 1982.
D-3. Participation. Each Employee of an Employer shall become a
Participant in this Supplement D (a "Supplement D Participant") on the date as
of which he becomes either a Participant in the Plan or a Supplement C
Participant, but not prior to January 1, 1982.
D-4. Amount of Deposits. Under the terms stated below, and subject
to any limitations contained in the Plan or this Supplement D, a Supplement D
Participant, if he so desires, may elect to make deposits under this Supplement
D for any calendar year, beginning with the later of the calendar year ending
December 31, 1982 or the calendar year in which he becomes a Supplement D
Participant, in an amount not more than the lesser of: (a) $2,000, or (b) 100%
of his compensation (whether or not earned as a Supplement D Participant) for
that year. Each such election by a Supplement D Participant under
D-1
<PAGE>
this paragraph D-4 must be in writing and filed with his Employer at such time
and in such way as the Committee determines, but not later than the end of the
calendar year for which such deposits are to be made. A Supplement D Participant
may not make deposits under this Supplement D for any calendar year ending after
the earlier of (i) the date he attains age 70-1/2 years, or (ii) December 31,
1986.
D-5. Deduction or Payment of Deposits. A Supplement D Participant's
deposits must be made in cash by the end of the calendar year for which they are
made. Such deposits may be made by regular payroll deductions or in any other
way approved by the Committee. Supplement D Participant deposits deducted by an
Employer shall be paid by such Employer to the Trustee.
D-6. Variation, Discontinuance and Resumption of Deposits. A
Supplement D Participant may elect to change his deposit rate (but not
retroactively) within the limits specified in paragraph D-4 above, to
discontinue making deposits or to resume deposits. Each such election shall be
made at such time, in such manner, and in accordance with such rules as the
Committee shall establish.
D-7. Investment of Deposits. Deposits under this Supplement D
normally will be invested in the Guaranteed Fund. However, a Supplement D
Participant may elect to have all or a portion of his deposits under this
Supplement D invested in one or more of the other Investment Funds (other than
the Employer Stock Fund). Subject to the foregoing limitations of this
paragraph, a Supplement D Participant may also elect that all or a part of his
interest in an Investment Fund shall be liquidated and the proceeds thereof
transferred to one or more of the other Investment Funds. Each election by a
Participant under this paragraph D-7 shall be permitted only at such time, in
such manner, and in accordance with such rules as the Committee shall establish.
D-2
<PAGE>
D-8. Accounting. If a Supplement D Participant elects to make
deposits, the Committee shall maintain a "Supplement D account" in his name
which will reflect his deposits under this Supplement D and the income, losses,
appreciation and depreciation attributable thereto. As of each valuation date,
the Committee shall:
(a) First, charge to each Supplement D account all payments or
distributions made from such account since the last preceding
valuation date that have not been charged previously;
(b) Next, credit each Supplement D account with its pro rata share of
any increase or charge such account with its pro rata share of
any decrease in the value of the "adjusted net worth" of each
Investment Fund in which it has an interest as of that date; and
(c) Finally, credit each Supplement D Participant's deposits made
since the last preceding valuation date to his Supplement D
account.
Deposits not yet allocated to Supplement D accounts will be excluded in
determining the adjusted net worth of an Investment Fund.
D-9. Vesting. The right of a Supplement D Participant to the balance
in his Supplement D account, as adjusted under paragraph D-8 above, shall be
nonforfeitable at all times.
D-10. Withdrawal of Deposits. If the Committee so provides, a
Supplement D Participant may elect to withdraw all or any portion of the amount
then credited to his Supplement D account. Each election by a Participant under
this paragraph D-10 shall be permitted only at such time, in such manner, and
D-3
<PAGE>
in accordance with such rules as the Committee shall establish. Any amounts
withdrawn by a Participant from his Supplement D account shall be treated as a
distribution of his "accumulated deductible employee contributions" under
Section 72 of the Internal Revenue Code of 1954.
D-11. Loans. The balance in a Participant's Supplement D account
shall be excluded for purposes of determining the amount of any loan which may
be made to the Participant under subsection 7.6 of the Plan.
D-12. Distribution. As soon as practicable after December 31, 1987,
the balance in each Participant's Supplement D account (after all adjustments
required under paragraph D-8 as of that date have been made) will be distributed
to him by one of the following methods:
(a) By a lump sum payment.
(b) By transfer to an individual retirement account established by
the Participant at the Bank.
A Supplement D Participant may elect the method of distributing his benefits
under this paragraph D-12; provided that if a Participant fails to make such an
election within the time prescribed by the Committee, his Supplement D account
shall be distributed under subparagraph (a) above.
D-13. Use of Terms. All terms and provisions of the Plan shall apply
to this Supplement D, except that where the terms and provisions of the Plan and
this Supplement D conflict, the terms and provisions of this Supplement D shall
govern.
D-4
<PAGE>
SUPPLEMENT E
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Argo State Bank
---------------------------
E-1. On July 31, 1982 (the "Closing Date"), Harris Bankcorp, Inc.
acquired 100% of the voting shares of Argo State Bank ("Argo"). Effective as of
the Closing Date, Argo adopted Employees' Savings and Profit Sharing Plan of
Harris Trust and Savings Bank and Affiliated Companies (the "Harris Plan") for
the benefit of its eligible employees and became a party to Employees' Savings
and Profit Sharing Trust Fund of Harris Trust and Savings Bank and Affiliated
Companies as an employer thereunder. Prior to the Closing Date, Argo was an
employer under a savings plan (the "Argo Plan") for the benefit of certain of
its eligible employees.
E-2. Salaried employees of Argo on the Closing Date who, immediately
prior to that date, were covered under the Argo Plan will become Participants in
the Harris Plan effective as of the Closing Date. Other salaried employees of
Argo on the Closing Date will become Participants in the Harris Plan on the
earlier of the date they satisfy the eligibility requirements of the Harris Plan
or the date they would have satisfied the eligibility requirements of the Argo
Plan. Employees hired by Argo after the Closing Date will become Participants
in the Harris Plan on the date they satisfy the eligibility requirements of the
Harris Plan.
E-3. The last continuous period of employment of an employee with
Argo prior to the Closing Date shall be included in his credited service for
purposes of determining when he satisfies the eligibility requirements of the
Harris Plan.
E-1
<PAGE>
E-4. All provisions of the Harris Plan, to the extent that they are
consistent with the provisions of this Supplement, shall apply to employees of
Argo covered under the Harris Plan. Unless the context clearly implies or
indicates the contrary, a word, term or phrase used in the Harris Plan is
similarly used or defined in this Supplement.
E-2
<PAGE>
SUPPLEMENT F
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Roselle State Bank and Trust Company
------------------------------------------------
F-1. Introduction. Effective as of January 1, 1983, Roselle State
Bank and Trust Company ("Roselle") adopted Employees' Savings and Profit Sharing
Plan of Harris Trust and Savings Bank and Affiliated Companies (the "Harris
Plan") as an amendment, restatement and continuation of the profit sharing plan
(the "Roselle Plan") incorporated in Roselle State Bank and Trust Company Profit
Sharing Plan and Trust (the "Roselle Trust"). The Roselle Trust is being merged
into and continued in the form of Employees' Savings and Profit Sharing Trust
Fund of Harris Trust and Savings Bank and Affiliated Companies.
F-2. Participation in the Harris Plan. Employees of Roselle on
December 31, 1982 who were covered under the Roselle Plan on that date will
become Participants in the Harris Plan effective as of January 1, 1983. Other
employees of Roselle will become Participants in the Harris Plan on the date
they satisfy the eligibility requirements of the Harris Plan. The last
continuous period of employment of an employee with Roselle prior to January 1,
1983 shall be included in his credited service for purposes of determining when
he satisfies the eligibility requirements of the Harris Plan.
F-3. Employer Contributions by Roselle. Notwithstanding the
provisions of subsection 4.3 of the Harris Plan, for each calendar year for
which Roselle has been designated as a Separate Employer pursuant to Section 17
or subsection 4.1 of the Harris Plan, Roselle will contribute to the Harris Plan
such amount, if any, as shall be determined by the Board of
F-1
<PAGE>
Directors of Roselle. The provisions of this paragraph F-3 shall cease to be
effective after December 31, 1994.
F-4. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Roselle Plan whose
interest thereunder is transferred to the Harris Plan, with an opening balance
equal to the amount transferred to the Harris Plan on his behalf.
F-5. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement F, except that where the terms and provisions of the
Harris Plan and this Supplement F conflict, the terms and provisions of this
Supplement F shall govern.
F-2
<PAGE>
SUPPLEMENT G
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Trust Company of New York
--------------------------------------------
G-1. Introduction. On or about September 30, 1983, Harris Trust
Company of New York ("HTCNY") acquired the Shareholder Services operations of
Chemical Bank ("Chemical"), and certain employees of Chemical ("Transferred
Employees") transferred to employment with HTCNY. Effective as of January 3,
1984, HTCNY adopted Employees' Savings and Profit Sharing Plan of Harris Trust
and Savings Bank and Affiliated Companies (the "Harris Profit Sharing Plan") for
the benefit of its eligible employees and became a party to Employees' Savings
and Profit Sharing Trust Fund of Harris Trust and Savings Bank and Affiliated
Companies as an Employer thereunder. Prior to their employment by HTCNY,
certain Transferred Employees were covered under Profit Sharing Plan of Chemical
Bank and Certain Affiliates (the "Chemical Profit Sharing Plan").
G-2. Participation in the Harris Profit Sharing Plan. Transferred
Employees who were covered under the Chemical Profit Sharing Plan immediately
prior to their employment with HTCNY will become Participants in the Harris
Profit Sharing Plan effective as of the date of their employment by HTCNY.
Other Transferred Employees will become Participants in the Harris Profit
Sharing Plan upon the completion of three years of credited service. A
Transferred Employee's last continuous period of employment with Chemical prior
to his employment by HTCNY shall be included in his credited service. Other
employees hired by HTCNY will become participants in the Harris Profit Sharing
Plan when they satisfy the eligibility requirements of the Harris Profit Sharing
Plan.
G-1
<PAGE>
G-3. Use of Terms. All terms and provisions of the Harris Profit
Sharing Plan shall apply to this Supplement G, except that where the terms and
provisions of the Harris Profit Sharing Plan and this Supplement G conflict, the
terms and provisions of this Supplement G shall govern.
G-2
<PAGE>
SUPPLEMENT H
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Bank of Montreal
----------------------------
H-1. Introduction. Effective as of September 4, 1984, Harris
Bankcorp, Inc. became a wholly owned subsidiary of Bank of Montreal ("BMO").
Effective as of July 1, 1985, BMO adopted Employees' Savings and Profit Sharing
Plan of Bank of Montreal/Harris (the "Harris Plan") for the benefit of certain
of its United States employees ("eligible BMO employees") and became a party to
Employees' Savings and Profit Sharing Trust Fund of Bank of Montreal/Harris as
an Employer thereunder.
H-2. Participation in the Harris Plan. Each eligible BMO employee
shall become a Participant in the Harris Plan on the first day of the month,
beginning July 1, 1985, coincident with or next following the date he satisfies
the eligibility requirements of the Harris Plan. Employment with BMO prior to
July 1, 1985 shall be included in an eligible BMO employee's credited service
for purposes of determining when he satisfies the eligibility requirements of
the Harris Plan, and all such employment (whether or not continuous) shall be
taken into account in the case of an employee who was employed by BMO on June
30, 1985.
H-3. Employer Contributions by BMO. Notwithstanding the provisions
of subsection 4.3 of the Harris Plan, for each calendar year for which BMO has
been designated as a Separate Employer pursuant to Section 17 or subsection 4.1
of the Harris plan, BMO will contribute to the Harris Plan such amount, if any,
as shall be determined by BMO. The provisions of this paragraph H-3 shall cease
to be effective after December 31, 1994.
H-1
<PAGE>
H-4. Accounts. Certain eligible BMO employees are Members in Bank of
Montreal U.S. Pension Plan (the "BMO Plan"). The Committee shall establish a
separate account under the Harris Plan in the name of each Member in the BMO
Plan whose Accumulated Contributions thereunder (as defined in Section 10.05 of
the BMO Plan) are transferred to the Harris Plan, with an opening balance equal
to the amount transferred to the Harris Plan on his behalf.
H-5. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement H, except that where the terms and provisions of the
Harris Plan and this Supplement H conflict, the terms and provisions of this
Supplement H shall govern.
H-2
<PAGE>
SUPPLEMENT I
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Coverage of Former Employees of
-------------------------------
National Westminster Bank USA
-----------------------------
I-1. Introduction. On or about January 18, 1985, Harris Trust
Company of New York ("HTCNY") acquired the Shareholder Services operations of
National Westminster Bank USA ("Westminster"), and certain employees of
Westminster ("Transferred Employees") transferred to employment with HTCNY.
HTCNY has adopted Employees' Savings and Profit Sharing Plan of Bank of
Montreal/Harris (the "Harris Plan") for the benefit of its eligible employees.
Prior to their employment by HTCNY, certain Transferred Employees were covered
under Westminster Savings Plan (the "Westminster Plan").
I-2. Participation in the Harris Plan. Transferred Employees who
were covered under the Westminster Plan immediately prior to their employment
with HTCNY will become Participants in the Harris Plan effective as of the date
of their employment by HTCNY. Other Transferred Employees will become
Participants in the Harris Plan upon the completion of three years of credited
service. A Transferred Employee's last continuous period of employment with
Westminster prior to his employment by HTCNY shall be included in this credited
service.
I-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each Transferred Employee whose interest
under the Westminster Plan is transferred to the Harris Plan, with an opening
balance equal to the amount transferred to the Harris Plan on his behalf.
I-1
<PAGE>
I-4. Use of Terms. All terms and provisions of the Harris plan shall
apply to this Supplement I, except that where the terms and provisions of the
Harris Plan and this Supplement I conflict, the terms and provisions of this
Supplement I shall govern.
I-2
<PAGE>
SUPPLEMENT J
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Derivitive Markets Management, Inc.
-----------------------------------------------
J-1. Introduction. Effective as of March 20, 1986, Derivitive
Markets Management, Inc. ("DMM") adopted Employees' Savings and Profit Sharing
Plan of Bank of Montreal/Harris (the "Harris Plan") for the benefit of its
eligible employees and became a party to Employees' Savings and Profit Sharing
Trust Fund of Bank of Montreal/Harris as an Employer thereunder.
J-2. Employer Contributions by DMM. Notwithstanding the provisions
of subsection 4.3 of the Harris Plan, for each calendar year for which DMM has
been designated as a Separate Employer pursuant to Section 17 or subsection 4.1
of the Harris Plan, DMM will contribute to the Harris Plan such amount, if any,
as shall be determined by DMM.
J-3. The chief executive officer of DMM will not participate in DMM
contributions under the Harris Plan.
J-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement J, except that where the terms and provisions of the
Harris Plan and this Supplement J conflict, the terms and provisions of this
Supplement J shall govern. This Supplement J shall cease to be effective after
December 31, 1994.
J-1
<PAGE>
SUPPLEMENT K
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Wilmette, N.A.
--------------------------------------
K-1. Introduction. As of January 1, 1987 (the "Effective Date"),
Harris Bank Wilmette, N.A. ("Wilmette") adopted Employees' Savings and Profit
Sharing Plan of Bank of Montreal/Harris (the "Harris Plan") as an amendment,
restatement and continuation of First National Bank of Wilmette Profit Sharing
Retirement Plan (the "Wilmette Plan"). First National Bank of Wilmette Profit
Sharing Retirement Trust is being merged into and continued in the form of
Employees' Savings and Profit Sharing Trust Fund of Bank of Montreal/Harris.
K-2. Participation in the Harris Plan. Employees of Wilmette on the
Effective Date who, immediately prior to that date, were covered under the
Wilmette Plan will become Participants in the Harris Plan on the Effective Date.
Other employees of Wilmette on the Effective Date will become Participants in
the Harris Plan on the earlier of the date they satisfy the eligibility
requirements of the Harris Plan or the date they would have satisfied the
eligibility requirements of the Wilmette Plan. Employees hired by Wilmette
after the Effective Date will become Participants in the Harris Plan on the date
they satisfy the eligibility requirements of the Harris Plan. The last
continuous period of employment of an employee with Wilmette prior to the
Effective Date shall be included in his credited service for purposes of
determining when he satisfies the eligibility requirements of the Harris plan.
K-3. Employer Contributions by Wilmette. Notwithstanding the
provisions of subsection 4.3 of the Harris Plan,
K-1
<PAGE>
for each calendar year for which Wilmette has been designated as a Separate
Employer pursuant to Section 17 or subsection 4.1 of the Harris Plan, Wilmette
will contribute to the Harris Plan such amount, if any, as shall be determined
by the Board of Directors of Wilmette. The provisions of this paragraph K-3
shall cease to be effective after December 31, 1994.
K-4. Accounts. The Committee shall establish a separate account
under the Harris plan in the name of each participant in the Wilmette Plan whose
interest thereunder is transferred to the Harris Plan, with an opening balance
equal to the amount transferred to the Harris Plan on his behalf.
K-5. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement K, except that where the terms and provisions of the
Harris Plan and this Supplement K conflict, the terms and provisions of this
Supplement K shall govern.
K-2
<PAGE>
SUPPLEMENT L
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Coverage of Former Employees of
-------------------------------
Marine Midland Bank, N.A.
-------------------------
L-1. Introduction. On or about September 20, 1985, Harris Trust
Company of New York ("HTCNY") acquired the Shareholder Services operations of
Marine Midland Bank, N.A. ("MMB"), and certain employees of MMB ("Transferred
Employees') transferred to employment with HTCNY. HTCNY has adopted Employees'
Savings and Profit Sharing Plan of Bank of Montreal/ Harris (the "Harris Plan")
for the benefit of its eligible employees. Prior to their employment by HTCNY,
certain Transferred Employees were covered under The Marine Midland Thrift
Incentive Plan (the "MMB Savings Plan").
L-2. Participation in the Harris Plan. Transferred Employees who
were covered under the MMB Savings Plan immediately prior to their employment
with HTCNY will become Participants in the Harris Plan effective as of the date
of their employment by HTCNY. Other Transferred Employees will become
Participants in the Harris Plan upon the completion of three years of credited
service. A Transferred Employee's last continuous period of employment with MMB
prior to his employment by HTCNY shall be included in his credited service.
L-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each Transferred Employee whose interest
under the MMB Savings Plan is transferred to the Harris Plan, with an opening
balance equal to the amount transferred to the Harris Plan on his behalf.
L-1
<PAGE>
L-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement L, except that where the terms and provisions of the
Harris Plan and this Supplement L conflict, the terms and provisions of this
Supplement L shall govern.
L-2
<PAGE>
SUPPLEMENT M
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Barrington, N.A.
----------------------------------------
M-1. Introduction. As of January 1, 1989 (the "Effective Date"),
Harris Bank Barrington, N.A. ("Barrington") adopted Employees' Savings and
Profit Sharing Plan of Bank of Montreal/Harris (the "Harris Plan") as an
amendment, restatement and continuation of First Retirement Estates Plan of
Harris Bank Barrington (the "Barrington Plan"). First Retirement Estates of
Harris Bank Barrington is being merged into and continued in the form of
Employees' Savings and Profit Sharing Trust Fund of Bank of Montreal/Harris.
M-2. Participation in the Harris Plan. Employees of Barrington on
the Effective Date who, immediately prior to that date, were covered under the
Barrington Plan will become Participants in the Harris Plan on the Effective
Date. Other employees of Barrington will become Participants in the Harris Plan
on the date they satisfy the eligibility requirements of the Harris Plan. The
last continuous period of employment of an employee with Barrington prior to the
Effective Date shall be included in his credited service for purposes of
determining when he satisfies the eligibility requirements of the Harris Plan.
M-3. Allocation of Employer Contributions. Notwithstanding the
provisions of subsection 3.7 of the Harris Plan, an employee of Barrington on
the Effective Date will be entitled to share in Employer contributions after he
has completed one year of credited service.
M-1
<PAGE>
M-4. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Barrington Plan
whose interest thereunder is transferred to the Harris Plan, with an opening
balance equal to the amount transferred to the Harris Plan on his behalf.
M-5. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement M, except that where the terms and provisions of the
Harris Plan and this Supplement M conflict, the terms and provisions of this
Supplement M shall govern.
M-2
<PAGE>
SUPPLEMENT N
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Libertyville
------------------------------------
N-1. Introduction. As of July 1, 1990 (the "Effective Date"), Harris
Bank Libertyville ("Libertyville") adopted Employees' Savings and Profit Sharing
Plan of Bank of Montreal/Harris (the "Harris Plan").
N-2. Participation in the Harris Plan. Employees of Libertyville
will become Participants in the Harris Plan on the first day of the month,
beginning with the Effective Date, on which they satisfy the eligibility
requirements of the Harris Plan. The last continuous period of employment of an
employee with Libertyville prior to the Effective Date shall be included in his
credited service for purposes of determining when he satisfies the eligibility
requirements of the Harris Plan.
N-3. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement N, except that where the terms and provisions of the
Harris Plan and this Supplement N conflict, the terms and provisions of this
Supplement N shall govern.
N-1
<PAGE>
SUPPLEMENT O
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Hinsdale, N.A.
--------------------------------------
O-1. Introduction. As of July 1, 1992 (the "Effective Date"), Harris
Bank Hinsdale, N.A. ("Hinsdale") adopted Employees' Savings and Profit Sharing
Plan of Bank of Montreal/Harris (the "Harris Plan"). Prior to the Effective
Date, certain Hinsdale employees were covered under a profit sharing plan
maintained by Hinsdale (the "Hinsdale Plan"). The Hinsdale Plan was terminated
effective October 31, 1991 (the "Termination Date"), and certain accounts of
participants in the Hinsdale Plan are being transferred to the Harris Plan.
O-2. Participation in the Harris Plan. Employees of Hinsdale who
were hired on or before the Termination Date will become Participants in the
Harris Plan on the Effective Date. Employees hired by Hinsdale after the
Termination Date will become Participants in the Harris Plan on the date they
satisfy the eligibility requirements of the Harris Plan. The last continuous
period of employment of an employee with Hinsdale prior to the Effective Date
shall be included in his credited service for purposes of determining when he
satisfies the eligibility requirements of the Harris Plan.
O-3. Allocation of Employer Contributions. Notwithstanding the
provisions of subsection 7.5 of the Harris Plan, an employee of Hinsdale who
became a Participant in the Harris Plan on the Effective Date will be entitled
to share in Employer contributions based on: (a) his compensation on and after
January 1, 1992 if he was or would have become a participant in the Hinsdale
Plan on or before January 1, 1992; and (b) his compensation on and after the
Effective Date if he would have become a participant in the Hinsdale plan after
January 1, 1992.
O-1
<PAGE>
O-4. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Hinsdale Plan whose
interest thereunder is transferred to the Harris Plan, with an opening balance
equal to the amount transferred to the Harris Plan on his behalf.
O-5. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement O, except that where the terms and provisions of the
Harris Plan and this Supplement O conflict, the terms and provisions of this
Supplement O shall govern.
O-2
<PAGE>
SUPPLEMENT P
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Batavia, N.A.
-------------------------------------
P-1. Introduction. As of January 1, 1989 (the "Effective Date"),
Harris Bank Batavia, N.A. ("Batavia") adopted Employees' Savings and Profit
Sharing Plan of Bank of Montreal/Harris (the "Harris Plan") as an amendment,
restatement and continuation of The First National Bank of Batavia Profit
Sharing Plan (the "Batavia Plan").
P-2. Participation in the Harris Plan. Employees of Batavia on the
Effective Date who, immediately prior to that date, were covered under the
Batavia Plan will become Participants in the Harris Plan on the Effective Date.
Other employees of Batavia will become Participants in the Harris Plan on the
date they satisfy the eligibility requirements of the Harris Plan. The last
continuous period of employment of an employee with Batavia prior to the
Effective Date shall be included in his credited service for purposes of
determining when he satisfies the eligibility requirements of the Harris Plan.
P-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Batavia Plan whose
interest thereunder is transferred to the Harris Plan, with an opening balance
equal to the amount transferred to the Harris Plan on his behalf.
P-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement P, except that where the terms and provisions of the
Harris Plan and this Supplement P conflict, the terms and provisions of this
Supplement P shall govern.
P-1
<PAGE>
SUPPLEMENT Q
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Frankfort
---------------------------------
Q-1. Introduction. As of October 1, 1990 (the "Effective Date"),
Harris Bank Frankfort ("Frankfort") adopted Employees' Savings and Profit
Sharing Plan of Bank of Montreal/ Harris (the "Harris Plan").
Q-2. Participation in the Harris Plan. Employees of Frankfort will
become Participants in the Harris Plan on the first day of the month, beginning
with the Effective Date, on which they satisfy the eligibility requirements of
the Harris Plan. The last continuous period of employment of an employee with
Frankfort prior to the Effective Date shall be included in his credited service
for purposes of determining when he satisfies the eligibility requirements of
the Harris Plan.
Q-3. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement Q, except that where the terms and provisions of the
Harris Plan and this Supplement Q conflict, the terms and provisions of this
Supplement Q shall govern.
Q-1
<PAGE>
SUPPLEMENT R
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Naperville
----------------------------------
R-1. Introduction. As of January 1, 1994 (the "Effective Date"),
Harris Bank Naperville ("Naperville") is adopting Employees' Savings and Profit
Sharing Plan of Bank of Montreal/Harris (the "Harris Plan") as an amendment,
restatement and continuation of the profit sharing plan maintained by Naperville
(the "Naperville Plan"), and the trust forming a part of the Naperville Plan is
being merged into and continued in the form of Employees' Savings and Profit
Sharing Trust Fund of Bank of Montreal/Harris.
R-2. Participation in the Harris Plan. Salaried and regular hourly
employees of Naperville on November 15, 1993 will become Participants in the
Harris Plan on the Effective Date. Other employees of Naperville will become
Participants in the Harris Plan on the date they satisfy the eligibility
requirements of the Harris Plan. The last continuous period of employment of an
employee with Naperville prior to the Effective Date shall be included in his
credited service for purposes of determining when he satisfies the eligibility
requirements of the Harris Plan; provided that salaried and regular hourly
employees of Naperville on November 15, 1993 will be deemed to have completed
two years of credited service on the Effective Date for purposes of subsection
3.7 of the Harris Plan.
R-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Naperville Plan
whose interest thereunder is transferred to the Harris Plan, with an opening
balance equal to the amount transferred to the Harris Plan on his behalf.
R-1
<PAGE>
R-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement R, except that where the terms and provisions of the
Harris Plan and this Supplement R conflict, the terms and provisions of this
Supplement R shall govern.
R-2
<PAGE>
SUPPLEMENT S
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank St. Charles
-----------------------------------
S-1. Introduction. As of January 1, 1994 (the "Effective Date"),
Harris Bank St. Charles ("St. Charles") is adopting Employees' Savings and
Profit Sharing Plan of Bank of Montreal/Harris (the "Harris Plan") as an
amendment, restatement and continuation of the profit sharing plan maintained by
St. Charles (the "St. Charles Plan"), and the trust forming a part of the St.
Charles Plan is being merged into and continued in the form of Employees'
Savings and Profit Sharing Trust Fund of Bank of Montreal/Harris.
S-2. Participation in the Harris Plan. Salaried and regular hourly
employees of St. Charles on November 15, 1993 will become Participants in the
Harris Plan on the Effective Date. Other employees of St. Charles will become
Participants in the Harris Plan on the date they satisfy the eligibility
requirements of the Harris Plan. The last continuous period of employment of an
employee with St. Charles prior to the Effective Date shall be included in his
credited service for purposes of determining when he satisfies the eligibility
requirements of the Harris Plan; provided that salaried and regular hourly
employees of St. Charles on November 15, 1993 will be deemed to have completed
two years of credited service on the Effective Date for purposes of subsection
3.7 of the Harris Plan.
S-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the St. Charles Plan
whose interest thereunder is transferred to the Harris Plan, with an opening
balance equal to the amount transferred to the Harris Plan on his behalf.
S-1
<PAGE>
S-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement S, except that where the terms and provisions of the
Harris Plan and this Supplement S conflict, the terms and provisions of this
Supplement S shall govern.
S-2
<PAGE>
SUPPLEMENT T
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Winnetka, N.A.
--------------------------------------
T-1. Introduction. As of January 1, 1994 (the "Effective Date"),
Harris Bank Winnetka, N.A. ("Winnetka") is adopting Employees' Savings and
Profit Sharing Plan of Bank of Montreal/Harris (the "Harris Plan") as an
amendment, restatement and continuation of the profit sharing plan maintained by
Winnetka (the "Winnetka Plan"), and the trust forming a part of the Winnetka
Plan is being merged into and continued in the form of Employees' Savings and
Profit Sharing Trust Fund of Bank of Montreal/Harris.
T-2. Participation in the Harris Plan. Salaried and regular hourly
employees of Winnetka on November 15, 1993 will become Participants in the
Harris Plan on the Effective Date; provided that Byron A. Warnes shall not be a
Participant in the Harris Plan. Other employees of Winnetka will become
Participants in the Harris Plan on the date they satisfy the eligibility
requirements of the Harris Plan. The last continuous period of employment of an
employee with Winnetka prior to the Effective Date shall be included in his
credited service for purposes of determining when he satisfies the eligibility
requirements of the Harris Plan; provided that salaried and regular hourly
employees of Winnetka on November 15, 1993 will be deemed to have completed two
years of credited service on the Effective Date for purposes of subsection 3.7
of the Harris Plan.
T-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Winnetka Plan whose
interest thereunder is transferred to the Harris Plan, with an opening balance
equal to the amount transferred to the Harris Plan on his behalf.
T-1
<PAGE>
T-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement T, except that where the terms and provisions of the
Harris Plan and this Supplement T conflict, the terms and provisions of this
Supplement T shall govern.
T-2
<PAGE>
SUPPLEMENT U
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Bank Glencoe-Northbrook, N.A.
------------------------------------------------
U-1. Introduction. As of January 1, 1994 (the "Effective Date"),
Harris Bank Glencoe-Northbrook, N.A. ("Glencoe") is adopting Employees' Savings
and Profit Sharing Plan of Bank of Montreal/Harris (the "Harris Plan") as an
amendment, restatement and continuation of the profit sharing plan maintained by
Glencoe (the "Glencoe Plan"), and the trust forming a part of the Glencoe Plan
is being merged into and continued in the form of Employees' Savings and Profit
Sharing Trust Fund of Bank of Montreal/Harris.
U-2. Participation in the Harris Plan. Salaried and regular hourly
employees of Glencoe on November 15, 1993 will become Participants in the Harris
Plan on the Effective Date. Other employees of Glencoe will become Participants
in the Harris Plan on the date they satisfy the eligibility requirements of the
Harris Plan. The last continuous period of employment of an employee with
Glencoe prior to the Effective Date shall be included in his credited service
for purposes of determining when he satisfies the eligibility requirements of
the Harris Plan; provided that salaried and regular hourly employees of Glencoe
on November 15, 1993 will be deemed to have completed two years of credited
service on the Effective Date for purposes of subsection 3.7 of the Harris Plan.
U-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Glencoe Plan whose
interest thereunder is transferred to the Harris Plan, with an opening balance
equal to the amount transferred to the Harris Plan on his behalf.
U-1
<PAGE>
U-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement U, except that where the terms and provisions of the
Harris Plan and this Supplement U conflict, the terms and provisions of this
Supplement U shall govern.
U-2
<PAGE>
SUPPLEMENT V
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Harris Nesbitt Thomson Securities Inc.
--------------------------------------------------
V-1. Introduction. As of April 1, 1992 (the "Effective Date"),
Harris Nesbitt Thomson Securities Inc. ("Nesbitt Thomson") adopted Employees'
Savings and Profit Sharing Plan of Bank of Montreal/Harris (the "Harris Plan")
for the benefit of its employees who are residents of and employed in the United
States of America ("U.S. employees").
V-2. Participation in the Harris Plan. U.S. Employees of Nesbitt
Thomson will become Participants in the Harris Plan on the first day of the
month, beginning with the Effective Date, on which they satisfy the eligibility
requirements of the Harris Plan. Employment of a U.S. employee with Nesbitt
Thomson on and after the Effective Date shall be included in his credited
service for purposes of determining when he satisfies the eligibility
requirements of the Harris Plan.
V-3. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement V, except that where the terms and provisions of the
Harris Plan and this Supplement V conflict, the terms and provisions of this
Supplement V shall govern.
1
<PAGE>
SUPPLEMENT W
------------
TO
--
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
------------------------------------------
OF
--
BANK OF MONTREAL/HARRIS
-----------------------
Adoption by Suburban Banks
--------------------------
W-1. Introduction. Effective as of January 1, 1995 (the "Effective
Date"), Harris Bank Palatine N.A., Harris Bank Oakbrook Terrace, Harris Bank
Arlington Meadows, Harris Bank Bartlett, Harris Bank Hoffman-Schaumburg, Harris
Bank Aurora, N.A., Suburban Bank of Barrington, Harris Bank Elk Grove, N.A.,
Harris Bank Marengo, Harris Bank Cary-Grove, Harris Bank Westchester, Harris
Bank Huntley and Harris Bank Woodstock (collectively referred to below as the
"Suburban Banks" and sometimes individually as a "Suburban Bank") have adopted
Employees' Savings and Profit Sharing Plan of Bank of Montreal/ Harris (the
"Harris Plan") as an amendment, restatement and continuation of the profit
sharing plan maintained by the Suburban Banks (the "Suburban Plan"), and the
trust forming a part of the Suburban Plan was merged into and continued in the
form of Employees' Savings and Profit Sharing Trust Fund of Bank of
Montreal/Harris, effective July 1, 1995.
W-2. Participation in the Harris Plan. Salaried and regular hourly
employees of the Suburban Banks on December 31, 1994 will become participants in
the Harris Plan on the Effective Date. Other employees of the Suburban Banks
will become participants in the Harris Plan on the date they satisfy the
eligibility requirements of the Harris Plan. The last continuous period of
employment of an employee with the Suburban Banks prior to the Effective Date
shall be included in his credited service for purposes of determining when he
satisfies the eligibility requirements of the Harris Plan; provided that
salaried and regular hourly employees of the Suburban Banks on December 31, 1994
will be deemed to have completed two years of credited service on the Effective
Date for purposes of subsection 3.7 of the Harris Plan.
W-1
<PAGE>
W-3. Accounts. The Committee shall establish a separate account
under the Harris Plan in the name of each participant in the Suburban Plan whose
interest thereunder is transferred to the Harris Plan, with an opening balance
equal to the amount transferred to the Harris Plan on his behalf.
W-4. Use of Terms. All terms and provisions of the Harris Plan shall
apply to this Supplement W, except that where the terms and provisions of the
Harris Plan and this Supplement W conflict, the terms and provisions of this
Supplement W shall govern.
W-2
<PAGE>
1995 STOCK APPRECIATION RIGHTS PLAN
ARTICLE I PURPOSE OF THE PLAN AND EFFECTIVE DATE
1.1 This Plan is established for certain designated executives and other
employees of Harris Bankmont, Inc., Harris Bankcorp, Inc., and their
respective Affiliates (as hereinafter defined) in order to provide an
incentive to Participants (as hereinafter defined) in the Plan to attain
long-term strategic goals and to attract and retain the services of
valuable employees.
1.2 This Plan shall be effective as of January 1, 1995.
ARTICLE II DEFINITIONS
2.1 In this Plan, words importing the singular shall include the plural and
vice versa, and words importing the masculine gender shall extend to and
include the feminine gender, unless the context in which a particular word
is used clearly requires otherwise; and the following capitalized terms
shall and have the following meanings:
"Affiliate" means an "affiliate" as defined in Rule 12b-2 of the Securities
Exchange Act of 1934.
"Common Share" means a common share in the capital of the Bank of Montreal.
"Company" means as the context may require each of Harris Bankmont, Inc.
and Harris Bankcorp, Inc., and collectively both of said entities.
"Compensation Committee" means the Compensation Committees of the Boards of
Directors of the Company or such other committee designated by the Boards
of Directors performing the same functions.
"Cumulative Actual Economic Performance Level" means as of any date of
determination during the term of a SAR the product of all ROE Indices for
all Fiscal Years ending after the date a SAR (as hereinafter defined) was
granted.
"Cumulative Economic Performance Threshold" means as of any date of
determination during the term of a SAR the product of all Economic
Performance Indices for all Fiscal Years ending after the date such SAR was
granted.
"Designated Participant" means a Participant (as hereinafter defined) who
is a participant in the Harris Growth Incentive Plan of the Company and/or
its Affiliates for the period 1994-1996.
Page 1
<PAGE>
"Economic Performance Index" means in respect of a particular Fiscal Year:
(i) the Economic Performance Threshold for such Fiscal Year
divided by
(ii) 100
plus
(iii) 1.0.
"Economic Performance Threshold" means such ROE for the Bank of Montreal
(expressed as a percentage) as is determined and defined by the Human
Resources and Management Compensation Committee to be applicable in respect
of a Fiscal Year for the purposes of this Plan.
"Employee" means a full-time employee of the Company or of any Affiliate of
the Company.
"Exercisable SAR" means a SAR which is exercisable under the provisions of
Article IV hereof.
"Expiry Date" means (i) with respect to a Five-Year SAR the 60th day after
the first Record Date occurring after the tenth anniversary of the
effective date of the Plan and (ii) with respect to a Three-Year SAR the
60th day after the first Record Date occurring after the sixth anniversary
of such effective date.
"First Five-Year Term" means the first five Fiscal Years measured from
November 1 of the Fiscal Year during which a Five-Year SAR was granted.
"First Three-Year Term" means the first three Fiscal Years measured from
November 1 of the Fiscal Year during which a Three-Year SAR was granted.
"Fiscal Year" means the twelve month period beginning November 1 and
ending October 31.
"Five-Year SAR" means any SAR granted pursuant hereto that is not a
Three-Year SAR (as hereinafter defined).
"Human Resources and Management Compensation Committee" means the Human
Resources and Management Compensation Committee of the Board of Directors
of the Bank of Montreal or such other Committee designated by such Board of
Directors performing the same functions.
"Market Value" is defined in Section 5.3 below.
Page 2
<PAGE>
"Participant" means an Employee who has been granted SARs hereunder by the
Company or the Affiliate which employs such Employee.
"Stock Appreciation Right" or "SAR" means the right subject to the terms
hereof, to receive from the Company or Affiliate which employs a
Participant, a cash payment calculated by subtracting the relevant SAR
Price from the Market Value of a Common Share on the date of determination,
provided such result is a positive number.
"Permanent Disability" means the permanent inability of a Participant to
perform the duties of his or her employment as a result of illness,
accident or physical or mental disability.
"Plan" means the Stock Appreciation Rights Plan set forth in this document,
as may be amended from time to time in accordance with Article VI hereof.
"Record Date" means the date on which the Bank of Montreal publishes its'
annual report.
"ROE" for a particular Fiscal Year means:
(i) the net income or loss of the Bank of Montreal for such Fiscal
Year, net of any dividends on shares other than Common Shares
paid in such year;
divided by the sum of
(ii) the average common share capital of Bank of Montreal for the
Fiscal Year; and
(iii) the Bank of Montreal's average retained earnings in respect of
such Fiscal Year;
multiplied by
(iv) 100,
all as reported in the Bank of Montreal's published annual report in
respect of the Fiscal Year.
"SAR Price" means as to any SAR an amount equal to the closing price on the
New York Stock Exchange of a Common Share on January 16, 1995, the
effective date of the Plan.
Page 3
<PAGE>
"ROE Index" in respect of a particular Fiscal Year means:
(i) the ROE (which may be a positive or negative number) for
such Fiscal Year
divided by
(ii) 100
plus
(iii) 1.0.
"Second Five-Year Term" means the period of time commencing on the day
immediately following the expiry of the First Five-Year Term and ending on
the Expiry Date of the Five-Year SARs.
"Second Three Year Term" means the period of time commencing on the day
immediately following the expiry of the First-Three Year Term and ending on
the Expiry Date of the Three-Year SARs.
"Three-Year SAR" means a SAR with respect to which the election under
Section 3.6 below has been made.
ARTICLE III ELIGIBILITY AND GRANT OF STOCK APPRECIATION RIGHTS
3.1 The Compensation Committee is authorized, in its sole and absolute
discretion, to grant on behalf of the Company to Employees selected by it
SARs for a stated period. The number of SARs to be granted to any Employee
under this Plan shall be determined by the Compensation Committee of the
Company in its sole and absolute discretion. The Board of Directors of any
Affiliate which employs a Participant shall concur in the award of any SARs
to its Employee/Participants, but may not increase the amount of a grant.
3.2 Each Participant shall receive a certificate specifying the number of SARs
granted to such Participant and the relevant terms thereof.
3.3 In the event of any termination of employment of a Participant which is
voluntary on the part of such Participant or any termination of the
employment of a Participant by the Company or by an Affiliate for cause
during the term of a SAR, all unexercised SAR(s) held by the Participant on
such date shall be immediately forfeited, cancelled and terminated.
3.4 In the event of the termination of the employment of a Participant by the
Company or by an Affiliate without cause during the term of a SAR, all
otherwise Exercisable SARs held by the Participant on the date of
termination of employment may be exercised in accordance with the terms of
the Plan. All other SARs held by a Participant on the date of such
termination of employment without cause shall be immediately forfeited,
cancelled and terminated.
Page 4
<PAGE>
3.5 For the purposes of this Plan, the Chief Executive Officer of the Company
shall conclusively determine whether or not a Participant has retired, is
Permanently Disabled or been discharged for cause or otherwise, and the
effective date of such event.
3.6 All SARs granted hereunder shall be Five-Year SARs except that each
Designated Participant may elect by written notice received by the
Secretary of the Company on or before July 31, 1995 to convert to Three-
Year SARs 50% of the SARs issued to such Designated Participant. Such
conversion shall be irrevocable.
ARTICLE IV EXERCISABILITY OF SARs
4.1 No SARs granted under this Plan may be exercised by a Participant unless
the SARs have become exercisable in accordance with the provisions of this
Article, whereupon such SARs will be deemed to be Exercisable SARs.
4.2 (a) A Five-Year SAR shall be exercisable by a Participant (or other person
as provided in Section 4.4) only during the sixty day period beginning
on the first Record Date to occur after the end of the First Five-Year
Term if the Cumulative Actual Economic Performance Level
equals or exceeds the Cumulative Economic Performance Threshold.
(b) If a Five-Year SAR does not become an Exercisable SAR pursuant
to the preceding paragraph 4.2 (a), such SAR may be exercised
during the sixty-day period beginning on the first Record Date during
the Second Five-Year Term on which it is reported that the Cumulative
Actual Economic Performance Level exceeds the Cumulative
Economic Performance Threshold.
(c) An Exercisable Five-Year SAR shall terminate and be cancelled if it is
not exercised during the relevant 60-day exercise period provided for
in paragraphs (a) or (b) of this Section 4.2.
4.3 (a) A Three-Year SAR shall be exercisable by a Participant (or other person
as provided in Section 4.4) only during the sixty day period beginning
on the first Record Date to occur after the end of the First Three-Year
Term if the Cumulative Actual Economic Performance Level equals or
exceeds the Cumulative Economic Performance Threshold.
Page 5
<PAGE>
(b) If a Three-Year SAR does not become an Exercisable SAR pursuant to the
preceding paragraph 4.3 (a), such SAR may be exercised during the sixty-
day period beginning on the first Record Date during the Second Three-
Year Term on which it is reported that the Cumulative Actual Economic
Performance Level exceeds the Cumulative Economic Performance Threshold.
(c) An Exercisable Three-Year SAR shall terminate and be cancelled
automatically if it is not exercised during the relevant 60-day exercise
period provided for in paragraphs (a) or (b) of this Section 4.3.
4.4 In the event of a Participant's death, Permanent Disability or retirement
in accordance with the Company's retirement policy any SARs granted to such
Participant and not otherwise terminated and cancelled, may be exercised by
the Participant, or by his or her legal representative, as the case may be,
in accordance with the terms of the Plan.
4.5 The Human Resources and Management Compensation Committee in its sole
discretion may make such adjustments to the ROE of the Company in respect
of any Fiscal Year for the purpose of this Plan as it deems appropriate in
the circumstances.
ARTICLE V METHOD OF EXERCISE OF EXERCISABLE SARs
5.1 A Participant may exercise an Exercisable SAR only by delivering to the
Corporate Secretary of the Company a written notice specifying the number
of SARs exercised.
5.2 Upon the exercise of an Exercisable SAR in accordance with section 5.1
hereof, the Company or Affiliate which employs such Participant shall pay
with reasonable promptness to the Participant in respect of the SARs so
exercised an amount equal to the difference between the Market Value of a
Common Share on the date of exercise of the designated SARs and the SAR
Price specified therein, multiplied by the number of SARs referred to in
the notice of exercise. Upon such payment being made, all such Exercisable
SARs shall thereupon be cancelled. All payments shall be subject to
withholding for income and other taxes as required pursuant to applicable
law.
5.3 The Market Value of a Common Share on the date of exercise of a SAR will
for the purposes of this Plan be deemed to be equal to the volume weighted
average trading price of the Common Shares on The New York Stock Exchange
(as published in the Volume-Weighted Average Quote Recap, as calculated by
Bloomberg Financial Markets) for the 20 trading days ending on the last
trading day immediately prior to the date of exercise.
Page 6
<PAGE>
ARTICLE VI AMENDMENT OR TERMINATION OF THE PLAN
6.1 The Company reserves the right, subject to any regulatory or required
shareholder approval, to amend, modify or terminate the Plan at any time,
provided, however, that any such amendment or modification shall not
decrease the entitlements of a Participant which have accrued prior to the
date of such amendment or termination, as the case may be.
6.2 The Human Resources and Management Compensation Committee may at any time
resolve to cease granting further SARs under this Plan. Such resolution
shall not, however, decrease the entitlements of a Participant that had
accrued prior to the date of such termination.
6.3 Notwithstanding any other provision hereof, any modification or amendment
to the Plan which is deemed necessary or appropriate to bring the Plan into
conformity with applicable law or regulation may be made retroactively, if
appropriate.
ARTICLE VII VARIATION OF SECURITIES
7.1 SARs based on the Bank of Montreal's Common Shares shall apply, mutatis
mutandis:
(i) to any securities that result either directly or indirectly from the
conversion, changing, reclassification, redivision, redesignation,
sub-division or consolidation of Common Shares; and
(ii) to any securities of the Company or of any successor or continuing
Company which may result from a reorganization, amalgamation,
consolidation or merger, statutory or otherwise.
ARTICLE VIII COMPLIANCE WITH REGULATORY REQUIREMENTS
8.1 Notwithstanding any other provision hereof, SARs may be issued to Employees
by the Compensation Committee subsequent to the adoption of the Plan by the
Boards of Directors of the Company.
8.2 The Company's obligation to issue SARs in accordance with the terms of this
Plan and any SARs granted hereunder are subject to compliance with any
applicable legislation and the rules, regulations and published policies of
any regulatory authorities or agencies having or asserting jurisdiction
over the issuance and distribution of such SARs in such jurisdictions as
the Company may elect to grant SARs to Participants.
Page 7
<PAGE>
ARTICLE IX ADMINISTRATION
9.1 The Plan shall be administered by the Compensation Committee. The
Committee shall have full and complete authority to interpret this Plan and
to prescribe such rules and regulations and make such other determinations
as it deems necessary for the administration of this Plan.
9.2 The Company shall maintain a register of all SARs granted to, or exercised
by, Participant(s), as well as all SARs that have been forfeited,
terminated and cancelled or expired, as the case may be.
9.3 A Participant may request a copy of an excerpt of such register to the
extent that the information requested relates to the Participant's own
personal entitlements under the Plan.
9.4 The Company shall from time to time determine whether any particular SARs
granted hereunder have become Exercisable SARs in accordance with Article
IV hereof and shall advise Participants from time to time of the status of
such SARs.
ARTICLE X GENERAL
10.1 The Plan shall not be construed to create or enlarge any right of any
Participant to remain in the employment or service of the Company, or any
Affiliate of the Company, nor to interfere in any manner with the right of
the Company, or any Affiliate of the Company, to discharge any Employee.
10.2 No SARs granted under the Plan shall be transferable or assignable by the
Participant otherwise than by will or pursuant to the laws of succession
and no SARs may be exercised by anyone other than the participant or his or
her legal representative during the lifetime of the Participant.
Furthermore, no SARs may be pledged, encumbered or charged by the
Participant in any manner.
10.3 The Plan shall be governed by and construed in accordance with the law of
the State of Illinois and the laws of the United States applicable therein.
10.4 This Plan shall be binding upon the Company, its successors and assigns.
10.5 Participation in the Plan is entirely voluntary, and any decision of an
Employee not to participate shall not affect the Employee's employment with
the Company or any Affiliate of the Company.
Page 8
<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 26, 1996,
relating to the consolidated statements of condition of Harris Bankcorp, Inc.
and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in stockholder's equity and cash flows for each of
the years in the three year period ended December 31, 1995, which report appears
on page 58 of the December 31, 1995 Annual Report on Form 10-K of Harris
Bankcorp, Inc.
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
March 25, 1996
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below authorizes Alan G. McNally,
Chairman of the Board and Chief Executive Officer, or Edward W. Lyman, Jr. or
Maribeth S. Rahe, Vice Chairs of the Board, to execute in the name of each such
person who is then an officer or director of the registrant, and to file, the
1995 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.
RICHARD M. JAFFEE
- ----------------------------- -----------------------------
Matthew W. Barrett Richard M. Jaffee
Director Director
F. ANTHONY COMPER EDWARD W. LYMAN, JR.
- ----------------------------- -----------------------------
F. Anthony Comper Edward W. Lyman, Jr.
Director Vice Chair and Director
SUSAN T. CONGALTON ALAN G. MCNALLY
- ----------------------------- -----------------------------
Susan T. Congalton Alan G. McNally
Director Chairman of the Board,
Chief Executive Officer,
and Director
ROXANNE J. DECYK
- -----------------------------
Roxanne J. Decyk
Director
WILBUR H. GANTZ MARIBETH S. RAHE
- ----------------------------- -----------------------------
Wilbur H. Gantz Maribeth S. Rahe
Director Vice Chair and Director
JAMES J. GLASSER CHARLES H. SHAW
- ----------------------------- -----------------------------
James J. Glasser Charles H. Shaw
Director Director
DARYL F. GRISHAM RICHARD E. TERRY
- ----------------------------- -----------------------------
Daryl F. Grisham Richard E. Terry
Director Director
LEO M. HENIKOFF JAMES O. WEBB
- ----------------------------- -----------------------------
Leo M. Henikoff James O. Webb
Director Director
STANLEY O. IKENBERRY WILLIAM J. WEISZ
- ----------------------------- -----------------------------
Stanley O. Ikenberry William J. Weisz
Director Director
Dated: February 21, 1996
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,522,418
<INT-BEARING-DEPOSITS> 457,702
<FED-FUNDS-SOLD> 179,692
<TRADING-ASSETS> 98,638
<INVESTMENTS-HELD-FOR-SALE> 3,389,967
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<ALLOWANCE> 129,259
<TOTAL-ASSETS> 15,676,201
<DEPOSITS> 10,228,782
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0
180,000
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<INCOME-PRETAX> 217,726
<INCOME-PRE-EXTRAORDINARY> 147,551
<EXTRAORDINARY> 0
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<LOANS-NON> 50,503
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