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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1996
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-18179
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
HARRIS BANKCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 36-2722782
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
111 WEST MONROE STREET, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
</TABLE>
312/461-2121
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $8 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
All voting stock (6,667,490 shares of Common Stock, $8 par value) is owned by
Bankmont Financial Corp., 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 10-K with a reduced
disclosure format.
Documents incorporated by reference:
NONE
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FORM 10-K CROSS REFERENCE INDEX
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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 1996)......................... 4
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 4
Item 6 Selected Financial Data..................................... 6
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 8 Financial Statements and Supplementary Data:
Quarterly Financial Data.................................... 41
Consolidated Statement of Income............................ 42
Consolidated Statement of Condition......................... 43
Statement of Changes in Stockholder's Equity................ 44
Consolidated Statement of Cash Flows........................ 45
Notes to Financial Statements............................... 46
Joint Independent Auditors.................................. 79
Independent Auditors' Report................................ 79
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 79
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 80
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 81
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 81
Signatures................................................................ 83
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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. 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, personal
trust 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, 58 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; a foreign branch office in Nassau; and an Edge Act
subsidiary, Harris Bank International Corporation ("HBIC"), in New York. On June
28, 1996, HTSB acquired 54 branches previously owned by Household Bank, f.s.b.
("Household"), a wholly-owned subsidiary of Household International.
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. In
1995, HTSB and BMO combined their U.S. foreign exchange activities ("FX"). Under
this arrangement, FX net profit is shared by HTSB and BMO in accordance with a
specific formula set forth in the agreement and an amendment in 1996.
HTSB's overseas activities are conducted through its representative
offices, foreign branch, 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; and acts as stock and bond
registrar and transfer agent, dividend reinvestment agent and paying agent. In
1996, HTSB sold its securities custody and related trustee services business for
large institutions to Citibank.
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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. Notes 15 and 16 to Financial Statements on pages 70 through 72 of
this Report provide details with respect to regulatory capital and 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 State and Federal regulations.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("the Act")
was signed into law. Along with numerous provisions pertaining to the U.S.
banking industry, the legislation addressed resolution of the bank and thrift
deposit insurance funds. This provision of the Act had three components. The
first is a one-time assessment to capitalize the Savings Association Insurance
Fund ("SAIF"). The second is a requirement that the repayment of the Financing
Corporation ("FICO") bonds be shared by both banks and thrift institutions. FICO
bonds had been issued in the past as a funding source to support SAIF. A final
component is the elimination of the two separate funds (SAIF and Bank Insurance
Fund ("BIF")) by merging them into a new Deposit Insurance Fund. Since the
deposits assumed as a result of the Household transaction were SAIF-insured, the
Corporation was subject to a one-time assessment. See the Summary of 1996
Compared to 1995 section on page 8 of this Report for additional information.
Future charges for insurance assessments on SAIF-insured deposits are
expected to be substantially reduced from what they otherwise would have been as
a result of the Act. Although the rate for those deposits insured by BIF should
increase slightly, the combined SAIF and BIF rate applicable to the
Corporation's subsidiary banks is expected to decline January 1, 1997 compared
to the average rate in effect since the Household branch purchase.
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
3
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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 6,363 and
4,813, respectively, at December 31, 1996.
ITEM 2 -- PROPERTIES
The Corporation's headquarters and HTSB's main banking premises are located
at 111 West Monroe Street, Chicago, Illinois. This bank and office building
complex is comprised of three connected buildings containing a total of
approximately 1,590,000 gross square feet. Approximately 54 percent of the
rentable space is committed to use by HTSB. Virtually all of the remaining space
in the entire building complex has been rented to tenants, including BMO. 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 branches and
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 52 of this Report.
ITEM 3 -- LEGAL PROCEEDINGS
For information on the Corporation's legal proceedings, see Note 17 to
Financial Statements on page 72 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 1996.
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 1996,
Bankcorp declared and paid to Bankmont approximately $48.2 million in cash
dividends on common stock and $15.0 million in cash dividends on preferred
stock. In 1995, Bankcorp declared and paid to Bankmont approximately $262.7
million in cash dividends on common stock, including a $205.0 million special
dividend in connection with the capital restructuring described below. Dividends
on common stock amounting to approximately $34.7 million were declared and paid
to Bankmont in 1994.
In conjunction with the acquisition of former Household branches, the
Corporation increased its capital base by $340 million, in part through the
issuance of $45 million of Series B nonvoting, callable, perpetual preferred
stock and an additional $15 million of long term subordinated debt. The 45
shares of preferred stock
4
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have no par value and a stated value of $1.0 million per share. The dividend
rate per annum is 7.875 percent of the stated value per share. The balance of
the capital increase, amounting to $280 million, was provided via an infusion of
equity by Bankmont. At December 31, 1996, the Corporation's equity capital
included $225 million of preferred stock.
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.
5
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ITEM 6 -- SELECTED FINANCIAL DATA
HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENT OF INCOME
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<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(FULLY TAXABLE EQUIVALENT (FTE) BASIS, DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
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INTEREST INCOME
Loans, including fees...................................... $ 838,789 $ 778,770 $594,265 $515,994 $586,000
Money market assets:
Deposits at banks........................................ 30,483 38,617 30,739 25,212 32,419
Federal funds sold and securities purchased under
agreement to resell.................................... 11,918 19,330 21,523 17,436 12,560
Trading account............................................ 4,968 4,556 2,796 6,537 21,056
Securities held-to-maturity................................ -- 77,820 87,740 193,487 200,393
Securities available-for-sale.............................. 276,077 162,867 121,372 -- --
---------- ---------- -------- -------- --------
Total interest income.................................... 1,162,235 1,081,960 858,435 758,666 852,428
---------- ---------- -------- -------- --------
INTEREST EXPENSE
Domestic deposits.......................................... 284,301 215,276 160,357 143,614 188,082
Foreign deposits........................................... 113,866 143,310 89,645 56,558 64,544
Short-term borrowings...................................... 160,790 168,993 108,485 73,043 103,988
Senior notes............................................... 22,425 31,125 -- -- --
Long-term notes............................................ 26,067 23,005 19,520 26,406 18,933
---------- ---------- -------- -------- --------
Total interest expense................................... 607,449 581,709 378,007 299,621 375,547
---------- ---------- -------- -------- --------
Net Interest Income........................................ 554,786 500,251 480,428 459,045 476,881
Provision for loan losses.................................. 56,540 42,995 45,040 62,835 77,560
---------- ---------- -------- -------- --------
Net Interest Income after Provision for Loan Losses........ 498,246 457,256 435,388 396,210 399,321
---------- ---------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees....................... 117,762 149,979 148,094 148,809 145,091
Trading account............................................ 7,992 5,110 (396) 5,258 (4,499)
Foreign exchange........................................... 9,992 14,248 19,769 24,302 25,062
Charge card................................................ 47,244 41,788 37,402 36,516 36,355
Service fees and charges................................... 82,802 69,333 73,621 77,774 80,056
Gain on sales of foreign claims............................ -- -- -- -- 15,823
Securities gains........................................... 8,786 23,379 5,254 13,038 4,239
Other...................................................... 54,729 34,436 30,700 31,391 32,902
---------- ---------- -------- -------- --------
Total noninterest income................................. 329,307 338,273 314,444 337,088 335,029
---------- ---------- -------- -------- --------
NONINTEREST EXPENSES
Employment................................................. 326,994 318,302 312,570 305,758 281,562
Net occupancy.............................................. 47,690 46,099 45,052 46,676 47,673
Equipment.................................................. 41,715 42,541 42,284 43,396 46,460
Marketing.................................................. 29,342 25,583 24,632 22,613 20,114
Communication and delivery................................. 20,954 20,251 17,732 17,916 17,970
Deposit insurance.......................................... 18,189 8,124 15,684 15,047 16,586
Trust customer charge...................................... -- -- 51,335 -- --
Writedown of property held for expansion................... -- -- -- -- 11,802
Other...................................................... 90,944 89,853 84,573 88,896 109,908
---------- ---------- -------- -------- --------
575,828 550,753 593,862 540,302 552,075
Goodwill and other valuation intangibles................... 18,168 9,350 10,266 11,785 13,898
---------- ---------- -------- -------- --------
Total noninterest expenses............................... 593,996 560,103 604,128 552,087 565,973
---------- ---------- -------- -------- --------
FTE pretax income.......................................... 233,557 235,426 145,704 181,211 168,377
Applicable income taxes.................................... 65,812 70,175 24,528 39,879 22,095
FTE adjustment............................................. 25,381 17,700 23,830 25,489 33,029
---------- ---------- -------- -------- --------
Income before cumulative effect of a change in accounting
principle.............................................. 142,364 147,551 97,346 115,843 113,253
Cumulative effect on prior years (to December 31, 1992) of
changing the accounting method for income taxes.......... -- -- -- 1,782 --
---------- ---------- -------- -------- --------
Net Income............................................... 142,364 147,551 97,346 117,625 113,253
Dividends on preferred stock............................... 15,006 -- -- -- --
---------- ---------- -------- -------- --------
Net income applicable to common stock...................... $ 127,358 $ 147,551 $ 97,346 $117,625 $113,253
========== ========== ======== ======== ========
Per Common Share Statistics................................
Net income applicable to common stock...................... $19.10 $22.13 $14.60 $17.64 $16.99
Common stock dividends..................................... 7.23 39.40 5.21 8.48 6.62
Average common shares outstanding (in thousands)........... 6,667 6,667 6,667 6,667 6,667
PROFITABILITY RATIOS
Net income:
% Average total assets................................... 0.83% 0.95% 0.68% 0.90% 0.86%
% Average common stockholder's equity.................... 11.55 13.61 9.70 12.31 12.71
NUMBER OF EMPLOYEES AT YEAR-END
(full-time equivalent basis)............................. 6,363 5,749 5,655 5,792 5,528
</TABLE>
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HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DAILY AVERAGES, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
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ASSETS
Cash and demand balances due from banks... $ 1,147,075 $ 1,206,234 $ 1,173,266 $ 1,191,748 $ 1,142,354
Money market assets:
Interest-bearing deposits at banks...... 576,913 566,072 686,995 677,565 687,311
Federal funds sold and securities
purchased under agreement to resell... 213,939 330,783 536,185 522,757 338,026
Portfolio securities:
Held-to-maturity........................ -- 962,245 963,690 2,987,053 2,782,148
Available-for-sale...................... 4,219,179 2,611,707 2,269,171 7,213 --
Trading account assets.................... 70,452 64,777 39,812 110,493 250,578
Domestic loans, net of unearned income.... 9,888,591 8,735,388 7,629,399 6,988,838 7,217,339
Foreign office loans, net of unearned
income.................................. 59,235 50,183 43,176 55,970 76,787
----------- ----------- ----------- ----------- -----------
Total loans........................... 9,947,826 8,785,571 7,672,575 7,044,808 7,294,126
Allowance for possible loan losses........ (134,310) (126,041) (129,377) (131,243) (129,739)
Premises and equipment.................... 247,521 224,205 223,538 228,992 239,676
Customers' liability on acceptances....... 87,972 104,994 80,813 71,844 104,498
Goodwill and other valuation
intangibles............................. 185,673 48,531 53,400 65,225 71,829
Other assets.............................. 615,790 735,993 647,275 302,729 378,812
----------- ----------- ----------- ----------- -----------
Total assets.......................... $17,178,030 $15,515,071 $14,217,343 $13,079,184 $13,159,619
=========== =========== =========== =========== ===========
LIABILITIES
Demand deposits........................... $ 2,812,007 $ 2,808,747 $ 2,859,643 $ 2,672,152 $ 2,346,435
Interest checking deposits................ 815,853 629,448 663,598 639,377 602,529
Money market accounts..................... 1,434,293 1,037,963 1,170,181 1,235,487 1,294,723
Savings deposits and certificates......... 3,626,767 2,442,101 2,189,049 2,164,583 2,272,386
Other time deposits....................... 674,985 682,320 722,373 756,560 718,140
Deposits in foreign offices............... 2,159,909 2,435,124 2,110,342 1,813,720 1,638,363
----------- ----------- ----------- ----------- -----------
Total deposits........................ 11,523,814 10,035,703 9,715,186 9,281,879 8,872,576
Short-term borrowings..................... 3,220,570 3,010,753 2,654,891 2,332,260 2,938,501
Senior notes.............................. 392,283 512,204 -- -- --
Acceptances outstanding................... 87,969 105,064 80,818 73,711 104,501
Other liabilities......................... 275,925 465,145 463,736 136,862 150,854
Long-term notes........................... 371,734 299,771 298,745 298,807 202,350
----------- ----------- ----------- ----------- -----------
Total liabilities..................... 15,872,295 14,428,640 13,213,376 12,123,519 12,268,782
Stockholder's equity...................... 1,305,735 1,086,431 1,003,967 955,665 890,837
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's
equity.............................. $17,178,030 $15,515,071 $14,217,343 $13,079,184 $13,159,619
=========== =========== =========== =========== ===========
Ratios (Percentage of total average
assets)
Money market assets....................... 4.6% 5.8% 8.6% 9.2% 7.8%
Portfolio securities and trading account
assets.................................. 25.0 23.5 23.0 23.7 23.0
Loans, net of unearned income............. 57.9 56.6 54.0 53.9 55.4
Deposits.................................. 67.1 64.7 68.3 71.0 67.4
Short-term borrowings..................... 18.7 19.4 18.7 17.8 22.3
Common stockholder's equity............... 6.42 6.99 7.06 7.31 6.77
SELECTED YEAR-END DATA
Loans, net of unearned income............. $10,744,653 $ 9,517,797 $ 8,229,254 $ 7,703,957 $ 7,082,861
Allowance for possible loan losses........ 142,211 129,259 124,734 131,676 130,123
Total assets.............................. 18,228,740 15,676,201 15,331,539 13,517,834 12,729,237
Deposits.................................. 12,990,301 10,228,782 9,919,732 9,375,871 8,776,734
Long-term notes........................... 379,107 363,952 298,810 298,681 298,813
Preferred stock -- Series A............... 180,000 180,000 -- -- --
Preferred stock -- Series B............... 45,000 -- -- -- --
Common stockholder's equity............... 1,290,166 965,776 1,021,154 1,017,672 930,191
YEAR-END COMMON STOCKHOLDER'S EQUITY PER
COMMON SHARE............................ $193.50 $144.85 $153.15 $152.63 $139.51
</TABLE>
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ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
1996 COMPARED TO 1995
The Corporation's 1996 net income was $142.4 million. Earnings and return
on average common equity ("ROE") comparability between years was affected by the
June 1996 purchase of Household's Chicagoland retail banking business. As part
of the Household transaction, HTSB was assessed a one-time $10 million after-tax
charge resulting from third quarter 1996 legislation to recapitalize the Savings
Association Insurance Fund ("SAIF"). This charge should significantly reduce the
Corporation's obligation for future deposit insurance premiums. In addition to
the Household acquisition, the Corporation's earnings comparability was affected
by net gains from debt portfolio securities transactions amounting to $23.4
million in 1995 compared to an $8.8 million net gain for 1996. Most of the 1995
gains were recognized during the second quarter when conditions in the U.S. bond
market led to significant price rallies and profit opportunities not typically
available. Excluding the effect of these debt portfolio securities gains and the
impact of the Household transaction (which includes the $10 million after-tax
SAIF charge), 1996 earnings increased 14 percent from 1995. This increase in
earnings is attributable to strong business growth across corporate, private and
retail banking, and to sustained cost control.
ROE for 1996, excluding the Household transaction, was 14.77 percent and
return on average assets ("ROA") was 0.94 percent. For 1995, ROE was 13.61
percent and ROA was 0.95 percent.
For 1996, net interest income on a fully taxable equivalent basis of $554.8
million was up 11 percent from 1995. Net interest margin fell from 3.75 percent
to 3.69 percent in 1996, while average earning assets rose 13 percent from
$13.33 billion to $15.05 billion, and average loans increased 13 percent or
$1.16 billion. Excluding the contribution of the Household transaction, net
interest income would have increased $29.0 million or 6 percent year-to-year.
Noninterest income decreased 3 percent to $329.3 million for 1996,
primarily because of the reduction in net gains from debt portfolio securities
transactions and a $32.2 million or 21 percent decline in trust fees. While
personal and corporate trust fees grew strongly during 1996, total trust fees
and related noninterest expenses decreased as a result of HTSB's sale of its
securities custody and related trustee services business for large institutions
in January 1996.
Total noninterest expenses were $594.0 million in the current year.
Excluding the effect of charges related to the acquisition and ongoing
operations of the Household retail banking business acquired at the end of
second quarter 1996 (including the one-time special SAIF assessment), expenses
declined by 4 percent compared to 1995.
Income taxes decreased by $4.4 million during 1996 primarily reflecting
lower pretax income.
The 1996 provision for loan losses of $56.5 million was up $13.5 million
from $43.0 million in 1995. Net loan charge-offs during the current year were
$48.4 million compared to $38.5 million in 1995, primarily reflecting higher
writeoffs in the charge card portfolio.
Nonperforming assets at December 31, 1996 totaled $31 million, or 0.3
percent of total loans compared to $55 million or 0.6 percent a year ago. At
December 31, 1996, the allowance for possible loan losses was $142 million or
1.3 percent of total loans outstanding compared to $129 million or 1.4 percent
of loans at the end of 1995. As a result, the ratio of the allowance for
possible loan losses to nonperforming assets increased from 235 percent at
December 31, 1995 to 455 percent at December 31, 1996.
At December 31, 1996, the Corporation's consolidated equity capital
amounted to $1.52 billion, up from $1.15 billion at December 31, 1995. The
increase resulted from the issuance of $45 million of preferred stock, a $280
million equity infusion by Bankmont and earnings for the prior twelve months,
offset somewhat by $35 million of after-tax unrealized holding losses related to
the Corporation's debt and equity securities classified as available for sale.
Also, Bankcorp paid $48.2 million of dividends on common stock and $15.0 million
of
8
<PAGE> 10
preferred dividends. In conjunction with the acquisition of Household's
Chicagoland retail banking business, the Corporation increased its capital base
by $340 million, in part through the issuance of $45 million of preferred stock
and an additional $15 million of long term subordinated debt. The balance of the
capital, $280 million, was provided via an infusion of equity by Bankmont. At
December 31, 1996, the Corporation's equity capital includes $225 million of
preferred stock.
The Corporation's regulatory capital leverage ratio was 6.79 percent
compared to 6.77 percent one year earlier. Regulators require most banking
institutions to maintain capital leverage ratios of not less than 4.0 percent.
At December 31, 1996, the Corporation's Tier 1 and Total Risk-based capital
ratios were 8.10 percent and 11.40 percent, respectively, compared to respective
ratios of 8.14 percent and 11.79 percent at December 31, 1995. The 1996 year-end
ratios substantially exceeded minimum required regulatory ratios of 4.0 percent
and 8.0 percent, respectively.
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 13.61
percent and the return on average assets was 0.95 percent, compared to returns
of 9.70 percent and 0.68 percent, respectively, in 1994. 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, 13.02 percent and 0.92 percent in 1994, compared to 13.61
percent and 0.95 percent in 1995; and 1995 earnings increased by 13 percent
compared to 1994. The earnings gain was 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 in
1994, 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 1994. 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.
9
<PAGE> 11
The 1995 provision for loan 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 in 1994, 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 at
December 31, 1994. At December 31, 1995, the allowance for possible loan 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 loan 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 loan 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 1994 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, Bankcorp 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
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 for fourth quarter 1994. 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.
10
<PAGE> 12
NET INTEREST INCOME
HARRIS BANKCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
INTEREST 1996 VS. 1995
----------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN
AVERAGE AVERAGE NET -------------------
BALANCE INTEREST RATE CHANGE VOLUME RATE
------- -------- ------- ------ ------ ----
(FULLY TAXABLE EQUIVALENT BASIS, DOLLARS IN MILLION)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
DOMESTIC OFFICES:
Loans, including fees....................................... $9,889 $ 836 8.45% $ 59 $ 99 $(40)
Portfolio securities:
U.S. Treasury and Federal agency.......................... 3,895 246 6.31 57 53 4
State and municipal....................................... 299 27 9.22 (15) (8) (7)
Other..................................................... 50 3 5.43 (6) (6) --
------- ------ ----
Total portfolio securities.............................. 4,244 276 6.50 36 43 (7)
Trading account assets...................................... 71 5 7.05 -- -- --
Interest-bearing deposits at banks.......................... -- -- -- (1) (1) --
Federal funds sold and securities purchased under agreement
to resell................................................. 166 10 5.97 (7) (7) --
------- ------ ----
Total domestic earning assets/interest income........... 14,370 1,127 7.84 87 134 (47)
------- ------ ----
FOREIGN OFFICES:
Loans, including fees....................................... 59 3 4.89 1 -- 1
Interest-bearing deposits at banks.......................... 577 30 5.28 (8) 1 (9)
Federal funds sold and securities purchased under agreement
to resell................................................. 48 2 4.19 -- -- --
------- ------ ----
Total foreign earning assets/interest income............ 684 35 5.17 (7) 1 (8)
------- ------ ----
Total domestic and foreign earning assets/interest income... $15,054 $1,162 7.72 $ 80 87 (7)
======= ====== ====
SUPPORTING LIABILITIES/INTEREST EXPENSE
DOMESTIC OFFICES:
Interest checking deposits.................................. $ 816 $ 15 1.87 $ 1 4 (3)
Money market accounts....................................... 1,434 56 3.91 16 15 1
Savings deposits and certificates........................... 3,627 178 4.90 56 58 (2)
Other interest-bearing time deposits........................ 649 35 5.42 (5) (1) (4)
------- ------ ----
Total interest-bearing deposits......................... 6,526 284 4.36 68 77 (9)
Short-term borrowings....................................... 3,126 158 5.04 (7) 12 (19)
Senior notes................................................ 392 22 5.72 (9) (5) (4)
Long-term notes............................................. 372 26 7.01 3 5 (2)
------- ------ ----
Total domestic interest-bearing liabilities/interest
expense............................................... 10,416 490 4.71 55 92 (37)
------- ------ ----
FOREIGN OFFICES:
Time deposits............................................... 2,121 114 5.37 (29) (16) (13)
Short-term borrowings....................................... 94 3 3.44 (1) -- (1)
------- ------ ----
Total foreign interest-bearing liabilities/interest
expense............................................... 2,215 117 5.29 (30) (16) (14)
------- ------ ----
Total domestic and foreign interest-bearing
liabilities/interest expense.............................. 12,631 607 4.81 25 82 (57)
Other noninterest-bearing supporting liabilities............ 2,423 -- -- -- -- --
------- ------ ----
Total domestic and foreign supporting liabilities/interest
expense................................................... $15,054 607 4.04 25 82 (57)
======= ------ ----
Total net interest income from domestic and foreign
offices................................................... $ 555 3.69% $ 55 $ 5 $ 50
====== ==== ==== ==== ====
</TABLE>
- -------------------------
NOTES TO NET INTEREST INCOME TABLES:
(1) Fully taxable equivalent adjustment
Tax-exempt interest income (for Federal purposes) has been restated to a
comparable taxable level. The Federal statutory tax rate used for this
purpose was 35 percent in 1996, 1995 and 1994. Beginning in 1996, the
adjustment includes a State tax component.
(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 securities classified as available-for-sale are based on amortized
cost.
11
<PAGE> 13
NET INTEREST INCOME
HARRIS BANKCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------- ----------------------------
INTEREST 1995 VS. 1994
----------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN
AVERAGE AVERAGE NET ------------------- AVERAGE AVERAGE
BALANCE INTEREST RATE CHANGE VOLUME RATE BALANCE INTEREST RATE
------- -------- ------- ------ ------ ---- ------- -------- -------
(FULLY TAXABLE EQUIVALENT BASIS, DOLLARS IN MILLION)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
DOMESTIC OFFICES:
Loans, including fees................ $8,735 $ 777 8.89% $184 $ 92 $ 92 $7,629 $593 7.78%
Portfolio securities:
U.S. Treasury and Federal agency... 3,049 189 6.20 46 27 19 2,582 143 5.53
State and municipal................ 379 42 11.27 (16) (12) (4) 480 58 12.09
Other.............................. 154 9 5.74 1 (1) 2 171 8 4.85
------- ------ ---- ------- ----
Total portfolio securities....... 3,582 240 6.72 31 23 8 3,233 209 6.47
Trading account assets............... 65 5 7.03 2 2 -- 40 3 7.02
Interest-bearing deposits at banks... 9 1 3.92 -- 1 (1) 12 1 8.73
Federal funds sold and securities
purchased under agreement to
resell............................. 276 17 6.01 (2) (9) 7 460 19 4.13
------- ------ ---- ------- ----
Total domestic earning
assets/interest income......... 12,667 1,040 8.22 215 99 116 11,374 825 7.26
------- ------ ---- ------- ----
FOREIGN OFFICES:
Loans, including fees................ 50 2 3.91 1 -- 1 43 1 1.69
Interest-bearing deposits at banks... 557 38 6.37 8 (5) 13 675 30 4.40
Federal funds sold and securities
purchased under agreement to
resell............................. 55 2 5.00 -- (1) 1 76 2 3.29
------- ------ ---- ------- ----
Total foreign earning
assets/interest income......... 662 42 6.07 9 (5) 14 794 33 4.14
------- ------ ---- ------- ----
Total domestic and foreign earning
assets/interest income............. $13,329 $1,082 8.12 $224 87 137 $12,168 $858 7.05
======= ====== ==== ======= ====
SUPPORTING LIABILITIES/INTEREST
EXPENSE
DOMESTIC OFFICES:
Interest checking deposits........... $ 629 $ 14 2.24 $ 1 (1) 2 $ 664 $ 13 1.99
Money market accounts................ 1,038 40 3.87 6 (4) 10 1,170 34 2.88
Savings deposits and certificates.... 2,442 122 4.98 40 10 30 2,189 82 3.78
Other interest-bearing time
deposits........................... 665 40 5.91 9 (1) 10 696 31 4.42
------- ------ ---- ------- ----
Total interest-bearing
deposits....................... 4,774 216 4.51 56 4 52 4,719 160 3.40
Short-term borrowings................ 2,909 165 5.66 58 18 40 2,527 107 4.22
Senior notes......................... 512 31 6.08 31 31 --
Long-term notes...................... 300 23 7.67 3 -- 3 299 20 6.53
------- ------ ---- ------- ----
Total domestic interest-bearing
liabilities/interest expense... 8,495 435 5.11 148 40 108 7,545 287 3.80
------- ------ ---- ------- ----
FOREIGN OFFICES:
Time deposits........................ 2,400 143 5.97 54 16 38 2,072 89 4.33
Short-term borrowings................ 101 4 4.31 2 -- 2 128 2 1.35
------- ------ ---- ------- ----
Total foreign interest-bearing
liabilities/interest expense... 2,501 147 5.90 56 14 42 2,200 91 4.15
------- ------ ---- ------- ----
Total domestic and foreign interest-
bearing liabilities/interest
expense............................ 10,996 582 5.29 204 53 151 9,745 378 3.88
Other noninterest-bearing supporting
liabilities........................ 2,333 -- -- -- -- -- 2,423 -- --
------- ------ ---- ------- ----
Total domestic and foreign supporting
liabilities/interest expense....... 13,329 582 4.37 204 53 151 $12,168 378 3.10
======= ------ ---- ======= ----
Total net interest income from
domestic and foreign offices....... $ 500 3.75% $ 20 $ 34 $(14) $480 3.95%
====== ===== ==== ==== ==== ==== ======
</TABLE>
12
<PAGE> 14
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 with nontax-advantaged income. In
1996, the Corporation's FTE net interest income was $554.8 million, up 11
percent from $500.3 million in 1995.
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
1996, the Corporation's average earning assets grew 13 percent, while net
interest margin decreased 6 basis points from 3.75 percent in 1995 to 3.69
percent in 1996.
Average earning assets in 1996 totaled $15.05 billion, up $1.72 billion, or
13 percent, from $13.33 billion in 1995. This growth is primarily the result of
an increase in average loans of $1.16 billion, or 13 percent, to $9.95 billion,
led by increases in average commercial and real estate loan outstandings of $746
million (13 percent) and $443 million (31 percent), respectively. The growth in
average loans is attributable to a growing demand for credit in the U.S.
economy, an aggressive marketing effort by the Corporation, and the $340 million
of loans purchased from Household. Average portfolio securities increased $662
million, or 19 percent, to $4.24 billion primarily as a result of increased
holdings of Federal agency securities amounting to $785 million. Loans and
portfolio securities, as a percent of earning assets, were 66.1 percent and 28.2
percent, respectively, compared to 65.9 percent and 26.9 percent, respectively,
in 1995. Average Federal funds sold and securities purchased under agreement to
resell decreased approximately 35 percent, or $117 million, year to year.
Changes in the mix of total supporting funds are a function of loan demand,
consumer preferences for maintaining funds in 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. A major source of incremental funding
during 1996 resulted from the assumption of $2.9 billion in deposit liabilities
in connection with the June 1996 purchase of branches owned by Household. In
conjunction with that transaction, the Corporation immediately reduced its
reliance on certain wholesale funding sources. On average, nearly all major
categories of supporting liabilities increased year to year. Short-term
borrowings rose $210 million or 7 percent from 1995 levels. Federal funds
purchased and securities sold under agreement to repurchase grew $271 million.
Domestic interest-bearing deposits increased $1.75 billion, or 37 percent, from
one year ago. Average foreign office time deposits totaled $2.1 billion, down 12
percent or $279 million, compared to $2.4 billion in 1995. Noninterest-bearing
funds supporting earning assets increased $90 million, and declined from 18
percent to 16 percent year to year as a percentage of average supporting
liabilities.
The Corporation's consolidated net interest margin declined to 3.69 percent
from 3.75 percent in the prior year. This decrease reflects the maturity of
higher-yielding municipal bond holdings, the relative decrease in
noninterest-bearing funds, and spread compression within certain categories of
assets and related funding. This was somewhat offset by the lower interest cost
of the assumed deposits from Household compared to interest costs on wholesale
funds displaced, contributing approximately 23 basis points to the 1996 net
interest margin. Additionally, beginning in January 1996, the restatement of
certain tax-exempt income to a fully taxable equivalent status includes a State
tax adjustment. The effect of this adjustment was to increase net interest
margin in 1996 by approximately 7 basis points. Excluding the contribution of
the Household transaction, net interest income would have increased $29.0
million or 6 percent year-to-year.
13
<PAGE> 15
NONINTEREST INCOME
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1996 VS. 1995 1995 VS. 1994
-------------------------------- --------------- --------------
1996 1995 1994 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment management
fees........................... $117,762 $149,979 $148,094 $(32,217) (21) $ 1,885 1
Trading account.................. 7,992 5,110 (396) 2,882 56 5,506 +
Foreign exchange................. 9,992 14,248 19,769 (4,256) (30) (5,521) (28)
Charge card...................... 47,244 41,788 37,402 5,456 13 4,386 12
Service fees and charges......... 82,802 69,333 73,621 13,469 19 (4,288) (6)
Securities gains................. 8,786 23,379 5,254 (14,593) (62) 18,125 +
Other............................ 54,729 34,436 30,700 20,293 59 3,736 12
-------- -------- -------- -------- -------
Total noninterest income.... $329,307 $338,273 $314,444 $ (8,966) (3) $23,829 8
======== ======== ======== ======== === ======= ===
</TABLE>
Noninterest income for the year was $329.3 million in 1996, down $9.0
million or 3 percent from 1995. Lower trust and investment management fees,
securities gains and foreign exchange revenues were partially offset by higher
service fees and charges, charge card fees, trading account profits and other
income.
Service fees and charges were $82.8 million in 1996, up $13.5 million or 19
percent over 1995 due to the prior year's higher interest rate environment and
customer refunds with respect to FDIC insurance in 1995. Household contributed
$5.0 million to 1996 service fees and charges. Charge card fees were $47.2
million in 1996, up $5.5 million or 13 percent from the previous year. Trading
account gains, primarily from municipal bond trading, totaled $8.0 million, up
$2.9 million from the prior year. Financial results from trading activities will
typically exhibit greater fluctuations over time than other business activities.
On January 11, 1996, the Corporation announced the sale of its securities
custody and related trustee services business for large institutions to
Citibank. Other income, which included incremental revenue from bank owned life
insurance, syndication fees, mortgage loan sales and the net gain from the trust
sale, increased $20.3 million or 59%.
Trust and investment management fees were $117.8 million, down $32.2
million or 21 percent from the prior year, due primarily to the sale of the
securities custody and related trustee services business for large institutions
in January 1996. Excluding the business sold, these fees increased 9 percent.
Net gains reported from the sale of debt securities totaled $8.8 million, down
$14.6 million or 62 percent from 1995. 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. 1996 market conditions were not as
conducive to securities gains. Foreign exchange revenues were $10.0 million,
down $4.3 million or 30 percent from 1995. 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. 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 or 1996 net income or financial position.
14
<PAGE> 16
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1996 VS. 1995 1995 VS. 1994
------------------------------ ------------- ---------------
1996 1995 1994 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation......... $273,849 $260,539 $246,200 $13,310 5 $ 14,339 6
Pension, profit sharing and other
employee benefits..................... 53,145 57,763 66,370 (4,618) (8) (8,607) (13)
Net occupancy........................... 47,690 46,099 45,052 1,591 3 1,047 2
Equipment............................... 41,715 42,541 42,284 (826) (2) 257 1
Marketing............................... 29,342 25,583 24,632 3,759 15 951 4
Communication and delivery.............. 20,954 20,251 17,732 703 3 2,519 14
Deposit insurance....................... 18,189 8,124 15,684 10,065 124 (7,560) (48)
Trust customer charge................... -- -- 51,335 -- -- (51,335) (100)
Other................................... 90,944 89,853 84,573 1,091 1 5,280 6
-------- -------- -------- ------- --------
575,828 550,753 593,862 25,075 5 (43,109) (7)
Goodwill and other valuation
intangibles........................... 18,168 9,350 10,266 8,818 94 (916) (9)
-------- -------- -------- ------- --------
Total noninterest expenses......... $593,996 $560,103 $604,128 $33,893 6 $(44,025) (7)
======== ======== ======== ======= === ======== ====
</TABLE>
Noninterest expenses totaled $594.0 million, up $33.9 million or 6 percent
from 1995. 1996 included operating expenses associated with Household and the
related amortization of goodwill and other intangible assets. In addition, the
expense for the one-time SAIF assessment levied on deposits assumed from
Household, amounting to $16.7 million pre-tax, was recognized in 1996. Excluding
all Household-related charges, total noninterest expenses would have decreased
$22.2 million or 4 percent from 1995.
Future charges for insurance assessments on SAIF-insured deposits are
expected to be substantially reduced from what they otherwise would have been as
a result of the recent legislation. Although the rate for those deposits insured
by the Bank Insurance Fund ("BIF") should increase slightly, the combined SAIF
and BIF rate applicable to the Corporation's subsidiary banks is expected to
decline starting January 1, 1997 compared to the average rate in effect since
the Household branch purchase.
Employment-related expenses totaled $327.0 million, an increase of $8.7
million or 3 percent. Excluding the effect of Household, employment-related
expenses would have decreased $2.1 million or 1 percent. Net occupancy expenses
totaled $47.7 million, up $1.6 million over the previous year. Net occupancy
expenses would have decreased $2.0 million or 4 percent, excluding the effect of
Household. Marketing increased $3.8 million over 1995, of which $2.4 is
attributable to Household. Other noninterest expenses increased $1.1 million or
1 percent over the previous year. Excluding the impact of Household expenses,
other noninterest expenses would have decreased $9.6 million or 11 percent.
Amortization of goodwill and other valuation intangibles increased $8.8 million,
with virtually the entire increase resulting from the Household transaction.
INCOME TAXES
The Corporation recorded income tax expense of $65.8 million in 1996,
compared to $70.2 million in 1995, primarily due to lower (approximately $9.6
million) pretax earnings. The Corporation's effective tax rate decreased to 31.6
percent in 1996 from 32.2 percent in 1995.
At December 31, 1996, the Corporation's Federal and Illinois net deferred
tax assets were $64.9 million and $13.3 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.
15
<PAGE> 17
The deferred taxes reported on the Corporation's Statement of Condition at
December 31, 1996 also include a $5.4 million asset for the tax effect of
unrealized gains or losses associated with marking to market certain securities
designated as available-for-sale in accordance with SFAS No. 115.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement supersedes FASB Statements No.
76, Extinguishment of Debt, No. 77, Reporting by Transferors for Transfers of
Receivables with Recourse, and amends No. 122, Accounting for Mortgage Servicing
Rights, No. 65, Accounting for Certain Mortgage Banking Activities, and No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The Statement
provides standards based on the application of a financial components approach
to transfers and servicing of financial assets and extinguishments of
liabilities. The approach is focused on control of assets and liabilities
existing after transfers of financial assets whereby an entity recognizes the
assets it controls and the liabilities it has incurred and derecognizes the
assets it no longer controls and the liabilities it has extinguished. The
Statement provides standards to determine whether transfers of financial assets
are to be accounted for as sales or secured borrowings. This Statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. In December 1996, the FASB issued
SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125. This Statement is effective December 31, 1996 and amends FASB
Statement No. 125 by delaying for one year the effective date for the following
types of transfers of financial assets: secured borrowings and collateral,
repurchase agreements, dollar-rolls and securities lending. The Corporation
intends to adopt both Statements in 1997 and does not expect them to have a
material effect on the Corporation's financial position or results of
operations.
RETURN ON ASSETS AND COMMON STOCKHOLDER'S EQUITY
Return on assets, measured by net income as a percentage of average total
assets, was 0.83 percent in 1996 compared with 0.95 percent in 1995. The current
year's return on assets was slightly lower than the average return on assets of
0.84 percent for the five-year period ended December 31, 1996. 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 6.42 percent in 1996 compared
to 6.99 percent in 1995. For 1996, the return on common stockholder's equity was
11.55 percent, down from the 13.61 percent achieved in 1995 and slightly lower
than the 11.98 percent five-year average return for the period ended December
31, 1996. Comparability of returns on both average assets and common
stockholder's equity between 1996 and 1995 was affected by the Household
acquisition, including the one-time $10.0 million after-tax SAIF charge.
Excluding the Household transaction, 1996 return on assets would have been
approximately 0.95 percent and return on common equity would have been
approximately 14.77 percent. In 1994, returns on both average assets and common
stockholder's equity were adversely affected by a 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 0.92 percent and
return on common equity would have been approximately 13.02 percent.
16
<PAGE> 18
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1996 1995 1994
---- ---- ----
(BASED ON NET INCOME
AND DAILY AVERAGES)
<S> <C> <C> <C>
Return on assets(1)......................................... 0.83% 0.95% 0.68%
Common stockholder's equity as a percentage of total
assets(1)................................................. 6.42 6.99 7.06
Return on common stockholder's equity(1).................... 11.55 13.61 9.70
Dividend payout ratio(2).................................... 44.40 178.04 35.69
Earnings retained as a percentage of common stockholder's
equity(3)................................................. 7.18 (10.62) 6.24
Percentage growth in total average assets................... 10.72 9.13 8.70
</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. 1996 includes dividends on both common
and preferred stock. 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 $1.52 billion at December 31, 1996, has
increased significantly from five years earlier when equity capital amounted to
$861 million. In June 1996, equity was infused in connection with the
acquisition of branches previously owned by Household. See the Summary of 1996
Compared to 1995 section on page 8 of this Report for additional information.
During 1996, Bankcorp declared and paid common and preferred dividends of $48.2
million and $15.0 million, respectively. During 1995 and 1994, common dividends
declared and paid amounted to $262.7 million and $34.7 million, respectively.
The 1995 dividends included a $205 million special dividend as part of a capital
restructuring. For additional information, see the Summary of 1995 Compared to
1994 section on page 9 of this Report. During 1996, the Corporation's equity
capital was reduced by $35.2 million representing after-tax unrealized holding
losses related to the Corporation's debt and equity securities classified as
available-for-sale. During 1995, equity capital was increased by $59.8 million
of after-tax unrealized holding gains. Average consolidated equity capital for
1996 was $1.3 billion, compared with the 1995 average of $1.1 billion and the
1994 average of $1.0 billion.
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 102 percent at December
31, 1996, down slightly from 103 percent at December 31, 1995. 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.
17
<PAGE> 19
banking regulators. Effective December 31, 1992, the guidelines specify minimum
ratios for Tier 1 capital to risk-weighted assets of 4 percent and total
regulatory capital to risk-weighted assets of 8 percent.
Risk-based capital guidelines define total capital to consist of Tier 1
(core) and Tier 2 (supplementary) capital. In general, Tier 1 capital is
comprised of stockholder's equity, including certain types of preferred stock,
less goodwill and certain other intangibles. Core capital must comprise at least
50 percent of total capital. Tier 2 capital basically includes subordinated debt
(less a discount factor during the five years prior to maturity), other types of
preferred stock and the allowance for possible loan losses. At year-end 1996,
the portion of the allowance for possible loan 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 8.10 percent and 11.40 percent,
respectively, at December 31, 1996.
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 6.88 percent for fourth quarter 1996
and 6.77 percent for fourth quarter 1995.
The Federal Deposit Insurance Corporation Improvement Act of 1991 contains
several provisions that established five capital categories for all Federal
Deposit Insurance Corporation ("FDIC") insured institutions ranging from "well
capitalized" to "critically undercapitalized". See Note 15 to Financial
Statements on page 70 of this Report. Based on those regulations effective at
December 31, 1996, all of the Corporation's subsidiary banks were designated as
"well capitalized" at year-end 1996, the highest capital category.
Capital adequacy guidelines generally restrict the inclusion of intangible
assets in Tier 1 capital. However, mortgage servicing rights and the premium on
purchased credit card relationships may be 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.
Identifiable intangibles acquired before February 19, 1992 continue to be
included with Tier 1 capital. All other intangibles (including core deposit
premiums and goodwill), 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. At December 31, 1996, the Corporation's intangible assets
totaled $310.7 million, including approximately $292.8 million of intangibles
excluded under capital guidelines. The Corporation's tangible Tier 1 leverage
ratio (which excludes all intangibles) was 6.79 percent for the fourth quarter
of 1996.
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 the Corporation's risk-based capital
ratios.
Effective December 31, 1994, the Board amended its risk-based capital
guidelines to exclude net unrealized holding gains (losses) associated with
marking to market securities designated as available-for-sale 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 ($8.1) million and $27.1 million at December 31, 1996 and 1995,
respectively.
18
<PAGE> 20
The following table summarizes the Corporation's risk-based capital ratios
and Tier 1 leverage ratio for the past three years.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets (end of period)........................ $18,228,740 $15,676,201 $15,331,539
=========== =========== ===========
Average assets (fourth quarter)..................... $18,159,800 $16,325,680 $14,668,264
=========== =========== ===========
Risk-based on-balance-sheet assets.................. $11,975,359 $10,336,569 $ 9,078,759
=========== =========== ===========
Risk-based off-balance-sheet assets................. $ 3,508,486 $ 3,203,701 $ 2,580,005
=========== =========== ===========
Total risk-based assets, net of deductions
(based on regulatory accounting
principles).................................. $15,191,093 $13,540,270 $11,658,764
=========== =========== ===========
Tier 1 capital...................................... $ 1,230,628 $ 1,100,899 $ 1,033,481
=========== =========== ===========
Supplementary capital............................... $ 501,497 $ 492,911 $ 423,254
=========== =========== ===========
Total capital, net of deductions (based on
regulatory accounting principles)............ $ 1,731,448 $ 1,593,810 $ 1,456,735
=========== =========== ===========
Tier 1 leverage ratio............................... 6.88% 6.77% 7.03%
Risk-based capital ratios:
Tier 1......................................... 8.10% 8.14% 8.86%
Total.......................................... 11.40% 11.79% 12.49%
</TABLE>
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. The Corporation maintains a
liquidity risk policy within its comprehensive risk management framework and
manages and monitors liquidity risk within the parameters of this policy.
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 34 percent of the Corporation's
total assets and amounted to $6.29 billion at December 31, 1996 compared to
liquid assets of $5.65 billion or approximately 36 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
19
<PAGE> 21
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, 1996, $350
million of short-term notes were outstanding with original maturities of 365
days and interest rates ranging from 5.50 to 6.04 percent. As of December 31,
1995, $478 million of short-term notes were outstanding with original maturities
and interest rates ranging from 29 to 180 days and 5.50 to 5.79 percent,
respectively.
In connection with the acquisition of branches previously owned by
Household, as discussed earlier in this Report, HTSB assumed deposits totaling
approximately $2.9 billion. In addition, HTSB acquired loans amounting to $340
million, along with real property and certain other miscellaneous assets. HTSB
received cash from Household at closing of $2.24 billion. Capital of $325
million was contributed to HTSB, and HTSB issued $15 million in additional
subordinated debt. The incremental cash available from all of these sources of
approximately $2.6 billion was used by HTSB to liquidate more-expensive sources
of wholesale funding.
Primarily as a result of the Household acquisition, there were significant
changes in the composition of liabilities from December 31, 1995 to December 31,
1996. Total core deposits increased from $7.3 billion or 53% of total non-equity
funding at December 31, 1995 to $11.3 billion or 70% of total non-equity funding
at December 31, 1996. Total wholesale deposits and short-term borrowings
decreased from $6.4 billion or 47% of total non-equity funding at December 31,
1995 to $4.8 billion or 30% of total non-equity funding at December 31, 1996.
The Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and certificates, and
money market accounts, increased to $8.69 billion from $6.92 billion a year ago.
Core deposits represented 57.7 percent of average supporting liabilities in 1996
up from 51.9 percent in 1995. Average deposits and core deposits as a percentage
of average supporting liabilities were significantly impacted by the Household
transaction. Average money market liabilities increased 7 percent to $3.22
billion from $3.01 billion for 1995, primarily as a result of increases in
Federal funds borrowed and securities sold under repurchase agreements. Average
money market assets decreased $106.0 million or 11.8 percent from 1995. These
assets represented 5 percent of average earning assets in 1996 compared to 7
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 1996 or 1995.
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.
20
<PAGE> 22
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------------------------
REPRICING PERIOD
--------------------------------------------------------------- NONREPRICING
1-31 DAYS 32-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS ITEMS TOTAL
--------- ---------- ----------- --------- ------------ ------------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans........................ $ 6,389 $1,230 $ 919 $1,478 $ 480 $ 249 $10,745
Portfolio and trading account
securities................ 684 307 615 1,369 1,117 4 4,096
Interest-bearing deposits at
banks..................... 161 386 111 -- -- -- 658
Federal funds sold and
securities purchased under
agreement to resell....... 295 -- -- -- -- -- 295
Other assets................. -- -- -- -- -- 2,435 2,435
------- ------ ------ ------ ------ ------- -------
Total assets................... 7,529 1,923 1,645 2,847 1,597 2,688 $18,229
------- ------ ------ ------ ------ ------- =======
LIABILITIES AND STOCKHOLDER'S
EQUITY
Time deposits................ 2,034 737 1,609 734 18 -- $ 5,132
Savings and interest checking
deposits.................. 4,180 -- -- -- -- -- 4,180
Noninterest-bearing
deposits.................. -- -- -- -- -- 3,678 3,678
------- ------ ------ ------ ------ ------- -------
Total deposits................. 6,214 737 1,609 734 18 3,678 12,990
Federal funds purchased and
securities sold under
agreement to repurchase... 1,959 7 15 2 -- -- 1,983
Other interest-bearing
liabilities............... 669 164 200 99 280 -- 1,412
Other noninterest-bearing
liabilities............... -- -- -- -- -- 329 329
Stockholder's equity......... -- -- -- -- -- 1,515 1,515
------- ------ ------ ------ ------ ------- -------
Total liabilities and
stockholder's equity......... 8,842 908 1,824 835 298 5,522 $18,229
------- ------ ------ ------ ------ ------- =======
Interest sensitivity gap
before net interest rate
swaps, derivative products
and forward commitments... (1,313) 1,015 (179) 2,012 1,299 (2,834)
Net interest rate swaps........ -- (185) 185 -- -- --
Derivative products and forward
commitments.................. 49 9 -- -- (58) --
------- ------ ------ ------ ------ -------
Interest sensitivity gap..... $(1,264) $ 839 $ 6 $2,012 $1,241 $(2,834)
======= ====== ====== ====== ====== =======
Cumulative gap............... $ (425) $ (419) $1,593 $2,834
====== ====== ====== ======
</TABLE>
The schedule above presents the Corporation's consolidated interest
sensitivity gap at December 31, 1996. 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
21
<PAGE> 23
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, 1996,
the Corporation had a cumulative negative one-year interest rate gap of $419
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 earnings risk and valuation risk, defined as risk to net equity
valuation, 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. Given a static balance
sheet at December 31, 1996, for an immediate 100 basis point upward movement in
interest rates, net interest income would increase by approximately $9 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 $81
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 45 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
deposits, both infusions from and dividend payments to the stockholder, along
with borrowings and principal repayments to bondholders or other creditors.
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 trading assets be included with operating cash flows,
normal year-end fluctuations in these holdings may not appropriately portray the
company's cash flows generated from operations. Core operating cash flows,
consisting of net income before provision for loan losses and depreciation and
amortization, increased by $16.9 million. Year-end trading account assets
increased $12 million year to year, while loans held for sale (primarily
residential mortgages) increased $64 million.
In 1996, the Corporation's investing activities provided a total of $342
million in net cash, reflecting cash received from Household at closing of $2.24
billion. Loans, the primary use of new funds, increased $870 million.
Interest-bearing deposits at banks increased $201 million, Federal funds sold
and securities purchased under agreement to resell increased $115 million, and
portfolio securities increased $645 million in 1996.
In 1996, 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 utilized $781 million of
net cash available to the Corporation in 1996. Deposits (excluding Household
deposits
22
<PAGE> 24
assumed) decreased $130 million and net short-term senior notes of $128 million
were repaid. In connection with the Household transaction, $45 million of
preferred stock was issued and a contribution to capital surplus of $280 million
was received. 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 1993, the Corporation has had one significant noncash transaction. On
December 29, 1995, all held-to-maturity securities were reclassified to
available-for-sale. See Portfolio Securities section below for further
information. Non-cash portions of this transaction were excluded from the
Corporation's Consolidated Statement of Cash Flows.
SELECTED LOAN MATURITY SPREAD
Variable rate loans, excluding consumer loans, accounted for 56 percent of total
loans in 1996 compared to 55 percent in 1995. Excluding consumer loans, term
loans (those with a remaining contractual maturity in excess of one year)
totaled $961 million. Of these loans, $792 million or 83 percent are due within
five years. Overall, the average FTE yield on total loans decreased to 8.43
percent in 1996 from 8.89 percent in 1995. The Corporation's average prime rate
in 1996 was 8.27 percent compared to 8.83 percent in 1995.
Type of Loan, by Maturity*
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
WITHIN 1 THROUGH OVER
1 YEAR 5 YEARS 5 YEARS TOTAL
------ --------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural........... $5,570,370 $751,906 $161,973 $6,484,249
Real estate construction......................... 140,111 39,879 6,922 186,912
Foreign.......................................... 141,520 -- -- 141,520
---------- -------- -------- ----------
$5,852,001 $791,785 $168,895 $6,812,681
========== ======== ======== ==========
Loans with:
Predetermined interest rates................... $ 480,241 $193,064 $ 74,695 $ 748,000
Floating interest rates........................ 5,371,760 598,721 94,200 6,064,681
---------- -------- -------- ----------
$5,852,001 $791,785 $168,895 $6,812,681
========== ======== ======== ==========
</TABLE>
- -------------------------
*Excludes installment loans to individuals, real estate mortgages and lease
financing.
PORTFOLIO SECURITIES
Debt and marketable equity securities are classified into three categories.
Trading account securities 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, 1996,
available-for-sale securities included $13.5 million of fair value below
amortized cost and stockholder's equity included $8.1 million of unrealized
(after tax effect) holding losses. 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.
Portfolio securities averaged $4.22 billion in 1996. On an FTE basis,
interest income from portfolio securities increased $35.4 million to $276.1
million. The overall FTE yield on the Corporation's portfolio
23
<PAGE> 25
securities averaged 6.50 percent during 1996. Yields on the portion of average
portfolio securities classified as available-for-sale are based on amortized
cost.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ -----
(FULLY TAXABLE EQUIVALENT YIELDS)
(DAILY BALANCE SHEET AVERAGES, DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury......................... $1,585,333 6.37% $1,536,686 6.10% $1,620,059 6.04%
Federal agency........................ 2,271,859 6.26 1,504,096 6.31 962,144 4.69
State and municipal................... 311,202 9.22 379,337 11.27 479,432 12.09
Other................................. 50,785 5.43 153,833 5.74 171,226 4.85
---------- ---------- ----------
Total portfolio securities.......... $4,219,179 6.50% $3,573,952 6.72% $3,232,861 6.47%
========== ==== ========== ===== ========== =====
</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 1996,
the Corporation purchased $8.74 billion of available-for-sale securities, sold
$1.46 billion of available-for-sale securities and had $6.63 billion of
available-for-sale securities mature. 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 of available-for-sale securities and $714 million of
held-to-maturity securities mature. The aforementioned sales of securities
generated a pretax net gain of $8.8 million during 1996 compared to a net gain
of $23.4 million during 1995 and a net gain of $5.3 million in 1994. $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 $5.4 million in 1996 compared to
$14.3 million in 1995 and $3.2 million in 1994. 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.
Unrealized holding losses for available-for-sale securities, as of December
31, 1996, amounted to $13.5 million compared to unrealized holding gains of
$44.9 million as of December 31, 1995. The change in unrealized gains and losses
of $58.4 million was due to losses in market value as a result of increases in
interest rates at year-end 1996 versus 1995 and a change in the mix of the
portfolio.
24
<PAGE> 26
Carrying Value
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
U.S. Treasury...................... $ -- -- $ -- -- $ 536,480 14.5
Federal agency..................... -- -- -- -- 68,278 1.9
State and municipal................ -- -- -- -- 466,965 12.6
Other.............................. -- -- -- -- 35,936 1.0
---------- -----
Total held-to-maturity.......... -- -- -- -- 1,107,659 30.0
---------- -----
Available-for-Sale
U.S. Treasury...................... 1,282,218 32.2 1,205,167 35.6 1,443,169 39.1
Federal agency..................... 2,357,726 59.2 1,740,578 51.3 1,038,460 28.2
State and municipal................ 312,843 7.8 308,805 9.1 11,917 0.3
Other.............................. 32,396 0.8 135,417 4.0 87,747 2.4
---------- ----- ---------- ----- ---------- -----
Total available-for-sale........ 3,985,183 100.0 3,389,967 100.0 2,581,293 70.0
---------- ----- ---------- ----- ---------- -----
Total portfolio securities........... $3,985,183 100.0 $3,389,967 100.0 $3,688,952 100.0
========== ===== ========== ===== ========== =====
</TABLE>
At year-end 1996, the weighted average maturity of the Corporation's
portfolio securities was 3 years and 8 months, an increase of 5 months from the
average maturity at the end of 1995. The maturity distribution of the investment
portfolio at December 31, 1996, 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, 1996. Yields
on tax-exempt securities have been calculated on an FTE basis.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------------
STATE, MUNICIPAL
U.S. TREASURY FEDERAL AGENCY AND OTHER TOTAL
--------------------- --------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ -------- ------ -------- ------ -------- ------ --------
(FULLY TAXABLE EQUIVALENT YIELDS, DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
Within 1 year........ $ 243,978 6.02% $1,094,461 5.54% $ 25,528 7.70% $1,363,967 5.66%
1 to 5 years......... 612,945 6.11 534,159 6.38 181,366 9.01 1,328,470 6.61
5 to 10 years........ 438,363 5.79 739,631 6.88 77,633 7.86 1,255,627 6.56
Over 10 years........ -- -- 1,000 7.50 21,256 8.93 22,256 8.87
No stated maturity... -- -- -- -- 28,346 4.87 28,346 4.87
---------- ---------- -------- ----------
1996 Total........... $1,295,286 5.98% $2,369,251 6.15% $334,129 8.29% $3,998,666 6.27%
========== ==== ========== ==== ======== ==== ========== ====
1995 Total........... $1,189,605 6.29% $1,726,694 6.42% $428,810 8.48% $3,345,109 6.64%
========== ==== ========== ==== ======== ==== ========== ====
1996 Average
maturity............. 4 years 2 months 3 years 4 months 3 years 11 months 3 years 8 months
1995 Average
maturity............. 1 year 11 months 4 years 3 months 2 years 9 months 3 years 3 months
</TABLE>
Other than securities of the U.S. Government and its agencies and
corporations, at December 31, 1996, 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, 1996.
25
<PAGE> 27
DEPOSITS
Total deposits in 1996 averaged $11.52 billion, up $1.49 billion or 15
percent from 1995. The Corporation's average core deposits, consisting of demand
deposits, interest checking deposits, money market accounts, passbook and
statement savings accounts, and savings certificates grew $1.77 billion or 26
percent to $8.69 billion. The deposits assumed as a result of the June 1996
acquisition of branches owned by Household accounted for $1.51 billion or 85
percent of the growth in average core deposits. Savings certificates experienced
the largest growth, up $926 million or 59 percent over 1995 levels, followed by
money market accounts which increased by $396 million or 38 percent to $1.43
billion. Passbook and statement savings accounts and interest checking deposits
also grew by $259 million or 29 percent and by $186 million or 30 percent over
1995 levels, respectively. Demand deposits totaling $2.81 billion remained at
relatively the same level as 1995. Deposits in foreign offices decreased by $275
million or 11 percent to $2.16 billion. Other time deposits reflected a minimal
decrease of $7 million or 1 percent from 1995. Daily averages and year-to-year
comparisons are summarized below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1996 VS. 1995 1995 VS. 1994
-------------------------------------- ---------------- ----------------
1996 1995 1994 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DAILY AVERAGES, DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits......... $ 2,812,007 $ 2,808,747 $2,859,643 $ 3,260 -- ($ 50,896) (2)
Interest checking
deposits.............. 815,853 629,448 663,598 186,405 30 (34,150) (5)
Money market accounts... 1,434,293 1,037,963 1,170,181 396,330 38 (132,218) (11)
Passbook and statement
savings accounts...... 1,134,912 876,412 882,507 258,500 29 (6,095) (1)
Savings certificates.... 2,491,855 1,565,689 1,306,542 926,166 59 259,147 20
Other time deposits..... 674,985 682,320 722,373 (7,335) (1) (40,053) (6)
Deposits in foreign
offices............... 2,159,909 2,435,124 2,110,342 (275,215) (11) 324,782 15
----------- ----------- ---------- ---------- ----------
Total deposits........ $11,523,814 $10,035,703 $9,715,186 $1,488,111 15 $ 320,517 3
=========== =========== ========== ========== === ========== ===
</TABLE>
Interest expense on deposits increased by $40 million or 11 percent in 1996
primarily due to higher average deposit balances. Interest expense on domestic
deposits rose 32 percent from 1995, while interest on foreign office deposits
decreased by 20 percent compared to the prior year. Effective interest rates on
both domestic and foreign office interest-bearing deposits are summarized below.
Average Interest Rates Paid
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest checking deposits.................................. 1.87% 2.24% 1.99%
Money market accounts....................................... 3.91 3.87 2.88
Passbook and statement savings accounts..................... 3.29 3.71 2.90
Savings certificates........................................ 5.64 5.69 4.37
Other interest-bearing time deposits........................ 5.42 5.91 4.41
Time deposits in foreign offices............................ 5.37 5.97 4.33
Total interest-bearing deposits........................... 4.61% 5.00% 3.68%
==== ==== ====
</TABLE>
Certificates of deposit in denominations of $100,000 or more issued by
domestic offices totaled $914 million at December 31, 1996. Total 1996 interest
expense on domestic office certificates of deposit of $100,000 or more amounted
to approximately $70.1 million. Virtually all time deposits in foreign offices
were in denominations of $100,000 or more.
26
<PAGE> 28
The remaining maturity of domestic office certificates of deposit of
$100,000 or more is as follows:
Domestic Office Certificates of Deposit
<TABLE>
<CAPTION>
DECEMBER 31
1996
-----------
(IN MILLIONS)
<S> <C>
Maturities:
3 months or less............................................ $402
3 to 6 months............................................... 250
6 to 12 months.............................................. 139
Over 12 months.............................................. 123
----
Total..................................................... $914
====
</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 11.8 percent to $791 million in 1996 from $897 million in 1995. The
average yield on money market assets decreased from 6.46 percent in 1995 to 5.50
percent in 1996. Interest income earned on these assets decreased 27 percent to
$42.4 million in 1996. At December 31, 1996, interest-bearing deposits at banks
and Federal funds sold totaled $658 million and $295 million, respectively,
compared to $458 million and $100 million at year-end 1995. Reverse repurchase
agreements totaled $79 million at December 31, 1995. There were no reverse
repurchase agreements outstanding at December 31, 1996. The increase in money
market assets was primarily the result of investing increases in funds available
at the end of 1996.
Money market liabilities, consisting of Federal funds purchased, securities
sold under agreement to repurchase, commercial paper, senior notes and other
short-term borrowings, represent a managed source of funds for the Corporation.
During 1996, money market liabilities averaged $3.61 billion, an increase of 3
percent from 1995, when money market liabilities averaged $3.52 billion. The
average rate paid on these borrowings decreased from 5.68 percent in 1995 to
5.07 percent in 1996, reflecting generally lower short-term interest rates
experienced by the market during 1996. At December 31, 1996, repurchase
agreements totaled $1.42 billion compared to $1.18 billion at year-end 1995.
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 1996, 1995 and 1994:
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year...................... $1,983,047 $1,896,817 $2,632,167
Average interest rate of outstanding borrowings at end
of year.............................................. 6.64% 5.14% 5.03%
Highest amount outstanding as of any month-end during
the year............................................. $3,116,382 $2,894,321 $2,632,167
Daily average amount outstanding during the year....... $2,524,176 $2,253,142 $1,924,373
Daily average annualized rate of interest.............. 5.00% 5.65% 4.13%
</TABLE>
27
<PAGE> 29
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 1996, 1995 and 1994:
Short-Term Borrowings
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................... $347,690 $843,049 $670,362
Average interest rate of outstanding borrowings at end of
year...................................................... 5.27% 5.77% 5.56%
Highest amount outstanding as of any month-end during the
year...................................................... $858,381 $843,049 $670,362
Daily average amount outstanding during the year............ $421,200 $488,042 $435,129
Daily average annualized rate of interest................... 4.88% 5.44% 4.02%
</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 1996, 1995 and 1994:
Commercial Paper
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................... $334,653 $292,022 $306,737
Average interest rate of outstanding commercial paper at end
of year................................................... 5.06% 5.32% 5.08%
Highest amount outstanding as of any month-end during the
year...................................................... $334,653 $295,629 $306,737
Daily average amount outstanding during the year............ $275,194 $269,569 $295,388
Daily average annualized rate of interest................... 5.08% 5.58% 3.89%
</TABLE>
Senior notes are short- and medium-term notes issued to institutional
investors from time-to-time. During 1996 and 1995, only short-term notes were
outstanding. There were no outstandings under this program in 1994. The
following amounts and rates applied during 1996 and 1995:
Senior notes
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year......................... $350,000 $ 478,000 $ --
Average interest rate of outstanding senior notes at end
of year................................................. 5.61% 5.65% --%
Highest amount outstanding as of any month-end during the
year.................................................... $589,000 $1,054,245 $ --
Daily average amount outstanding during the year.......... $392,283 $ 512,205 $ --
Daily average annualized rate of interest................. 5.72% 6.08% --%
</TABLE>
28
<PAGE> 30
LOANS
SUMMARY
In 1996, significant year-to-year loan growth occurred among the following
loan categories: manufacturing and processing, public and private service
industries, other financial institutions and mortgages secured by residential
property.
Distribution of Loans by Type of Borrower
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Manufacturing and processing.............. $ 1,817.0 $1,437.7 $1,065.5 $ 972.9 $ 983.0
Public and private service industries..... 2,073.0 1,968.4 1,738.7 1,593.7 1,511.0
Mining (including oil and gas)............ 24.8 27.8 8.0 25.2 41.1
Farmers................................... 148.3 35.5 35.3 28.0 18.8
Individuals (single payment).............. 402.0 344.5 394.3 371.1 488.2
Loans to purchase and carry securities.... 41.4 76.4 62.7 92.5 115.1
State and political subdivisions,
including industrial revenue bonds..... 18.3 28.5 37.5 53.8 77.2
Other commercial.......................... 583.0 607.5 568.4 606.8 513.2
--------- -------- -------- -------- --------
Total Commercial....................... 5,107.8 4,526.3 3,910.4 3,744.0 3,747.6
--------- -------- -------- -------- --------
Finance companies........................... 233.7 215.4 207.3 188.7 128.3
Commercial banks............................ 111.9 15.8 14.7 7.8 7.6
Investment companies........................ 74.7 77.4 66.8 64.5 64.3
Mortgage companies.......................... 3.4 5.1 4.6 14.3 6.6
Other financial institutions................ 505.3 393.1 247.8 245.3 144.9
--------- -------- -------- -------- --------
Total Financial Institutions........... 929.0 706.8 541.2 520.6 351.7
--------- -------- -------- -------- --------
Total Brokers and Dealers.............. 447.4 331.4 392.5 448.8 345.8
--------- -------- -------- -------- --------
Construction.............................. 186.9 195.7 175.5 197.6 193.5
Mortgages secured by residential
property............................... 1,947.6 1,511.8 1,252.9 1,185.2 1,027.6
Mortgages secured by commercial
property............................... 436.1 485.0 374.6 378.3 351.3
--------- -------- -------- -------- --------
Total Real Estate...................... 2,570.6 2,192.5 1,803.0 1,761.1 1,572.4
--------- -------- -------- -------- --------
Charge card................................. 1,041.9 1,095.8 898.3 708.2 638.4
Other installment........................... 484.1 478.4 436.8 312.0 306.7
--------- -------- -------- -------- --------
Total Installment (to individuals)..... 1,526.0 1,574.2 1,335.1 1,020.2 945.1
--------- -------- -------- -------- --------
Total Lease Financing.................. 29.9 -- -- -- 1.9
--------- -------- -------- -------- --------
Total Domestic Loans................... 10,610.7 9,331.2 7,982.2 7,494.7 6,964.5
--------- -------- -------- -------- --------
Foreign Loans:
Governments and official institutions..... 1.0 1.0 1.0 1.0 1.0
Banks and other financial institutions.... 137.6 160.8 250.6 221.6 131.9
Other, primarily commercial and
industrial............................. 3.0 40.9 16.2 8.1 5.4
--------- -------- -------- -------- --------
Total Foreign Loans.................... 141.6 202.7 267.8 230.7 138.3
--------- -------- -------- -------- --------
Less unearned income........................ 7.6 16.1 20.7 21.4 19.9
--------- -------- -------- -------- --------
Loans, net of unearned income............. $10,744.7 $9,517.8 $8,229.3 $7,704.0 $7,082.9
========= ======== ======== ======== ========
</TABLE>
29
<PAGE> 31
Average loans increased by 13 percent during 1996 compared to 1995. Daily
average loans over the last five years were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DAILY AVERAGES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural..................... $6,462,497 $5,716,282 $5,107,563 $4,762,573 $5,050,436
Real estate construction........... 178,338 164,575 185,101 193,104 198,759
Real estate mortgages.............. 1,686,435 1,257,370 1,062,828 998,256 959,411
Installment........................ 451,430 503,073 418,166 318,405 306,786
Charge card........................ 965,043 971,565 740,088 613,931 619,721
Foreign............................ 214,767 190,816 180,830 178,215 178,541
Lease financing.................... 1,986 -- 10 798 2,678
---------- ---------- ---------- ---------- ----------
Total loans................... 9,960,496 8,803,681 7,694,586 7,065,282 7,316,332
Less unearned income............... 12,670 18,110 22,011 20,474 22,206
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income...... $9,947,826 $8,785,571 $7,672,575 $7,044,808 $7,294,126
========== ========== ========== ========== ==========
</TABLE>
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 exposure. 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 $7.19 billion
and $3.55 billion, respectively, of total loans at 1996 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 1996, 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. 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 of
Directors' 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
30
<PAGE> 32
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 concentration risk is mitigated by
a number of factors (see Note 10 to Financial Statements on page 63 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 1996 fourth
quarter at 5.0 percent and projected to increase to 5.3 percent in 1997, the
unemployment rate in the various states of the Midwestern region is also
expected to be equal to, or lower than, the national rate.
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 46 and
52 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 days past due. 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.
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.
31
<PAGE> 33
NONACCRUAL, RESTRUCTURED AND PAST DUE LOANS
Management closely monitors nonperforming assets, including assets received
in satisfaction of debt. Nonperforming assets were 0.29 percent of total loans
at December 31, 1996, compared with 0.58 percent at year-end 1995. 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 $6.5 million in 1996 compared to $2.9 million
a year ago.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................. $28,153 $50,503 $83,803 $ 91,131 $136,340
Restructured loans........................... 1,512 2,059 2,889 3,262 --
------- ------- ------- -------- --------
Total nonperforming loans.................... 29,665 52,562 86,692 94,393 136,340
Other assets received in satisfaction of
debt....................................... 1,562 2,470 8,071 19,000 18,086
------- ------- ------- -------- --------
Total nonperforming assets................. $31,227 $55,032 $94,763 $113,393 $154,426
======= ======= ======= ======== ========
90-day past due loans, still accruing
interest (all domestic).................... $46,369 $28,302 $31,071 $ 33,491 $ 37,483
======= ======= ======= ======== ========
Gross amount of interest that would have been
recorded if all year-end nonperforming
loans had been accruing interest at their
original terms............................. $ 3,134 $ 4,500 $ 5,278 $ 6,292 $ 10,135
Interest income actually recognized.......... 76 1,572 1,348 2,569 4,164
------- ------- ------- -------- --------
Interest shortfall, before consideration of
any income tax effect...................... $ 3,058 $ 2,928 $ 3,930 $ 3,723 $ 5,971
======= ======= ======= ======== ========
Nonperforming loans to total loans at
year-end................................... 0.28% 0.55% 1.05% 1.23% 1.92%
Nonperforming assets to total loans at
year-end................................... 0.29% 0.58% 1.15% 1.47% 2.18%
==== ==== ==== ==== ====
</TABLE>
LOAN CONCENTRATIONS
Management monitors industry loan concentrations in an effort to maintain a
well-diversified loan portfolio. Excluding total residential mortgage loans, at
December 31, 1996 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 $5.11 billion, or 48 percent of total outstandings at year-end
1996. Most of these credits were extended to manufacturing and service-related
companies. Outstandings to machinery industries represented 23 percent of all
manufacturing loans and 4 percent of total consolidated loans. The largest
concentration within service-related industries was consumer wholesalers, which
accounted for 33 percent of all service-related credits and 6 percent of total
loans.
Foreign loans totaled $142 million at year-end 1996, accounting for 1
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 33 of this Report.
Real estate loans, including residential mortgages, totaled $2.57 billion
at December 31, 1996, or 24 percent of total outstandings. Mortgage loans
collateralized by residential property totaled $1.95 billion, or 18 percent of
loans. Commercial real estate mortgages and construction loans total $623
million at the end of 1996. Further details on the Corporation's commercial real
estate outstandings can be found on page 33 of this Report.
32
<PAGE> 34
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, 1996, 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
TOTAL INSTITUTIONS INDUSTRIAL
----- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
1996
Outstandings (including accrued interest) to one
country in excess of 1% of total consolidated assets
at year-end:
Japan............................................. $209,714 $209,642 $ 72
1995
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
Outstandings (including accrued interest) to one
country in excess of 1% of total consolidated assets
at year-end:
Japan............................................. $268,617 $268,588 $ 29
</TABLE>
At December 31, 1996, 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.
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, 1996, the Corporation, primarily through its banking
subsidiaries, had outstanding commercial real estate loans of approximately $623
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 $1.9 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 1996 or 1995. Other real estate owned and other assets
received in satisfaction of debt were $1.6 million at December 31, 1996,
compared to $2.5 million at December 31, 1995, and comprised approximately 5% 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.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for loan losses is based upon management's estimate of
potential loan losses and its evaluation of the adequacy of the allowance for
possible loan losses. Factors which influence management's
33
<PAGE> 35
judgment in estimating loan 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 ("the Board"). This statement outlines a methodology management
should follow in order to properly measure the adequacy of the allowance for
possible loan losses. It includes specific quantitative measures as well as
certain subjective factors that may cause estimated loan 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 loan losses for the upcoming
twelve 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 loan 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 loan 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 5
percent, 12 percent, 11 percent, 23 percent and 24 percent of the consolidated
allowance for possible loan losses was represented by doubtful portions of loans
at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. At December 31,
1996, the Corporation had allocated $8.0 million to loans internally categorized
as doubtful, compared to $14.9 million at year-end 1995.
At December 31, 1996 and 1995, the Corporation designated all of the
allocated portion of the allowance to cover total domestic credit exposure.
During 1996, the provision for loan losses increased to $56.5 million,
compared to $43.0 million in 1995. At year-end 1996, the allowance for possible
loan losses was $142.2 million, or 1.32 percent of total loans outstanding,
compared to $129.3 million or 1.36 percent of total loans one year ago. The
provision for loan 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 loan losses to total loans and the ratio of the allowance
for possible loan losses to nonperforming loans are evaluated on a regular
basis. At year-end 1996, the ratios of the allowance for possible loan losses to
total loans and to nonperforming loans were 1.32 percent and 479 percent,
respectively.
Net charge-offs in 1996 were $48.4 million, or 0.49 percent of average
loans outstanding as compared to $38.5 million, or 0.44 percent of average loans
outstanding in 1995. Net charge-offs of domestic commercial loans amounted to
$8.0 million in 1996, or 0.12 percent of average domestic commercial loans
outstanding, down from $9.9 million, or 0.17 percent of average domestic
commercial loans outstanding in 1995. The
34
<PAGE> 36
charge card portfolio experienced net charge-offs of $39.3 million of $27.4
million in 1996 and 1995, respectively, or 4.07 percent and 2.82 percent,
respectively, of average outstandings. Installment loans, including real estate
mortgages, had net charge-offs of $1.7 million in 1996, or 0.08 percent of
average outstandings, and $1.3 million, or 0.08 percent of average outstandings
in 1995. Over the five-year period ending December 31, 1996, combined total net
charge-offs were 0.69 percent of average total loans outstanding.
The Board has established rules requiring banking institutions to establish
special reserves against the risks presented in certain international assets, as
determined by the Board. At December 31, 1996 and 1995, the Corporation was not
required to maintain any special reserve under the aforementioned regulation.
The following table sets forth the Corporations allocation of the allowance
for possible loan losses. This allocation is based on management's subjective
estimates. The amount allocated to a particular category should not be
interpreted as the only amount available for future charge-offs that may occur
within that category; it may not be indicative of future charge-off trends and
it may change from year to year based on management's assessment of the risk
characteristics of the loan portfolio.
Allocation of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------- -------------------------
LOAN CATEGORY LOAN CATEGORY LOAN CATEGORY
AS A % OF AS A % OF AS A % OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ------------- --------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated Portion:
Commercial.................. $ 45,901 66.1% $ 59,255 65.5% $ 60,897 65.4%
Retail, including charge
card..................... 40,578 32.6 39,227 32.4 41,523 31.4
Foreign..................... -- 1.3 -- 2.1 3,819 3.2
-------- ----- -------- ----- -------- -----
Total Allocated Portion....... 86,479 100.0% 98,482 100.0% 106,239 100.0%
===== ===== =====
Unallocated Portion........... 55,732 N/A 30,777 N/A 18,495 N/A
-------- -------- --------
Total......................... $142,211 $129,259 $124,734
======== ======== ========
</TABLE>
35
<PAGE> 37
Analysis of Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance.................. $ 129,259 $ 124,734 $ 131,676 $ 130,123 $ 125,091
----------- ---------- ---------- ---------- ----------
Charge-offs:
Commercial, financial and
agricultural.................. 12,808 20,967 31,900 43,537 54,565
Real estate construction......... 803 2,644 65 -- 29
Installment and real estate
mortgages..................... 2,757 2,442 7,581 3,446 3,414
Charge card...................... 46,627 35,914 30,360 35,145 39,048
----------- ---------- ---------- ---------- ----------
Total charge-offs............. 62,995 61,967 69,906 82,128 97,056
----------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and
agricultural.................. 4,799 11,063 7,216 10,657 3,859
Real estate construction......... 1,465 2,867 21 -- --
Installment and real estate
mortgages..................... 1,065 1,093 1,646 783 1,136
Charge card...................... 7,278 8,474 9,041 9,378 9,295
Foreign.......................... -- -- -- 28 10,238
----------- ---------- ---------- ---------- ----------
Total recoveries.............. 14,607 23,497 17,924 20,846 24,528
----------- ---------- ---------- ---------- ----------
Net charge-offs............... 48,388 38,470 51,982 61,282 72,528
----------- ---------- ---------- ---------- ----------
Provisions charged (credited) to
expense:
Domestic......................... 56,540 46,814 44,922 61,707 89,083
Foreign.......................... -- (3,819) 118 1,128 (11,523)
----------- ---------- ---------- ---------- ----------
Total provisions.............. 56,540 42,995 45,040 62,835 77,560
----------- ---------- ---------- ---------- ----------
Allowance related to acquired
loans............................ 4,800 -- -- -- --
----------- ---------- ---------- ---------- ----------
Ending balance..................... $ 142,211 $ 129,259 $ 124,734 $ 131,676 $ 130,123
=========== ========== ========== ========== ==========
Net loans, end of period........... $10,744,653 $9,517,797 $8,229,254 $7,703,957 $7,082,861
=========== ========== ========== ========== ==========
Net loans, daily averages.......... $ 9,947,826 $8,785,571 $7,672,575 $7,044,808 $7,294,126
=========== ========== ========== ========== ==========
Ratios:
Net charge-offs to average loans
outstanding................... 0.49% 0.44% 0.68% 0.87% 0.99%
Allowance for possible loan
losses to loans outstanding
(end of period)............... 1.32 1.36 1.52 1.71 1.84
Allowance for possible loan
losses to nonperforming loans
(end of period)............... 479 246 144 139 95
Allowance for possible loan
losses to nonperforming
assets........................ 455 235 132 116 84
Net charge-offs to allowance for
possible loan losses
(beginning of period)......... 37% 31% 39% 47% 58%
=========== ========== ========== ========== ==========
</TABLE>
36
<PAGE> 38
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 Nassau branch office; representative offices in Los Angeles and Tokyo; Bank
of Montreal Trust Company (Channel Islands), Ltd.; and HBIC.
International banking services contributed $16.0 million, or 11 percent, of
the Corporation's 1996 consolidated net income, compared to $15.3 million or 10
percent in 1995. International operating income was $40.0 million in 1996 and
represented 3 percent of the Corporation's total operating income. In 1995 and
1994, international operating income represented 4 and 5 percent, respectively,
of the Corporation's total operating income. Assets and liabilities associated
with foreign domiciled customers are summarized as follows:
Foreign Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans:
Governments and official institutions..................... $ 984 $ 984 $ 984
Banks and other financial institutions.................... 137,560 160,808 250,563
Other, primarily commercial and industrial................ 2,976 40,900 16,210
-------- -------- ----------
Total loans............................................ 141,520 202,692 267,757
-------- -------- ----------
Allowance for possible loan losses........................ -- -- (3,819)
-------- -------- ----------
Deposits in banks located outside the United States:
Interest-bearing.......................................... 651,508 447,700 660,083
Other..................................................... 6,331 64,499 78,745
-------- -------- ----------
Total deposits in banks................................ 657,839 512,199 738,828
-------- -------- ----------
Acceptances and other identifiable assets................... 36,298 102,337 40,018
-------- -------- ----------
Total identifiable foreign assets...................... $835,657 $817,228 $1,042,784
======== ======== ==========
Deposit liabilities:
Banks located in foreign countries........................ $ 76,886 $346,832 $ 335,370
Foreign governments and official institutions............. 45 15,000 100,139
Other demand.............................................. 78,514 72,145 39,510
Other time and savings.................................... 271,717 176,466 111,524
-------- -------- ----------
Total deposit liabilities.............................. 427,162 610,443 586,543
Short-term borrowings....................................... 32,676 107,645 249,536
Acceptances outstanding..................................... 36,024 55,898 14,782
-------- -------- ----------
Total identifiable foreign liabilities................. $495,862 $773,986 $ 850,861
======== ======== ==========
</TABLE>
37
<PAGE> 39
GEOGRAPHIC DISTRIBUTION
As of year-end 1996, 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:
International Banking by Domicile of Obligor
<TABLE>
<CAPTION>
INTERNATIONAL LOANS
------------------- INTEREST-BEARING
DOMESTIC FOREIGN DEPOSITS
OFFICES OFFICES AT BANKS TOTAL %
-------- ------- ---------------- ----- -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Continental Europe.......................... $ 26,808 $ 642 $ 342,899 $370,349 47
Pacific and Far East........................ 88,233 -- 224,622 312,855 39
United Kingdom and Ireland.................. 1,181 1,214 -- 2,395 1
Western Hemisphere (excluding U.S. and
Canada)................................... 12,680 1,064 14,469 28,213 3
Canada...................................... 9,698 -- 69,518 79,216 10
-------- -------- --------- -------- ---
Total international banking............ $138,600 $ 2,920 $ 651,508 $793,028 100
======== ======== ========= ======== ===
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 $448,316 48
Pacific and Far East........................ 113,266 99,794 177,208 390,268 42
United Kingdom and Ireland.................. 1,000 218 -- 1,218 --
Western Hemisphere (excluding U.S. and
Canada)................................... 7,666 984 41,000 49,650 6
Canada...................................... 5,888 -- 32,500 38,388 4
-------- -------- --------- -------- ---
Total international banking............ $159,977 $107,780 $ 660,083 $927,840 100
======== ======== ========= ======== ===
</TABLE>
VISION 2002
The Corporation and BMO have developed a joint, long-term strategic plan
with the goal of becoming, over a period of 10 years culminating in 2002, a
premier North American financial services organization with comprehensive
capabilities in both Canada and the United States. This plan, called Vision
2002, envisions Harris (the Corporation and its sister company, Harris Bankmont,
Inc.) as an integral part of the BMO 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 BMO presence in the United
States, principally focused in the Harris organization as its centerpiece.
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.
Since 1993, Harris has tripled its retail customer base, significantly
increased the number of its relationships with mid-market companies throughout
the Midwest and expanded its corporate trust and cash management services
nationwide in support of BMO U.S. corporate banking. In June 1996, Harris met
its branch expansion goal a full six years ahead of schedule by acquiring 54
branches and 250,000 customers of Household in the greater Chicago area. With
the acquisition, Harris now serves 775,000 customers and has
38
<PAGE> 40
143 locations opened or planned at the end of 1996, creating one of the largest
retail banking networks in Chicagoland. Less than two years earlier, in October
1994, BMO and Suburban Bancorp, Inc. (now known as Harris Bankmont, Inc.)
completed their merger. The merger was effected using BMO stock valued at
approximately $237 million. 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.
The three-year process of building a cost-effective operations and staff
support infrastructure, started in 1994, continued in 1996, with close to $50
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 eliminates duplication, creates scale efficiencies and
improves quality and responsiveness. Additionally, the use of technology to
automate processing activities at the point of customer contact lowers costs and
increases quality. To this end, the consolidation of processing functions for
Harris' and BMO's U.S.-based derivatives operations at a single location in
Toronto was completed in 1996. In 1997, operations support for the former
Household branches will be consolidated at a community banking operations
center.
Together with BMO, Harris is expanding its retail banking services across
the Midwest through mbanx TM/SM, North American full-service direct banking.
Customers and prospective customers in Illinois, Wisconsin, Indiana, Michigan,
Missouri, Iowa, Minnesota and Ohio can call for information and apply over the
phone for services such as home equity loans, checking accounts, money market
accounts, CD's, credit cards, mortgages, mutual funds and discount brokerage.
Customers of mbanx can use their phone or personal computers to check balances,
review transaction history and transfer funds between accounts -- whether at
home, at work or on the road. The PC-banking capabilities of mbanx will be
expanding to allow customers to pay bills, communicate with the bank via e-mail
and download transaction information to personal financial management software.
FOURTH QUARTER 1996 COMPARED WITH FOURTH QUARTER 1995
Net income for the fourth quarter of 1996 was $37.8 million, down 3 percent
from fourth quarter 1995 earnings of $38.8 million. Earnings and return on
average common equity ("ROE") comparability between quarters was affected by the
June 1996 purchase of Household's Chicagoland retail banking business. Excluding
the impact of the Household transaction, earnings increased 4 percent from
fourth quarter 1995. The earnings increase is attributable primarily to strong
business growth across corporate, private and retail banking, and to sustained
cost control. ROE for fourth quarter 1996, excluding the Household transaction,
was 14.01 percent and return on average assets was 0.92 percent, compared to
respective returns of 13.72 percent and 0.94 percent in last year's fourth
quarter.
Fourth quarter 1996 net interest income on a fully taxable equivalent basis
was $144.7 million, up $17.0 million or 13 percent from $127.7 million in 1995's
fourth quarter. Average earning assets rose 13 percent to $15.79 billion from
$14.03 billion in fourth quarter 1995, attributable to an increase of 12 percent
or $1.11 billion in average loans. Commercial, installment and residential
mortgage lending were the strongest contributors to this growth. Net interest
margin rose to 3.65 percent from 3.62 percent in the same quarter last year.
This reflects a more favorable funding mix resulting from lower interest costs
associated with deposits assumed from Household, compared to interest costs on
wholesale funds displaced, contributing approximately 23 basis points on a
comparative basis to 1996 fourth quarter net interest margin. This increase was
somewhat offset by the effects of rate compression in certain asset categories
and the relative decline in noninterest-bearing sources of funds. Excluding the
contribution of the Household transaction, net interest income would have
increased $4.2 million or 3 percent quarter-to-quarter.
Noninterest income of $88.2 million rose 2 percent in fourth quarter 1996
from the same quarter last year. During first quarter 1996, HTSB sold its
securities custody and related trustee services business for large institutions.
As a result of this sale, trust fees declined in fourth quarter 1996 by $7.5
million or 20 percent from the prior year's fourth quarter. All other categories
of noninterest income increased quarter-to-quarter except foreign exchange
revenue which declined $2.8 million.
39
<PAGE> 41
Fourth quarter 1996 noninterest expenses of $156.6 million rose $15.0
million or 11 percent from fourth quarter last year. Fourth quarter 1995 did not
include operating expenses associated with Household or the related amortization
of goodwill and other intangible assets. Excluding all Household-related
charges, total expenses declined $4.9 million or 3 percent in fourth quarter
1996 compared to the year-earlier quarter.
Income taxes decreased by $0.6 million during the current quarter primarily
reflecting lower pretax income.
The fourth quarter 1996 provision for loan losses of $14.3 million was up
$2.7 million from $11.6 million in the fourth quarter of 1995. Net loan
charge-offs during the current quarter were $15.3 million, compared to $11.7
million in the same period last year, primarily reflecting higher writeoffs in
the charge card portfolio.
40
<PAGE> 42
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPLEMENTARY DATA
HARRIS BANKCORP, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
SUMMARY OF EARNINGS AND NET INTEREST INCOME
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------- --------------------------------- ---------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST 4TH 3RD
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(FULLY TAXABLE EQUIVALENT (FTE) BASIS, DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............... $298.9 $293.4 $278.0 $266.5 $279.8 $272.1 $260.0 $252.3 $237.8 $217.8
Interest expense.............. 160.5 154.2 149.3 143.4 155.5 151.1 140.2 134.9 117.1 101.1
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income........... 138.4 139.2 128.7 123.1 124.3 121.0 119.8 117.4 120.7 116.7
FTE adjustment................ 6.3 7.6 5.9 5.6 3.4 3.9 5.0 5.4 6.1 5.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest income --
FTE basis.................... 144.7 146.8 134.6 128.7 127.7 124.9 124.8 122.8 126.8 122.6
Provision for loan losses..... 14.3 15.0 13.7 13.5 11.6 11.0 11.8 8.6 10.5 9.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses.... 130.4 131.8 120.9 115.2 116.1 113.9 113.0 114.2 116.3 113.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Income
Trust and investment
management fees............ 29.4 29.1 29.4 29.8 36.9 38.0 36.3 38.7 36.7 36.2
Trading account.............. 3.7 .7 2.7 1.0 2.1 .4 .7 1.9 .7 .1
Foreign exchange............. 1.3 1.7 3.5 3.5 4.1 2.4 3.2 4.6 4.3 4.0
Charge card.................. 13.0 13.1 11.1 10.0 11.2 10.9 10.5 9.2 10.5 9.9
Service fees and charges..... 23.0 23.6 19.3 17.1 17.9 16.2 17.5 17.7 17.7 18.5
Securities (losses) gains.... 4.5 .7 .1 3.4 2.8 1.7 16.8 2.1 (.4) 2.4
Other........................ 13.3 11.6 14.0 15.7 11.3 10.4 6.4 6.4 7.5 5.1
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total noninterest income... 88.2 80.5 80.1 80.5 86.3 80.0 91.4 80.6 77.0 76.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Expenses
Employment................... 82.5 84.9 81.2 78.4 79.8 78.9 79.3 80.2 74.1 77.2
Net occupancy................ 13.2 12.9 10.9 10.7 11.0 11.7 12.0 11.4 11.7 11.0
Equipment.................... 11.3 10.3 10.3 9.8 11.4 10.9 10.4 9.8 11.2 10.4
Marketing.................... 9.0 7.7 7.1 5.7 6.5 6.6 6.7 5.8 6.9 5.8
Communication and delivery... 5.7 4.7 5.2 5.3 5.3 5.1 5.2 4.7 4.6 4.7
Deposit insurance............ (.2) 18.3 -- -- .8 (.3) 3.8 3.8 3.9 3.9
Trust customer charge........ -- -- -- -- -- -- -- -- -- --
Other........................ 28.3 21.6 21.4 19.7 24.6 22.0 23.2 20.2 24.2 21.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
149.8 160.4 136.1 129.6 139.4 134.9 140.6 135.9 136.6 134.2
Goodwill and other valuation
intangibles................ 6.8 6.9 2.2 2.2 2.3 2.3 2.4 2.4 2.5 2.5
Total noninterest expenses... 156.6 167.3 138.3 131.8 141.7 137.2 143.0 138.3 139.1 136.7
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
FTE income (loss) -- pretax... 62.0 45.0 62.7 63.9 60.7 56.7 61.4 56.5 54.2 53.1
Applicable income taxes
(benefit).................... 17.9 10.9 18.0 19.1 18.5 17.0 18.2 16.4 12.5 13.4
FTE adjustment................ 6.3 7.6 5.9 5.6 3.4 3.9 5.0 5.4 6.1 5.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income.................... 37.8 26.5 38.8 39.2 38.8 35.8 38.2 34.7 35.6 33.8
Dividends on preferred
stock........................ 4.1 4.2 3.3 3.4 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income applicable to
common stock................. $ 33.7 $ 22.3 $ 35.5 $ 35.8 $ 38.8 $ 35.8 $ 38.2 $ 34.7 $ 35.6 $ 33.8
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per common share
(based on average shares
outstanding)................. $ 5.05 $ 3.35 $ 5.33 $ 5.37 $ 5.83 $ 5.36 $ 5.72 $ 5.21 $ 5.34 $ 5.07
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net Interest Margin
Yield on earning assets...... 7.70% 7.77% 7.65% 7.80% 8.02% 8.02% 8.27% 8.18% 7.75% 7.26%
Rate on supporting
liabilities................ 4.05 3.98 4.03 4.11 4.40 4.37 4.38 4.28 3.72 3.28
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest margin.......... 3.65% 3.79% 3.62% 3.69% 3.62% 3.65% 3.89% 3.90% 4.03% 3.98%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
1994
---------------
2ND 1ST
QTR. QTR.
---- ----
(FULLY TAXABLE EQUIVALENT (FTE) BASIS, DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C>
Interest income............... $201.3 $177.7
Interest expense.............. 87.7 72.1
------ ------
Net Interest Income........... 113.6 105.6
FTE adjustment................ 6.0 5.8
------ ------
Net interest income --
FTE basis.................... 119.6 111.4
Provision for loan losses..... 12.0 13.4
------ ------
Net Interest Income after
Provision for Loan Losses.... 107.6 98.0
------ ------
Noninterest Income
Trust and investment
management fees............ 37.7 37.6
Trading account.............. (.1) (1.2)
Foreign exchange............. 5.2 6.2
Charge card.................. 8.9 8.1
Service fees and charges..... 18.5 19.0
Securities (losses) gains.... .1 3.1
Other........................ 10.3 7.7
------ ------
Total noninterest income... 80.6 80.5
------ ------
Noninterest Expenses
Employment................... 79.6 81.7
Net occupancy................ 11.3 11.1
Equipment.................... 10.0 10.7
Marketing.................... 6.4 5.5
Communication and delivery... 4.3 4.2
Deposit insurance............ 3.9 3.9
Trust customer charge........ 51.3 --
Other........................ 20.3 18.8
------ ------
187.1 135.9
Goodwill and other valuation
intangibles................ 2.6 2.7
Total noninterest expenses... 189.7 138.6
------ ------
FTE income (loss) -- pretax... (1.5) 39.9
Applicable income taxes
(benefit).................... (8.0) 6.7
FTE adjustment................ 6.0 5.8
------ ------
Net Income.................... .5 27.4
Dividends on preferred
stock........................ -- --
------ ------
Net income applicable to
common stock................. $ .5 $ 27.4
====== ======
Earnings per common share
(based on average shares
outstanding)................. $ .08 $ 4.11
====== ======
Net Interest Margin
Yield on earning assets...... 6.82% 6.33%
Rate on supporting
liabilities................ 2.89 2.50
------ ------
Net interest margin.......... 3.93% 3.83%
====== ======
</TABLE>
Rows may not add to annual amounts because of rounding.
41
<PAGE> 43
FINANCIAL STATEMENTS
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $ 837,057 $ 776,226 $591,532
Money market assets:
Deposits at banks......................................... 30,483 38,617 30,739
Federal funds sold and securities purchased under
agreement to resell..................................... 11,918 19,330 21,523
Trading account............................................. 3,959 3,842 2,190
Securities available-for-sale:
U.S. Treasury and federal agency.......................... 232,571 152,508 115,489
State and municipal....................................... 18,149
Other..................................................... 2,717 9,671 5,754
Securities held-to-maturity:
U.S. Treasury and federal agency.......................... -- 36,641 27,362
State and municipal....................................... -- 27,072 37,432
Other..................................................... -- 353 2,584
---------- ---------- --------
Total interest income..................................... 1,136,854 1,064,260 834,605
---------- ---------- --------
INTEREST EXPENSE
Deposits.................................................... 398,167 358,586 250,002
Short-term borrowings....................................... 160,790 168,993 108,485
Senior notes................................................ 22,425 31,125 --
Long-term notes............................................. 26,067 23,005 19,520
---------- ---------- --------
Total interest expense.................................... 607,449 581,709 378,007
---------- ---------- --------
Net Interest Income......................................... 529,405 482,551 456,598
Provision for loan losses................................... 56,540 42,995 45,040
---------- ---------- --------
Net Interest Income after Provision for Loan Losses......... 472,865 439,556 411,558
---------- ---------- --------
Noninterest Income..........................................
Trust and investment management fees........................ 117,762 149,979 148,094
Trading account............................................. 7,992 5,110 (396)
Foreign exchange............................................ 9,992 14,248 19,769
Charge card................................................. 47,244 41,788 37,402
Service fees and charges.................................... 82,802 69,333 73,621
Securities gains............................................ 8,786 23,379 5,254
Other....................................................... 54,729 34,436 30,700
---------- ---------- --------
Total noninterest income.................................. 329,307 338,273 314,444
---------- ---------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 273,849 260,539 246,200
Pension, profit sharing and other employee benefits......... 53,145 57,763 66,370
Net occupancy............................................... 47,690 46,099 45,052
Equipment................................................... 41,715 42,541 42,284
Marketing................................................... 29,342 25,583 24,632
Communication and delivery.................................. 20,954 20,251 17,732
Deposit insurance........................................... 18,189 8,124 15,684
Trust customer charge....................................... -- -- 51,335
Other....................................................... 90,944 89,853 84,573
---------- ---------- --------
575,828 550,753 593,862
Goodwill and other valuation intangibles.................... 18,168 9,350 10,266
---------- ---------- --------
Total noninterest expenses................................ 593,996 560,103 604,128
---------- ---------- --------
Income before income taxes.................................. 208,176 217,726 121,874
Applicable income taxes..................................... 65,812 70,175 24,528
---------- ---------- --------
Net Income.................................................. 142,364 147,551 97,346
Dividends on preferred stock................................ 15,006 -- --
---------- ---------- --------
Net income applicable to common stock....................... $ 127,358 $ 147,551 $ 97,346
========== ========== ========
Earnings per Common Share (based on 6,667,490 average shares
outstanding)
Net income applicable to common stock....................... $19.10 $22.13 $14.60
====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
42
<PAGE> 44
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995
---- ----
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,238,028 $ 1,522,418
Money market assets:
Interest-bearing deposits at banks........................ 658,257 457,702
Federal funds sold and securities purchased under
agreement to resell.................................... 294,792 179,692
Portfolio securities available for sale..................... 3,985,183 3,389,967
Trading account assets...................................... 110,355 98,638
Loans, net of unearned income of $7,624 in 1996 and $16,091
in 1995................................................... 10,744,653 9,517,797
Allowance for possible loan losses.......................... (142,211) (129,259)
Net loans................................................. 10,602,442 9,388,538
Premises and equipment...................................... 275,091 225,540
Customers' liability on acceptances......................... 78,983 95,326
Goodwill and other valuation intangibles.................... 310,663 38,407
Other assets................................................ 674,946 279,973
----------- -----------
Total assets........................................... $18,228,740 $15,676,201
=========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 3,642,578 $ 3,003,088
-- interest-bearing............ 7,668,893 4,859,939
Deposits in foreign offices -- noninterest-bearing......... 35,116 41,004
-- interest-bearing............ 1,643,714 2,324,751
----------- -----------
Total deposits............................................ 12,990,301 10,228,782
Federal funds purchased and securities sold under agreement
to repurchase............................................. 1,983,047 1,896,817
Commercial paper outstanding................................ 334,653 292,022
Short-term borrowings....................................... 347,690 843,049
Senior notes................................................ 350,000 478,000
Acceptances outstanding..................................... 78,983 95,326
Accrued interest, taxes and other expenses.................. 159,250 143,580
Other liabilities........................................... 90,543 188,897
Long-term notes............................................. 379,107 363,952
----------- -----------
Total liabilities.................................... 16,713,574 14,530,425
----------- -----------
STOCKHOLDER'S EQUITY
Series A Non-voting, Callable, Perpetual Preferred stock (no
par value); authorized 1,000,000 shares; issued and
outstanding 180 shares ($1,000,000 stated value); 7.25%
dividend rate............................................. 180,000 180,000
Series B Non-voting, Callable, Perpetual Preferred stock (no
par value); authorized 45 shares; issued and outstanding
45 shares ($1,000,000 stated value); 7.875% dividend
rate...................................................... 45,000 --
Common stock ($8 par value); authorized 10,000,000 shares;
issued and outstanding 6,667,490 shares................... 53,340 53,340
Surplus..................................................... 484,319 203,897
Retained earnings........................................... 760,626 681,468
Unrealized holding gains (losses), net of deferred taxes of
($5,364) in 1996 and $17,787 in 1995...................... (8,119) 27,071
----------- -----------
Total stockholder's equity........................... 1,515,166 1,145,776
----------- -----------
Total liabilities and stockholder's equity........... $18,228,740 $15,676,201
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
43
<PAGE> 45
HARRIS BANKCORP, INC. (CONSOLIDATED AND PARENT COMPANY ONLY)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B UNREALIZED TOTAL
PREFERRED PREFERRED COMMON RETAINED HOLDING GAINS STOCKHOLDER'S
STOCK STOCK STOCK SURPLUS EARNINGS (LOSSES) EQUITY
--------- --------- ------ ------- -------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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 common
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 Series A 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
Issuance of Series B preferred
stock........................ -- 45,000 -- -- -- -- 45,000
Contribution to capital
surplus...................... -- -- -- 280,422 -- -- 280,422
Net income..................... -- -- -- -- 142,364 -- 142,364
Dividends -- Series A preferred
stock ($73,305.56 per
share)....................... -- -- -- -- (13,195) -- (13,195)
Dividends -- Series B preferred
stock ($40,250.00 per
share)....................... -- -- -- -- (1,811) -- (1,811)
Dividends -- common stock
($7.23 per share)............ -- -- -- -- (48,200) -- (48,200)
Change in unrealized holding
gains (losses) on available
for sale securities, net of
tax effect of ($23,168)...... -- -- -- -- -- (35,190) (35,190)
-------- ------- ------- -------- --------- -------- ----------
Balance at December 31, 1996..... $180,000 $45,000 $53,340 $484,319 $ 760,626 $ (8,119) $1,515,166
======== ======= ======= ======== ========= ======== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
44
<PAGE> 46
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................................. $ 142,364 $ 147,551 $ 97,346
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 56,540 42,995 45,040
Depreciation and amortization, including intangibles...... 57,031 48,492 49,873
Deferred tax benefit...................................... (3,755) (1,380) (3,818)
Gain on sales of portfolio securities..................... (8,786) (23,379) (5,254)
Trading account net cash (purchases) sales................ (11,717) (62,571) 13,994
Increase in interest receivable........................... (13,639) (243) (40,721)
(Decrease) increase in interest payable................... (188) 8,270 9,403
(Increase) decrease in loans held for sale................ (63,836) (21,314) 245,445
Other, net................................................ 877 43,912 (18,673)
---------- ---------- ----------
Net cash provided by operating activities............. 154,891 182,333 392,635
---------- ---------- ----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks................................................... (200,555) 299,525 (229,747)
Net (increase) decrease in Federal funds sold and
securities purchased under agreement to resell.......... (115,100) 224,534 98,304
Proceeds from maturities of securities held-to-maturity... -- 713,897 482,378
Purchases of securities held-to-maturity.................. -- (445,371) (842,817)
Proceeds from sales of securities available-for-sale...... 1,462,522 2,025,099 146,114
Proceeds from maturities of securities
available-for-sale...................................... 6,634,038 5,219,361 4,198,226
Purchases of securities available-for-sale................ (8,741,345) (7,091,515) (4,595,187)
Net increase in loans..................................... (870,493) (1,305,639) (822,724)
Net cash received upon assumption of certain assets and
liabilities of Household Bank f.s.b..................... 2,244,009 -- --
Proceeds from sales of premises and equipment............. 20,532 28,270 42,045
Purchases of premises and equipment....................... (82,794) (72,501) (76,174)
Other, net................................................ (8,833) 152,672 1,969
---------- ---------- ----------
Net cash provided (used) by investing activities...... 341,981 (251,668) (1,597,613)
---------- ---------- ----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits....................... (129,685) 309,050 543,861
Net increase (decrease) in Federal funds purchased and
securities sold under agreement to repurchase........... 86,230 (735,350) 771,106
Net increase (decrease) in commercial paper outstanding... 42,631 (14,715) (19,531)
Net (decrease) increase in other short-term borrowings.... (495,359) 172,687 211,170
Proceeds from issuance of senior notes.................... 1,239,436 2,978,345 --
Repayment of senior notes................................. (1,367,436) (2,500,345) --
Proceeds from issuance of long-term notes................. 15,000 65,000 --
Proceeds from issuance of preferred stock................. 45,000 180,000 --
Proceeds from contribution to capital surplus............. 280,000 -- --
Cash dividends paid on preferred stock.................... (15,006) -- --
Cash dividends paid on common stock....................... (48,200) (262,700) (34,738)
Other, net................................................ (433,873) -- --
---------- ---------- ----------
Net cash provided (used) by financing activities...... (781,262) 191,972 1,471,868
---------- ---------- ----------
Net (decrease) increase in cash and demand balances due
from banks.............................................. (284,390) 122,637 266,890
Cash and demand balances due from banks at January 1...... 1,522,418 1,399,781 1,132,891
---------- ---------- ----------
Cash and demand balances due from banks at December 31.... $1,238,028 $1,522,418 $1,399,781
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized).................... $ 596,939 $ 573,439 $ 368,605
Income taxes............................................ $ 71,626 $ 74,269 $ 34,047
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
45
<PAGE> 47
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 20 for additional information on business
combinations and Note 21 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 nonbank 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
income.
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 income.
46
<PAGE> 48
Securities
The Corporation classifies securities 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 income, 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, the Corporation considers
"portfolio securities" to include both held-to-maturity and available-for-sale
securities.
On December 29, 1995, the Corporation transferred all held-to-maturity
securities to available-for-sale. See Note 2 on page 49 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, 1996 and 1995, the Corporation's
Consolidated Statement of Condition included approximately $18.7 million and
$13.8 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 allocated cost or
current market value, on a portfolio basis. Prior to the adoption of Statement
of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights, the loans were 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.
During the first quarter of 1996, the Corporation adopted SFAS No. 122,
Accounting for Mortgage Servicing Rights. 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. As
required by the Statement, the rights to service mortgage loans for others are
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 capitalized mortgage servicing
rights are amortized in proportion to, and over the period of, estimated net
servicing income. The capitalized mortgage servicing rights are periodically
evaluated for impairment based on the fair value of those rights. Fair values
are estimated using discounted cash flow analyses. The risk characteristics of
the underlying loans used to stratify capitalized mortgage servicing rights for
purposes of measuring impairment are loan current market interest rates, loan
type and repricing interval. Mortgage servicing rights of $2.6 million were
capitalized in 1996. Amortization of mortgage servicing rights was $0.1 million
in 1996. The $2.5 million unamortized balance of the mortgage servicing rights
at December 31, 1996 is reflective of the fair value of those rights. Additions,
reductions and direct write-downs to the valuation allowance for mortgage
servicing rights in 1996 were $0.6 million, $0.1 million and $0, respectively,
resulting in a year-end balance of $0.5 million at December 31, 1996. The
adoption of the Statement did not have a material effect on the Corporation's
financial position or results of operations.
47
<PAGE> 49
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 180 days past due. Accrued interest on these loans is
charged to interest income. Such loans are not normally placed on nonaccrual
status.
Loan commitments and letters of credit are executory contracts and are not
reflected on the Corporation's Consolidated Statement of Condition. Fees
collected are generally deferred and recognized over the life of the facility.
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 loan 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 loan losses
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan 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 loan
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, loan losses. Such estimates
are reviewed periodically and adjustments, if necessary, are recorded during the
periods in which they become known.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Interest costs associated with long-term construction projects are
capitalized and then amortized over the life of the related asset after the
project is completed. For financial reporting purposes, the provision for
depreciation and amortization is computed on the straight-line basis over the
estimated useful lives of the assets.
Other assets
The Corporation records specifically identifiable and unidentifiable
(goodwill) intangibles in connection with the acquisition of assets from
unrelated parties or the acquisition of new subsidiaries. Original lives range
from 3 to 15 years. Goodwill is amortized on the straight-line basis.
Identifiable intangibles are amortized on either an accelerated or straight-line
basis depending on the character of the acquired asset. Goodwill and other
valuation intangibles are reviewed for impairment when events indicate that the
carrying value may not be recoverable.
48
<PAGE> 50
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.
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.
Cash flows
On December 29, 1995, the Corporation transferred all held-to-maturity
securities to available-for-sale. See Note 2 on page 49 for further information.
The non-cash portion of this transaction was 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 areas
requiring significant management judgment include: provision and allowance for
possible loan losses, income taxes, pension cost, postemployment benefits,
valuation of intangible assets, fair values and temporary vs.
other-than-temporary impairment.
2. PORTFOLIO SECURITIES
The amortized cost and estimated fair value of securities
available-for-sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------- -------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- ----- --------- ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........ $1,295,286 $ 2,749 $15,817 $1,282,218 $1,189,605 $15,967 $ 405 $1,205,167
Federal agency....... 2,369,251 2,858 14,383 2,357,726 1,726,694 15,968 2,084 1,740,578
State and
municipal.......... 301,650 11,725 532 312,843 294,120 14,973 288 308,805
Other................ 32,479 5 88 32,396 134,690 929 202 135,417
---------- ------- ------- ---------- ---------- ------- ------ ----------
Total securities..... $3,998,666 $17,337 $30,820 $3,985,183 $3,345,109 $47,837 $2,979 $3,389,967
========== ======= ======= ========== ========== ======= ====== ==========
</TABLE>
49
<PAGE> 51
At December 31, 1996 and 1995, portfolio and trading account securities
having a par value of $2.4 billion and $1.7 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
$1.4 billion and $1.1 billion were sold under agreement to repurchase at
December 31, 1996 and 1995, 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 fair value of available-for-sale
securities at December 31, 1996, 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>
DECEMBER 31, 1996
------------------------
AMORTIZED FAIR
COST VALUE
--------- -----
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Within 1 year............................................. $1,363,967 $1,364,160
1 to 5 years.............................................. 1,328,470 1,332,886
5 to 10 years............................................. 1,255,627 1,236,431
Over 10 years............................................. 22,256 23,379
Other securities without stated maturity.................... 28,346 28,327
---------- ----------
Total securities............................................ $3,998,666 $3,985,183
========== ==========
</TABLE>
In 1996 and 1995, proceeds from the sale of securities available-for-sale
amounted to $1.46 billion and $2.03 billion. Gross gains of $9.3 million and
gross losses of $0.5 million were realized on these sales in 1996, while gross
gains of $26.3 million and gross losses of $2.9 million were realized on these
sales in 1995, and gross gains of $6.0 million and gross losses of $0.8 million
were realized in 1994. Net unrealized holding gain or loss on trading securities
included in earnings during 1995 changed by $0.2 million from an unrealized gain
of $0.8 million at December 31, 1995 to an unrealized gain of $1.0 million at
December 31, 1996.
50
<PAGE> 52
3. LOANS
The following table summarizes loan balances by category:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and
dealers................................................ $ 6,484,249 $5,564,489
Real estate construction.................................. 186,912 195,699
Real estate mortgages..................................... 2,383,659 1,996,670
Installment............................................... 484,104 478,441
Charge card............................................... 1,041,886 1,095,897
Direct lease financing.................................... 29,947 --
Foreign loans:
Governments and official institutions..................... 984 984
Banks and other financial institutions.................... 137,560 160,808
Other, primarily commercial and industrial................ 2,976 40,900
----------- ----------
Total loans............................................ 10,752,277 9,533,888
Less unearned income........................................ 7,624 16,091
----------- ----------
Loans, net of unearned income.......................... 10,744,653 9,517,797
Less allowance for possible loan losses..................... 142,211 129,259
----------- ----------
Loans, net of allowance for possible loan losses....... $10,602,442 $9,388,538
=========== ==========
</TABLE>
The Corporation had approximately $127 million and $103 million of loans
classified as held for sale at December 31, 1996 and 1995, respectively.
Approximately 71 percent and 80 percent of these respective amounts were real
estate mortgages.
Nonaccrual loans, restructured loans and other nonperforming assets are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans............................................ $28,153 $50,503 $83,803
Restructured loans.......................................... 1,512 2,059 2,889
------- ------- -------
Total nonperforming loans................................... 29,665 52,562 86,692
Other assets received in satisfaction of debt............... 1,562 2,470 8,071
------- ------- -------
Total nonperforming assets................................ $31,227 $55,032 $94,763
======= ======= =======
Gross amount of interest income that would have been
recorded if year-end nonperforming loans had been accruing
interest at their original terms.......................... $ 3,134 $ 4,500 $ 5,278
Interest income actually recognized......................... 76 1,572 1,348
------- ------- -------
Interest shortfall, before consideration of any income tax
effect.................................................... $ 3,058 $ 2,928 $ 3,930
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the Corporation had no aggregate public and
private sector outstanding to any single country experiencing a liquidity
problem 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.
51
<PAGE> 53
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $129,259 $124,734 $131,676
-------- -------- --------
Charge-offs................................................. (62,995) (61,967) (69,906)
Recoveries.................................................. 14,607 23,497 17,924
-------- -------- --------
Net charge-offs........................................ (48,388) (38,470) (51,982)
Provisions charged to operations............................ 56,540 42,995 45,040
Allowance related to acquired loans......................... 4,800 -- --
-------- -------- --------
Balance, end of year........................................ $142,211 $129,259 $124,734
======== ======== ========
</TABLE>
Details on impaired loans and related allowance are as follows:
<TABLE>
<CAPTION>
IMPAIRED LOANS IMPAIRED LOANS TOTAL
FOR WHICH THERE IS FOR WHICH THERE IS IMPAIRED
A RELATED ALLOWANCE NO RELATED ALLOWANCE LOANS
------------------- -------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1996
Balance......................................... $ 4,827 $23,326 $28,153
Related allowance............................... 3,244 -- 3,244
------- ------- -------
Balance, net of allowance....................... $ 1,583 $23,326 $24,909
======= ======= =======
December 31, 1995
Balance......................................... $19,820 $30,683 $50,503
Related allowance............................... 12,967 -- 12,967
------- ------- -------
Balance, net of allowance....................... $ 6,853 $30,683 $37,536
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-----------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Average impaired loans...................................... $41,624 $67,874
======= =======
Total interest income on impaired loans..................... $ 160 $ 1,572
======= =======
Interest income on impaired loans recorded on a cash
basis..................................................... $ 160 $ 1,572
======= =======
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. A summary of these accounts are stated below:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 39,153 $ 28,039
Premises.................................................... 302,119 266,815
Equipment................................................... 284,934 255,271
Leasehold improvements...................................... 29,859 27,731
-------- --------
Total.................................................. 656,065 577,856
Accumulated depreciation and amortization................... 380,974 352,316
-------- --------
Premises and equipment................................. $275,091 $225,540
======== ========
</TABLE>
52
<PAGE> 54
The provision for depreciation and amortization was $38,147,000 in 1996,
$39,142,000 in 1995, and $39,524,000 in 1994.
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, 1996 and
1995 Consolidated Statement of Condition reflecting a value of $8.5 million for
this property.
6. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL AND SECURITIES SOLD UNDER
AGREEMENT TO REPURCHASE
The Corporation enters into purchases of U.S. Treasury and Federal agency
securities under agreements to resell identical securities. The amounts advanced
under these agreements represent short-term loans and are reflected as
receivables in the Consolidated Statement of Condition. There were no securities
purchased under agreement to resell outstanding at December 31, 1996. Securities
purchased under agreement to resell totaled $79 million at December 31, 1995.
The securities underlying the agreements are book-entry securities. Securities
are transferred by appropriate entry into the Corporation's account with Bank of
New York at the Federal Reserve Bank of New York under a written custodial
agreement with Bank of New York that explicitly recognizes the Corporation's
interest in these securities.
The Corporation also enters into sales of U.S. Treasury and Federal agency
securities under agreements to repurchase identical securities. The amounts
received under these agreements represent short-term borrowings and are
reflected as liabilities in the Consolidated Statement of Condition. Securities
sold under agreement to repurchase totaled $1.42 billion and $1.18 billion at
December 31, 1996 and 1995, respectively. Securities sold under agreement to
repurchase are transferred via book-entry to the counterparty, if transacted
with a financial institution or a broker-dealer, or are delivered to customer
safekeeping accounts.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Amount outstanding at end of year........................... $ -- $ 79,344
Highest amount outstanding as of any month-end during the
year...................................................... $ 54,380 $ 266,588
Daily average amount outstanding during the year............ $ 19,880 $ 90,147
<CAPTION>
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Amount outstanding at end of year........................... $1,416,988 $1,179,788
Highest amount outstanding as of any month-end during the
year...................................................... $2,896,879 $2,231,126
Daily average amount outstanding during the year............ $1,701,506 $1,499,031
</TABLE>
53
<PAGE> 55
7. SHORT, MEDIUM AND LONG-TERM NOTES AND UNUSED LINES OF CREDIT
The following table summarizes the Corporation's long-term notes:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Fixed rate 9 3/8% subordinated notes due June 1, 2001
($100,000 par value)...................................... $ 99,107 $ 98,952
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 65,000
Fixed rate 7 5/8% subordinated note to Bankmont due June 27,
2008...................................................... 15,000 --
-------- --------
Total.................................................. $379,107 $363,952
======== ========
</TABLE>
On June 27, 1996 in connection with the Household acquisition, Bankcorp
issued a $15 million par value 7 5/8% subordinated note to Bankmont that matures
on June 27, 2008. 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 1996, 180 day
LIBOR was 5.60 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. This revolving credit agreement has a credit limit
of $150 million and a maturity date of December 18, 1999. There were no
borrowings under this credit agreement during 1996 or 1995.
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, 1996, $350 million of short-term notes were outstanding with original
maturities of 365 days (remaining maturities ranged from 85 to 168 days) and
stated interest rates ranging from 5.50 to 6.04 percent. As of December 31,
1995, $478 million of short-term notes were outstanding with original maturities
and stated interest rates ranging from 29 to 180 days and 5.50 to 5.79 percent,
respectively.
8. 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 judgment in estimating these values, there are inherent
limitations in any estimation methodology. In addition, accounting
pronouncements require that fair values be estimated on an item-by-item basis,
thereby ignoring the impact a large sale would have on a thin market and
intangible values imbedded in established lines of business. Therefore, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Corporation could realize in an actual transaction. The fair value
estimation methodologies employed by the Corporation were as follows:
The carrying amounts for cash and demand balances due from banks along with
short-term money market assets and liabilities reported on the Corporation's
Consolidated Statement of Condition were considered to be the best estimates of
fair value for these financial instruments. Fair values of trading account
assets and portfolio securities were based on quoted market prices.
A variety of methods were used to estimate the fair value of loans. Changes
in estimated fair value of loans reflect changes in credit risk and general
interest rates which have occurred since the loans were
54
<PAGE> 56
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 carrying value since 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 loan 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.
55
<PAGE> 57
The estimated fair values of the Corporation's financial instruments at
December 31, 1996 and 1995 are presented in the following table. See Note 9 for
additional information regarding fair values of off-balance-sheet financial
instruments.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and demand balances due from banks... $ 1,238,028 $ 1,238,028 $ 1,522,418 $ 1,522,418
Money market assets:
Interest-bearing deposits at banks...... 658,257 658,257 457,702 457,702
Federal funds sold and securities
purchased under agreement to
resell............................... 294,792 294,792 179,692 179,692
Portfolio securities available for sale... 3,985,183 3,985,183 3,389,967 3,389,967
Trading account assets.................... 110,355 110,355 98,638 98,638
Loans, net of unearned income and
allowance for possible loan losses...... 10,602,442 10,575,977 9,388,538 9,391,070
Customers' liability on acceptances....... 78,983 78,983 95,326 95,326
----------- ----------- ----------- -----------
Total on-balance-sheet financial
assets............................. $16,968,040 $16,941,575 $15,132,281 $15,134,813
=========== =========== =========== ===========
LIABILITIES
Deposits:
Demand deposits......................... $ 7,796,980 $ 7,796,980 $ 5,638,268 $ 5,638,268
Time deposits........................... 5,193,321 5,177,382 4,590,514 4,596,441
Federal funds purchased and securities
sold under agreement to repurchase...... 1,983,047 1,983,047 1,896,817 1,896,817
Commercial paper outstanding.............. 334,653 334,653 292,022 292,022
Other short-term borrowings............... 347,690 347,690 843,049 843,049
Acceptances outstanding................... 78,983 78,983 95,326 95,326
Senior notes.............................. 350,000 350,000 478,000 478,000
Long-term notes........................... 379,107 375,525 363,952 379,819
----------- ----------- ----------- -----------
Total on-balance-sheet financial
liabilities........................ $16,463,781 $16,444,260 $14,197,948 $14,219,742
=========== =========== =========== ===========
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
(POSITIVE POSITIONS/(OBLIGATIONS))
Credit facilities......................... $ (18,652) $ (18,652) $ (13,753) $ (13,753)
Interest rate contracts:
Dealer and trading contracts............ 803 803 1,041 1,041
Risk management contracts............... 12,697 9,714 (5,521) (11,784)
----------- ----------- ----------- -----------
Total off-balance-sheet financial
instruments........................ $ (5,152) $ (8,135) $ (18,233) $ (24,496)
=========== =========== =========== ===========
</TABLE>
9. 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 are
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.
56
<PAGE> 58
Credit facilities
Credit facilities with off-balance-sheet risk include commitments to extend
credit, standby letters of credit and commercial letters of credit.
Commitments to extend credit are contractual agreements to lend to a
customer as long as contract terms have been met. They generally require payment
of a fee and have fixed expiration dates. The Corporation's commitments serve
both business and individual customer needs, and include commercial loan
commitments, credit card lines, home equity lines, commercial real estate loan
commitments and mortgage loan commitments. The Corporation's maximum risk of
accounting loss is represented by the total contractual amount of commitments
which was $9.52 billion and $8.20 billion at December 31, 1996 and 1995,
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, 1996, totaled $351 million and at
December 31, 1995, totaled $244 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 $1.70 billion at December 31, 1996 and
$1.59 billion at December 31, 1995. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $435 million
at December 31, 1996 and $270 million at December 31, 1995.
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 $122
million at December 31, 1996 and $131 million at December 31, 1995.
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 $18.7 million at December 31, 1996 and $13.8
million at December 31, 1995.
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.
57
<PAGE> 59
These contracts may create exposure to both credit and market risk.
Replacement risk, the primary component of credit risk, is the risk of loss
should a counterparty default following unfavorable market movements and is
measured as the Corporation's cost of replacing contracts at current market
rates. The Corporation manages credit risk by establishing credit limits for
customers and products through an independent corporate-wide credit review
process and continually monitoring exposure against those limits to ensure they
are not exceeded. Credit risk is, in many cases, further mitigated by the
existence of netting agreements which provide for netting of contractual
receivables and payables in the event of default or bankruptcy.
Market risk is the risk of loss as a result of changes in interest rates.
The Corporation manages market risk by establishing limits which are based on
dollars at risk given a parallel shift in the yield curve. Limits are
established by product, maturity and volatility. Limits are approved by
management and monitored independently of the traders on a regular basis. Market
risk is further diminished by entering into offsetting positions. Senior
management oversees all dealer risk-related activities.
Futures and forward contracts are agreements in which the Corporation is
obligated to make or take delivery, at a specified future date, of a specified
instrument, at a specified price or yield. Futures contracts are exchange traded
and, because of exchange requirements that gains and losses be settled daily,
create negligible exposure to credit risk.
Forward rate agreements are arrangements between two parties to exchange
amounts, at a specified future date, based on the difference between an agreed
upon interest rate and reference rate applied to a notional principal amount.
These agreements enable purchasers and sellers to fix interest costs and
returns.
Options are contracts that provide the buyer the right (but not the
obligation) to purchase or sell a financial instrument, at a specified price,
either within a specified period of time or on a certain date. Interest rate
guarantees (caps, floors and collars) are agreements between two parties that,
in general, establish for the purchaser a maximum level of interest expense or a
minimum level of interest revenue based on a notional principal amount for a
specified term. Options and guarantees written create exposure to market risk.
As a writer of interest rate options and guarantees, the Corporation receives a
premium at the outset of the agreement and bears the risk of an unfavorable
change in the price of the financial instrument underlying the option or
guarantee. Options and guarantees purchased create exposure to credit risk and,
to the extent of the premium paid or unrealized gain recognized, 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
58
<PAGE> 60
resulting from customer defaults and is computed as the cost of replacing, at
current market rates, all outstanding contracts with unrealized gains.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
CONTRACTUAL OR MAXIMUM
NOTIONAL AMOUNT REPLACEMENT COST
------------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards.............................. $ 146,861 $ 56,175 $ -- $ --
Forward rate agreements........................... 155,000 5,000 98 2
Options written................................... -- -- -- --
Options purchased................................. 1,000 -- 2 --
Guarantees written................................ 855,967 1,632,121 -- --
Guarantees purchased.............................. 856,117 1,638,157 1,802 5,801
Swaps............................................. 1,631,091 876,320 9,198 12,585
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards
Unrealized gains......................... $ -- $ -- $ -- $ --
Unrealized losses........................ -- -- -- --
Forward rate agreements
Unrealized gains......................... 98 38 2 357
Unrealized losses........................ (27) (21) -- (284)
Options
Purchased................................ 2 -- -- 228
Written.................................. -- -- -- (164)
Guarantees
Purchased................................ 1,802 11,588 5,801 7,867
Written.................................. (1,749) (11,580) (5,789) (7,987)
Swaps
Unrealized gains......................... 9,198 6,187 12,585 9,806
Unrealized losses........................ (8,521) (4,428) (11,558) (8,624)
------- ------- ------- -------
Total Interest Rate Contracts.......... $ 803 $ 1,784 $ 1,041 $ 1,199
======= ======= ======= =======
</TABLE>
59
<PAGE> 61
Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31, 1996,
1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards...................................... $ 926 $(1,462) $1,020
Forward rate agreements................................... -- (285) (628)
Options................................................... (66) (545) (224)
Guarantees................................................ (1,215) 988 (134)
Swaps..................................................... 69 603 279
Debt Instruments............................................ 8,278 5,811 (709)
------- ------- ------
Total Trading Revenue.................................. $ 7,992 $ 5,110 $ (396)
======= ======= ======
</TABLE>
The following table summarizes the maturities and weighted average interest
rates paid and received on dealer/trading interest rate swaps:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------
WITHIN 1 TO 3 3 TO 5 5 TO 10
1 YEAR YEARS YEARS YEARS TOTAL
------ ------ ------ ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount..................... $145,729 $200,408 $289,023 $167,385 $ 802,545
Average pay rate.................... 6.36% 6.24% 6.30% 6.54% 6.35%
Average receive rate................ 5.66% 5.58% 3.85% 5.54% 4.96%
Receive Fixed Swaps:
Notional amount..................... $145,729 $200,409 $229,023 $167,385 $ 742,546
Average pay rate.................... 5.66% 5.58% 4.86% 6.11% 5.49%
Average receive rate................ 6.32% 6.37% 6.29% 6.54% 6.37%
Basis swaps:
Notional amount..................... $ 86,000 -- -- -- $ 86,000
Average pay rate.................... 5.39% -- -- -- 5.39%
Average receive rate................ 5.43% -- -- -- 5.43%
Total notional amount............ $377,458 $400,817 $518,046 $334,770 $1,631,091
</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 1996 and 1995, interest rate swaps were primarily used to
alter the character of funds supporting certain fixed rate loans, the senior
note program and the municipal bond portfolio. The Corporation had $584 million
notional amount of swap contracts, used for risk management purposes,
outstanding at December 31, 1996 with a fair value of $9.7 million and a
replacement cost of $13.2 million. At December 31, 1995, the Corporation had
$281 million notional amount of swap contracts outstanding with a fair value of
($11.8) million and a replacement cost of zero. 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 $0.8 million
and $3.8 million, respectively, at December 31, 1996 and $0 and $6.3 million,
respectively, at December 31, 1995. Risk management activity, including the
related cash positions, had no material effect on the Corporation's net income
for the year ended December 31, 1996 or 1995. There were no deferred gains or
losses on terminated contracts at December 31, 1996 or 1995.
60
<PAGE> 62
The following table summarizes swap activity for risk management purposes:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------
(IN THOUSANDS)
<S> <C>
Amount, December 31, 1994................................... $ 496,853
Additions................................................... 609,406
Maturities.................................................. (475,226)
Terminations................................................ (350,000)
---------
Amount, December 31, 1995................................... 281,033
Additions................................................... 680,707
Maturities.................................................. (377,659)
Terminations................................................ --
---------
Amount, December 31, 1996................................... $ 584,081
=========
</TABLE>
The following table summarizes the maturities and weighted average interest
rates paid and received on interest rate swaps used for risk management:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
WITHIN 1 TO 3 3 TO 5 5 TO 10
1 YEAR YEARS YEARS YEARS TOTAL
------ ------ ------ ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount......................... $ 31,000 $110,804 $ 57,401 $ 34,876 $234,081
Average pay rate........................ 10.60% 5.81% 6.18% 6.88% 6.69%
Average receive rate.................... 5.73% 5.68% 5.62% 5.64% 5.67%
Basis swaps:
Notional amount......................... $350,000 -- -- -- $350,000
Average pay rate........................ 5.42% -- -- -- 5.42%
Average receive rate.................... 5.81% -- -- -- 5.81%
Total notional amount................ $381,000 $110,804 $ 57,401 $ 34,876 $584,081
</TABLE>
Foreign exchange contracts
Dealer activity
The Corporation is a dealer in foreign exchange. 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, HTSB and BMO agreed to combine their
U.S. foreign exchange activities ("FX"). Under this arrangement, FX net profit
is shared by HTSB 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 1996 or 1995 net income or
financial position at December 31, 1996 or 1995.
At December 31, 1996, approximately two-thirds of the Corporation's gross
notional positions in foreign currency contracts are represented by seven
currencies: English pounds, German deutsche marks, Canadian dollars, Japanese
yen, Belgian francs, Italian lira and French francs.
61
<PAGE> 63
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>
DECEMBER 31
---------------------------------------------
CONTRACTUAL OR MAXIMUM
NOTIONAL AMOUNT REPLACEMENT COST
------------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forward.................... $1,896,730 $4,786,883 $9,345 $45,100
Options written.............................. 56,408 85,551 -- --
Options purchased............................ 56,408 85,551 1,324 1,386
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards
Unrealized gains............................ $ 60,666 $ 43,477 $ 45,100 $ 137,511
Unrealized losses........................... (60,666) (43,477) (45,100) (139,447)
Options
Purchased................................... 1,324 1,388 1,386 6,301
Written..................................... (1,324) (1,398) (1,386) (6,301)
-------- -------- -------- ---------
Total Foreign Exchange........................ $ -- $ (10) $ -- $ (1,936)
======== ======== ======== =========
</TABLE>
At December 31, 1996, spot, futures and forward contracts with BMO
represent $39,766,000 and ($24,031,0000) of unrealized gains and unrealized
losses, respectively. Options contracts with BMO represent $1,284,000 and
($40,000) of options purchased and options written, respectively.
Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1996, 1995 and 1994 are summarized below. 1996 and 1995
net foreign exchange gains include $10.0 million and $8.8 million, respectively,
of net profit under the aforementioned agreement with BMO.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
-------- -------- --------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Spot, futures and forwards.................................. $9,992 $14,290 $19,567
Options..................................................... -- (42) 202
------ ------- -------
Total Foreign Exchange.................................... $9,992 $14,248 $19,769
====== ======= =======
</TABLE>
62
<PAGE> 64
Securities activities
The Corporation's securities activities that have off-balance-sheet risk
include municipal bond underwriting and short selling of securities.
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 $41.9 million at December 31, 1996 and $15.5 million at
December 31, 1995.
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, 1996
or 1995.
10. CONCENTRATIONS OF CREDIT RISK IN FINANCIAL INSTRUMENTS
The Corporation had two concentrations of credit risk arising from
financial instruments at December 31, 1996 and 1995. These concentrations were
the Midwest geographic area and individuals. 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, Ohio 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 $13.7 billion or 49 percent of the Corporation's total credit
exposure at December 31, 1996 and $12.8 billion or 49 percent of the
Corporation's total credit exposure at December 31, 1995.
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 9 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.
63
<PAGE> 65
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 $5.8 billion or 21 percent
of the Corporation's total credit exposure at December 31, 1996 and $5.7 billion
or 22 percent of the Corporation's total credit exposure at December 31, 1995.
11. RETIREMENT AND OTHER POSTEMPLOYMENT PLANS
The Corporation has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1996. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1996. 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 was $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 1996, the contribution was less than the amount recorded as pension expense
for financial reporting purposes. For 1995, the contribution was greater than
the amount recorded as pension expense for financial reporting purposes. For
1994, the minimum and maximum deductible contribution were both zero as a result
of the full funding limitation.
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
assumptions 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.
64
<PAGE> 66
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1996** 1995** 1994**
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $144,032 in 1996, $145,430 in 1995 and $105,804 in
1994.................................................. $ 160,736 $ 162,325 $ 122,357
========= ========= =========
Projected benefit obligation for service rendered to
date..................................................... $(209,871) $(212,772) $(172,016)
Plan assets at fair value*................................. 217,175 206,539 187,249
--------- --------- ---------
Excess of plan assets over projected benefit obligation.... 7,304 (6,233) 15,233
Unrecognized net (gain) loss from past experience different
from that assumed and effects of changes in
assumptions.............................................. 812 17,401 (3,416)
Prior service cost not yet recognized in net periodic
pension cost............................................. (7,962) (8,797) (4,221)
Unrecognized net asset at December 31 being recognized over
16.3 years from January 1, 1986.......................... (1,868) (2,222) (2,577)
Contributions made between measurement date (September 30)
and end of year.......................................... 7,111 7,827 --
--------- --------- ---------
Prepaid pension cost..................................... $ 5,397 $ 7,976 $ 5,019
========= ========= =========
Assumptions used:
Discount rate............................................ 7.50% 7.25% 7.75%
Rate of increase in compensation......................... 5.70% 5.70% 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.
** Plan assets and obligations measured as of September 30.
Net pension expense included the following components for the primary plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 10,270 $ 7,659 $ 10,796
Interest cost on projected benefit obligation............... 15,206 13,718 13,526
Actual return on plan assets................................ (21,864) (32,128) 1,368
Net amortization and deferral............................... 5,388 16,271 (17,460)
-------- -------- --------
Net periodic pension expense.............................. $ 9,000 $ 5,520 $ 8,230
======== ======== ========
</TABLE>
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>
YEARS ENDED DECEMBER 31
---------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated benefit obligation.............................. $ 7,293 $ 5,871 $ 7,703
Projected benefit obligation for service rendered to date... 15,598 14,543 19,573
Accrued pension liability................................... 8,891 7,599 6,138
Net periodic pension expense................................ 2,465 4,256 6,983
Assumptions used:
Discount rate............................................. 5.25% 5.25% 5.75%
Rate of increase in compensation.......................... 5.70% 5.70% 6.60%
</TABLE>
65
<PAGE> 67
During 1996, 1995 and 1994, the Corporation's lump-sum benefit payments to
retirees resulted in settlement losses of approximately $0.1 million, $0.8
million and $3.1 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 1996, 1995 and 1994 was $11.5 million, $9.8 million and
$15.2 million, 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, 1996, 1995 and
1994 for the Corporation:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1996** 1995** 1994**
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Retirees.................................................. $(19,688) $(22,104) $(28,562)
Fully eligible active plan participants................... (3,697) (3,744) (5,041)
Other active employees not fully eligible................. (15,165) (13,418) (13,637)
-------- -------- --------
Accumulated postretirement benefit obligation............... (38,550) (39,266) (47,240)
Plan assets at fair value*.................................. 12,133 8,350 6,924
-------- -------- --------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... (26,417) (30,916) (40,316)
Unrecognized net (gain) loss from past experience different
from that assumed......................................... (13,430) (11,385) (949)
Prior service cost not yet recognized in net periodic
postretirement benefit cost............................... 2,788 2,982 3,177
Unrecognized transition obligation.......................... 31,463 33,430 35,396
-------- -------- --------
Prepaid (accrued) postretirement benefit cost............... $ (5,596) $ (5,889) $ (2,692)
======== ======== ========
Assumptions used in determining actuarial present value of
benefit obligation:
Discount rate............................................. 7.50% 7.25% 7.75%
Rate of increase in health care costs:
Initial................................................ 8.50% 9.00% 12.00%
Ultimate............................................... 6.00% 6.00% 7.00%
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.
** Plan assets and obligations measured as of September 30.
66
<PAGE> 68
Net postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 1,735 $ 1,260 $2,003
Interest cost on accumulated postretirement benefit
obligation................................................ 2,644 2,634 3,399
Actual return on plan assets................................ (1,067) (1,426) 2
Amortization of transition obligation over 20 years......... 1,966 1,966 1,966
Net amortization and deferral............................... 82 657 (203)
------- ------- ------
Net postretirement benefit expense........................ $ 5,360 $ 5,091 $7,167
======= ======= ======
</TABLE>
For 1996, the weighted average annual rate of increase in the per capita
cost of covered benefits was assumed to be 8.5 percent and was assumed to
decrease gradually to 6 percent in 2001 and remain level thereafter. For 1995
and 1994, the weighted average annual rate of increase in the per capita cost of
covered benefits was assumed to be 9 percent and 12 percent, respectively, and
was assumed to decrease gradually to 6 percent and 7 percent, respectively, 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 year would have increased the
accumulated postretirement benefit obligation as of September 30, 1996,
September 30, 1995 and September 30, 1994 by $6.3 million, $6.3 million and $7.3
million, respectively, and the aggregate service and interest cost components of
net postretirement benefit expense for 1996 by approximately $0.8 million.
12. STOCK OPTIONS
At December 31, 1996, the Corporation has two stock-based compensation
plans which are described below. During the first quarter of 1996, the
Corporation adopted SFAS No. 123, Accounting for Stock-based Compensation and
elected the fair value based method of accounting for its stock-based
compensation plans. Employment expense for these plans was $4.6 million and $0.5
million in 1996 and 1995, respectively. There was no expense in 1994.
In January 1996, the Corporation adopted the Harris Bank Stock Option
Program under the Bank of Montreal Stock Option Plan. The plan was established
for certain designated executives and certain other employees of the Corporation
and affiliated companies in order to provide incentive to attain long-term
strategic goals and to attract and retain services of key employees. On February
26, 1996, the Corporation granted 510,200 stock options with a ten-year term
which are exercisable only during the second five years of their term, assuming
cumulative performance goals are met. The stock options are exercisable for Bank
of Montreal common stock at a price of Canadian $31.00 per share, equal to the
market price on the date of grant (equivalent to U.S. $22.55). The estimated
grant-date fair value of the options granted on February 26, 1996 was Canadian
$5.79, equivalent to U.S. $4.26. The fair value of the option grant was
estimated using the Bloomberg model with the following assumptions: risk-free
interest rate of 7.57%, expected life of 7.5 years, expected volatility of
16.97% and compound annual dividend growth of 5.24%. A summary of the status of
the stock option plan as of December 31, 1996 and changes during the year ended
December 31, 1996 is presented below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE
------- ------ ----------------
<S> <C> <C>
Outstanding at 1/1/96................................. 0
Granted............................................... 510,200 $22.55
Exercised............................................. 0
Forfeited, cancelled.................................. 8,800 22.55
Expired............................................... 0
-------
Outstanding at 12/31/96............................... 501,400 22.55
=======
Options exercisable at 12/31/96....................... None
Weighted-average fair value of options granted during
1996................................................ $4.26
</TABLE>
67
<PAGE> 69
The Corporation maintains the Harris Bank Stock Appreciation Rights Plan
which was established in January 1995. The rights granted under this plan have
either a three-year or five-year term and are exercisable after the expiration
of the respective term, assuming cumulative performance goals are met. No rights
were granted in 1996. There are 601,000 rights outstanding at December 31, 1996.
13. LEASE EXPENSE AND OBLIGATIONS
Rental expense for all operating leases was $19,598,000 in 1996,
$18,144,000 in 1995 and $16,002,000 in 1994. These amounts include real estate
taxes, maintenance and other rental-related operating costs of $4,678,000,
$3,992,000 and $4,151,000 for 1996, 1995 and 1994, respectively, paid under net
lease arrangements. Lease commitments are primarily for office space.
Minimum rental commitments as of December 31, 1996 for all noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................ $13,468
1998........................................................ 11,344
1999........................................................ 9,143
2000........................................................ 7,261
2001........................................................ 7,062
2002 and thereafter......................................... 14,406
-------
Total minimum future rentals........................... $62,684
=======
</TABLE>
Occupancy expenses for 1996, 1995, and 1994 have been reduced by
$14,466,000, $13,200,000 and $13,816,000, respectively, for rental income from
leased premises.
14. INCOME TAXES
The 1996, 1995, and 1994 applicable income tax expense (benefit) was as
follows:
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Current................................................ $62,871 $ 5,483 $1,213 $69,567
Deferred............................................... (2,513) (1,242) -- (3,755)
------- ------- ------ -------
Total............................................. $60,358 $ 4,241 $1,213 $65,812
======= ======= ====== =======
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
======= ======= ====== =======
</TABLE>
68
<PAGE> 70
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Gross deferred tax assets:
Allowance for possible loan losses........................ $54,963 $51,179 $53,765
Intangible assets......................................... 7,221 8,023 7,182
Deferred employee compensation............................ 6,101 5,116 4,432
Deferred expense and prepaid income....................... 4,920 7,467 7,029
Pension and medical trust................................. 4,702 4,917 3,910
Other assets.............................................. 4,312 2,893 3,793
------- ------- -------
Deferred tax assets.................................... 82,219 79,595 80,111
------- ------- -------
Gross deferred tax liabilities:
Depreciable assets........................................ (2,873) (3,200) (3,899)
Other liabilities......................................... (1,113) (1,917) (3,114)
------- ------- -------
Deferred tax liabilities............................... (3,986) (5,117) (7,013)
Valuation allowance......................................... -- -- --
------- ------- -------
Net deferred tax assets................................... 78,233 74,478 73,098
------- ------- -------
Tax effect of adjustment related to available-for-sale
securities................................................ 5,364 (17,787) 21,535
------- ------- -------
Net deferred tax assets including adjustment related to
available-for-sale securities............................. $83,597 $56,691 $94,633
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the respective net deferred tax assets of
$78.2 million and $74.5 million included $64.9 million and $62.4 million for
Federal tax and $13.3 million and $12.1 million for Illinois tax, 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 deferred tax asset. The
deferred taxes reported on the Corporation's Consolidated Statement of Condition
at December 31, 1996 and 1995 also include a $5.4 million deferred tax asset and
a $17.8 million deferred tax liability, respectively, for the tax effect of the
net unrealized gains associated with marking to market certain securities
designated as available for sale.
Total income tax expense of $65,812,000 for 1996, $70,175,000 for 1995, and
$24,528,000 for 1994 reflects effective tax rates of 31.6 percent, 32.2 percent,
and 20.1 percent, respectively. The reasons for the
69
<PAGE> 71
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>
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
1996 1995 1994
------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed tax expense................ $72,862 35.0% $ 76,204 35.0% $ 42,656 35.0%
Increase (reduction) in income tax
expense due to:
Tax-exempt income from loans and
investments net of municipal
interest expense
disallowance................... (7,240) (3.5) (10,463) (4.8) (14,135) (11.6)
Reduction of deferred tax
valuation allowance............ -- -- -- -- (2,825) (2.3)
Other, net........................ 190 0.1 4,434 2.0 (1,168) (1.0)
------- ---- -------- ---- -------- -----
Actual tax expense.................. $65,812 31.6% $ 70,175 32.2% $ 24,528 20.1%
======= ==== ======== ==== ======== =====
</TABLE>
The tax expense from net gains on security sales amounted to $3,418,000,
$9,094,000 and $4,440,000 in 1996, 1995 and 1994, respectively.
15. REGULATORY CAPITAL
Bankcorp, as a U.S. bank holding company, and HTSB, as a state-member bank,
must each adhere to the capital adequacy guidelines of the Federal Reserve Board
(the "Board"), which are not significantly different than those published by
other U.S. banking regulators. Effective December 31, 1992, the guidelines
specify minimum ratios for Tier 1 capital to risk-weighted assets of 4 percent
and total regulatory capital to risk-weighted assets of 8 percent.
Risk-based capital guidelines define total capital to consist of Tier 1
(core) and Tier 2 (supplementary) capital. In general, Tier 1 capital is
comprised of stockholder's equity, including certain types of preferred stock,
less goodwill and certain other intangibles. Core capital must comprise at least
50 percent of total capital. Tier 2 capital basically includes subordinated debt
(less a discount factor during the five years prior to maturity), other types of
preferred stock and the allowance for possible loan losses. At year-end 1996,
the portion of the allowance for possible loan losses includable in Tier 2
capital is limited to 1.25 percent of risk-weighted assets.
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 Federal Deposit Insurance Corporation Improvement Act of 1991 contains
prompt corrective action provisions that established five capital categories for
all Federal Deposit Insurance Corporation ("FDIC")-insured institutions ranging
from "well capitalized" to "critically undercapitalized." Classification within
a category is based primarily on the three capital adequacy measures. An
institution is considered "well capitalized" if its capital level significantly
exceeds the required minimum levels, "adequately capitalized" if it meets the
minimum levels, "undercapitalized" if it fails to meet the minimum levels,
"significantly undercapitalized" if it is significantly below the minimum levels
and "critically undercapitalized" if it has a ratio of tangible equity to total
assets of 2 percent or less.
70
<PAGE> 72
Noncompliance with minimum capital requirements may result in regulatory
corrective actions which could have a material effect on the Corporation.
Depending on the level of noncompliance, regulatory corrective actions may
include the following: requiring a plan for restoring the institution to an
acceptable capital category, restricting or prohibiting certain activities,
appointing a receiver or conservator for the institution.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Corporation and HTSB as "well capitalized" under the regulatory
framework for prompt corrective action. Management is not aware of conditions or
events since December 31, 1996 that have changed the capital category of the
Corporation or HTSB.
The following table summarizes the Corporation's and HTSB's risk-based
capital ratios and Tier 1 leverage ratio for the past two years as well as the
minimum amounts and ratios as per capital adequacy guidelines and FDIC prompt
corrective action provisions.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------------- ----------------------- ----------------------------
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital to
Risk-Weighted
Assets
Corporation...... $1,731,448 11.40% > $ 1,215,051 > $ 8.00% > $ 1,518,814 > 10.00%
- - - -
HTSB............. $1,340,198 10.74% > $ 998,285 > $ 8.00% > $ 1,247,857 > 10.00%
Tier 1 Capital to - - - -
Risk-Weighted
Assets
Corporation...... $1,230,628 8.10% > $ 607,718 > $ 4.00% > $ 911,576 > 6.00%
- - - -
HTSB............. $ 928,872 7.44% > $ 499,394 > $ 4.00% > $ 749,090 > 6.00%
Tier 1 Capital to - - - -
Average Assets
Corporation...... $1,230,628 6.88% > $ 715,481 > $ 4.00% > $ 894,352 > 5.00%
- - - -
HTSB............. $ 928,872 6.65% > $ 558,720 > $ 4.00% > $ 698,400 > 5.00%
As of December 31, 1995: - - - -
Total Capital to
Risk-Weighted
Assets
Corporation...... $1,593,810 11.79% > $ 1,081,466 > $ 8.00% > $ 1,351,832 > 10.00%
- - - -
HTSB............. $1,208,671 10.86% > $ 890,365 > $ 8.00% > $ 1,112,957 > 10.00%
Tier 1 Capital to - - - -
Risk-Weighted
Assets
Corporation...... $1,100,899 8.14% > $ 540,982 > $ 4.00% > $ 811,473 > 6.00%
- - - -
HTSB............. $ 819,818 7.37% > $ 444,949 > $ 4.00% > $ 667,423 > 6.00%
Tier 1 Capital to - - - -
Average Assets
Corporation...... $1,100,899 6.77% > $ 650,457 > $ 4.00% > $ 813,072 > 5.00%
- - - -
HTSB............. $ 819,818 6.44% > $ 509,204 > $ 4.00% > $ 636,505 > 5.00%
- - - -
</TABLE>
71
<PAGE> 73
16. INVESTMENTS IN SUBSIDIARIES AND STATUTORY RESTRICTIONS
Bankcorp's investment in the combined net assets of its wholly-owned
subsidiaries was $1,540,052,000 and $1,175,037,000 at December 31, 1996 and
1995, 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 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, $245,342,000 of dividends at
December 31, 1996. Actual dividends paid, however, would be subject to prudent
capital maintenance. Cash dividends paid to Bankcorp by its subsidiaries
amounted to $75,884,000 and $63,265,000 in 1996 and 1995, 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 1996 and
1995, daily average reserve balances of $234 million and $198 million,
respectively, were required for those subsidiaries of Bankcorp that must
maintain such balances. At year-end 1996 and 1995, balances on deposit at the
Federal Reserve Bank totaled $166 million and $441 million, respectively.
17. 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.
72
<PAGE> 74
18. FOREIGN ACTIVITIES (BY DOMICILE OF CUSTOMER)
Income and expenses identifiable with foreign and domestic operations are
summarized in the table below:
<TABLE>
<CAPTION>
FOREIGN DOMESTIC CONSOLIDATED
------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
1996
Total operating income................................. $ 40,067 $ 1,426,094 $ 1,466,161
Total expenses......................................... 13,399 1,244,586 1,257,985
---------- ----------- -----------
Income before taxes.................................... 26,668 181,508 208,176
Applicable income taxes................................ 10,599 55,213 65,812
---------- ----------- -----------
Net income............................................. $ 16,069 $ 126,295 $ 142,364
========== =========== ===========
Identifiable assets at year-end........................ $ 835,657 $17,393,083 $18,228,740
========== =========== ===========
1995
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
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
========== =========== ===========
</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, 1996, 1995 and 1994,
identifiable foreign assets accounted for 5, 5 and 7 percent, respectively, of
total consolidated assets.
73
<PAGE> 75
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Presented below is the statement of income, balance sheet and statement of
cash flows for Harris Bankcorp, Inc. (parent company only):
Statement of Income
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
*Interest on securities purchased from bank subsidiary under
agreement to resell....................................... $ 5,473 $ 8,820 $ 7,032
Interest on advances to affiliates.......................... 203 -- --
*Interest on advances to bank subsidiaries................... 20,807 17,081 13,613
*Interest on advances to nonbank subsidiaries................ -- 1 2
Interest on investments in Federal agency securities........ 10,466 7,442 6,387
Interest on investments in foreign securities............... 246 1,367 217
*Interest on deposits at bank subsidiaries................... 62 916 571
Interest on deposits at nonaffiliated banks................. -- 463 507
*Dividends from bank subsidiaries............................ 75,884 61,765 47,231
*Dividends from nonbank subsidiaries......................... -- 1,500 2,500
Other operating income...................................... 159 20 58
-------- -------- -------
Total operating income................................. 113,300 99,375 78,118
-------- -------- -------
Interest expense on commercial paper........................ 13,969 15,054 11,496
Interest expense on long-term notes......................... 26,067 23,005 19,520
Other operating expense..................................... 10,215 6,870 5,228
-------- -------- -------
Total operating expenses............................... 50,251 44,929 36,244
-------- -------- -------
Income before income taxes and equity in undistributed net
income of subsidiaries.................................... 63,049 54,446 41,874
Applicable income tax benefit............................... (5,430) (4,323) (3,441)
-------- -------- -------
Income before equity in undistributed net income of
subsidiaries.............................................. 68,479 58,769 45,315
*Equity in undistributed net income of bank subsidiaries..... 68,268 86,317 51,960
*Equity in undistributed net income of nonbank
subsidiaries.............................................. 5,617 2,465 71
-------- -------- -------
Net income............................................. $142,364 $147,551 $97,346
======== ======== =======
</TABLE>
- -------------------------
* Eliminated in consolidation.
74
<PAGE> 76
Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Demand balances due from banks.............................. $ 50 $ 50
Investment in U. S. Treasury and Federal agency
securities................................................ 202,607 138,511
Investment in foreign securities............................ -- 24,754
*Securities purchased from bank subsidiary under agreement
to resell................................................. -- 138,475
*Advances to bank subsidiaries............................... 335,000 295,000
*Interest-bearing deposits at bank subsidiaries.............. 152,799 25,000
Equity investments in wholly-owned subsidiaries:
*Banks.................................................... 1,482,549 1,123,183
*Nonbanks................................................. 57,503 51,854
Other assets................................................ 7,206 9,115
---------- ----------
Total assets......................................... $2,237,714 $1,805,942
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper outstanding................................ $ 334,653 $ 292,022
Other liabilities........................................... 8,788 4,192
Long-term notes............................................. 379,107 363,952
---------- ----------
Total liabilities.................................... 722,548 660,166
Stockholder's equity........................................ 1,515,166 1,145,776
---------- ----------
Total liabilities and stockholder's equity........... $2,237,714 $1,805,942
========== ==========
</TABLE>
- -------------------------
*Eliminated in consolidation.
75
<PAGE> 77
Statement of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 142,364 $ 147,551 $ 97,346
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed net income of subsidiaries............... (73,885) (88,782) (52,031)
Accretion and amortization............................. (10,712) (7,069) (5,037)
Deferred income tax (benefit) provision................ (65) (52) 30
Net decrease (increase) in interest receivable......... 966 (812) (344)
Other, net............................................. 4,434 (268) (1,172)
--------- --------- -----------
Net cash provided by operating activities......... 63,102 50,568 38,792
--------- --------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits at banks..... (127,799) -- (5,000)
Net decrease (increase) in securities purchased under
agreement to resell................................. 138,475 (1,563) 14,525
Proceeds from maturities of portfolio securities....... 865,880 774,155 1,102,363
Purchases of portfolio securities...................... (894,510) (729,552) (1,096,928)
Additional capital invested in bank subsidiaries....... (325,000) -- --
Net (increase) decrease in advances to subsidiaries.... (30,000) (60,000) 500
Net increase in advances to affiliates................. (10,000) -- --
Other, net............................................. 5 (1,193) 21
--------- --------- -----------
Net cash (used) provided by investing
activities..................................... (382,949) (18,153) 15,481
--------- --------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in commercial paper
outstanding......................................... 42,631 (14,715) (19,531)
Proceeds from issuance of long-term notes.............. 15,000 65,000 --
Proceeds from issuance of Series A preferred stock..... -- 180,000 --
Proceeds from issuance of Series B preferred stock..... 45,000 -- --
Contribution to capital surplus........................ 280,422 -- --
Cash dividends paid Series A preferred stock........... (13,195) -- --
Cash dividends paid Series B preferred stock........... (1,811) -- --
Cash dividends paid on common stock.................... (48,200) (262,700) (34,738)
--------- --------- -----------
Net cash provided (used) by financing
activities..................................... 319,847 (32,415) (54,269)
--------- --------- -----------
Net increase in demand balances due from banks........... -- -- 4
Demand balances due from banks at January 1.............. 50 50 46
--------- --------- -----------
Demand balances due from banks at December 31............ $ 50 $ 50 $ 50
========= ========= ===========
</TABLE>
20. BUSINESS COMBINATIONS AND DISPOSITIONS/INTANGIBLES
At December 31, 1996 and 1995, intangible assets, including goodwill
resulting from business combinations, amounted to $310,663,000 and $38,407,000,
respectively. Amortization of these intangibles amounted to $18,168,000 in 1996,
$9,350,000 in 1995, and $10,266,000 in 1994. The impact of purchase accounting
adjustments, other than amortization of intangibles, was not material to the
Corporation's reported results.
On June 28, 1996, HTSB completed the acquisition of 54 branches previously
owned by Household Bank, f.s.b. ("Household"), a wholly-owned subsidiary of
Household International, Inc. The 54 branches are located throughout the
metropolitan Chicago area. In addition to acquiring real and personal property,
HTSB has assumed certain deposit liabilities and purchased other assets,
primarily consumer loans. The transaction has been accounted for as a purchase
and the Corporation's consolidated financial statements include the results of
the acquired branches from the date of acquisition. In anticipation of this
transaction, on June 27, 1996 the Corporation increased its capital base by $340
million, in part through the issuance of $45 million of Series B non-voting,
callable perpetual preferred stock and an additional $15 million of long term
subordinated
76
<PAGE> 78
debt. Both issues were purchased by Bankmont. The balance of the capital, $280
million, was provided through a direct infusion of common equity by Bankmont.
At the closing, HTSB assumed deposits totaling $2.9 billion. In addition,
HTSB acquired loans amounting to $340 million along with real property and
certain other miscellaneous assets. After paying a purchase price of $277
million, HTSB received approximately $2.24 billion in cash from Household as
consideration for the deposit liabilities assumed, net of assets purchased.
The purchase price of $277 million was recorded as an intangible asset,
along with certain fair value adjustments and deferred acquisition costs,
resulting in goodwill and other intangibles recognized of $284 million.
Following is an unaudited condensed statement of condition of the
Corporation at June 30, 1996, reflecting the impact of the transaction on the
Corporation's financial position at the acquisition date.
<TABLE>
<CAPTION>
JUNE 30, 1996 HOUSEHOLD JUNE 30, 1996
WITHOUT HOUSEHOLD IMPACT AS REPORTED
----------------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..... $ 1,179 $ 105 (a)(f) $ 1,284
Money market and trading account assets..... 863 863
Portfolio securities........................ 4,386 4,386
Loans, net of unearned income............... 9,895 340 (b) 10,235
Allowance for possible loan losses.......... (134) (5)(b) (139)
Premises and equipment...................... 230 30 (c) 260
Other assets................................ 685 294 (b)(c)(d)(g) 979
------- ------- -------
Total assets........................... $17,104 $ 764 $17,868
======= ======= =======
LIABILITIES
Total deposits.............................. $11,023 $ 1,643 (e)(f) $12,666
Short-term borrowings....................... 4,324 (1,244)(f) 3,080
Other liabilities........................... 271 25 (g) 296
Long-term notes............................. 364 15 (a) 379
------- ------- -------
Total liabilities...................... $15,982 $ 439 $16,421
======= ======= =======
STOCKHOLDER'S EQUITY
Preferred stock............................. $ 180 $ 45 (a) $ 225
Common equity............................... 942 280 (a) 1,222
------- ------- -------
Total stockholder's equity............. 1,122 325 1,447
------- ------- -------
Total liabilities and stockholder's
equity............................... $17,104 $ 764 $17,868
======= ======= =======
</TABLE>
- -------------------------
(a) The Corporation received a contribution to capital surplus from Bankmont of
$280 million and issued to Bankmont $45 million of preferred stock and $15
million of subordinated debt.
(b) The Corporation acquired loans amounting to $340 million plus accrued
interest receivable and established a related allowance for possible credit
losses of $4.8 million in order to record the loans at fair value.
(c) The Corporation acquired fixed assets totaling $30 million including a $3.9
million adjustment to reflect land acquired at fair market value.
(d) The Corporation recorded the $277 million purchase price as an intangible
asset.
(e) The Corporation assumed deposit liabilities totaling $2.9 billion.
(f) The Corporation reduced short-term borrowings (wholesale time deposits,
Federal funds purchased, etc.) with the net cash available from Household
and the related capital infusion from Bankmont. In addition, cash and due
from bank balances increased as a result of statutory reserve requirements
on deposits.
(g) The Corporation recorded $17 million of accrued interest payable on the
assumed deposit liabilities and capitalized as part of the purchase price
approximately $6.8 million for investment banker fees, severance costs and
other charges.
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In January 1996, the Corporation announced the sale of its securities
custody and related trustee services business for large institutions to
Citibank. After restructuring charges, the Corporation recognized a $4.0 million
gain on the sale. The gain was recorded net of certain anticipated costs to exit
this activity, including employee termination benefits, amounting to
approximately $13.0 million. Computation of the gain also included the
Corporation's estimated obligation to service affected customers on an interim
basis. The Corporation is entitled to contingent revenue in the event certain
levels of customer retention are achieved by the purchaser of the business. The
right to receive such revenue in 1998 was included as consideration in an
arrangement consummated with Bankmont during 1996 (see Note 21).
21. 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 $19.2
million at December 31, 1996 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 1996, 1995 and 1994, 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. Fees for these services were determined in
accordance with applicable banking regulations. During 1996, 1995 and 1994, the
Corporation received from BMO approximately $14.3 million, $15.7 million and
$12.8 million respectively, primarily for trust services, data processing and
other operations support provided by the Corporation.
In order to facilitate HTSB's exit from the securities custody and related
trustee services business for large institutions (see Note 20), HTSB and
Bankmont entered into an agreement effective December 31, 1996 whereby Bankmont
will assume responsibility for potential costs (subject to limits) related to
certain litigation matters involving HTSB. As part of this agreement Bankmont
incurred $2.7 million of costs through the date of the agreement. In return for
assuming this obligation, Bankmont is entitled to receive funds from a
contingent revenue arrangement between HTSB and Citibank. Bankmont paid HTSB
$480,000 as consideration for accepting this arrangement, which was recorded as
income. This agreement should be without material tax consequences since HTSB is
part of Bankmont's consolidated tax return.
During 1996, the Corporation purchased $10 million of subordinated debt
from Harris Bankmont, Inc., a wholly-owned subsidiary of Bankmont. The debt
bears a fixed interest rate of 7 5/8 percent and matures October 1, 2006.
Interest income recognized in 1996 on this debt totaled $0.2 million.
Effective April 3, 1995, HTSB and BMO agreed to combine their U.S. foreign
exchange activities. Under this arrangement, FX net profit is shared by HTSB 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. 1996 and 1995 foreign exchange
revenues included $10.0 million and $8.8 million of net profit, respectively,
under this agreement.
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JOINT INDEPENDENT AUDITORS
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
years ended December 31, 1996, 1995 and 1994.
BMO has elected to appoint two firms of independent public accountants to
be auditors of BMO and all significant subsidiaries. The Corporation's
independent public accountants reflect the appointments made by BMO.
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, 1996 and 1995, 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,
1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
January 31, 1997
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.
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PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Bankcorp's Board of Directors consists of fifteen members. Directors are
elected annually. Each present director, except Mrs. Congalton (an attorney),
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.
F. ANTHONY COMPER, age 51, President and Chief Operating Officer and a
Director of Bank of Montreal. Elected in 1990.
SUSAN T. CONGALTON, age 50, Managing Director, Lupine Partners (private
investments). Elected in 1988.
ROXANNE J. DECYK, age 44, 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 59, 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 62, Chairman Emeritus 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.
DR. LEO M. HENIKOFF, age 57, 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 62, 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 61, 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 54, Vice Chair of the Board of Bankcorp and
Harris Trust and Savings Bank. Elected in 1995.
ALAN G. MCNALLY, age 51, Chairman of the Board and Chief Executive Officer
of Bankcorp and Harris Trust and Savings Bank. Elected in 1993.
MARIBETH S. RAHE, age 48, Vice Chair of the Board of Bankcorp and Harris
Trust and Savings Bank. Elected in 1995.
CHARLES H. SHAW, age 64, Chairman, The Charles H. Shaw Company (real estate
development). Elected in 1990.
RICHARD E. TERRY, age 59, Chairman and Chief Executive Officer, Peoples
Energy Corporation (public utility) and a Director of Amsted Industries. Elected
in 1992.
JAMES O. WEBB, age 65, President, James O. Webb & Associates, Inc.
(consultant in new ventures and business development). Elected in 1995.
WILLIAM J. WEISZ, age 70, 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
fifteen executive officers at December 31, 1996 -- Harry G. Ackstein, age 58,
Jeffrey D. Butterfield, age 50, Charles H. Davis, age 54, Michael E. Godwin, age
47, Pierre O. Greffe, age 44, Kenneth R. Keck, age 58, Louis F. Lanwermeyer, age
48, Michael B. Lowe, age 51, Scott B. McCallum, age 37, Richard J. Moreland, age
50, Paul V. Reagan, age 50, William E. Thonn, age 48, Charles R. Tonge, age 49,
Edward J. Williams, age 54 and Sohrab Zargham, age 55. Each officer, other than
Mr. Reagan, who was, prior to 1995, Managing Director and Counsel with Bankers
Trust Company, has held executive positions with the Corporation or an affiliate
for many years.
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<PAGE> 82
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:
(1) 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 two Fixed
Rate Subordinated Notes to its parent company, Bankmont. The
principal amount of these notes totals $200 million for the
floating rate notes and $80 million for the fixed rate note,
respectively. The floating rate notes mature in 2004, 2005 and
2006, respectively. The fixed rate notes mature in 2007 and
2008, respectively. Bankcorp hereby agrees to file a copy of
the agreement relating to any such notes with the Commission
upon request.
10. Material Contracts and Compensatory Plans
a) 1996 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 (filed as an
Exhibit to Bankcorp's 1995 Form 10-K and incorporated herein
by reference)
d) 1995 Stock Appreciation Rights Plan (filed as an Exhibit to
Bankcorp's 1995 Form 10-K and incorporated herein by
reference)
e) Harris Retirement Benefit Replacement Plan (filed as an
Exhibit to Bank of Montreal's August 3, 1994 Registration
Statement on Form F-4, File No. 33-82358, and incorporated
herein by reference)
f) Harris Bank Stock Option Program, pursuant to which certain
designated executives and certain other employees of the
Corporation participate in the Bank of Montreal Stock
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<PAGE> 83
Option Plan (filed as an Exhibit to Bank of Montreal's
May 9, 1995 Registration Statement on Form S-8, File No.
33-92112, and incorporated herein by reference)
23. Consents of Experts and Counsel (consents of Independent
Auditors)
24. Power of Attorney
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the last quarter of 1996.
- -------------------------
* Copies of Exhibits (a) (3) 3, 4, 10, 23, 24 and 27 not contained herein, may
be obtained at a cost of 25 cents per page upon written request to the
Secretary of Harris Bankcorp, Inc.
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<PAGE> 84
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 24th
day of March 1997.
<TABLE>
<C> <S>
/s/ ALAN G. MCNALLY Chairman of the Board and Chief Executive
- -------------------------------------------- Officer
Alan G. McNally
/s/ PIERRE O. GREFFE Chief Financial Officer
- --------------------------------------------
Pierre O. Greffe
/s/ PAUL R. SKUBIC Chief Accounting Officer
- --------------------------------------------
Paul R. Skubic
</TABLE>
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 24th day of March 1997.
<TABLE>
<S> <C> <C>
F. Anthony Comper Leo M. Henikoff Charles H. Shaw
Susan T. Congalton Richard M. Jaffee Richard E. Terry
Roxanne J. Decyk Edward W. Lyman, Jr. James O. Webb
Wilbur H. Gantz Maribeth S. Rahe William J. Weisz
James J. Glasser
Alan G. McNally
Attorney-In-Fact
</TABLE>
Supplemental Information
No annual report or proxy statement will be sent to security holders in
1997.
83
<PAGE> 1
EXHIBIT 3(b)
BYLAWS HARRIS BANKCORP, INC.
[HARRIS BANKCORP LOGO]
<PAGE> 2
BYLAWS
JULY, 1995
<PAGE> 3
HARRIS BANKCORP, INC
BYLAWS
AS AMENDED DECEMBER 3, 1996
ARTICLE III, SECTION 7, MEETINGS. All meetings of the Board of Directors
shall be held at the same time and place as meetings of the Board of Directors
of Harris Trust and Savings Bank and Harris Bankmont, Inc., or at such other
place or time as the Chairman of the Board or a Vice Chair of the Board may
designate.
In the event that the Chairman of the Board or a Vice Chair of the Board
shall designate an alternate meeting place or time for any regular meeting,
notice of the alternate meeting place or time 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 or telefaxing the same to him or her or delivering
the same to him or her personally not later than the day previous to such
meeting , but save for any such required notice of alternate meeting place or
time, such regular meeting shall be held without notice other than this By-law.
Special meetings of the Board of Directors may be called by the Chairman of
the Board or a Vice Chair of the Board. 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 or time shall be given in the same manner provided for
notice of regular meetings. Except as otherwise required by statute or these
By-laws, neither the business to be transacted at, nor the purpose of any
meeting need be specified in the notice or any waiver thereof.
<PAGE> 4
ARTICLE I
OFFICES
December, 1996
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 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.
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<PAGE> 5
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
Incorportion 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> 6
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> 7
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> 8
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 11. 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> 9
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> 10
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> 11
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> 12
INDEX
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
<PAGE> 13
[HARRIS BANKCORP LOGO]
Harris Bankcorp, Inc.
111 West Monroe Street Chicago, Illinois 60603
<PAGE> 1
EXHIBIT 10.a
1996 HARRIS BANK MANAGERIAL INCENTIVE PLAN
Compensation Division
June, 1996
<PAGE> 2
1996 HARRIS BANK MANAGERIAL INCENTIVE PLAN
I. PURPOSE
The 1996 Harris Bank Managerial Incentive Plan is designed to link
employee rewards to the achievement of Harris Bankcorp and Bank of
Montreal (BMO) objectives.
II. OBJECTIVES
1. Facilitate the achievement of the goals and objectives for
the Harris Bankcorp 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
Bankcorp and BMO.
III.EFFECTIVE DATE
January 1, 1996 to December 31, 1996
IV. ELIGIBILITY
Select full-time and part-time Division Administrator equivalent or above
employees are eligible to participate in the plan.
Eligible positions and corresponding incentive targets are listed in
Exhibit A. I 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 will be eligible for pro-rated awards based on the date
of hire during the plan year.
V. PLAN DESIGN
A. DESIGN SUMMARY
1. Select Division Administrator equivalent or above employees
participate.
<PAGE> 3
1996 HARRIS BANK MANAGERIAL INCENTIVE PLAN
2. Actual incentive compensation will be based on a maximum of three
weighted Performance measurement grouping:
a. Total Harris Bankcorp - Net Income (NI)
b. BMO consolidated ROE divided by a weighted average peer bank ROE
c. Individual employee - Performance Planning and Review (PPR)
rating
Plan payout multipliers for the above three performance groupings
are described in Exhibits B, C and D, respectively.
3. 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. 1996 threshold level has been set at 12%
4. Target awards, which are based on a percentage of base
salary, are established for all participants.
5. Total Harris Bankcorp performance is linked to plan funding:
a. Harris Bankcorp performance must meet threshold of 90% of
annual target
b. Managerial plan funding adjusted to reflect both Harris
Bankcorp and BMO performance above/below annual target.
B. FORMULA
Award = Position Target x Team Performance x Individual Performance
Multiplier
(Harris + BMO
Multiplier Multiplier)
C. PLAN FUNDING
1. Target Pool
The Target Pool is the sum of individual incentive target award
plus a provision of 12.5% to recognize the normal distribution of PPR
ratings. For 1996, the incentive pool is projected to be $3,204,442.
2
<PAGE> 4
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.
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 Bankcorp 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
Multiplier
(Harris + BMO
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 Bankcorp
and BMO performance:
CATEGORY BANKCORP 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> 5
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 participants death
shall receive all unpaid incentive compensation generated through the
date of termination.
3. A participant whose employment terminates after a service date,
for any reason other than termination for cause, shall receive
incentive compensation earned during the preceding 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
For the purpose of accruing incentive compensation, target goals will be set
and approved on at least an annual basis by the Harris Bankcorp Board of
Directors and BMO Board of Directors.
3. INCENTIVE AWARDS NOT DISTRIBUTED TO PARTICIPANTS
Any portion of incentive compensation not earned and disbursed will be
retained by the Bankcorp.
4
<PAGE> 6
4. PAYMENT OF AWARDS TO PARTICIPANTS
Incentive Compensation awards will be determined by the provisions of the
plan. The CEO, Harris Bankcorp reserves the right to modify individual
awards beyond provisions of the Plan.
5. WITHHOLDING AND BENEFITS
All incentive payments are subject to the payroll and other withholding
as required by law, as well as Crusade of Mercy withholding.
6. MODIFICATION AND CONTINUATION OF THE PROGRAM
The Bankcorp reserves the right to revise or terminate the Plan at any
time. The Bankcorp 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.
8. PLAN INTERPRETATION OR AMENDMENT
8.1 The Bankcorp retains the sole and final authority to interpret
and administer the Plan. All questions concerning plan
interpretation or administration should be submitted in writing to
the EVP, Risk Management or appropriate Vice Chair for CIFS or PCFS,
who will respond in writing within thirty (30) days.
8.2 Plan participants may appeal a decision of the EVP or Vice
Chair by submitting a written request to the CEO within (10) days
after receipt of the EVP's or Vice Chair decision. The Vice CEO will
respond in writing within thirty (30) calendar days. The CEO's
decision will be final.
9. ADMINISTRATION AND RESPONSIBILITIES
9.1 Calculation of employee incentive compensation will be the
responsibility of the EVP or appropriate Vice Chair and a
representative of the Compensation Division. A copy of the current
Plan and authorized disbursements will be kept the Compensation
Division. The EVP, Risk Management Vice Chairs for CIFS and
PCFS will submit a list of participants to the CEO, Harris Bankcorp
with a copy to a representative of the Compensation Division on an
annual basis (upon approval of the Plan). The list, approved by the
CEO, Harris Bankcorp will be submitted to Payroll for disbursement
purposes.
9.2 The Plan will be reviewed by the Group Executive and a respresentative
of the Compensation Division at lease annually; and update as
necessary.
5
<PAGE> 7
EXHIBIT B
HARRIS BANKCORP 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% 110%
$174.4 108% 108%
$171.1 106% 106%
$167.9 104% 104%
$161.7 102% 102%
$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%
<$145.3 0% 0%
</TABLE>
MULTIPLIER FORMULA:
Above Target Performance: Incentive plan multiplier increases by 3% for every
1% by which Actual Net Income exceeds Target Net
Income
Below Target Performance: Incentive plan multipler descreases 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> 8
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>
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 multiplier 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 multiplier is 0.
<PAGE> 9
EXHIBIT D
INDIVIDUAL PERFORMANCE LEVERAGE TABLE
Measurement: 1996 PPR Rating
<TABLE>
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> 1
EXHIBIT 23
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 31, 1997,
relating to the consolidated statements of condition of Harris Bankcorp, Inc.
and Subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report
appears on page 79 of the December 31, 1996 Annual Report on Form 10-K of
Harris Bankcorp, Inc.
Coopers & Lybrand L.L.P.
KPMG Peat Marwick LLP
Chicago, Illinois
March 24, 1997
<PAGE> 1
EXHIBIT 24
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 1996 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.
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 MARIBETH S. RAHE
- ---------------------------- ---------------------------
Roxanne J. Decyk Maribeth S. Rahe
Director Vice Chair and Director
WILBUR H. GANTZ CHARLES H. SHAW
- ---------------------------- ---------------------------
Wilbur H. Gantz Charles H. Shaw
Director Director
JAMES J. GLASSER RICHARD E. TERRY
- ---------------------------- ---------------------------
James J. Glasser Richard E. Terry
Director Director
LEO M. HENIKOFF JAMES O. WEBB
- ---------------------------- ---------------------------
Leo M. Henikoff James O. Webb
Director Director
RICHARD M. JAFFEE WILLIAM J. WEISZ
- ---------------------------- ---------------------------
Richard M. Jaffee William J. Weisz
Director Director
Dated: February 19, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,238,028
<INT-BEARING-DEPOSITS> 658,257
<FED-FUNDS-SOLD> 294,792
<TRADING-ASSETS> 110,355
<INVESTMENTS-HELD-FOR-SALE> 3,985,183
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,744,653
<ALLOWANCE> 142,211
<TOTAL-ASSETS> 18,228,740
<DEPOSITS> 12,990,301
<SHORT-TERM> 3,015,390
<LIABILITIES-OTHER> 249,793
<LONG-TERM> 379,107
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,236,826
<TOTAL-LIABILITIES-AND-EQUITY> 18,228,740
<INTEREST-LOAN> 837,057
<INTEREST-INVEST> 253,437
<INTEREST-OTHER> 42,401
<INTEREST-TOTAL> 1,136,854
<INTEREST-DEPOSIT> 398,167
<INTEREST-EXPENSE> 607,449
<INTEREST-INCOME-NET> 529,405
<LOAN-LOSSES> 56,540
<SECURITIES-GAINS> 8,786
<EXPENSE-OTHER> 593,996
<INCOME-PRETAX> 208,176
<INCOME-PRE-EXTRAORDINARY> 142,364
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,364
<EPS-PRIMARY> 19.10
<EPS-DILUTED> 19.10
<YIELD-ACTUAL> 3.69
<LOANS-NON> 28,153
<LOANS-PAST> 46,369
<LOANS-TROUBLED> 1,512
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 129,259
<CHARGE-OFFS> 62,995
<RECOVERIES> 14,607
<ALLOWANCE-CLOSE> 142,211
<ALLOWANCE-DOMESTIC> 86,479
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 55,732
</TABLE>
