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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1997
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, 1997 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)
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<S> <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)
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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 (I) (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.................................................. 5
Item 3 Legal Proceedings........................................... 5
Item 4 Submission of Matters to a Vote of Security Holders
(during the fourth quarter of 1997)......................... 5
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 6
Item 6 Selected Financial Data..................................... 7
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 9
Item 8 Financial Statements and Supplementary Data:
Quarterly Financial Data.................................... 42
Consolidated Statement of Income............................ 43
Consolidated Statement of Condition......................... 44
Statement of Changes in Stockholder's Equity................ 45
Consolidated Statement of Cash Flows........................ 46
Notes to Financial Statements............................... 47
Joint Independent Auditors.................................. 82
Independent Auditors' Report................................ 82
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 82
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 83
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 84
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 84
Signatures................................................................ 86
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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 January 23, 1998, BMO announced that it has entered into a
definitive agreement to merge with Royal Bank of Canada designed as a merger of
equals transaction. This transaction is subject to regulatory and shareholder
approval.
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
New York, Bank of Montreal Trust Company and Harris Trust/Bank of Montreal
(formerly Harris Trust Company of Florida). In July 1997, 80 percent ownership
of Harris Trust/Bank of Montreal was transferred through a noncash dividend to
Bankmont. The trust companies provide specialized nondeposit services, notably
stock transfer, personal trust and indenture trust. Beginning in January 1998,
Harris Trust/Bank of Montreal obtained full banking powers and began providing
full banking services in Florida. Other principal nonbank subsidiaries include
Harris Investors Direct, Inc., a discount brokerage company, Harris Investment
Management, Inc., a registered investment adviser, and Harris Preferred Capital
Corporation ("HPCC"), a real estate investment trust ("REIT"). For further
information on publicly traded preferred stock issued by HPCC, see Item 5 --
Market for Registrant's Common Equity and Related Stockholder Matters section on
page 6. 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, 60 domestic branch
offices, an international banking facility and two automatic banking centers
located in the Chicago area. 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.
On September 4, 1997, HTSB announced that it had entered into a contract to
transfer its credit card portfolio to a company to be owned by BankBoston
Corporation, First Annapolis Consulting, Inc. and Bankmont. That transaction
closed January 29, 1998. At closing, the assets sold had a carrying value of
$693 million, representing less than 5% of the Corporation's total consolidated
assets. Upon completion of the
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transfer, HTSB received cash and an equity interest in the newly formed company,
which it immediately sold for cash to Bankmont. The impact of this transaction
on the Corporation's financial position and future results of operations is not
expected to be material.
HTSB's overseas activities are conducted through its representative
offices, a foreign branch, an international banking facility 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.
FORWARD-LOOKING INFORMATION
This Report contains certain forward-looking statements and information
that are based on the beliefs of, and information currently available to, the
Corporation's management, as well as estimates and assumptions made by the
Corporation's management. Forward-looking statements, which describe future
plans, strategies and expectations of the Corporation, are generally
identifiable by use of words such as "anticipate", "believe", "estimate",
"expect", "future", "intend", "plan", "project" and similar expressions. The
Corporation's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Corporation include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative or regulatory environment, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or securities portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market areas and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements.
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 leads 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 more than 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 and ongoing growth, Harris now serves over 800,000
customers and has 139 locations opened or planned at the end of 1997, creating
one of the top three retail banking networks in the Chicago area. Three years
ago, 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. The transaction added 13 banks with 30
locations in Cook and surrounding counties.
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The process of building a cost-effective operations and staff support
infrastructure, started in 1994, continued in 1997, with $60 million in
infrastructure costs reduced and redeployed into marketing, sales, and service
over the three year period. The goal is to obtain North American scale
advantages and reduce fixed costs. Building broad-based centers of competence
within Corporate Services and Operations is intended to eliminate duplication,
create scale efficiencies and improve quality and responsiveness. Additionally,
the use of technology to automate processing activities at the point of customer
contact should lower costs and increase quality. To this end, 1997
accomplishments included consolidation of operations support for the former
Household branches and all community banks at a community banking operations
center. In 1998, operations support for all remaining retail banking activities
will be consolidated at this community banking operations center while service
utilities will be enhanced/created to centralize and standardize specific
competencies such as mortgage lending and commercial loan servicing.
Together with BMO, Harris continues to expand its retail banking services
across the Midwest through mbanx(SM), pc banking, telephone banking and bill
payment. In 1997, Harris was one of the first banks in Chicago to offer Internet
banking and Harris is the only U.S. bank to offer an integrated telephone and
Internet bill payment service. Customers and prospective customers can call for
information and apply over the phone for services such as home equity loans,
checking accounts, money market accounts, CD's, mortgages, mutual funds and
discount brokerage. Customers can use their phone or personal computers to check
balances, review transaction history, pay bills, communicate with the bank via
secure e-mail and transfer funds between accounts -- whether at home, at work or
on the road.
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. 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 72 through 74 of
this Report provide details with respect to regulatory capital and dividend
restrictions.
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
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of the bank and thrift deposit insurance funds. This provision of the Act had
three components. The first was a one-time assessment to capitalize the Savings
Association Insurance Fund ("SAIF"). The second was 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 was 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 10 of this
Report for additional information.
Future charges for insurance assessments on SAIF-insured deposits have been
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 declined starting January 1, 1997 compared to the average rate
in effect from the date of the Household branch purchase through December 31,
1996.
COMPETITION
Active competition exists in all principal geographic and product line
areas in which the Corporation is presently engaged. Competitors include other
commercial banks, investment banks, savings and loan associations, finance
companies, credit unions, insurance companies, mutual funds, mortgage banks,
investment managers and advisors, leasing companies, other domestic and foreign
financial institutions and various nonfinancial intermediaries.
EMPLOYEES
The Corporation and HTSB had full-time equivalent employees of 6,425 and
4,985, respectively, at December 31, 1997.
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 55 of this Report.
ITEM 3 -- LEGAL PROCEEDINGS
For information on the Corporation's legal proceedings, see Note 17 to
Financial Statements on page 74 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 1997.
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PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bankmont presently owns all 6,667,490 shares of the voting stock of
Bankcorp, which are not listed or traded on any securities exchange. In 1997,
Bankcorp declared and paid to Bankmont approximately $42.0 million in cash
dividends and $2.5 million in noncash dividends on common stock and $16.6
million in cash dividends on preferred stock. 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 to Bankmont, including a $205.0 million special dividend in
connection with the capital restructuring described below.
Effective February 11, 1998, HPCC issued $250 million of 7 3/8 percent
noncumulative, exchangeable Series A preferred stock. The preferred stock, which
is listed and traded on the New York Stock Exchange, is nonvoting except in
certain circumstances as outlined in HPCC's Form S-11 Registration Statement
("S-11") filed with the Securities and Exchange Commission. Dividends on the
preferred stock are noncumulative and are payable at the rate of 7 3/8 percent
per annum of the $25 per share liquidation preference. The preferred shares can
be redeemed in whole or in part at HPCC's option on or after March 30, 2003 or
upon the occurrence of a tax event as defined in the S-11. Upon the occurrence
of specific events described in the S-11, including HTSB becoming less than
"adequately capitalized", HTSB being placed into conservatorship or receivership
or the Board of Governors of the Federal Reserve Bank directing such an
exchange, each preferred share would be exchanged automatically for one newly
issued HTSB preferred share.
In conjunction with the 1996 acquisition of former Household branches, the
Corporation increased its capital base by $340 million, in part through the
issuance to Bankmont 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 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, 1997 and
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.
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ITEM 6 -- SELECTED FINANCIAL DATA
HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENT OF INCOME
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FOR THE YEARS ENDED DECEMBER 31
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1997 1996 1995 1994 1993
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(FULLY TAXABLE EQUIVALENT (FTE) BASIS, DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
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INTEREST INCOME
Loans, including fees....................................... $ 928,155 $ 838,789 $ 778,770 $594,265 $515,994
Money market assets:
Deposits at banks.......................................... 31,464 30,483 38,617 30,739 25,212
Federal funds sold and securities purchased under agreement
to resell................................................ 12,692 11,918 19,330 21,523 17,436
Trading account............................................. 4,638 4,968 4,556 2,796 6,537
Securities held-to-maturity................................. -- -- 77,820 87,740 193,487
Securities available-for-sale............................... 319,475 276,077 162,867 121,372 --
---------- ---------- ---------- -------- --------
Total interest income...................................... 1,296,424 1,162,235 1,081,960 858,435 758,666
---------- ---------- ---------- -------- --------
INTEREST EXPENSE
Domestic deposits........................................... 378,825 284,301 215,276 160,357 143,614
Foreign deposits............................................ 96,832 113,866 143,310 89,645 56,558
Short-term borrowings....................................... 156,559 160,790 168,993 108,485 73,043
Senior notes................................................ 39,883 22,425 31,125 -- --
Long-term notes............................................. 26,499 26,067 23,005 19,520 26,406
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Total interest expense..................................... 698,598 607,449 581,709 378,007 299,621
---------- ---------- ---------- -------- --------
Net Interest Income......................................... 597,826 554,786 500,251 480,428 459,045
Provision for loan losses................................... 58,447 56,540 42,995 45,040 62,835
---------- ---------- ---------- -------- --------
Net Interest Income after Provision for Loan Losses......... 539,379 498,246 457,256 435,388 396,210
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NONINTEREST INCOME
Trust and investment management fees........................ 133,714 117,762 149,979 148,094 148,809
Trading account............................................. 7,269 7,992 5,110 (396) 5,258
Foreign exchange............................................ 5,364 9,992 14,248 19,769 24,302
Charge card................................................. 50,085 47,244 41,788 37,402 36,516
Service fees and charges.................................... 96,324 82,802 69,333 73,621 77,774
Securities gains............................................ 13,207 8,786 23,379 5,254 13,038
Other....................................................... 71,785 54,729 34,436 30,700 31,391
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Total noninterest income................................... 377,748 329,307 338,273 314,444 337,088
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NONINTEREST EXPENSES
Employment.................................................. 372,142 326,994 318,302 312,570 305,758
Net occupancy............................................... 56,462 47,690 46,099 45,052 46,676
Equipment................................................... 48,119 41,715 42,541 42,284 43,396
Marketing................................................... 25,675 29,342 25,583 24,632 22,613
Communication and delivery.................................. 24,129 20,954 20,251 17,732 17,916
Deposit insurance........................................... 2,988 18,189 8,124 15,684 15,047
Expert services............................................. 31,159 19,382 20,353 14,215 13,906
Trust customer charge....................................... -- -- -- 51,335 --
Other....................................................... 75,164 71,562 69,500 70,358 74,990
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635,838 575,828 550,753 593,862 540,302
Goodwill and other valuation intangibles.................... 27,839 18,168 9,350 10,266 11,785
---------- ---------- ---------- -------- --------
Total noninterest expenses................................. 663,677 593,996 560,103 604,128 552,087
---------- ---------- ---------- -------- --------
FTE pretax income........................................... 253,450 233,557 235,426 145,704 181,211
Applicable income taxes..................................... 70,076 65,812 70,175 24,528 39,879
FTE adjustment.............................................. 26,800 25,381 17,700 23,830 25,489
---------- ---------- ---------- -------- --------
Income before cumulative effect of a change in accounting
principle................................................ 156,574 142,364 147,551 97,346 115,843
Cumulative effect on prior years (to December 31, 1992) of
changing the accounting method for income taxes............ -- -- -- -- 1,782
---------- ---------- ---------- -------- --------
Net Income................................................. 156,574 142,364 147,551 97,346 117,625
Dividends on preferred stock................................ 16,594 15,006 -- -- --
---------- ---------- ---------- -------- --------
Net income applicable to common stock....................... $ 139,980 $ 127,358 $ 147,551 $ 97,346 $117,625
========== ========== ========== ======== ========
PER COMMON SHARE STATISTICS
Net income applicable to common stock....................... $21.00 $19.10 $22.13 $14.60 $17.64
Common stock dividends...................................... 6.30 7.23 39.40 5.21 8.48
Average common shares outstanding (in thousands)............ 6,667 6,667 6,667 6,667 6,667
PROFITABILITY RATIOS
Net income:
% Average total assets..................................... 0.82% 0.83% 0.95% 0.68% 0.90%
% Average common stockholder's equity...................... 10.54 11.55 13.61 9.70 12.31
% Average total assets (cash basis)........................ 0.92 0.91 1.00 0.74 0.97
% Average common stockholder's equity (cash basis)......... 13.87 14.17 14.77 10.96 14.00
NUMBER OF EMPLOYEES AT YEAR-END
(full-time equivalent basis)................................ 6,425 6,363 5,749 5,655 5,792
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HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENT OF CONDITION
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<CAPTION>
YEARS ENDED DECEMBER 31
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DAILY AVERAGES, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
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ASSETS
Cash and demand balances due from banks... $ 1,225,644 $ 1,147,075 $ 1,206,234 $ 1,173,266 $ 1,191,748
Money market assets:
Interest-bearing deposits at banks...... 601,672 576,913 566,072 686,995 677,565
Federal funds sold and securities
purchased under agreement to resell... 229,572 213,939 330,783 536,185 522,757
Portfolio securities:
Held-to-maturity........................ -- -- 962,245 963,690 2,987,053
Available-for-sale...................... 4,895,735 4,219,179 2,611,707 2,269,171 7,213
Trading account assets.................... 68,336 70,452 64,777 39,812 110,493
Domestic loans, net of unearned income.... 10,870,692 9,888,591 8,735,388 7,629,399 6,988,838
Foreign office loans, net of unearned
income.................................. 90,584 59,235 50,183 43,176 55,970
----------- ----------- ----------- ----------- -----------
Total loans......................... 10,961,276 9,947,826 8,785,571 7,672,575 7,044,808
Allowance for possible loan losses........ (136,760) (134,310) (126,041) (129,377) (131,243)
Premises and equipment.................... 293,879 247,521 224,205 223,538 228,992
Customers' liability on acceptances....... 62,547 87,972 104,994 80,813 71,844
Goodwill and other valuation
intangibles............................. 308,746 185,673 48,531 53,400 65,225
Other assets.............................. 709,005 615,790 735,993 647,275 302,729
----------- ----------- ----------- ----------- -----------
Total assets........................ $19,219,652 $17,178,030 $15,515,071 $14,217,343 $13,079,184
=========== =========== =========== =========== ===========
LIABILITIES
Demand deposits........................... $ 3,020,864 $ 2,812,007 $ 2,808,747 $ 2,859,643 $ 2,672,152
Interest checking deposits................ 853,800 815,853 629,448 663,598 639,377
Money market accounts..................... 1,964,212 1,434,293 1,037,963 1,170,181 1,235,487
Savings deposits and certificates......... 4,734,360 3,626,767 2,442,101 2,189,049 2,164,583
Other time deposits....................... 914,836 674,985 682,320 722,373 756,560
Deposits in foreign offices............... 1,795,952 2,159,909 2,435,124 2,110,342 1,813,720
----------- ----------- ----------- ----------- -----------
Total deposits...................... 13,284,024 11,523,814 10,035,703 9,715,186 9,281,879
Short-term borrowings..................... 3,000,177 3,220,570 3,010,753 2,654,891 2,332,260
Senior notes.............................. 695,329 392,283 512,204 -- --
Acceptances outstanding................... 62,561 87,969 105,064 80,818 73,711
Other liabilities......................... 245,448 275,925 465,145 463,736 136,862
Long-term notes........................... 379,192 371,734 299,771 298,745 298,807
----------- ----------- ----------- ----------- -----------
Total liabilities................... 17,666,731 15,872,295 14,428,640 13,213,376 12,123,519
Stockholder's equity...................... 1,552,921 1,305,735 1,086,431 1,003,967 955,665
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's
equity........................... $19,219,652 $17,178,030 $15,515,071 $14,217,343 $13,079,184
=========== =========== =========== =========== ===========
RATIOS (PERCENTAGE OF TOTAL AVERAGE
ASSETS)
Money market assets....................... 4.3% 4.6% 5.8% 8.6% 9.2%
Portfolio securities and trading account
assets.................................. 25.8 25.0 23.5 23.0 23.7
Loans, net of unearned income............. 57.0 57.9 56.6 54.0 53.9
Deposits.................................. 69.1 67.1 64.7 68.3 71.0
Short-term borrowings..................... 15.6 18.7 19.4 18.7 17.8
Common stockholder's equity............... 6.91 6.42 6.99 7.06 7.31
SELECTED YEAR-END DATA
Loans, net of unearned income............. $10,868,250 $10,744,653 $ 9,517,797 $ 8,229,254 $ 7,703,957
Allowance for possible loan losses........ 130,876 142,211 129,259 124,734 131,676
Total assets.............................. 20,133,461 18,228,740 15,676,201 15,331,539 13,517,834
Deposits.................................. 14,432,063 12,990,301 10,228,782 9,919,732 9,375,871
Long-term notes........................... 379,278 379,107 363,952 298,810 298,681
Preferred stock -- Series A............... 180,000 180,000 180,000 -- --
Preferred stock -- Series B............... 45,000 45,000 -- -- --
Common stockholder's equity............... 1,407,515 1,290,166 965,776 1,021,154 1,017,672
YEAR-END COMMON STOCKHOLDER'S EQUITY PER
COMMON SHARE............................ $211.10 $193.50 $144.85 $153.15 $152.63
</TABLE>
8
<PAGE> 10
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SUMMARY
1997 COMPARED TO 1996
The Corporation's 1997 net income was $156.6 million, a 10 percent increase
from $142.4 million in 1996. 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 in 1996, HTSB was assessed a one-time $10 million after-tax charge
resulting from third quarter 1996 legislation to recapitalize the SAIF. In
addition to the impact of the Household transaction, during the first quarter a
year ago the Corporation realized a $2.4 million aftertax gain from the sale of
its securities custody and related trustee services business for large
institutions. Excluding the effect of the Household transaction (which includes
the $10 million after-tax SAIF charge) and the gain from the sale of the custody
business for large institutions, 1997 core earnings increased 6 percent from
1996. This increase in earnings is primarily attributable to strong business
growth across corporate, private and retail banking.
ROE for 1997 was 10.54 percent and return on average assets ("ROA") was
0.82 percent. For 1996, ROE was 11.55 percent and ROA was 0.83 percent.
With the acquisition of Household earnings on a cash basis is the most
relevant measure of performance. Earnings before amortization of goodwill and
other valuation intangibles ("cash earnings") were $199.7 million in 1997
compared to $174.9 million in 1996. On a cash basis, return on equity ("cash
ROE") and return on assets ("cash ROA") were 13.87 percent and 0.92 percent,
respectively compared to cash ROE of 14.17 percent and cash ROA of 0.91 percent
in 1996.
For 1997, net interest income on a fully taxable equivalent basis of $597.8
million was up 8 percent from 1996. Net interest margin fell from 3.69 percent
to 3.56 percent in 1997, while average earning assets rose 11 percent from
$15.05 billion to $16.78 billion. Average loans increased 10 percent or $1.01
billion. Excluding the contribution of the Household transaction, net interest
income would have increased $17.0 million or 3 percent year-to-year.
Noninterest income increased 15 percent to $377.7 million for 1997. The
primary contributors to this revenue growth were trust and investment management
fees, service charges on deposits, syndication fees, gains on mortgage loan
sales and income from bank-owned insurance.
Total noninterest expenses were $663.7 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
increased by 9 percent compared to 1996.
Income taxes increased by $4.3 million during 1997 primarily reflecting
higher pretax income.
The 1997 provision for loan losses of $58.4 million was up $1.9 million
from $56.5 million in 1996. Net loan charge-offs during the current year were
$69.8 million compared to $48.4 million in 1996, primarily reflecting higher
writeoffs in the charge card portfolio. On January 29, 1998, HTSB sold its
credit card portfolio. See Note 22 to Financial Statements on page 81 of this
Report.
Nonperforming assets at December 31, 1997 totaled $20 million, or 0.2
percent of total loans compared to $31 million or 0.3 percent a year ago. At
December 31, 1997, the allowance for possible loan losses was $131 million or
1.2 percent of total loans outstanding compared to $142 million or 1.3 percent
of loans at the end of 1996. As a result, the ratio of the allowance for
possible loan losses to nonperforming assets increased from 455 percent at
December 31, 1996 to 665 percent at December 31, 1997.
At December 31, 1997, the Corporation's consolidated equity capital
amounted to $1.63 billion, up from $1.52 billion at December 31, 1996. Bankcorp
paid $42.0 million in cash dividends and $2.5 million in noncash
9
<PAGE> 11
dividends on common stock and $16.6 million of preferred dividends. At December
31, 1997, the Corporation's equity capital includes $225 million of preferred
stock.
The Corporation's regulatory capital leverage ratio was 6.74 percent
compared to 6.79 percent one year earlier. Regulators require most banking
institutions to maintain capital leverage ratios of not less than 4.0 percent.
At December 31, 1997, the Corporation's Tier 1 and Total risk-based capital
ratios were 7.94 percent and 10.72 percent, respectively, compared to respective
ratios of 8.10 percent and 11.40 percent at December 31, 1996. The 1997 year-end
ratios substantially exceeded minimum required regulatory ratios of 4.0 percent
and 8.0 percent, respectively.
1996 COMPARED TO 1995
The Corporation's 1996 net income was $142.4 million, down 4 percent from
1995 net income of $147.6 million. Earnings and ROE comparability between 1996
and 1995 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 SAIF. 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
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 1996. 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 1996 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.
10
<PAGE> 12
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 preferred dividends. In conjunction with the acquisition of Household Bank'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 included $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.
11
<PAGE> 13
NET INTEREST INCOME
HARRIS BANKCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
INTEREST 1997 VS. 1996
----------------------------
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....................................... $10,871 $ 923 8.49% $ 87 $ 83 $ 4
Portfolio securities:
U.S. Treasury and Federal agency.......................... 4,499 287 6.38 41 39 2
State and municipal....................................... 305 26 8.68 (1) 1 (2)
Other..................................................... 33 2 4.81 (1) (1) --
------- ------ ----
Total portfolio securities.............................. 4,837 315 6.51 39 39 --
Trading account assets...................................... 68 5 6.79 -- -- --
Interest-bearing deposits at banks.......................... -- -- -- -- -- --
Federal funds sold and securities purchased under agreement
to resell................................................. 198 11 5.68 1 2 (1)
------- ------ ----
Total domestic earning assets/interest income........... 15,974 1,254 7.85 127 126 1
------- ------ ----
FOREIGN OFFICES:
Loans, including fees....................................... 90 5 5.24 2 2 --
Portfolio securities:
U.S. Treasury and Federal agency.......................... 80 5 5.76 5 5 --
Interest-bearing deposits at banks.......................... 602 31 5.22 1 1 --
Federal funds sold and securities purchased under agreement
to resell................................................. 32 1 4.61 (1) (1) --
------- ------ ----
Total foreign earning assets/interest income............ 804 42 5.26 7 6 1
------- ------ ----
Total domestic and foreign earning assets/interest income... $16,778 1,296 7.72 134 133 1
======= ====== ====
SUPPORTING LIABILITIES/INTEREST EXPENSE
DOMESTIC OFFICES:
Interest checking deposits.................................. $ 854 15 1.73 -- 1 (1)
Money market accounts....................................... 1,964 79 4.03 23 21 2
Savings deposits and certificates........................... 4,735 235 4.97 57 55 2
Other interest-bearing time deposits........................ 890 50 5.59 15 13 2
------- ------ ----
Total interest-bearing deposits......................... 8,443 379 4.49 95 86 9
Short-term borrowings....................................... 2,910 153 5.27 (5) (11) 6
Senior notes................................................ 695 39 5.57 16 17 (1)
Long-term notes............................................. 379 27 7.29 2 1 1
------- ------ ----
Total domestic interest-bearing liabilities/interest
expense............................................... 12,427 598 4.82 108 96 12
------- ------ ----
FOREIGN OFFICES:
Time deposits............................................... 1,768 97 5.48 (17) (19) 2
Short-term borrowings....................................... 90 3 3.65 -- -- --
------- ------ ----
Total foreign interest-bearing liabilities/interest
expense............................................... 1,858 100 5.39 (17) (19) 2
------- ------ ----
Total domestic and foreign interest-bearing
liabilities/interest expense.............................. 14,285 698 4.89 91 81 10
Other noninterest-bearing supporting liabilities............ 2,493 -- -- -- -- --
------- ------ ----
Total domestic and foreign supporting liabilities/interest
expense................................................... $16,778 698 4.16 91 71 20
======= ------ ----
Total net interest income from domestic and foreign
offices................................................... $ 598 3.56% $ 43 $ 62 $(19)
====== ==== ==== ==== ====
</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 1997, 1996 and 1995. Beginning in 1996, the
adjustment includes a State tax component.
(2) Interest income
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.
12
<PAGE> 14
NET INTEREST INCOME
HARRIS BANKCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------- ----------------------------
INTEREST 1996 VS. 1995
------------------------
INCREASE
(DECREASE) DUE
AVERAGE AVERAGE NET TO CHANGE IN--- AVERAGE AVERAGE
BALANCE INTEREST RATE CHANGE VOLUME RATE BALANCE INTEREST RATE
------- -------- ------- ------ ------ ---- ------- -------- -------
(FULLY TAXABLE EQUIVALENT BASIS, DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
DOMESTIC OFFICES:
Loans, including fees................. $ 9,889 $ 836 8.45% $ 59 $ 99 $(40) $ 8,735 $ 777 8.89%
Portfolio securities:
U.S. Treasury and Federal agency.... 3,895 246 6.31 57 53 4 3,049 189 6.20
State and municipal................. 299 27 9.22 (15) (8) (7) 379 42 11.27
Other............................... 50 3 5.43 (6) (6) -- 154 9 5.74
------- ------ ---- ------- ------
Total portfolio securities...... 4,244 276 6.50 36 43 (7) 3,582 240 6.72
Trading account assets................ 71 5 7.05 -- -- -- 65 5 7.03
Interest-bearing deposits at banks.... -- -- -- (1) (1) -- 9 1 3.92
Federal funds sold and securities
purchased under agreement to
resell.............................. 166 10 5.97 (7) (7) -- 276 17 6.01
------- ------ ---- ------- ------
Total domestic earning assets/
interest income.............. 14,370 1,127 7.84 87 134 (47) 12,667 1,040 8.22
------- ------ ---- ------- ------
FOREIGN OFFICES:
Loans, including fees................. 59 3 4.89 1 -- 1 50 2 3.91
Interest-bearing deposits at banks.... 577 30 5.28 (8) 1 (9) 557 38 6.37
Federal funds sold and securities
purchased under agreement to
resell.............................. 48 2 4.19 -- -- -- 55 2 5.00
------- ------ ---- ------- ------
Total foreign earning
assets/interest income....... 684 35 5.17 (7) 1 (8) 662 42 6.07
------- ------ ---- ------- ------
Total domestic and foreign earning
assets/interest income.............. $15,054 1,162 7.72 $ 80 87 (7) $13,329 1,082 8.12
======= ====== ==== ======= ======
SUPPORTING LIABILITIES/INTEREST
EXPENSE DOMESTIC OFFICES:
Interest checking deposits............ $ 816 15 1.87 $ 1 4 (3) $ 629 14 2.24
Money market accounts................. 1,434 56 3.91 16 15 1 1,038 40 3.87
Savings deposits and certificates..... 3,627 178 4.90 56 58 (2) 2,442 122 4.98
Other interest-bearing time
deposits............................ 649 35 5.42 (5) (1) (4) 665 40 5.91
------- ------ ---- ------- ------
Total interest-bearing
deposits..................... 6,526 284 4.36 68 77 (9) 4,774 216 4.51
Short-term borrowings................. 3,126 158 5.04 (7) 12 (19) 2,909 165 5.66
Senior notes.......................... 392 22 5.72 (9) (5) (4) 512 31 6.08
Long-term notes....................... 372 26 7.01 3 5 (2) 300 23 7.67
------- ------ ---- ------- ------
Total domestic interest-bearing
liabilities/interest
expense...................... 10,416 490 4.71 55 92 (37) 8,495 435 5.11
------- ------ ---- ------- ------
FOREIGN OFFICES:
Time deposits......................... 2,121 114 5.37 (29) (16) (13) 2,400 143 5.97
Short-term borrowings................. 94 3 3.44 (1) -- (1) 101 4 4.31
------- ------ ---- ------- ------
Total foreign interest-bearing
liabilities/ interest
expense...................... 2,215 117 5.29 (30) (16) (14) 2,501 147 5.90
Total domestic and foreign
interest-bearing
liabilities/interest expense........ 12,631 607 4.81 25 82 (57) 10,996 582 5.29
Other noninterest-bearing supporting
liabilities......................... 2,423 -- -- -- -- -- 2,333 -- --
------- ------ ---- ------- ------
TOTAL DOMESTIC AND FOREIGN SUPPORTING
LIABILITIES/INTEREST EXPENSE........ $15,054 607 4.04 25 82 (57) $13,329 582 4.37
------- ------ ---- ------- ------
TOTAL NET INTEREST INCOME FROM
DOMESTIC AND FOREIGN OFFICES........ $ 555 3.69% $ 55 $ 5 $ 50 $ 500 3.75%
====== ==== ==== ==== ==== ====== =====
</TABLE>
13
<PAGE> 15
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
1997, the Corporation's FTE net interest income was $597.8 million, up 8 percent
from $554.8 million in 1996.
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
1997, the Corporation's average earning assets grew 11 percent, while net
interest margin decreased 13 basis points from 3.69 percent in 1996 to 3.56
percent in 1997.
Average earning assets in 1997 totaled $16.78 billion, up $1.72 billion, or
11 percent, from $15.05 billion in 1996. This growth is primarily the result of
an increase in average loans of $1.01 billion, or 10 percent, to $10.96 billion,
led by increases in average commercial and real estate loan outstandings of $503
million (8 percent) and $504 million (27 percent), respectively. The growth in
average loans is attributable to a growing demand for credit in the U.S.
economy, coupled with an aggressive marketing effort by the Corporation. Average
portfolio securities increased $673 million, or 16 percent, to $4.92 billion
primarily as a result of increased holdings of Federal agency securities
amounting to $533 million. Loans and portfolio securities, as a percent of
earning assets, were 65.3 percent and 29.3 percent, respectively, compared to
66.1 percent and 28.2 percent, respectively, in 1996. Average Federal funds sold
and securities purchased under agreement to resell increased 7 percent, or $16
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
in 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. In 1997, term Federal funds
purchased decreased $333 million or 86 percent, offset somewhat by an increase
in overnight Federal funds purchased and securities sold under agreement to
repurchase of $87 million or 3 percent, resulting in a decline in total
short-term borrowings of $220 million or 7 percent from 1996 levels. Domestic
interest-bearing deposits increased $1.92 billion, or 29 percent, from one year
ago. Average foreign office time deposits totaled $1.77 billion, down 17 percent
or $353 million, compared to $2.12 billion in 1996. Noninterest-bearing funds
supporting earning assets increased $70 million, and declined from 16 percent to
15 percent year to year as a percentage of average supporting liabilities.
The Corporation's consolidated net interest margin declined to 3.56 percent
from 3.69 percent in the prior year. This decrease reflects 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.
14
<PAGE> 16
NONINTEREST INCOME
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1997 VS. 1996 1996 VS. 1995
-------------------------------- -------------- ---------------
1997 1996 1995 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment management
fees........................... $133,714 $117,762 $149,979 $15,952 14 $(32,217) (21)
Trading account.................. 7,269 7,992 5,110 (723) (9) 2,882 56
Foreign exchange................. 5,364 9,992 14,248 (4,628) (46) (4,256) (30)
Charge card...................... 50,085 47,244 41,788 2,841 6 5,456 13
Service fees and charges......... 96,324 82,802 69,333 13,522 16 13,469 19
Securities gains................. 13,207 8,786 23,379 4,421 50 (14,593) (62)
Other............................ 71,785 54,729 34,436 17,056 31 20,293 59
-------- -------- -------- ------- --- -------- ---
Total noninterest income.... $377,748 $329,307 $338,273 $48,441 15 $ (8,966) (3)
======== ======== ======== ======= === ======== ===
</TABLE>
Noninterest income for the year was $377.7 million in 1997, up $48.4
million or 15 percent from 1996. Higher trust and investment management fees,
service fees and charges, securities gains, charge card fees and other income
were partially offset by lower foreign exchange revenues and trading account
profits.
Trust and investment management fees were $133.7 million, up $16.0 million
or 14 percent from the prior year, primarily from increased personal trust and
corporate trust revenue. Service fees and charges were $96.3 million in 1997, up
$13.5 million or 16 percent over 1996 due primarily to product growth, with
Household contributing $5.0 million of the increase. Net gains reported from the
sale of debt securities totaled $13.2 million, up $4.4 million or 50 percent
from 1996, due to opportunities in the market for periodic sale and profitable
reinvestment of proceeds in 1997. Charge card fees were $50.1 million in 1997,
up $2.8 million or 6 percent from the previous year. Other income, which
included incremental revenue from bank owned life insurance, syndication fees
and mortgage loan sales, increased $17.1 million or 31%. On January 11, 1996,
the Corporation sold its securities custody and related trustee services
business for large institutions to Citibank. The gain recorded during 1996
amounted to $4 million.
Trading account gains, primarily from municipal bond trading, totaled $7.3
million, down $0.7 million from the prior year. Financial results from trading
activities will typically exhibit greater fluctuations over time than other
business activities. Foreign exchange revenues were $5.4 million, down $4.6
million or 46 percent from 1996. Effective April 3, 1995, HTSB and BMO agreed to
combine their U.S. 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, 1996 or 1997 net income or financial
position.
15
<PAGE> 17
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1997 VS. 1996 1996 VS. 1995
-------------------------------- -------------- --------------
1997 1996 1995 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation... $314,719 $273,849 $260,539 $40,870 15 $13,310 5
Pension, profit sharing and other
employee benefits............... 57,423 53,145 57,763 4,278 8 (4,618) (8)
Net occupancy..................... 56,462 47,690 46,099 8,772 18 1,591 3
Equipment......................... 48,119 41,715 42,541 6,404 15 (826) (2)
Marketing......................... 25,675 29,342 25,583 (3,667) (12) 3,759 15
Communication and delivery........ 24,129 20,954 20,251 3,175 15 703 3
Deposit insurance................. 2,988 18,189 8,124 (15,201) (84) 10,065 124
Expert services................... 31,159 19,382 20,353 11,777 61 (971) (5)
Other............................. 75,164 71,562 69,500 3,602 5 2,062 3
-------- -------- -------- ------- --- ------- ---
635,838 575,828 550,753 60,010 10 25,075 5
Goodwill and other valuation
intangibles..................... 27,839 18,168 9,350 9,671 53 8,818 94
-------- -------- -------- ------- --- ------- ---
Total noninterest expenses... $663,677 $593,996 $560,103 $69,681 12 $33,893 6
======== ======== ======== ======= === ======= ===
</TABLE>
Noninterest expenses totaled $663.7 million, up $69.7 million or 12 percent
from 1996. The first six months of 1996 did not include 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 the impact of Household-related charges for
the first six months of 1997 and the one-time SAIF assessment, total noninterest
expenses would have increased $49.4 million or 9 percent from 1996.
Employment-related expenses totaled $372.1 million, an increase of $45.1
million or 14 percent. Excluding the effect of Household for the first six
months of 1997, employment-related expenses would have increased $33.8 million
or 10 percent. Net occupancy expenses totaled $56.5 million, up $8.8 million
over the previous year. Net occupancy expenses would have increased $5.0 million
or 11 percent, excluding the effect of Household for the first six months of
1997. These expense increases reflect planned growth and expansion of several
lines of business, such as adding new locations to the community banking network
and creation of central processing utilities. Marketing expenses decreased $3.7
million or 12 percent in anticipation of the sale of the credit card portfolio
(see Note 22 on page 81 of this Report for additional information). Expert
services increased $11.8 million or 61 percent with Household contributing $1.7
million, primarily as a result of converting the community bank subsidiaries to
a single retail banking platform and Year 2000 compliance activities (see the
Risk Management Summary section of this Report on page 31 for further
information). Other noninterest expenses increased $3.6 million or 5 percent
over the previous year. Excluding the impact of Household expenses for the first
six months of 1997, other noninterest expenses would have decreased $2.4 million
or 3 percent. Amortization of goodwill and other valuation intangibles increased
$9.7 million, with virtually the entire increase resulting from the Household
transaction.
INCOME TAXES
The Corporation recorded income tax expense of $70.1 million in 1997,
compared to $65.8 million in 1996, primarily due to greater (approximately $18.5
million) pretax earnings. The Corporation's effective tax rate decreased to 30.9
percent in 1997 from 31.6 percent in 1996.
At December 31, 1997, the Corporation's Federal and Illinois net deferred
tax assets were $62.0 million and $13.9 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.
16
<PAGE> 18
The deferred taxes reported on the Corporation's Statement of Condition at
December 31, 1997 also include a $7.6 million liability for the tax effect of
unrealized gains or losses associated with marking to market certain securities
designated as available-for-sale in accordance with SFAS No. 115.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which specifies the computation and
presentation of earnings per share (EPS) for entities with publicly held common
stock or potential common stock. The Statement does not require presentation of
EPS in statements of wholly-owned subsidiaries. SFAS No. 128 replaces the
presentation of primary EPS and fully diluted EPS with basic EPS and diluted
EPS, respectively. It requires a dual presentation of basic and diluted EPS on
the face of the income statement and a reconciliation of the numerator and
denominator of the basic EPS computation to the diluted EPS computation. The
Statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997. The Corporation presented basic EPS in
accordance with this Statement for the year-ended December 31, 1997 and it did
not require revision of prior disclosures.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." The Statement establishes disclosure requirements for
the capital structure of both public and nonpublic companies by consolidating
required disclosures from previously-issued Statements and Opinions. The
Statement is effective for financial statements for periods ending after
December 15, 1997. The Corporation adopted this Statement for the year-ended
December 31, 1997 and it did not require revision of prior disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and display of
comprehensive income and its components and requires presentation in a full set
of general-purpose financial statements. Comprehensive income is the change in
an enterprise's equity that results from transactions during the period with
nonowner sources; it includes net income and specific items that bypass net
income and are reported as a separate component of equity. The Statement is
effective for fiscal years beginning after December 15, 1997. The Corporation
intends to adopt this Statement in 1998 and does not expect it to have a
material effect on the Corporation's financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Statement establishes standards for
reporting financial and nonfinancial information about an enterprise's operating
segments in annual financial statements and interim financial reports issued to
shareholders. The Statement is effective for fiscal years beginning after
December 15, 1997. The Corporation intends to adopt this Statement in 1998 and
does not expect it 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 0.82 percent in 1997 compared with 0.83 percent in 1996. 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, 1997. Average common
stockholder's equity to average total assets provides a measure of leverage for
the Corporation. The ratio of average common stockholder's equity to average
total assets was 6.91 percent in 1997 compared to 6.42 percent in 1996. For
1997, the return on common stockholder's equity was 10.54 percent, down from the
11.55 percent achieved in 1996 and the 11.54 percent five-year average return
for the period ended December 31, 1997. Comparability of returns on both average
assets and common stockholder's equity between 1997 and 1996 was affected by the
Household acquisition, including the one-time $10.0 million after-tax SAIF
charge.
17
<PAGE> 19
Cash ROA was 0.92 percent in 1997 and 0.91 percent in 1996. Cash ROE was
13.87 percent and 14.17 percent in 1997 and 1996, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1997 1996 1995
---- ---- ----
(BASED ON NET INCOME
AND DAILY AVERAGES)
<S> <C> <C> <C>
Return on assets(1)......................................... 0.82% 0.83% 0.95%
Return on assets (cash basis)(2)............................ 0.92 0.91 1.00
Common stockholder's equity as a percentage of total
assets(1)................................................. 6.91 6.42 6.99
Return on common stockholder's equity(1).................... 10.54 11.55 13.61
Return on common stockholder's equity (cash basis)(3)....... 13.87 14.17 14.77
Dividend payout ratio(4).................................... 38.99 44.40 178.04
Earnings retained as a percentage of common stockholder's
equity(5)................................................. 7.38 7.18 (10.62)
Percentage growth in total average assets................... 11.89 10.72 9.13
</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) Cash basis return on average assets is calculated as net income plus
after-tax amortization expenses of goodwill and other valuation intangibles,
divided by average assets less average intangible assets.
(3) Cash basis return on average common stockholder's equity is calculated as
net income applicable to common stock plus after-tax amortization expenses
of goodwill and other valuation intangibles, divided by average common
stockholder's equity less tax effected average intangible assets.
(4) Dividends on common and preferred stock as a percent of net income. 1997
includes both cash and noncash dividends. 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.
(5) 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 $1.63 billion at December 31, 1997, has
increased significantly from five years earlier when equity capital amounted to
$930 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 9 of this Report for additional information.
During 1997 and 1996, Bankcorp declared and paid common dividends of $44.5
million and $48.2 million, respectively, and preferred dividends of $16.6
million and $15.0 million, respectively. Included in 1997 common dividends were
cash dividends of $42.0 million and a $2.5 million dividend-in-kind related to
the partial transfer of Harris Trust Company of Florida to Bankmont. During
1995, common dividends declared and paid amounted to $262.7 million which
included a $205 million special dividend as part of a capital restructuring.
During 1997, the Corporation's equity capital was increased by $19.6 million
representing after-tax unrealized holding gains related to the Corporation's
debt and equity securities classified as available-for-sale. During 1996, equity
capital was reduced by $35.2 million of after-tax unrealized holding losses.
Average consolidated equity capital for 1997 was $1.6 billion, compared with the
1996 average of $1.3 billion and the 1995 average of $1.1 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 101 percent at December
31, 1997, down slightly from 102 percent at December 31, 1996. 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
18
<PAGE> 20
investments are supported, in part, by parent-issued debt. In the case of
Bankcorp, outstanding long-term debt is sufficient to fund equity investments
not otherwise covered by equity capital.
RISK-BASED CAPITAL
U.S. banking regulators have issued risk-based capital guidelines, based on
the international "Basle Committee" agreement, which are applicable to all U.S.
banks and bank holding companies. These guidelines serve to: 1) establish a
uniform capital framework which is more sensitive to risk factors, including
off-balance-sheet exposures; 2) promote the strengthening of capital positions;
and 3) diminish a source of competitive inequality arising from differences in
supervisory requirements among countries. Bankcorp, as a U.S. bank holding
company, and HTSB, as a state-member bank, must each adhere to the guidelines of
the Federal Reserve Board (the "Board"), which are not significantly different
than those published by other U.S. banking regulators. Effective December 31,
1992, the guidelines specify minimum ratios for Tier 1 capital to risk-weighted
assets of 4 percent and total regulatory capital to risk-weighted assets of 8
percent.
Risk-based capital guidelines define total capital to consist of Tier 1
(core) and Tier 2 (supplementary) capital. In general, Tier 1 capital is
comprised of stockholder's equity, including certain types of preferred stock,
less goodwill and 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 1997,
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 7.94 percent and 10.72 percent,
respectively, at December 31, 1997.
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 6.81 percent for fourth quarter 1997
and 6.88 percent for fourth quarter 1996.
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 72 of this Report. Based on those regulations effective at
December 31, 1997, all of the Corporation's subsidiary banks were designated as
"well capitalized" at year-end 1997, 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, 1997 the Corporation's intangible assets
totaled $293.0 million, including approximately $277.4 million of intangibles
excluded under capital guidelines. The Corporation's tangible Tier 1 leverage
ratio (which excludes all intangibles) was 6.74 percent for the fourth quarter
of 1997.
Risk-based capital guidelines 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 continue to be deducted from Tier 1 capital. Net
unrealized holding gains (losses) excluded for risk-based capital purposes
amounted to $11.5 million and ($8.1) million at December 31, 1997 and 1996,
respectively.
19
<PAGE> 21
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
---------------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets (end of period)........................ $20,133,461 $18,228,740 $15,676,201
=========== =========== ===========
Average assets (fourth quarter)..................... $19,978,660 $18,159,800 $16,325,680
=========== =========== ===========
Risk-based on-balance-sheet assets.................. $13,051,738 $11,975,359 $10,336,569
=========== =========== ===========
Risk-based off-balance-sheet assets................. $ 4,112,859 $ 3,508,486 $ 3,203,701
=========== =========== ===========
Total risk-based assets, net of deductions
(based on regulatory accounting
principles).................................. $16,883,446 $15,191,093 $13,540,270
=========== =========== ===========
Tier 1 capital...................................... $ 1,339,949 $ 1,230,628 $ 1,100,899
=========== =========== ===========
Supplementary capital............................... $ 470,443 $ 501,497 $ 492,911
=========== =========== ===========
Total capital, net of deductions (based on
regulatory accounting principles)............ $ 1,809,767 $ 1,731,448 $ 1,593,810
=========== =========== ===========
Tier 1 leverage ratio............................... 6.81% 6.88% 6.77%
Risk-based capital ratios:
Tier 1......................................... 7.94% 8.10% 8.14%
Total.......................................... 10.72% 11.40% 11.79%
</TABLE>
Effective February 11, 1998, HPCC issued $250 million of 7 3/8 percent
noncumulative, exchangeable Series A preferred stock. The preferred stock,
listed and traded on the New York Stock Exchange, is nonvoting except in certain
circumstances as outlined in HPCC's S-11. Dividends on the preferred stock are
noncumulative and are payable at the rate of 7 3/8 percent per annum of the $25
per share liquidation preference. The preferred shares can be redeemed in whole
or in part at HPCC's option on or after March 30, 2003 or upon the occurrence of
a tax event as defined in the S-11. Upon the occurrence of specific events
described in the S-11, including HTSB becoming less than "adequately
capitalized", HTSB being placed into conservatorship or receivership or the
Board of Governors of the Federal Reserve Bank directing such an exchange, each
preferred share would be exchanged automatically for one newly issued HTSB
preferred share. The Series A preferred shares will qualify as Tier 1 capital at
both HTSB and Bankcorp for U.S. banking regulatory purposes under relevant
regulatory capital guidelines.
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.
20
<PAGE> 22
Some level of liquidity is provided by maintaining assets which mature
within a short time-frame or could be sold quickly without significant loss. The
Corporation's liquid assets include cash and demand balances due from banks,
money market assets, portfolio securities available for sale and trading account
assets. Liquid assets represented approximately 36 percent of the Corporation's
total assets and amounted to $7.27 billion at December 31, 1997 compared to
liquid assets of $6.29 billion or approximately 34 percent of total assets one
year earlier. However, the most important source of liquidity is the ability to
raise funds, as required, in a variety of markets using multiple instruments.
This fund-raising activity involves the identification of broadly distributed
sources of funds, typically referred to as managed liabilities, which are varied
by type, maturity and geographical location of customers. The Corporation
monitors and controls the sources of these funds to avoid unwarranted market
activity or customer concentrations.
The principal sources of external funds available to the Corporation are
retail and wholesale liabilities. Retail liabilities are comprised of demand
deposits, money market accounts, NOW accounts, passbook savings and
nonnegotiable certificates of deposit, typically of small denomination.
Wholesale funding sources include Eurodollar deposits in foreign offices,
Federal funds borrowed, securities sold under agreement to repurchase,
negotiable large denomination certificates of deposit and commercial paper. HTSB
offers to institutional investors from time to time, unsecured short-term and
medium-term bank notes in an aggregate principal amount of up to $1.5 billion
outstanding at any time. The term of each note could range from fourteen days to
fifteen years. The notes are subordinated to deposits and rank pari passu with
all other senior unsecured indebtedness of HTSB. As of December 31, 1997, $100
million of short-term notes were outstanding with original maturities of 14 days
and an interest rate of 5.90 percent. 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.
In connection with the acquisition of branches previously owned by
Household in June 1996, 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.
The Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and certificates, and
money market accounts, increased from $8.69 billion or 57 percent of total
non-equity funding at December 31, 1996 to $10.63 billion or 63 percent of total
non-equity funding at December 31, 1997. Total wholesale deposits and short-term
borrowings decreased from $6.45 billion or 43 percent of total non-equity
funding at December 31, 1996 to $6.35 billion or 37 percent of total non-equity
funding at December 31, 1997.
Average money market liabilities decreased 7 percent to $3.00 billion from
$3.22 billion for 1996, primarily as a result of decreases in Federal funds
borrowed and securities sold under repurchase agreements. Average money market
assets increased $40.4 million or 5 percent from 1996. These assets represented
5 percent of average earning assets in 1997, remaining virtually unchanged from
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 1997 or 1996.
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.
21
<PAGE> 23
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, 1997
----------------------------------------------------------------------------------------
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........................ $ 5,990 $1,483 $ 846 $2,076 $ 449 $ 24 $10,868
Portfolio and trading account
securities................ 1,178 776 500 1,686 1,137 6 5,283
Interest-bearing deposits at
banks..................... 27 385 186 -- -- -- 598
Federal funds sold and
securities purchased under
agreement to resell....... 81 -- -- -- -- -- 81
Assets held for sale......... 726 -- -- -- -- -- 726
Other assets................. -- -- -- -- -- 2,577 2,577
------- ------ ------ ------ ------ ------- -------
Total assets................... 8,002 2,644 1,532 3,762 1,586 2,607 $20,133
------- ------ ------ ------ ------ ------- =======
LIABILITIES AND STOCKHOLDER'S
EQUITY
Time deposits................ 2,620 785 1,664 670 14 -- 5,753
Savings and interest checking
deposits.................. 4,468 -- -- -- -- -- 4,468
Noninterest-bearing
deposits.................. -- -- -- -- -- 4,211 4,211
------- ------ ------ ------ ------ ------- -------
Total deposits................. 7,088 785 1,664 670 14 4,211 14,432
Federal funds purchased and
securities sold under
agreement to repurchase... 2,150 292 9 1 -- -- 2,452
Other interest-bearing
liabilities............... 934 71 150 99 80 -- 1,334
Other noninterest-bearing
liabilities............... -- -- -- -- -- 282 282
Stockholder's equity......... -- -- -- -- -- 1,633 1,633
------- ------ ------ ------ ------ ------- -------
Total liabilities and
stockholder's equity......... 10,172 1,148 1,823 770 94 6,126 $20,133
------- ------ ------ ------ ------ ------- =======
Interest sensitivity gap
before net interest rate
swaps, derivative products
and forward commitments... (2,170) 1,496 (291) 2,992 1,492 (3,519)
Net interest rate swaps........ (285) 208 195 (82) (36) --
Derivative products and forward
commitments.................. 22 99 -- -- (121) --
------- ------ ------ ------ ------ -------
Interest sensitivity gap..... $(2,433) $1,803 $ (96) $2,910 $1,335 $(3,519)
======= ====== ====== ====== ====== =======
Cumulative gap............... $ (630) $ (726) $2,184 $3,519
====== ====== ====== ======
</TABLE>
22
<PAGE> 24
The schedule above presents the Corporation's consolidated interest
sensitivity gap at December 31, 1997. 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. Certificates of deposit are reported based upon scheduled
maturity without reference to early redemption or renewal options. Fixed term
assets such as residential mortgages and consumer loans are reported based upon
schedule repayments and estimated prepayments based on historical behavior. A
negative gap in a given time span indicates an excess of interest-bearing
liabilities over interest earning assets which reprice in that period. After
including interest rate swaps, derivative products and forward commitments, at
December 31, 1997, the Corporation had a cumulative negative one-year interest
rate gap of $726 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. These risk measurements include the impact of changes in interest
rates on all of the Corporation's assets, liabilities and off-balance-sheet
positions. They do not contemplate actions the Corporation could take to reduce
risk or actions customers might take in response to changing rates. Earnings
risk represents the 12-month impact on net income, and valuation risk represents
the change in value of the Corporation's assets and liabilities from adverse
changes in interest rates over the period that would be required to eliminate
open positions. The model of earnings risk and valuation risk is based on a
statistical analysis of historical data to calculate with 97.5% confidence the
potential loss in earnings/change in value the Corporation might experience if
an adverse change in market rates were to occur. 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 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, 1997, for an immediate 100
basis point upward movement in interest rates net interest income would increase
by approximately $7 million over the next year compared to what it would
otherwise have been, and the net equity value of all interest-sensitive
positions would decrease by $74 million. Conversely, a decline in rates would
have approximately the same absolute impacts but in the opposite direction. At
December 31, 1996, the same analysis using similar assumptions indicated that
net income would have increased by approximately $9 million and the net equity
value of all interest-sensitive positions would have decreased by $81 million.
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 46 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.
23
<PAGE> 25
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 $29 million. Year-end trading account assets
decreased $57 million year to year, while loans held for sale (primarily
residential mortgages) increased $12 million.
In 1997, the Corporation's investing activities utilized a total of $1.95
billion in net cash. Portfolio securities, the primary use of new funds,
increased $1.20 billion. Interest-bearing deposits at banks decreased $60
million and Federal funds sold and securities purchased under agreement to
resell decreased $214 million.
In 1997, the Corporation's financing activities included accepting customer
deposits, purchasing Federal funds and issuing short-term senior notes.
Financing activities provided $1.77 billion of net cash available to the
Corporation in 1997. Deposits increased $1.44 billion and short-term senior
notes of $250 million were repaid, net. 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.
In the past three years, the Corporation has had three significant noncash
transaction. As of December 31, 1997, credit card loan balances were transferred
to assets held for sale in anticipation of their sale in January 1998. See Note
22 on page 81 of this Report for further information. In July 1997, 80 percent
ownership of Harris Trust/Bank of Montreal was transferred through a noncash
dividend to Bankmont. On December 29, 1995, all held-to-maturity securities were
reclassified to available-for-sale. See Portfolio Securities section below for
further information. Noncash portions of these transactions were excluded from
the Corporation's Consolidated Statement of Cash Flows.
SELECTED LOAN MATURITY SPREAD
Variable rate loans, excluding consumer loans, accounted for 58 percent of
total loans in 1997 compared to 56 percent in 1996. Excluding consumer loans,
term loans (those with a remaining contractual maturity in excess of one year)
totaled $1.22 billion. Of these loans, $1.0 billion or 84 percent are due within
five years. Overall, the average FTE yield on total loans increased to 8.45
percent in 1997 from 8.43 percent in 1996. The Corporation's average prime rate
in 1997 was 8.44 percent compared to 8.27 percent in 1996.
Type of Loan, by Maturity*
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
WITHIN 1 THROUGH OVER
1 YEAR 5 YEARS 5 YEARS TOTAL
------ --------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural.......... $6,236,669 $ 995,638 $190,576 $7,422,883
Real estate construction........................ 129,169 33,798 919 163,886
Foreign......................................... 88,976 -- -- 88,976
---------- ---------- -------- ----------
$6,454,814 $1,029,436 $191,495 $7,675,745
========== ========== ======== ==========
Loans with:
Predetermined interest rates.................. $ 676,197 $ 607,204 $102,259 $1,385,660
Floating interest rates....................... 5,778,617 422,232 89,236 6,290,085
---------- ---------- -------- ----------
$6,454,814 $1,029,436 $191,495 $7,675,745
========== ========== ======== ==========
</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 are segregated into
24
<PAGE> 26
"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, 1997,
available-for-sale securities included $19.0 million of fair value above
amortized cost and stockholder's equity included $11.5 million of unrealized
(after tax effect) holding gains. 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.
Portfolio securities averaged $4.90 billion in 1997. On an FTE basis,
interest income from portfolio securities increased $43.4 million to $319.5
million. The overall FTE yield on the Corporation's portfolio securities
averaged 6.51 percent during 1997. Yields on the portion of average portfolio
securities classified as available-for-sale are based on amortized cost.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ -----
(FULLY TAXABLE EQUIVALENT YIELDS)
(DAILY BALANCE SHEET AVERAGES, DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Portfolio securities available-for-sale
U.S. Treasury........................ $1,658,037 6.37% $1,585,333 6.37% $1,536,686 6.10%
Federal agency....................... 2,810,739 6.38 2,271,859 6.26 1,504,096 6.31
State and municipal.................. 313,896 8.68 311,202 9.22 379,337 11.27
Other................................ 32,880 4.81 50,785 5.43 153,833 5.74
---------- ---------- ----------
Total portfolio securities
available-for-sale........... $4,815,552 6.51% $4,219,179 6.50% $3,573,952 6.72%
========== ==== ========== ==== ========== =====
</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 1997,
the Corporation purchased $14.2 billion of available-for-sale securities, sold
$1.31 billion of available-for-sale securities and had $11.67 billion of
available-for-sale securities mature. 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. The aforementioned sales of securities generated a pretax net
gain of $13.2 million during 1997 compared to a net gain of $8.8 million during
1996 and a net gain of $23.4 million in 1995. $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 $8.1 million in 1997 compared to $5.4 million in 1996
and $14.3 million in 1995. 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 gains for available-for-sale securities, as of December
31, 1997, amounted to $19.0 million compared to unrealized holding losses of
$13.5 million as of December 31, 1996. The change in
25
<PAGE> 27
unrealized gains and losses of $32.5 million was due to gains in market value as
a result of fluctuations in interest rates at year-end 1997 versus year-end 1996
and a change in the mix of the portfolio.
Carrying Value
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Portfolio securities available-for-sale
U.S. Treasury.......................... $1,628,882 31.1 $1,282,218 32.2 1,205,167 35.6
Federal agency......................... 3,253,819 62.2 2,357,726 59.2 1,740,578 51.3
State and municipal.................... 312,564 6.0 312,843 7.8 308,805 9.1
Other.................................. 34,125 0.7 32,396 0.8 135,417 4.0
---------- ----- ---------- ----- ---------- -----
Total portfolio securities
available-for-sale................ $5,229,390 100.0 $3,985,183 100.0 $3,389,967 100.0
========== ===== ========== ===== ========== =====
</TABLE>
At year-end 1997, the weighted average maturity of the Corporation's
portfolio securities was 5 years and 4 months, an increase of 1 year and 8
months from the average maturity at the end of 1996. The maturity distribution
of the investment portfolio at December 31, 1997, 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, 1997. 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>
Portfolio securities
available-for-sale
Within 1 year........ $ 271,034 5.88% $1,750,789 5.85% $ 47,048 9.45% $2,068,871 5.93%
1 to 5 years......... 688,397 3.30 776,968 6.31 156,954 8.39 1,622,319 5.23
5 to 10 years........ 665,460 5.86 92,951 6.59 80,432 8.04 838,843 6.15
Over 10 years........ -- -- 628,854 6.94 20,629 7.55 649,483 6.96
No stated maturity... -- -- -- -- 30,833 4.44 30,833 4.44
---------- ---- ---------- ---- -------- ---- ---------- ----
1997 Total........... $1,624,891 4.78% $3,249,562 6.19% $335,896 8.02% $5,210,349 5.87%
========== ==== ========== ==== ======== ==== ========== ====
1996 Total........... $1,295,286 5.98% $2,369,251 6.15% $334,129 8.29% $3,998,666 6.27%
========== ==== ========== ==== ======== ==== ========== ====
1997 Average
maturity............. 4 years 6 months 5 years 11 months 3 years 9 months 5 years 4 months
1996 Average
maturity............. 4 years 2 months 3 years 4 months 3 years 11 months 3 years 8 months
</TABLE>
Other than securities of the U.S. Government and its agencies and
corporations, at December 31, 1997, 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, 1997.
DEPOSITS
Total deposits in 1997 averaged $13.28 billion, up $1.76 billion or 15
percent from 1996. 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 $1.88 billion or 22
percent to $10.57 billion. In 1997 average core deposits associated with the
Household transaction were $2.95 billion compared to the average for six months
of $1.51 billion in 1996, an increase of $1.44 billion or 95 percent. Savings
certificates experienced the largest growth, up $838 million or 34 percent over
1996 levels, followed by
26
<PAGE> 28
money market accounts which increased by $530 million or 37 percent to $1.96
billion. Passbook and statement savings accounts and demand deposits grew by
$270 million or 24 percent and by $209 million or 7 percent over 1996 levels,
respectively. Interest checking deposits totaling $854 million remained at
relatively the same level as 1996. Deposits in foreign offices decreased by $364
million or 17 percent to $1.80 billion. Other time deposits reflected an
increase of $240 million or 36 percent from 1996. Daily averages and year-to-
year comparisons are summarized below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 VS. 1996 1996 VS. 1995
--------------------------------------- ---------------- ----------------
1997 1996 1995 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DAILY AVERAGES, DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits......... $ 3,020,864 $ 2,812,007 $ 2,808,747 $ 208,857 7 $ 3,260 --
Interest checking
deposits.............. 853,799 815,853 629,448 37,946 5 186,405 30
Money market accounts... 1,964,212 1,434,293 1,037,963 529,919 37 396,330 38
Passbook and statement
savings accounts...... 1,404,897 1,134,912 876,412 269,985 24 258,500 29
Savings certificates.... 3,329,464 2,491,855 1,565,689 837,609 34 926,166 59
Other time deposits..... 914,836 674,985 682,320 239,851 36 (7,335) (1)
Deposits in foreign
offices............... 1,795,952 2,159,909 2,435,124 (363,957) (17) (275,215) (11)
----------- ----------- ----------- ---------- --- ---------- ---
Total deposits........ $13,284,024 $11,523,814 $10,035,703 $1,760,210 15 $1,488,111 15
=========== =========== =========== ========== === ========== ===
</TABLE>
Interest expense on deposits increased by $77.5 million or 19.5 percent in
1997 primarily due to higher average deposit balances. Interest expense on
domestic deposits rose 33 percent from 1996, while interest on foreign office
deposits decreased by 15 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
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest checking deposits............................. 1.73% 1.87% 2.24%
Money market accounts.................................. 4.03 3.91 3.87
Passbook and statement savings accounts................ 3.29 3.29 3.71
Savings certificates................................... 5.67 5.64 5.69
Other interest-bearing time deposits................... 5.59 5.42 5.91
Time deposits in foreign offices....................... 5.48 5.37 5.97
Total interest-bearing deposits...................... 4.66% 4.61% 5.00%
==== ==== ====
</TABLE>
Certificates of deposit in denominations of $100,000 or more issued by
domestic offices totaled $1,637 million at December 31, 1997. Total 1997
interest expense on domestic office certificates of deposit of $100,000 or more
amounted to approximately $115.1 million compared to $70.1 million in 1996.
Virtually all time deposits in foreign offices were in denominations of $100,000
or more.
Domestic Office Certificates of Deposit
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-----------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Maturities:
3 months of less............................................ $1,132 $402
3 to 6 months............................................... 229 250
6 to 12 months.............................................. 178 139
Over 12 months.............................................. 98 123
------ ----
Total..................................................... $1,637 $914
====== ====
</TABLE>
27
<PAGE> 29
MONEY MARKET ASSETS AND LIABILITIES
The Corporation conducts most of its money market activities through HTSB.
Average money market assets, consisting primarily of interest-bearing deposits
at banks, Federal funds sold and securities purchased under agreement to resell,
increased 5 percent to $831 million in 1997 from $791 million in 1996. The
average yield on money market assets decreased from 5.50 percent in 1996 to 5.31
percent in 1997. Interest income earned on these assets increased 4 percent to
$44.2 million in 1997. At December 31, 1997, interest-bearing deposits at banks
and Federal funds sold totaled $598 million and $81 million, respectively,
compared to $658 million and $295 million at year-end 1996. There were no
reverse repurchase agreements outstanding at December 31, 1997 or December 31,
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 1997, money market liabilities averaged $3.70 billion, an increase of 2
percent from 1996, when money market liabilities averaged $3.61 billion. The
average rate paid on these borrowings increased from 5.07 percent in 1996 to
5.32 percent in 1997, reflecting generally higher short-term interest rates
experienced by the market during 1997. At December 31, 1997, repurchase
agreements totaled $1.87 billion compared to $1.42 billion at year-end 1996.
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 1997, 1996 and 1995:
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year...................... $2,451,873 $1,983,047 $1,896,817
Average interest rate of outstanding borrowings at end
of year.............................................. 5.65% 6.64% 5.14%
Highest amount outstanding as of any month-end during
the year............................................. $3,633,014 $3,116,382 $2,894,321
Daily average amount outstanding during the year....... $2,610,976 $2,524,176 $2,253,142
Daily average annualized rate of interest.............. 5.22% 5.00% 5.65%
</TABLE>
Short-term borrowings consist primarily of term borrowings in excess of
three days, term Federal funds purchased and short sales of securities. The
following amounts and rates applied during 1997, 1996 and 1995:
Short-Term Borrowings
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................... $503,320 $347,690 $843,049
Average interest rate of outstanding borrowings at end of
year...................................................... 5.96% 5.27% 5.77%
Highest amount outstanding as of any month-end during the
year...................................................... $503,320 $858,381 $843,049
Daily average amount outstanding during the year............ $ 68,396 $421,200 $488,042
Daily average annualized rate of interest................... 5.09% 4.88% 5.44%
</TABLE>
28
<PAGE> 30
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 1997, 1996 and 1995:
Commercial Paper
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................... $351,427 $334,653 $292,022
Average interest rate of outstanding commercial paper at end
of year................................................... 5.31% 5.06% 5.32%
Highest amount outstanding as of any month-end during the
year...................................................... $390,739 $334,653 $295,629
Daily average amount outstanding during the year............ $320,805 $275,194 $269,569
Daily average annualized rate of interest................... 5.23% 5.08% 5.58%
</TABLE>
Senior notes are short- and medium-term notes issued to institutional
investors from time-to-time. During 1997, 1996 and 1995 only short-term notes
were outstanding. The following amounts and rates applied during 1997, 1996 and
1995.
Senior Notes
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................ $ 100,000 $350,000 $ 478,000
Average interest rate of outstanding senior notes at end
of year................................................ 5.90% 5.61% 5.65%
Highest amount outstanding as of any month-end during the
year................................................... $1,325,000 $589,000 $1,054,245
Daily average amount outstanding during the year......... $ 695,329 $392,283 $ 512,205
Daily average annualized rate of interest................ 5.57% 5.72% 6.08%
</TABLE>
29
<PAGE> 31
LOANS
SUMMARY
In 1997, 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
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Manufacturing and processing............. $ 2,343.5 $ 1,817.0 $1,437.7 $1,065.5 $ 972.9
Public and private service industries.... 2,383.6 2,073.0 1,968.4 1,738.7 1,593.7
Mining (including oil and gas)........... 14.5 24.8 27.8 8.0 25.2
Farmers.................................. 163.6 148.3 35.5 35.3 28.0
Individuals (single payment)............. 534.7 402.0 344.5 394.3 371.1
Loans to purchase and carry securities... 25.6 41.4 76.4 62.7 92.5
State and political subdivisions,
including industrial revenue bonds.... 12.9 18.3 28.5 37.5 53.8
Other commercial......................... 494.5 583.0 607.5 568.4 606.8
--------- --------- -------- -------- --------
Total Commercial...................... 5,972.9 5,107.8 4,526.3 3,910.4 3,744.0
--------- --------- -------- -------- --------
Finance companies........................ 217.5 233.7 215.4 207.3 188.7
Commercial banks......................... 1.5 111.9 15.8 14.7 7.8
Investment companies..................... 93.8 74.7 77.4 66.8 64.5
Mortgage companies....................... 68.4 3.4 5.1 4.6 14.3
Other financial institutions............. 631.4 505.3 393.1 247.8 245.3
--------- --------- -------- -------- --------
Total Financial Institutions.......... 1,012.6 929.0 706.8 541.2 520.6
--------- --------- -------- -------- --------
Total Brokers and Dealers............. 437.3 447.4 331.4 392.5 448.8
--------- --------- -------- -------- --------
Construction............................. 163.9 186.9 195.7 175.5 197.6
Mortgages secured by residential
property.............................. 2,218.2 1,947.6 1,511.8 1,252.9 1,185.2
Mortgages secured by commercial property
...................................... 424.3 436.1 485.0 374.6 378.3
--------- --------- -------- -------- --------
Total Real Estate..................... 2,806.4 2,570.6 2,192.5 1,803.0 1,761.1
--------- --------- -------- -------- --------
Charge card*............................. -- 1,041.9 1,095.8 898.3 708.2
Other installment........................ 531.5 484.1 478.4 436.8 312.0
--------- --------- -------- -------- --------
Total Installment (to individuals).... 531.5 1,526.0 1,574.2 1,335.1 1,020.2
--------- --------- -------- -------- --------
Total Lease Financing................. 23.0 29.9 -- -- --
--------- --------- -------- -------- --------
Total Domestic Loans.................. 10,783.7 10,610.7 9,331.2 7,982.2 7,494.7
--------- --------- -------- -------- --------
Foreign Loans:
Governments and official institutions.... 0.9 1.0 1.0 1.0 1.0
Banks and other financial institutions... 51.0 137.6 160.8 250.6 221.6
Other, primarily commercial and
industrial............................ 37.1 3.0 40.9 16.2 8.1
--------- --------- -------- -------- --------
Total Foreign Loans................... 89.0 141.6 202.7 267.8 230.7
--------- --------- -------- -------- --------
Less unearned income....................... 4.4 7.6 16.1 20.7 21.4
--------- --------- -------- -------- --------
Loans, net of unearned income............ $10,868.3 $10,744.7 $9,517.8 $8,229.3 $7,704.0
========= ========= ======== ======== ========
</TABLE>
- -------------------------
* In anticipation of HTSB's sale of its credit card portfolio on January 29,1998
credit card loan balances were reclassified as of December 31,1997 to assets
held for sale. See Note 22 to Financial Statements on page 81 of this Report.
30
<PAGE> 32
Average loans increased by 10 percent during 1997 compared to 1996. Daily
average loans over the last five years were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DAILY AVERAGES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural.................... $ 6,965,201 $6,462,497 $5,716,282 $5,107,563 $4,762,573
Real estate construction.......... 196,864 178,338 164,575 185,101 193,104
Real estate mortgages............. 2,171,475 1,686,435 1,257,370 1,062,828 998,256
Installment....................... 708,045 451,430 503,073 418,166 318,405
Charge card....................... 806,085 965,043 971,565 740,088 613,931
Foreign........................... 92,390 214,767 190,816 180,830 178,215
Lease financing................... 26,883 1,986 -- 10 798
----------- ---------- ---------- ---------- ----------
Total loans.................. 10,966,943 9,960,496 8,803,681 7,694,586 7,065,282
Less unearned income.............. 5,667 12,670 18,110 22,011 20,474
----------- ---------- ---------- ---------- ----------
Loans, net of unearned income... $10,961,276 $9,947,826 $8,785,571 $7,672,575 $7,044,808
=========== ========== ========== ========== ==========
</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 $7.98 billion
and $2.89 billion, respectively, of total loans at 1997 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 1997, 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 liquidity risk and market risk.
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange
rates and equity prices. The Corporation's market risk is composed
primarily of interest rate risk.
3) Operating risk, which is risk that systems and controls do not
accurately or safely process transactions or safeguard 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.
31
<PAGE> 33
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 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 65 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 1997 fourth
quarter at 4.7 percent and projected to increase to 4.8 percent in 1998, 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.
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.
32
<PAGE> 34
The Corporation's exposure to interest rate risk is primarily managed
within the Corporation's Treasury Group. The Corporation follows BMO's Corporate
Standard for Position Risk Tolerance ("the Standard") to define the maximum
potential exposures that are permissible for interest rate risk activities. The
Standard is defined in terms of both earnings risk and valuation risk for the
Corporation's banking subsidiaries. For further information on interest rate
risk, see the Interest Sensitivity section on page 22 of this Report.
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two digit date position which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e. "99") could be the maximum date value these systems will be able to
accurately process. Because the Corporation utilizes and is dependent upon data
processing systems and software to conduct its business, the Corporation's
management recognizes the need to ensure its operations will not be adversely
impacted by year 2000 issues and is managing the related operational risk
accordingly. In 1996, the Corporation formed a Year 2000 Project Office to plan,
implement and manage year 2000 compliance. The renovation effort is well
underway and the Corporation is currently evaluating the need for testing
activities with customers, suppliers and various interfaces to the national and
global payments systems. The costs incurred in addressing the year 2000 problem
are expensed as incurred in accordance with generally accepted accounting
principles. Management estimates the cost of achieving year 2000 compliance to
be approximately $35 million (pre-tax) over the cost of normal software upgrades
and replacements that would have been incurred over the four-year period ending
with the year 2000. Through the end of 1997, approximately $12 million of costs
have been incurred. A significant portion of these costs would probably not have
been incremental to the Corporation, but would represent a redeployment of
existing information technology resources.
NONACCRUAL, RESTRUCTURED AND PAST DUE LOANS
Management closely monitors nonperforming assets, including assets received
in satisfaction of debt. Nonperforming assets were 0.18 percent of total loans
at December 31, 1997, compared with 0.29 percent at year-end 1996. All
nonperforming loans are domestic.
33
<PAGE> 35
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 $1.0 million in 1997 compared to $3.1 million
a year ago.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.............................. $17,790 $28,153 $50,503 $83,803 $ 91,131
Restructured loans............................ 598 1,512 2,059 2,889 3,262
------- ------- ------- ------- --------
Total nonperforming loans..................... 18,388 29,665 52,562 86,692 94,393
Other assets received in satisfaction of
debt........................................ 1,300 1,562 2,470 8,071 19,000
------- ------- ------- ------- --------
Total nonperforming assets............... $19,688 $31,227 $55,032 $94,763 $113,393
======= ======= ======= ======= ========
90-day past due loans, still accruing interest
(all domestic).............................. $27,083 $46,369 $28,302 $31,071 $ 33,491
======= ======= ======= ======= ========
Gross amount of interest that would have been
recorded if all year-end nonperforming loans
had been accruing interest at their original
terms....................................... $ 1,061 $ 3,134 $ 4,500 $ 5,278 $ 6,292
Interest income actually recognized........... 51 76 1,572 1,348 2,569
------- ------- ------- ------- --------
Interest shortfall, before consideration of
any income tax effect....................... $ 1,010 $ 3,058 $ 2,928 $ 3,930 $ 3,723
======= ======= ======= ======= ========
Nonperforming loans to total loans at
year-end.................................... 0.17% 0.28% 0.5% 1.05% 1.23%
Nonperforming assets to total loans at
year-end.................................... 0.18 0.29 0.58 1.15 1.47
======= ======= ======= ======= ========
</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, 1997 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 $5.97 billion, or 55 percent of total outstandings at year-end
1997. Most of these credits were extended to manufacturing and service-related
companies. Outstandings to food and beverage industries represented 25 percent
of all manufacturing loans and 5 percent of total consolidated loans. The
largest concentration within service-related industries was consumer
wholesalers, which accounted for 35 percent of all service-related credits and 8
percent of total loans.
Foreign loans totaled $89 million at year-end 1997, accounting for 0.8
percent of the Corporation's total outstandings. Further details on the
Corporation's foreign loans can be found in the Foreign Outstandings section
below.
Real estate loans, including residential mortgages, totaled $2.81 billion
at December 31, 1997, or 26 percent of total outstandings. Mortgage loans
collateralized by residential property totaled $2.22 billion, or 21 percent of
loans. Commercial real estate mortgages and construction loans totaled $588
million at the end of 1997, representing 5 percent of loans. Further details on
the Corporation's commercial real estate outstandings can be found on page 35 of
this Report.
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, 1997, 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
34
<PAGE> 36
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>
1997
Outstandings (including accrued interest) to one
country in excess of 1% of total consolidated assets
at year-end:
None.............................................. $ -- $ -- $ --
1996
Outstandings (including accrued interest) to one
country in excess of 1% of total consolidated assets
at year-end:
Japan............................................. $210,000 $210,000 $ --
1995
Outstandings (including accrued interest) to one
country in excess of 1% of total consolidated assets
at year-end:
Japan............................................. $254,000 $246,000 $8,000
</TABLE>
At December 31, 1997, 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, 1997, the Corporation, primarily through its banking
subsidiaries, had outstanding commercial real estate loans of approximately $588
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 $2.3 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 1997 or 1996. 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 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
35
<PAGE> 37
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, 5 percent, 12 percent, 11 percent and 23 percent of the consolidated
allowance for possible loan losses was represented by doubtful portions of loans
at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. At December 31,
1997, the Corporation had allocated $6.5 million to loans internally categorized
as doubtful, compared to $8.0 million at year-end 1996.
At December 31, 1997 and 1996, the Corporation designated all of the
allocated portion of the allowance only to cover total domestic credit exposure;
accordingly, no allocation was deemed necessary for foreign exposure.
During 1997, the provision for loan losses increased to $58.4 million,
compared to $56.5 million in 1996. At year-end 1997, the allowance for possible
loan losses was $130.9 million, or 1.20 percent of total loans outstanding,
compared to $142.2 million or 1.32 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 1997, the ratios of the allowance for possible loan losses to
total loans and to nonperforming loans were 1.20 percent and 712 percent,
respectively.
Net charge-offs in 1997 were $69.8 million, or 0.64 percent of average
loans outstanding as compared to $48.4 million, or 0.49 percent of average loans
outstanding in 1996. Net charge-offs of domestic commercial loans amounted to
$11.5 million in 1997, or 0.17 percent of average domestic commercial loans
outstanding, an increase from $8.0 million, or 0.12 percent of average domestic
commercial loans outstanding in 1996. The charge card portfolio experienced net
charge-offs of $53.0 million and $39.3 million in 1997 and 1996, respectively,
or 6.58 percent and 4.07 percent, respectively, of average outstandings.
Installment loans, including real estate mortgages, had net charge-offs of $5.2
million in 1997, or 0.18 percent of average outstandings, and $1.7 million, or
0.08 percent of average outstandings in 1996. Over the five-year period ending
December 31, 1997, combined total net charge-offs were 0.62 percent of average
total loans outstanding.
36
<PAGE> 38
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, 1997 and 1996, the Corporation was not
required to maintain any special reserve under the aforementioned regulation.
The following table sets forth the Corporation's 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>
1997 1996 1995
------------------------- ------------------------- -------------------------
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.................. $ 38,102 73.7% $ 45,901 66.1% $ 59,255 65.5%
Retail, including charge.... 4,681 25.5 40,578 32.6 39,227 32.4
Foreign..................... -- 0.8 -- 1.3 -- 2.1
-------- ----- -------- ----- -------- -----
Total Allocated Portion....... 42,783 100.0% 86,479 100.0% 98,482 100.0%
===== ===== =====
Unallocated Portion........... 88,093 N/A 55,732 N/A 30,777 N/A
-------- -------- --------
Total......................... $130,876 $142,211 $129,259
======== ======== ========
</TABLE>
- -------------------------
* In anticipation of HTSB's sale of its credit card portfolio on January 29,
1998, credit card loan balances were reclassified as of December 31, 1997 to
assets held for sale. The retail component of the allocated allowance for
possible loan losses does not include any allocation for charge card at
December 31, 1997. See Note 22 to Financial Statements on page 81 of this
Report.
37
<PAGE> 39
Analysis Of Allowance For Possible Loan Losses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance................. $ 142,211 $ 129,259 $ 124,734 $ 131,676 $ 130,123
----------- ----------- ---------- ---------- ----------
Charge-offs:
Commercial, financial and
agricultural................. 16,545 12,808 20,967 31,900 43,537
Real estate construction........ 719 803 2,644 65 --
Installment and real estate
mortgages.................... 6,393 2,757 2,442 7,581 3,446
Charge card..................... 58,898 46,627 35,914 30,360 35,145
----------- ----------- ---------- ---------- ----------
Total charge-offs............ 82,555 62,995 61,967 69,906 82,128
----------- ----------- ---------- ---------- ----------
Recoveries:
Commercial, financial and
agricultural................. 5,030 4,799 11,063 7,216 10,657
Real estate construction........ 622 1,465 2,867 21 --
Installment and real estate
mortgages.................... 1,228 1,065 1,093 1,646 783
Charge card..................... 5,893 7,278 8,474 9,041 9,378
Foreign......................... -- -- -- -- 28
----------- ----------- ---------- ---------- ----------
Total recoveries............. 12,773 14,607 23,497 17,924 20,846
----------- ----------- ---------- ---------- ----------
Net charge-offs.............. 69,782 48,388 38,470 51,982 61,282
----------- ----------- ---------- ---------- ----------
Provisions charged (credited) to
expense:
Domestic........................ 58,447 56,540 46,814 44,922 61,707
Foreign......................... -- -- (3,819) 118 1,128
----------- ----------- ---------- ---------- ----------
Total provisions............. 58,447 56,540 42,995 45,040 62,835
----------- ----------- ---------- ---------- ----------
Allowance related to acquired
loans........................... -- 4,800 -- -- --
----------- ----------- ---------- ---------- ----------
Ending balance.................... $ 130,876 $ 142,211 $ 129,259 $ 124,734 $ 131,676
=========== =========== ========== ========== ==========
Net loans, end of period.......... $10,868,250 $10,744,653 $9,517,797 $8,229,254 $7,703,957
=========== =========== ========== ========== ==========
Net loans, daily averages......... $10,961,276 $ 9,947,826 $8,785,571 $7,672,575 $7,044,808
=========== =========== ========== ========== ==========
Ratios:
Net charge-offs to average loans
outstanding.................. 0.64% 0.49% 0.44% 0.68% 0.87%
Allowance for possible loan
losses to loans outstanding
(end of period).............. 1.20 1.32 1.36 1.52 1.71
Allowance for possible loan
losses to nonperforming loans
(end of period).............. 712 479 246 144 139
Allowance for possible loan
losses to nonperforming
assets....................... 665 455 235 132 116
Net charge-offs to allowance for
possible loan losses
(beginning of period)........ 49 37 31 39 47
</TABLE>
38
<PAGE> 40
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; and
HBIC.
International banking services contributed $28.9 million, or 18 percent, of
the Corporation's 1997 consolidated net income, compared to $16 million or 11
percent in 1996. International operating income was $60.8 million in 1997 and
represented 4 percent of the Corporation's total operating income. In 1996 and
1995, international operating income represented 3 and 4 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
--------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans:
Governments and official institutions..................... $ 937 $ 984 $ 984
Banks and other financial institutions.................... 50,960 137,560 160,808
Other, primarily commercial and industrial................ 37,079 2,976 40,900
-------- -------- --------
Total loans............................................ 88,976 141,520 202,692
-------- -------- --------
Allowance for possible loan losses........................ -- -- --
-------- -------- --------
Deposits in banks located outside the United States:
Interest-bearing.......................................... 598,062 651,508 447,700
Other..................................................... 1,728 6,331 64,499
-------- -------- --------
Total deposits in banks................................ 599,790 657,839 512,199
-------- -------- --------
Acceptances and other identifiable assets................... 27,782 36,298 102,337
-------- -------- --------
Total identifiable foreign assets...................... $716,548 $835,657 $817,228
======== ======== ========
Deposit liabilities:
Banks located in foreign countries........................ $ 80,579 $ 76,886 $346,832
Foreign governments and official institutions ............ 22 45 15,000
Other demand.............................................. 97,848 78,514 72,145
Other time and savings.................................... 41,044 271,717 176,466
-------- -------- --------
Total deposit liabilities.............................. 219,493 427,162 610,443
Short-term borrowings....................................... 82,724 32,676 107,645
Acceptances outstanding..................................... 27,511 36,024 55,898
-------- -------- --------
Total identifiable foreign liabilities................. $329,728 $495,862 $773,986
======== ======== ========
</TABLE>
39
<PAGE> 41
GEOGRAPHIC DISTRIBUTION
As of year-end 1997, 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 AT
OFFICES OFFICES BANKS TOTAL %
-------- ------- ----------- ----- -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Continental Europe.............................. $ 20,741 $ 1,407 $428,461 $450,609 66
Pacific and Far East............................ 11,345 -- 61,299 72,644 11
United Kingdom and Ireland...................... 3,563 29,839 185 33,587 5
Western Hemisphere (excluding U.S. and
Canada)....................................... 203 3,661 18,648 22,512 3
Canada.......................................... 13,315 4,902 89,028 107,245
Middle East and Africa.......................... -- -- 441 441 --
-------- ------- -------- -------- ---
Total international banking................ $ 49,167 $39,809 $598,062 $687,038 100
======== ======= ======== ======== ===
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
======== ======= ======== ======== ===
</TABLE>
FOURTH QUARTER 1997 COMPARED WITH FOURTH QUARTER 1996
Net income for the fourth quarter of 1997 was $39.7 million, up 5 percent
from fourth quarter 1996 earnings of $37.8 million. The earnings increase is
attributable primarily to strong business growth across corporate, private and
retail banking. ROE for fourth quarter 1997 was 10.17 percent and ROA was 0.79
percent, compared to respective returns of 10.54 percent and 0.83 percent in
last year's fourth quarter. Cash earnings were $44.2 million in the fourth
quarter of 1997, a 5 percent increase compared to the corresponding quarter in
1996. Cash ROE and Cash ROA were 13.20 percent and 0.89 percent, respectively,
compared to Cash ROE and Cash ROA of 14.13 percent and 0.94 percent,
respectively, in the same quarter a year ago.
Fourth quarter 1997 net interest income on a fully taxable equivalent basis
was $150.5 million, up $5.7 million or 4 percent from $144.7 million in 1996's
fourth quarter. Average earning assets rose 10 percent to $17.42 billion from
$15.79 billion in fourth quarter 1996, attributable to an increase of $876
million, or 20 percent in portfolio securities available-for-sale and a 7
percent or $779 million increase in average loans. Commercial, installment and
residential mortgage lending were the strongest contributors to this growth. Net
interest margin declined to 3.43 percent from 3.65 percent in the same quarter
last year. This principally
40
<PAGE> 42
reflects strong earning asset growth and slower core deposit growth. As a
result, much of the incremental supporting liabilities are wholesale funds with
higher effective rates.
Noninterest income of $98.0 million rose 11 percent in fourth quarter 1997
from the same quarter last year. In the current quarter trust fees rose $5.2
million and service charge fees increased $1.7 million. Foreign exchange income
rose $0.6 million. Securities gains and charge card revenue declined $1.2
million and $0.3 million, respectively. Other income, which includes syndication
fees, foreign fees, bank-owned life insurance and gains on mortgage sales,
increased $3.5 million from 1996.
Fourth quarter 1997 noninterest expenses of $173.0 million rose $16.4
million or 10 percent from fourth quarter last year. Employment expense
increased $12.6 million, or 15 percent from the prior year. Net occupancy
expense increased $0.3 million from a year ago. These expense increases reflect
continued growth and development of the Corporation's lines of business such as
adding new locations to the community banking network and creation of central
processing utilities. Expert services increased $1.5 million from a year ago,
primarily as a result of converting the community banking subsidiaries to a
single retail banking platform and Year 2000 compliance activities.
Income taxes decreased by $2.4 million during the current quarter primarily
reflecting a reduction in the Corporation's effective tax rate.
The fourth quarter 1997 provision for loan losses of $13.1 million was down
$1.2 million from $14.3 million in the fourth quarter of 1996. Net loan
charge-offs during the current quarter were $21.1 million, compared to $15.3
million in the same period last year, primarily reflecting higher writeoffs in
the charge card portfolio. On January 29, 1998, HTSB sold its credit card
portfolio. See Note 22 to Financial Statements on page 81 of this Report.
41
<PAGE> 43
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>
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
QTR. QTR. 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> <C> <C>
Interest income....... $329.5 $319.7 $320.7 $300.5 $298.9 $293.4 $278.0 $266.5 $279.8 $272.1 $260.0 $252.3
Interest expense...... 186.2 178.8 174.4 159.2 160.5 154.2 149.3 143.4 155.5 151.1 140.2 134.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income... 143.3 140.9 146.3 141.3 138.4 139.2 128.7 123.1 124.3 121.0 119.8 117.4
FTE adjustment........ 7.2 6.6 6.8 6.1 6.3 7.6 5.9 5.6 3.4 3.9 5.0 5.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest income --
FTE basis............ 150.5 147.5 153.1 147.4 144.7 146.8 134.6 128.7 127.7 124.9 124.8 122.8
Provision for loan
losses............... 13.1 15.0 16.4 13.9 14.3 15.0 13.7 13.5 11.6 11.0 11.8 8.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income
after Provision for
Loan Losses.......... 137.4 132.5 136.7 133.5 130.4 131.8 120.9 115.2 116.1 113.9 113.0 114.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Income
Trust and investment
management fees...... 34.6 34.3 33.2 31.6 29.4 29.1 29.4 29.8 36.9 38.0 36.3 38.7
Trading account...... 3.9 0.8 1.6 0.9 3.7 0.7 2.7 1.0 2.1 0.4 0.7 1.9
Foreign exchange..... 1.9 1.3 1.2 0.9 1.3 1.7 3.5 3.5 4.1 2.4 3.2 4.6
Charge card.......... 12.7 12.9 12.8 11.6 13.0 13.1 11.1 10.0 11.2 10.9 10.5 9.2
Service fees and
charges............ 24.7 25.1 23.7 23.4 23.0 23.6 19.3 17.1 17.9 16.2 17.5 17.7
Securities (losses)
gains.............. 3.3 5.9 2.6 1.3 4.5 0.7 0.1 3.4 2.8 1.7 16.8 2.1
Other................ 16.9 20.1 15.4 18.1 13.3 11.6 14.0 15.7 11.3 10.4 6.4 6.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total noninterest
income........... 98.0 100.4 90.5 87.8 88.2 80.5 80.1 80.5 86.3 80.0 91.4 80.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Expenses
Employment........... 95.1 94.1 92.8 90.1 82.5 84.9 81.2 78.4 79.8 78.9 79.3 80.2
Net occupancy........ 13.5 14.9 13.6 14.5 13.2 12.9 10.9 10.7 11.0 11.7 12.0 11.4
Equipment............ 13.0 12.3 12.3 10.6 11.3 10.3 10.3 9.8 11.4 10.9 10.4 9.8
Marketing............ 6.7 6.0 7.0 6.0 9.0 7.7 7.1 5.7 6.5 6.6 6.7 5.8
Communication and
delivery........... 6.7 6.1 6.0 5.4 5.7 4.7 5.2 5.3 5.3 5.1 5.2 4.7
Deposit insurance.... 0.8 0.7 0.8 0.6 (0.2) 18.3 -- -- 0.8 (0.3) 3.8 3.8
Expert services...... 8.4 9.1 8.3 5.2 6.9 4.3 3.5 4.7 6.9 5.1 5.5 2.9
Other................ 21.9 18.0 17.6 17.6 21.4 17.3 17.9 15.0 17.7 16.9 17.7 17.3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
166.1 161.2 158.4 150.0 149.8 160.4 136.1 129.6 139.4 134.9 140.6 135.9
Goodwill and other
valuation
intangibles........ 6.9 7.0 6.9 7.0 6.8 6.9 2.2 2.2 2.3 2.3 2.4 2.4
Total noninterest
expenses........... 173.0 168.2 165.3 157.0 156.6 167.3 138.3 131.8 141.7 137.2 143.0 138.3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
FTE income --pretax... 62.4 64.7 61.9 64.3 62.0 45.0 62.7 63.9 60.7 56.7 61.4 56.5
Applicable income
taxes................ 15.5 18.0 17.7 18.9 17.9 10.9 18.0 19.1 18.5 17.0 18.2 16.4
FTE adjustment........ 7.2 6.6 6.8 6.1 6.3 7.6 5.9 5.6 3.4 3.9 5.0 5.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income............ 39.7 40.1 37.4 39.3 37.8 26.5 38.8 39.2 38.8 35.8 38.2 34.7
Dividends on preferred
stock................ 4.1 4.2 4.1 4.1 4.1 4.2 3.3 3.4 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income applicable
to common stock...... $ 35.6 $ 35.9 $ 33.3 $ 35.2 $ 33.7 $ 22.3 $ 35.5 $ 35.8 $ 38.8 $ 35.8 $ 38.2 $ 34.7
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per common
share (based on
average shares
outstanding)......... $ 5.33 $ 5.39 $ 4.99 $ 5.28 $ 5.05 $ 3.35 $ 5.33 $ 5.37 $ 5.83 $ 5.36 $ 5.72 $ 5.21
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net Interest Margin
Yield on earning
assets............. 7.68% 7.70% 7.84% 7.71% 7.70% 7.77% 7.65% 7.80% 8.02% 8.02% 8.27% 8.18%
Rate on supporting
liabilities........ 4.25 4.22 4.17 4.01 4.05 3.98 4.03 4.11 4.40 4.37 4.38 4.28
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest
margin............. 3.43% 3.48% 3.67% 3.70% 3.65% 3.79% 3.62% 3.69% 3.62% 3.65% 3.89% 3.90%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Rows may not add to annual amounts because of rounding.
42
<PAGE> 44
FINANCIAL STATEMENTS
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $ 927,090 $ 837,057 $ 776,226
Money market assets:
Deposits at banks......................................... 31,464 30,483 38,617
Federal funds sold and securities purchased under
agreement to resell..................................... 12,692 11,918 19,330
Trading account............................................. 3,752 3,959 3,842
Securities available-for-sale:
U.S. Treasury and federal agency.......................... 275,489 232,571 152,508
State and municipal....................................... 17,564 18,149 --
Other..................................................... 1,573 2,717 9,671
Securities held-to-maturity:
U.S. Treasury and federal agency.......................... -- -- 36,641
State and municipal....................................... -- -- 27,072
Other..................................................... -- -- 353
---------- ---------- ----------
Total interest income..................................... 1,269,624 1,136,854 1,064,260
---------- ---------- ----------
INTEREST EXPENSE
Deposits.................................................... 475,657 398,167 358,586
Short-term borrowings....................................... 156,559 160,790 168,993
Senior notes................................................ 39,883 22,425 31,125
Long-term notes............................................. 26,499 26,067 23,005
---------- ---------- ----------
Total interest expense.................................... 698,598 607,449 581,709
---------- ---------- ----------
Net Interest Income......................................... 571,026 529,405 482,551
Provision for loan losses................................... 58,447 56,540 42,995
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses......... 512,579 472,865 439,556
---------- ---------- ----------
NONINTEREST INCOME
Trust and investment management fees........................ 133,714 117,762 149,979
Trading account............................................. 7,269 7,992 5,110
Foreign exchange............................................ 5,364 9,992 14,248
Charge card................................................. 50,085 47,244 41,788
Service fees and charges.................................... 96,324 82,802 69,333
Securities gains............................................ 13,207 8,786 23,379
Other....................................................... 71,785 54,729 34,436
---------- ---------- ----------
Total noninterest income.................................. 377,748 329,307 338,273
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and other compensation............................. 314,719 273,849 260,539
Pension, profit sharing and other employee benefits......... 57,423 53,145 57,763
Net occupancy............................................... 56,462 47,690 46,099
Equipment................................................... 48,119 41,715 42,541
Marketing................................................... 25,675 29,342 25,583
Communication and delivery.................................. 24,129 20,954 20,251
Deposit insurance........................................... 2,988 18,189 8,124
Expert services............................................. 31,159 19,382 20,353
Other....................................................... 75,164 71,562 69,500
---------- ---------- ----------
635,838 575,828 550,753
Goodwill and other valuation intangibles.................... 27,839 18,168 9,350
---------- ---------- ----------
Total noninterest expenses................................ 663,677 593,996 560,103
---------- ---------- ----------
Income before income taxes.................................. 226,650 208,176 217,726
Applicable income taxes..................................... 70,076 65,812 70,175
---------- ---------- ----------
Net Income.................................................. 156,574 142,364 147,551
Dividends on preferred stock................................ 16,594 15,006 --
---------- ---------- ----------
Net income applicable to common stock....................... $ 139,980 $ 127,358 $ 147,551
========== ========== ==========
Basic Earnings per Common Share (based on 6,667,490 average
shares outstanding) Net income applicable to common
stock..................................................... $21.00 $19.10 $22.13
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
43
<PAGE> 45
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1996
---- ----
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,304,374 $ 1,238,028
Money market assets:
Interest-bearing deposits at banks........................ 598,070 658,257
Federal funds sold and securities purchased under
agreement to resell.................................... 80,782 294,792
Portfolio securities available-for-sale..................... 5,229,390 3,985,183
Trading account assets...................................... 53,209 110,355
Loans, net of unearned income of $4,390 in 1997 and $7,624
in 1996................................................... 10,868,250 10,744,653
Allowance for possible loan losses.......................... (130,876) (142,211)
Net loans................................................. 10,737,374 10,602,442
Premises and equipment...................................... 314,642 275,091
Customers' liability on acceptances......................... 46,480 78,983
Assets held for sale........................................ 725,760 --
Goodwill and other valuation intangibles.................... 292,981 310,663
Other assets................................................ 750,399 674,946
----------- -----------
Total assets........................................... $20,133,461 $18,228,740
=========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 4,192,454 $ 3,642,578
-- interest-bearing............ 8,489,732 7,668,893
Deposits in foreign offices -- noninterest-bearing.......... 18,431 35,116
-- interest-bearing.............. 1,731,446 1,643,714
----------- -----------
Total deposits......................................... 14,432,063 12,990,301
Federal funds purchased and securities sold under agreement
to repurchase............................................. 2,451,873 1,983,047
Commercial paper outstanding................................ 351,427 334,653
Short-term borrowings....................................... 503,320 347,690
Senior notes................................................ 100,000 350,000
Acceptances outstanding..................................... 46,480 78,983
Accrued interest, taxes and other expenses.................. 154,373 159,250
Other liabilities........................................... 82,132 90,543
Long-term notes............................................. 379,278 379,107
----------- -----------
Total liabilities...................................... 18,500,946 16,713,574
----------- -----------
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 45,000
Common stock ($8 par value); authorized 10,000,000 shares;
issued and outstanding 6,667,490 shares................... 53,340 53,340
Surplus..................................................... 486,545 484,319
Retained earnings........................................... 856,152 760,626
Unrealized holding gains (losses), net of deferred taxes of
$7,563 in 1997 and ($5,364) in 1996....................... 11,478 (8,119)
----------- -----------
Total stockholder's equity............................. 1,632,515 1,515,166
----------- -----------
Total liabilities and stockholder's equity............. $20,133,461 $18,228,740
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
44
<PAGE> 46
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, 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
Cash 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
Cash dividends -- Series A
preferred stock ($73,305.56
per share).................... -- -- -- -- (13,195) -- (13,195)
Cash dividends -- Series B
preferred stock ($40,250.00
per share).................... -- -- -- -- (1,811) -- (1,811)
Cash 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
Contribution to capital
surplus....................... -- -- -- 2,226 -- -- 2,226
Net income...................... -- -- -- -- 156,574 -- 156,574
Noncash dividend................ -- -- -- -- (2,454) -- (2,454)
Cash dividends -- Series A
preferred stock ($72,500.00
per share).................... -- -- -- -- (13,050) -- (13,050)
Cash dividends -- Series B
preferred stock ($78,750.00
per share).................... -- -- -- -- (3,544) -- (3,544)
Cash dividends -- common stock
($6.30 per share)............. -- -- -- -- (42,000) -- (42,000)
Change in unrealized holding
gains (losses) on available-
for-sale securities, net of
tax effect of $12,927......... -- -- -- -- -- 19,597 19,597
-------- ------- ------- -------- --------- -------- ----------
Balance at December 31, 1997...... $180,000 $45,000 $53,340 $486,545 $ 856,152 $ 11,478 $1,632,515
======== ======= ======= ======== ========= ======== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
45
<PAGE> 47
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................................. $ 156,574 $ 142,364 $ 147,551
Adjustments to reconcile net income to net cash (used)
provided by
operating activities:
Provision for loan losses................................. 58,447 56,540 42,995
Depreciation and amortization, including intangibles...... 67,849 57,031 48,492
Deferred tax expense (benefit)............................ 2,343 (3,755) (1,380)
Gain on sales of portfolio securities..................... (13,207) (8,786) (23,379)
Trading account net cash sales (purchases)................ 57,146 (11,717) (62,571)
Increase in interest receivable........................... (32,385) (13,639) (243)
(Decrease) increase in interest payable................... (5,709) (188) 8,270
Increase in loans held for sale........................... (12,202) (63,836) (21,314)
Other, net................................................ (35,555) 877 43,912
----------- ----------- -----------
Net cash provided by operating activities............. 243,301 154,891 182,333
----------- ----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks................................................... 60,187 (200,555) 299,525
Net decrease (increase) in Federal funds sold and
securities purchased under agreement to resell.......... 214,010 (115,100) 224,534
Proceeds from maturities of securities held-to-maturity... -- -- 713,897
Purchases of securities held-to-maturity.................. -- -- (445,371)
Proceeds from sales of securities available-for-sale...... 1,314,938 1,462,522 2,025,099
Proceeds from maturities of securities
available-for-sale...................................... 11,667,783 6,634,038 5,219,361
Purchases of securities available-for-sale................ (14,181,204) (8,741,345) (7,091,515)
Net increase in loans and assets held for sale............ (906,937) (870,493) (1,305,639)
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............. 28,735 20,532 28,270
Purchases of premises and equipment....................... (108,296) (82,794) (72,501)
Other, net................................................ (40,569) (8,833) 152,672
----------- ----------- -----------
Net cash (used) provided by investing activities...... (1,951,353) 341,981 (251,668)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 1,441,762 (129,685) 309,050
Net increase (decrease) in Federal funds purchased and
securities sold under agreement to repurchase........... 468,826 86,230 (735,350)
Net increase (decrease) in commercial paper outstanding... 16,774 42,631 (14,715)
Net increase (decrease) in other short-term borrowings.... 155,630 (495,359) 172,687
Proceeds from issuance of senior notes.................... 6,710,000 1,239,436 2,978,345
Repayment of senior notes................................. (6,960,000) (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.................... (16,594) (15,006) --
Cash dividends paid on common stock....................... (42,000) (48,200) (262,700)
Other, net................................................ -- (433,873) --
----------- ----------- -----------
Net cash provided (used) by financing activities...... 1,774,398 (781,262) 191,972
----------- ----------- -----------
Net increase (decrease) in cash and demand balances due
from banks.............................................. 66,346 (284,390) 122,637
Cash and demand balances due from banks at January 1...... 1,238,028 1,522,418 1,399,781
----------- ----------- -----------
Cash and demand balances due from banks at December 31.... $ 1,304,374 $ 1,238,028 $ 1,522,418
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized).................... $ 704,307 $ 596,939 $ 573,439
Income taxes............................................ $ 75,224 $ 71,626 $ 74,269
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
46
<PAGE> 48
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 18 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.
Derivative financial instruments
The Corporation uses various interest rate and foreign exchange derivative
contracts in the management of its risk strategy or as part of its dealer and
trading activities. Interest rate contracts may include futures, forward rate
agreements, option contracts, guarantees (caps, floors and collars) and swaps.
Foreign exchange contracts may include spot, future, forward and option
contracts.
Derivative financial instruments which are used as part of the
Corporation's dealer and trading activities are marked to market and the
resulting unrealized gains and losses are recognized in noninterest income in
the period of change. Realized and unrealized gains and losses on interest rate
contracts and foreign exchange contracts are recorded in trading account income
and foreign exchange income, respectively.
Derivative financial instruments which are used in the management of the
Corporation's risk strategy may qualify for hedge accounting. A derivative
financial instrument may be a hedge of an existing asset, liability, firm
commitment or anticipated transaction. Hedge accounting is used when the
following criteria are met: the hedged item exposes the Corporation to price,
currency or interest rate risk; the hedging instrument reduces the exposure to
risk and the hedging instrument is designated as a hedge. At the inception of
the hedge and
47
<PAGE> 49
throughout the hedge period, a high correlation of changes in both the market
value of the hedging instrument and the fair value of the hedged item should be
probable. Additional criteria for using hedge accounting for anticipated
transactions are: the significant characteristics and expected terms of the
anticipated transaction are identified and it is probable that the anticipated
transaction will occur.
If hedge criteria are met, then unrealized gains and losses on derivative
financial instruments other than interest rate swaps are generally recognized in
the same period and in the same manner in which gains and losses from the hedged
item are recognized. Unrealized gains and losses on a hedging instrument are
deferred when the hedged item is accounted for on an historical cost basis. The
hedging instrument is marked to market when the hedged item is accounted for on
a mark to market basis.
Deferred gains and losses on interest rate 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. Gains or losses on termination of an interest rate
futures contract designated as a hedge are deferred and recognized when the
offsetting gain or loss is recognized on the hedged item. When the hedged item
is sold, existing unrealized gains or losses on the interest rate futures
contract are recognized as part of net income at the time of the sale.
Thereafter, unrealized gains and losses on the hedge contract are recognized in
income immediately.
The Corporation engages in interest rate swaps in order to manage its
interest rate risk exposure. Contractual payments under interest rate swaps
designated as hedges are accrued in the Statement of Income as a component of
interest income or expense. There is no recognition of unrealized gains and
losses on the balance sheet. Gains or losses on termination of an interest rate
swap contract designated as a hedge are deferred and amortized as an adjustment
of the yield on the underlying balance sheet position over the remainder of the
original contractual life of the terminated swap. When the hedged item is sold,
existing unrealized gains or losses on the swap contract are recognized in
income at the time of the sale. Thereafter, unrealized gains and losses on the
hedge contract are recognized as part of net income when they occur.
Interest rate options are used to manage the Corporation's interest rate
risk exposure from rate lock commitments and fixed rate mortgage loans intended
to be sold in the secondary market. Changes in the market value of options
designated as hedges are deferred from income recognition and effectively
recognized as other noninterest income when the loans are sold and the hedge
position is closed. Loans intended to be sold in the secondary market are
carried at lower of amortized cost or current market value. When a hedge
contract with an embedded gain is terminated early, the deferred gain is
recorded as an adjustment to the carrying value of the loans. When a hedge
contract with an embedded loss is terminated early, the deferred loss is charged
to other noninterest income. When the hedged item is sold before the hedge
contract is terminated and the hedge contract has an embedded gain or loss, the
deferred gain or loss is recorded as other noninterest income in the same period
as part of the gain or loss on the sale of the loans. Thereafter, unrealized
gains and losses on the hedge contract are recognized as part of net income when
they occur.
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.
48
<PAGE> 50
On December 29, 1995, the Corporation transferred all held-to-maturity
securities to available-for-sale. See Note 2 on page 51 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, 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, 1997 and 1996, the Corporation's
Consolidated Statement of Condition included approximately $17.8 million and
$18.7 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 was amended by SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which the Corporation adopted during the first
quarter of 1997. SFAS No. 122 applies to the servicing of various financial
assets and requires the recognition of servicing rights as separate assets when
servicing rights are purchased or when servicing rights are retained in a sale
or securitization of the assets being serviced. The Corporation engages in the
servicing of mortgage loans and acquires mortgage servicing rights by purchasing
or originating mortgage loans and then selling those loans with servicing rights
retained. 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 current market
interest rates, loan type and repricing interval. Mortgage servicing rights of
$3.2 million and $2.6 million were capitalized in 1997 and 1996, respectively.
Amortization expense associated with these mortgage servicing rights was $0.5
million and $0.1 million in 1997 and 1996, respectively. The net remaining
capitalized servicing rights of $5.2 million and $2.5 million at December 31,
1997 and 1996, respectively, had a corresponding valuation allowance of $1.2
million and $0.5 million at December 31, 1997 and 1996, respectively.
Accordingly, the valuation allowance was increased by $0.7 million in 1997;
there were no reductions or direct writedowns in 1997; and the ending valuation
allowance of $0.5 million at December 31, 1996 was the result of $0.6 million of
valuation allowances offset by $0.1 million of reductions. There were no direct
writedowns in 1996. The net capitalized assets of $4.0 million and $2.0 million
at December 31, 1997 and 1996, respectively, are reflective of the fair value of
those rights.
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
49
<PAGE> 51
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.
Impaired loans (primarily commercial credits) are 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 this definition of impairment. The
Corporation determines loan impairment when assessing the adequacy of the
allowance for possible loan losses.
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.
Assets held for sale
In anticipation of HTSB's sale of its credit card portfolio on January 29,
1998, credit card loan balances were reclassified as of December 31, 1997 to
assets held for sale. See Note 22 to Financial Statements on page 81 of this
Report. These assets are carried at the lower of original cost or current market
value, on a portfolio basis.
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 or future
assessments of profitability indicate that the carrying value may not be
recoverable. When assessing recoverability, goodwill and other valuation
intangibles are included as part of the group of assets which were acquired in
the transaction that gave rise to the intangibles.
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
50
<PAGE> 52
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.
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
As of December 31, 1997, credit card loan balances were transferred to
assets held for sale in anticipation of the sale in January 1998. See Note 22 on
page 81 of this Report for further information. This transfer was a noncash
transaction and was excluded from the Consolidated Statement of Cash Flows. In
July 1997, 80 percent ownership of Harris Trust/Bank of Montreal (formerly
Harris Trust Company of Florida) was transferred through a noncash dividend to
Bankmont. This noncash transaction was excluded from the Corporation's
Consolidated Statement of Cash Flows. On December 29, 1995, the Corporation
transferred all held-to-maturity securities to available-for-sale. See Note 2 on
page 51 for further information. The noncash portion of this transaction was
excluded from the Corporation's Consolidated Statement of Cash Flows.
Income taxes
Bankmont, the Corporation 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, 1997 DECEMBER 31, 1996
------------------------------------------------- -------------------------------------------------
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........ $1,624,891 $ 4,192 $ 201 $1,628,882 $1,295,286 $ 2,749 $15,817 $1,282,218
Federal agency....... 3,249,562 6,492 2,235 3,253,819 2,369,251 2,858 14,383 2,357,726
State and
municipal.......... 301,769 10,992 197 312,564 301,650 11,725 532 312,843
Other................ 34,127 14 16 34,125 32,479 5 88 32,396
---------- ------- ------ ---------- ---------- ------- ------- ----------
Total securities..... $5,210,349 $21,690 $2,649 $5,229,390 $3,998,666 $17,337 $30,820 $3,985,183
========== ======= ====== ========== ========== ======= ======= ==========
</TABLE>
51
<PAGE> 53
At December 31, 1997 and 1996, portfolio and trading account securities
having a par value of $3.7 billion and $2.4 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
$1.87 billion and $1.4 billion were sold under agreement to repurchase at
December 31, 1997 and 1996, 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, 1997, 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, 1997
------------------------
AMORTIZED FAIR
COST VALUE
--------- -----
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Within 1 year............................................. $2,068,871 $2,083,951
1 to 5 years.............................................. 1,622,319 1,615,997
5 to 10 years............................................. 838,843 844,750
Over 10 years............................................. 649,483 653,859
Other securities without stated maturity.................... 30,833 30,833
---------- ----------
Total securities............................................ $5,210,349 $5,229,390
========== ==========
</TABLE>
In 1997, 1996 and 1995, proceeds from the sale of securities
available-for-sale amounted to $1.31 billion, $1.46 billion and $2.03 billion,
respectively. Gross gains of $13.5 million and gross losses of $0.3 million were
realized on these sales in 1997, while gross gains of $9.3 million and gross
losses of $0.5 million were realized on these sales in 1996, and gross gains of
$26.3 million and gross losses of $2.9 million were realized in 1995. Net
unrealized holding gain or loss on trading securities included in earnings
during 1997 changed by $0.8 million from an unrealized gain of $1.0 million at
December 31, 1996 to an unrealized gain of $1.8 million at December 31, 1997.
52
<PAGE> 54
3. LOANS
The following table summarizes loan balances by category:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and
dealers................................................ $ 7,422,883 $ 6,484,249
Real estate construction.................................. 163,886 186,912
Real estate mortgages..................................... 2,642,536 2,383,659
Installment............................................... 531,331 484,104
Charge card*.............................................. -- 1,041,886
Direct lease financing.................................... 23,028 29,947
Foreign loans:
Governments and official institutions..................... 937 984
Banks and other financial institutions.................... 50,960 137,560
Other, primarily commercial and industrial................ 37,079 2,976
----------- -----------
Total loans............................................ 10,872,640 10,752,277
Less unearned income........................................ 4,390 7,624
----------- -----------
Loans, net of unearned income.......................... 10,868,250 10,744,653
Less allowance for possible loan losses..................... 130,876 142,211
----------- -----------
Loans, net of allowance for possible loan losses....... $10,737,374 $10,602,442
=========== ===========
</TABLE>
- -------------------------
* In anticipation of HTSB's sale of its credit card portfolio on January 29,
1998 credit card loan balances were reclassified as of December 31, 1997 to
assets held for sale. See Note 22 to Financial Statements on page 81 of this
Report.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans............................................ $17,790 $28,153 $50,503
Restructured loans.......................................... 598 1,512 2,059
------- ------- -------
Total nonperforming loans................................... 18,388 29,665 52,562
Other assets received in satisfaction of debt............... 1,300 1,562 2,470
------- ------- -------
Total nonperforming assets................................ $19,688 $31,227 $55,032
======= ======= =======
Gross amount of interest income that would have been
recorded if year-end nonperforming loans had been accruing
interest at their original terms.......................... $ 1,061 $ 3,134 $ 4,500
Interest income actually recognized......................... 51 76 1,572
------- ------- -------
Interest shortfall, before consideration of any income tax
effect................................................. $ 1,010 $ 3,058 $ 2,928
======= ======= =======
</TABLE>
At December 31, 1997 and 1996, 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 34 of this Report.
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<PAGE> 55
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $142,211 $129,259 $124,734
-------- -------- --------
Charge-offs................................................. (82,555) (62,995) (61,967)
Recoveries.................................................. 12,773 14,607 23,497
-------- -------- --------
Net charge-offs........................................... (69,782) (48,388) (38,470)
Provisions charged to operations............................ 58,447 56,540 42,995
Allowance related to acquired loans......................... -- 4,800 --
-------- -------- --------
Balance, end of year........................................ $130,876 $142,211 $129,259
======== ======== ========
</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 31,1997
Balance......................................... $2,360 $15,430 $17,790
Related allowance............................... 1,850 -- 1,850
------ ------- -------
Balance, net of allowance....................... $ 510 $15,430 $15,940
====== ======= =======
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
====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired loans...................................... $27,945 $41,624 $67,874
======= ======= =======
Total interest income on impaired loans..................... $ 115 $ 160 $ 1,572
======= ======= =======
Interest income on impaired loans recorded on a cash
basis..................................................... $ 115 $ 160 $ 1,572
======= ======= =======
</TABLE>
54
<PAGE> 56
5. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. A summary of these accounts is set forth below:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 39,619 $ 39,153
Premises.................................................... 322,850 302,119
Equipment................................................... 322,812 284,934
Leasehold improvements...................................... 32,785 29,859
-------- --------
Total.................................................. 718,066 656,065
Accumulated depreciation and amortization................... 403,424 380,974
-------- --------
Premises and equipment................................. $314,642 $275,091
======== ========
</TABLE>
The provision for depreciation and amortization was $40,010,000 in 1997,
$38,147,000 in 1996, and $39,142,000 in 1995.
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, 1997 and
1996 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, 1997 and
December 31, 1996. 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 $1.87 billion and $1.42 billion at
December 31, 1997 and 1996, respectively.
55
<PAGE> 57
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>
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities purchased under agreement to resell
Amount outstanding at end of year......................... $ -- $ --
Highest amount outstanding as of any month-end during the
year................................................... $ 856,000 $ 54,380
Daily average amount outstanding during the year.......... $ 17,651 $ 19,880
Securities sold under agreement to repurchase
Amount outstanding at end of year......................... $1,865,739 $1,416,988
Highest amount outstanding as of any month-end during the
year................................................... $2,718,101 $2,896,879
Daily average amount outstanding during the year.......... $1,855,231 $1,701,506
</TABLE>
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
-------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Fixed rate 9 3/8% subordinated notes due June 1, 2001
($100,000 par value)...................................... $ 99,278 $ 99,107
Floating rate subordinated note to Bankmont due December 1,
2004...................................................... 100,000 100,000
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
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 15,000
-------- --------
Total.................................................. $379,278 $379,107
======== ========
</TABLE>
All of the Bankcorp notes are unsecured obligations, ranking on a parity
with all unsecured and subordinated indebtedness of the Corporation and are not
subject to redemption prior to maturity 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 1997, 180 day LIBOR was 5.84
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 1997 or 1996.
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, 1997, $100 million of short-term notes were outstanding with original
maturities of 14 days (remaining maturities of 4 days) and stated interest rates
of 5.90 percent. As of December 31, 1996, $350 million of short-term notes were
outstanding with original maturities of 365 days and stated interest rates
ranging from 5.50 to 6.04 percent.
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 CorporationIs 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
56
<PAGE> 58
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 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 accrued interest receivable and payable approximate
carrying values due to the short-term nature of these assets and liabilities.
The fair values of demand deposits, savings accounts, interest checking
deposits, and money market accounts were the amounts payable on demand at the
reporting date, or the carrying amounts. The fair value of time deposits was
estimated using a discounted cash flow calculation with current market rates
offered by the Corporation as discount rates.
The fair value of long-term notes was determined using a discounted cash
flow calculation with current rates available to the Corporation for similar
debt as discount rates.
The fair value of credit facilities are presented as an obligation in order
to represent the approximate cost the Corporation would incur to induce third
parties to assume these commitments.
The estimated fair values of the Corporation's financial instruments at
December 31, 1997 and 1996 are presented in the following table. See Note 9 for
additional information regarding fair values of off-balance-sheet financial
instruments.
57
<PAGE> 59
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1997 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and demand balances due from banks... $ 1,304,374 $ 1,304,374 $ 1,238,028 $ 1,238,028
Money market assets:
Interest-bearing deposits at banks...... 598,070 598,070 658,257 658,257
Federal funds sold and securities
purchased under agreement to
resell............................... 80,782 80,782 294,792 294,792
Portfolio securities available for sale... 5,229,390 5,229,390 3,985,183 3,985,183
Trading account assets.................... 53,209 53,209 110,355 110,355
Loans, net of unearned income and
allowance for possible loan losses*..... 10,737,374 10,725,544 10,602,442 10,575,977
Customers' liability on acceptances....... 46,480 46,480 78,983 78,983
Accrued interest receivable............... 165,396 165,396 133,011 133,011
Assets held for sale*..................... 725,760 745,760 -- --
----------- ----------- ----------- -----------
Total on-balance-sheet financial
assets.......................... $18,940,835 $18,949,005 $17,101,051 $17,074,586
=========== =========== =========== ===========
LIABILITIES
Deposits:
Demand deposits......................... $ 8,659,384 $ 8,659,384 $ 7,796,980 $ 7,796,980
Time deposits........................... 5,772,679 5,775,870 5,193,321 5,193,321
Federal funds purchased and securities
sold under agreement to repurchase...... 2,451,873 2,451,873 1,983,047 1,983,047
Commercial paper outstanding.............. 351,427 351,427 334,653 334,653
Other short-term borrowings............... 503,320 503,320 347,690 347,690
Acceptances outstanding................... 46,480 46,480 78,983 78,983
Accrued interest payable.................. 38,091 38,091 43,800 43,800
Senior notes.............................. 100,000 100,000 350,000 350,000
Long-term notes........................... 379,278 390,185 379,107 387,655
----------- ----------- ----------- -----------
Total on-balance-sheet financial
liabilities..................... $18,302,532 $18,316,630 $16,507,581 $16,516,129
=========== =========== =========== ===========
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
(POSITIVE POSITIONS/(OBLIGATIONS))
Credit facilities......................... $ (17,756) $ (17,756) $ (18,652) $ (18,652)
Interest rate contracts:
Dealer and trading contracts............ 525 525 803 803
Risk management contracts............... 13,076 10,300 12,697 9,714
----------- ----------- ----------- -----------
Total off-balance-sheet financial
instruments..................... $ (4,155) $ (6,931) $ (5,152) $ (8,135)
=========== =========== =========== ===========
</TABLE>
- -------------------------
* In anticipation of HTSB's sale of its credit card portfolio on January 29,
1998, credit card loan balances were reclassified as of December 31, 1997 to
assets held for sale. See Note 22 to Financial Statements on page 81 of this
Report.
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
58
<PAGE> 60
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.
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 $10.48 billion and $9.52 billion at December 31, 1997 and 1996,
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, 1997, totaled $297 million and at
December 31, 1996, totaled $351 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 $1.73 billion at December 31, 1997 and
$1.70 billion at December 31, 1996. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $437 million
at December 31, 1997 and $435 million at December 31, 1996.
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 $86
million at December 31, 1997 and $122 million at December 31, 1996.
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 $17.8 million at December 31, 1997 and $18.7
million at December 31, 1996.
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.
59
<PAGE> 61
Dealer and trading activity
As dealer, the Corporation serves customers seeking to manage interest rate
risk by entering into contracts as a counterparty to their (customer)
transactions. In its trading activities, the Corporation uses interest rate
contracts to profit from expected future market movements.
These contracts may create exposure to both credit and market risk.
Replacement risk, the primary component of credit risk, is the risk of loss
should a counterparty default following unfavorable market movements and is
measured as the Corporation's cost of replacing contracts at current market
rates. The Corporation manages credit risk by establishing credit limits for
customers and products through an independent corporate-wide credit review
process and continually monitoring exposure against those limits to ensure they
are not exceeded. Credit risk is, in many cases, further mitigated by the
existence of netting agreements which provide for netting of contractual
receivables and payables in the event of default or bankruptcy.
Market risk is the risk of loss as a result of changes in interest rates.
The Corporation manages market risk by establishing limits which are based on
dollars at risk given a parallel shift in the yield curve. Limits are
established by product, maturity and volatility. Limits are approved by
management and monitored independently of the traders on a regular basis. Market
risk is further diminished by entering into offsetting positions. Senior
management oversees all dealer risk-related activities.
Futures and forward contracts are agreements in which the Corporation is
obligated to make or take delivery, at a specified future date, of a specified
instrument, at a specified price or yield. Futures contracts are exchange traded
and, because of exchange requirements that gains and losses be settled daily,
create negligible exposure to credit risk.
Forward rate agreements are arrangements between two parties to exchange
amounts, at a specified future date, based on the difference between an agreed
upon interest rate and reference rate applied to a notional principal amount.
These agreements enable purchasers and sellers to fix interest costs and
returns.
Options are contracts that provide the buyer the right (but not the
obligation) to purchase or sell a financial instrument, at a specified price,
either within a specified period of time or on a certain date. Interest rate
guarantees (caps, floors and collars) are agreements between two parties that,
in general, establish for the purchaser a maximum level of interest expense or a
minimum level of interest revenue based on a notional principal amount for a
specified term. Options and guarantees written create exposure to market risk.
As a writer of interest rate options and guarantees, the Corporation receives a
premium at the outset of the agreement and bears the risk of an unfavorable
change in the price of the financial instrument underlying the option or
guarantee. Options and guarantees purchased create exposure to credit risk and,
to the extent of the premium paid 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
60
<PAGE> 62
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
------------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards............................... $ 210,266 $ 146,861 $ 81 $ --
Forward rate agreements............................ 272,120 155,000 438 98
Options written.................................... -- -- -- --
Options purchased.................................. -- 1,000 -- 2
Guarantees written................................. 594,760 855,967 118 --
Guarantees purchased............................... 594,760 856,117 1,368 1,802
Swaps.............................................. 1,817,508 1,631,091 8,432 9,198
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
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......................... $ 81 $ -- $ -- $ --
Unrealized losses........................ (24) -- -- --
Forward rate agreements
Unrealized gains......................... 438 19 98 38
Unrealized losses........................ (438) (26) (27) (21)
Options
Purchased................................ -- -- 2 --
Written.................................. -- -- -- --
Guarantees
Purchased................................ 1,250 1,802 1,802 11,588
Written.................................. (1,249) (1,778) (1,749) (11,580)
Swaps
Unrealized gains......................... 8,432 13,827 9,198 6,187
Unrealized losses........................ (7,965) (12,388) (8,521) (4,428)
------- -------- ------- --------
Total Interest Rate Contracts.......... $ 525 $ 1,513 $ 803 $ 1,784
======= ======== ======= ========
</TABLE>
61
<PAGE> 63
Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31, 1997,
1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards...................................... $ (649) $ 926 $(1,462)
Forward rate agreements................................... -- -- (285)
Options................................................... 54 (66) (545)
Guarantees................................................ (6) (1,215) 988
Swaps..................................................... 42 69 603
Debt Instruments............................................ 7,828 8,278 5,811
------ ------- -------
Total Trading Revenue..................................... $7,269 $ 7,992 $ 5,110
====== ======= =======
</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, 1997
------------------------------------------------------------------
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..................... $119,000 $436,526 $170,950 $282,278 $1,008,754
Average pay rate.................... 5.76% 5.98% 6.45% 6.52% 6.19%
Average receive rate................ 4.62% 2.61% 5.77% 5.27% 4.13%
Receive Fixed Swaps:
Notional amount..................... $119,000 $436,526 $170,950 $ 82,278 $ 808,754
Average pay rate.................... 4.62% 2.61% 5.77% 4.02% 3.72%
Average receive rate................ 5.89% 6.02% 6.46% 6.62% 6.15%
Basis swaps:
Notional amount..................... -- -- -- -- --
Average pay rate.................... -- -- -- -- --
Average receive rate................ -- -- -- -- --
Total notional amount............ $238,000 $873,052 $341,900 $364,556 $1,817,508
</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 1997 and 1996, 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 $483 million
notional amount of swap contracts, used for risk management purposes,
outstanding at December 31, 1997 with a fair value of $10.3 million and a
replacement cost of $13.0 million. At December 31, 1996, the Corporation had
$584 million notional amount of swap contracts outstanding with a fair value of
$9.7 million and a replacement cost of $13.2 million. Gross unrealized gains and
losses, representing the difference between fair value and carrying value (i.e.
accrued interest payable or receivable) on these contracts, totaled $0.2 million
and $2.9 million, respectively, at December 31, 1997 and $0.8 and $3.8 million,
respectively, at December 31, 1996. Risk management activity, including the
related cash positions, had no material effect on the Corporation's net income
for the year ended December 31, 1997 or 1996. There were no deferred gains or
losses on terminated contracts at December 31, 1997 or 1996.
62
<PAGE> 64
The following table summarizes swap activity for risk management purposes:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------
(IN THOUSANDS)
<S> <C>
Amount, December 31,........................................ $ 281,033
Additions................................................... 680,707
Maturities.................................................. (377,659)
Terminations................................................ --
---------
Amount, December 31, 1996................................... 584,081
Additions................................................... 802,440
Maturities.................................................. (903,489)
Terminations................................................ --
---------
Amount, December 31, 1997................................... $ 483,032
=========
</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, 1997
----------------------------------------------------
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......................... -- $ 18,698 $ 72,062 $ 42,272 $133,032
Average pay rate........................ -- 6.49% 6.30% 6.92% 6.52%
Average receive rate.................... -- 5.82% 5.80% 5.79% 5.80%
Basis swaps:
Notional amount......................... $350,000 -- -- -- $350,000
Average pay rate........................ 5.96% -- -- -- 5.96%
Average receive rate.................... 5.77% -- -- -- 5.77%
Total notional amount................ $350,000 $ 18,698 $ 72,062 $ 42,272 $483,032
</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. 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 1997 or 1996 net income or financial position at
December 31, 1997 or 1996.
At December 31, 1997, approximately three-fourths of the Corporation's
gross notional positions in foreign currency contracts are represented by eight
currencies: English pounds, German deutsche marks, Canadian dollars, Japanese
yen, Swiss francs, Belgian francs, Italian lira and French francs.
Foreign exchange contracts include spot, future, forward and option
contracts that enable customers to manage their foreign exchange risk. Spot,
future and forward contracts are agreements to exchange currencies
63
<PAGE> 65
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
------------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards................... $1,820,769 $1,896,730 $13,772 $9,345
Options written.............................. 88,440 56,408 -- --
Options purchased............................ 88,440 56,408 3,772 1,324
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the years ended December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
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............................ $ 37,394 $ 34,076 $ 60,666 $ 43,477
Unrealized losses........................... (37,394) (34,076) (60,666) (43,477)
Options
Purchased................................... 3,772 2,783 1,324 1,388
Written..................................... (3,772) (2,783) (1,324) (1,398)
-------- -------- -------- ---------
Total Foreign Exchange........................ $ -- $ -- $ -- $ (10)
======== ======== ======== =========
</TABLE>
At December 31, 1997, spot, futures and forward contracts with BMO
represent $17,283 and ($15,826) of unrealized gains and unrealized losses,
respectively. Options contracts with BMO represent $2,947 and ($0) of options
purchased and options written, respectively.
Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1997, 1996 and 1995 are summarized below. 1997 and 1996
net foreign exchange gains include $5.4 million and $10.0 million, respectively,
of net profit under the aforementioned agreement with BMO.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
-------- -------- --------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Spot, futures and forwards.................................. $5,364 $ 9,992 $14,290
Options..................................................... -- -- (42)
------ ------- -------
Total Foreign Exchange.................................... $5,364 $ 9,992 $14,248
====== ======= =======
</TABLE>
Securities activities
The Corporation's securities activities that have off-balance-sheet risk
include municipal bond underwriting and short selling of securities.
64
<PAGE> 66
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 $29.6 million at December 31, 1997 and $41.9 million at
December 31, 1996.
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, 1997
or 1996.
10. CONCENTRATIONS OF CREDIT RISK IN FINANCIAL INSTRUMENTS
The Corporation had two concentrations of credit risk arising from
financial instruments at December 31, 1997 and 1996. 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 $15.6 billion or 50 percent of the Corporation's total credit
exposure at December 31, 1997 and $13.7 billion or 49 percent of the
Corporation's total credit exposure at December 31, 1996.
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.
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 $5.0 billion or
65
<PAGE> 67
16 percent of the Corporation's total credit exposure at December 31, 1997 and
$5.8 billion or 21 percent of the Corporation's total credit exposure at
December 31, 1996.
11. EMPLOYEE BENEFIT PLANS
The Corporation has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1997. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1997. 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 1997 and 1995, cumulative contributions were greater than the amount
recorded as pension expense for financial reporting purposes. For 1996,
cumulative contributions were less than the amount recorded as pension expense
for financial reporting purposes.
The Corporation uses mortality assumption rates from the 1983 Group Annuity
Mortality Table in accordance with the Retirement Protection Act of 1994. The
assumption regarding future annual increases in the wage base is 5%.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1997** 1996** 1995**
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $150,786 in 1997, $144,032 in 1996 and $145,430 in
1995.................................................. $ 171,911 $ 160,736 $ 162,325
========= ========= =========
Projected benefit obligation for service rendered to
date..................................................... $(229,474) $(209,871) $(212,772)
Plan assets at fair value*................................. 266,589 217,175 206,539
--------- --------- ---------
Excess of plan assets over projected benefit obligation.... 37,115 7,304 (6,233)
Unrecognized net (gain) loss from past experience different
from that assumed and effects of changes in
assumptions.............................................. (29,079) 812 17,401
Prior service cost not yet recognized in net periodic
pension cost............................................. (7,127) (7,962) (8,797)
Unrecognized net asset at December 31 being recognized over
16.3 years from January 1, 1986.......................... (1,513) (1,868) (2,222)
Contributions made between measurement date (September 30)
and end of year.......................................... 9,269 7,111 7,827
--------- --------- ---------
Prepaid pension cost.................................. $ 8,665 $ 5,397 $ 7,976
========= ========= =========
Assumptions used:
Discount rate............................................ 7.25% 7.50% 7.25%
Rate of increase in compensation......................... 5.70% 5.70% 5.70%
Expected long-term asset return.......................... 9.00% 8.00% 8.00%
</TABLE>
- -------------------------
* Plan assets consist primarily of participating units in collective trust
funds and mutual funds administered by HTSB.
** Plan assets and obligations measured as of September 30.
66
<PAGE> 68
Net pension expense included the following components for the primary plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 9,862 $ 10,270 $ 7,659
Interest cost on projected benefit obligation............... 15,108 15,206 13,718
Actual return on plan assets................................ (58,246) (21,864) (32,128)
Net amortization and deferral............................... 39,277 5,388 16,271
-------- -------- --------
Net periodic pension expense........................... $ 6,001 $ 9,000 $ 5,520
======== ======== ========
</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
---------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated benefit obligation.............................. $ 5,767 $ 7,293 $ 5,871
Projected benefit obligation for service rendered to date... 13,056 15,598 14,543
Accrued pension liability................................... 9,510 8,891 7,599
Net periodic pension expense................................ 2,691 2,465 4,256
Assumptions used:
Discount rate............................................. 6.00% 5.25% 5.25%
Rate of increase in compensation.......................... 5.70% 5.70% 5.70%
</TABLE>
During 1997, 1996 and 1995, the Corporation's lump-sum benefit payments to
retirees resulted in settlement losses of approximately $0.2 million, $0.1
million and $0.8 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 1997, 1996 and 1995 was $8.7 million, $11.4 million and
$9.8 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. The Corporation also provides 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, supplemented by contributions to a trust fund created under
Internal Revenue Code Section 401(h).
67
<PAGE> 69
The following table sets forth the postretirement medical care benefit
plan's status at December 31, 1997, 1996 and 1995 for the Corporation:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1997** 1996** 1995**
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Retirees.................................................. $(20,813) $(19,688) $(22,104)
Fully eligible active plan participants................... (3,410) (3,697) (3,744)
Other active employees not fully eligible................. (15,534) (15,165) (13,418)
-------- -------- --------
Accumulated postretirement benefit obligation............... (39,757) (38,550) (39,266)
Plan assets at fair value*.................................. 18,031 12,133 8,350
-------- -------- --------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... (21,726) (26,417) (30,916)
Unrecognized net (gain) loss from past experience different
from that assumed......................................... (16,783) (13,430) (11,385)
Prior service cost not yet recognized in net periodic
postretirement benefit cost............................... 2,592 2,788 2,982
Unrecognized transition obligation.......................... 29,497 31,463 33,430
-------- -------- --------
Prepaid (accrued) postretirement benefit cost............... $ (6,420) $ (5,596) $ (5,889)
======== ======== ========
Assumptions used in determining actuarial present value of
benefit obligation:
Discount rate............................................. 7.25% 7.50% 7.25%
Rate of increase in health care costs:
Initial................................................ 8.00% 8.50% 9.00%
Ultimate............................................... 6.00% 6.00% 6.00%
Expected long-term asset return........................... 8.00% 8.00% 8.00%
</TABLE>
- -------------------------
* Plan assets consist primarily of participating units in collective trust
funds and mutual funds administered by HTSB.
** Plan assets and obligations measured as of September 30.
Net postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 1,552 $ 1,735 $ 1,260
Interest cost on accumulated postretirement benefit
obligation................................................ 2,645 2,644 2,634
Actual return on plan assets................................ (3,409) (1,067) (1,426)
Amortization of transition obligation over 20 years......... 1,966 1,966 1,966
Net amortization and deferral............................... 2,010 82 657
------- ------- -------
Net postretirement benefit expense..................... $ 4,764 $ 5,360 $ 5,091
======= ======= =======
</TABLE>
For 1997, the weighted average annual rate of increase in the per capita
cost of covered benefits was assumed to be 8 percent, and was assumed to
decrease gradually to 6 percent in 2001 and remain level thereafter. For 1996
and 1995, the weighted average annual rate of increase in the per capita cost of
covered benefits was assumed to be 8.5 percent and 9 percent, respectively. 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, 1997, September 30, 1996 and September 30, 1995
by $6.6 million, $6.3 million and $6.3 million, respectively, and the aggregate
service and interest cost components of net postretirement benefit expense for
1997 by approximately $0.9 million.
The Corporation has a defined contribution profit sharing plan covering
virtually all its employees. The plan includes a matching contribution and a
profit sharing contribution. The matching contribution is based on the amount of
eligible employee contributions. The profit sharing contribution is based on the
annual financial
68
<PAGE> 70
performance of the Corporation relative to predefined targets. The Corporation's
total expense for this plan was $10.3 million, $9.4 million and $11.8 million in
1997, 1996 and 1995, respectively.
12. STOCK OPTIONS
At December 31, 1997, 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 $6.7 million, $4.6
million and $0.5 million in 1997, 1996 and 1995, respectively.
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 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%.
On December 17, 1996, the Corporation granted 400,700 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 $39.85 per
share, equal to the market price on the date of grant (equivalent to U.S.
$29.15). The estimated grant date fair value of the options granted on December
17, 1996 was Canadian $7.76, equivalent to U.S. $5.68. The fair value of the
option grant was estimated using the Bloomberg model with the following
assumptions: risk-free interest rate of 6.71%, expected life of 7.5 years,
expected volatility of 17.20% and compound annual dividend growth of 6.12%.
On December 15, 1997, the Corporation granted 263,750 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 $65.80 per
share, equal to the market price on the date of grant (equivalent to U.S.
$46.33). The estimated grant date fair value of the options granted on December
15, 1997 was Canadian $13.53, equivalent to U.S. $9.53. The fair value of the
option grant was estimated using the Bloomberg model with the following
assumptions: risk-free interest rate of 5.81%, expected life of 7.5 years,
expected volatility of 15.96% and compound annual dividend growth of 8.82%.
69
<PAGE> 71
The following table summarizes the stock option activity for 1997 and 1996
and provides details of stock options outstanding at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 902,100 $25.48 --
Granted.................................. 263,750 46.33 910,900 $25.45
Exercised................................ -- --
Forfeited, cancelled..................... (89,550) 25.03 (8,800) 22.55
Expired.................................. -- --
--------- ---------
Outstanding at end of year............... 1,076,300 30.63 902,100 25.48
========= =========
Options exercisable at year-end.......... None None
Weighted-average fair value of options
granted during the year................ $9.53 $4.88
</TABLE>
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------------- ---------------- ----------------
<C> <C> <S> <C>
$22-30 812,550 8.52 years $25.53
46-50 263,750 9.95 46.33
---------
22-50 1,076,300 8.87 30.63
=========
</TABLE>
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. In 1996
and 1997, no rights were granted. There were 611,000 rights outstanding at
December 31, 1996. In 1997, 143,000 rights were exercised and 70,000 rights were
cancelled. There are 398,000 rights outstanding at December 31, 1997.
13. LEASE EXPENSE AND OBLIGATIONS
Rental expense for all operating leases was $20,835,000 in 1997,
$19,598,000 in 1996 and $18,144,000 in 1995. These amounts include real estate
taxes, maintenance and other rental-related operating costs of $4,266,000,
$4,678,000 and $3,992,000 for 1997, 1996 and 1995, respectively, paid under net
lease arrangements. Lease commitments are primarily for office space. Minimum
rental commitments as of December 31, 1997 for all noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $11,528
1999........................................................ 8,575
2000........................................................ 8,145
2001........................................................ 8,149
2002........................................................ 8,260
2003 and thereafter......................................... 22,364
-------
Total minimum future rentals........................... $67,022
=======
</TABLE>
Occupancy expenses for 1997, 1996 and 1995 have been reduced by
$14,255,000, $14,466,000 and $13,200,000, respectively, for rental income from
leased premises.
70
<PAGE> 72
14. INCOME TAXES
The 1997, 1996, and 1995 applicable income tax expense (benefit) was as
follows:
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997:
Current................................................ $64,314 $ 3,391 $ 28 $67,733
Deferred............................................... 2,922 (579) -- 2,343
------- ------- ------ -------
Total............................................. $67,236 $ 2,812 $ 28 $70,076
======= ======= ====== =======
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
======= ======= ====== =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Gross deferred tax assets:
Allowance for possible loan losses........................ $51,283 $54,963 $ 51,179
Deferred employee compensation............................ 8,224 6,101 5,116
Intangible assets......................................... 7,669 7,221 8,023
Deferred expense and prepaid income....................... 7,256 4,920 7,467
Pension and medical trust................................. 4,028 4,702 4,917
Other assets.............................................. 2,465 4,312 2,893
------- ------- --------
Deferred tax assets.................................... 80,925 82,219 79,595
------- ------- --------
Gross deferred tax liabilities:
Depreciable assets........................................ (2,686) (2,873) (3,200)
Other liabilities......................................... (2,349) (1,113) (1,917)
------- ------- --------
Deferred tax liabilities............................... (5,035) (3,986) (5,117)
Valuation allowance......................................... -- -- --
------- ------- --------
Net deferred tax assets................................... 75,890 78,233 74,478
------- ------- --------
Tax effect of adjustment related to available-for-sale
securities................................................ (7,563) 5,364 (17,787)
------- ------- --------
Net deferred tax assets including adjustment related to
available-for-sale securities............................. $68,327 $83,597 $ 56,691
======= ======= ========
</TABLE>
At December 31, 1997 and 1996, the respective net deferred tax assets of
$75.9 million and $78.2 million included $62.0 million and $64.9 million for
Federal tax and $13.9 million and $13.3 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, 1997 and 1996 also include a $7.6 million deferred tax liability
and a $5.4 million deferred tax asset, respectively, for the tax effect of the
net unrealized gains associated with marking to market certain securities
designated as available for sale.
71
<PAGE> 73
Total income tax expense of $70,076,000 for 1997, $65,812,000 for 1996, and
$70,175,000 for 1995 reflects effective tax rates of 30.9 percent, 31.6 percent,
and 32.2 percent, respectively. The reasons for the differences between actual
tax expense and the amount determined by applying the U.S. Federal income tax
rate of 35 percent to income before income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ---------------------
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................. $79,327 35.0% $72,862 35.0% $ 76,204 35.0%
Increase (reduction) in income tax
expense due to:
Tax-exempt income from loans and
investments net of municipal
interest expense disallowance... (6,591) (2.9) (7,240) (3.5) (10,463) (4.8)
Other, net......................... (2,660) (1.2) 190 0.1 4,434 2.0
------- ---- ------- ---- -------- ----
Actual tax expense................... $70,076 30.9% $65,812 31.6% $ 70,175 32.2%
======= ==== ======= ==== ======== ====
</TABLE>
The tax expense from net gains on security sales amounted to $5,137,000,
$3,418,000, and $9,094,000 in 1997, 1996, and 1995, 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. 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 1997,
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.
72
<PAGE> 74
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 and
appointing a receiver or conservator for the institution.
As of December 31, 1997, 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 any
conditions or events since December 31, 1997 that have changed the capital
category of the Corporation and 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, 1997:
Total Capital to Risk-
Weighted Assets
Corporation........... $1,809,767 10.72% M $1,350,572 M 8.00% M $1,688,215 M 10.00%
HTSB.................. $1,431,338 10.36% M $1,105,280 M 8.00% M $1,381,600 M 10.00%
Tier 1 Capital to Risk-
Weighted Assets
Corporation........... $1,339,949 7.94% M $ 675,037 M 4.00% M $1,012,556 M 6.00%
HTSB.................. $1,006,763 7.29% M $ 552,408 M 4.00% M $ 828,612 M 6.00%
Tier 1 Capital to Average
Assets
Corporation........... $1,339,949 6.81% M $ 787,048 M 4.00% M $ 983,810 M 5.00%
HTSB.................. $1,006,763 6.54% M $ 615,757 M 4.00% M $ 769,696 M 5.00%
As of December 31, 1996:
Total Capital to Risk-
Weighted Assets
Corporation........... $1,731,448 11.40% M $1,215,051 M 8.00% M $1,518,814 M 10.00%
HTSB.................. $1,340,198 10.74% M $ 998,285 M 8.00% M $1,247,857 M 10.00%
Tier 1 Capital to Risk-
Weighted Assets
Corporation........... $1,230,628 8.10% M $ 607,718 M 4.00% M $ 911,576 M 6.00%
HTSB.................. $ 928,872 7.44% M $ 499,394 M 4.00% M $ 749,090 M 6.00%
Tier 1 Capital to Average
Assets
Corporation........... $1,230,628 6.88% M $ 715,481 M 4.00% M $ 894,352 M 5.00%
HTSB.................. $ 928,872 6.65% M $ 558,720 M 4.00% M $ 698,400 M 5.00%
</TABLE>
16. INVESTMENTS IN SUBSIDIARIES AND STATUTORY RESTRICTIONS
Bankcorp's investment in the combined net assets of its wholly-owned
subsidiaries was $1,651,421,000 and $1,540,052,000 at December 31, 1997 and
1996, 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
73
<PAGE> 75
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, $305,650,000 of dividends at
December 31, 1997. Actual dividends paid, however, would be subject to prudent
capital maintenance. Cash dividends paid to Bankcorp by its subsidiaries
amounted to $65,662,000 and $75,884,000 in 1997 and 1996, 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 1997 and
1996, daily average reserve balances of $254 million and $234 million,
respectively, were required for those subsidiaries of Bankcorp that must
maintain such balances. At year-end 1997 and 1996, balances on deposit at the
Federal Reserve Bank totaled $233 million and $166 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.
74
<PAGE> 76
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>
1997
Total operating income................................... $ 60,823 $ 1,586,549 $ 1,647,372
Total expenses........................................... 12,884 1,407,838 1,420,722
-------- ----------- -----------
Income before taxes...................................... 47,939 178,711 226,650
Applicable income taxes.................................. 19,053 51,023 70,076
-------- ----------- -----------
Net income............................................... $ 28,886 $ 127,688 $ 156,574
======== =========== ===========
Identifiable assets at year-end.......................... $716,548 $19,416,913 $20,133,461
======== =========== ===========
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
======== =========== ===========
</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, 1997, 1996 and 1995,
identifiable foreign assets accounted for 4, 5 and 5 percent, respectively, of
total consolidated assets.
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):
75
<PAGE> 77
Statement of Income
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
*Interest on securities purchased from bank subsidiary under
agreement to resell....................................... $ 6,332 $ 5,473 $ 8,820
Interest on advances to affiliates.......................... 763 203 --
*Interest on advances to bank subsidiaries.................. 22,462 20,807 17,081
*Interest on advances to nonbank subsidiaries............... -- -- 1
Interest on investments in Federal agency securities........ 11,825 10,466 7,442
Interest on investments in foreign securities............... -- 246 1,367
*Interest on deposits at bank subsidiaries.................. 22 62 916
Interest on deposits at nonaffiliated banks................. -- -- 463
*Dividends from bank subsidiaries........................... 65,662 75,884 61,765
*Dividends from nonbank subsidiaries........................ -- -- 1,500
Other operating income...................................... 234 159 20
-------- -------- --------
Total operating income................................. 107,300 113,300 99,375
-------- -------- --------
Interest expense on commercial paper........................ 16,771 13,969 15,054
Interest expense on long-term notes......................... 26,499 26,067 23,005
Other operating expense..................................... 6,932 10,215 6,870
-------- -------- --------
Total operating expenses............................... 50,202 50,251 44,929
-------- -------- --------
Income before income taxes and equity in undistributed net
income of subsidiaries.................................... 57,098 63,049 54,446
Applicable income tax benefit............................... (5,760) (5,430) (4,323)
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries.............................................. 62,858 68,479 58,769
*Equity in undistributed net income of bank subsidiaries.... 88,574 68,268 86,317
*Equity in undistributed net income of nonbank
subsidiaries.............................................. 5,142 5,617 2,465
-------- -------- --------
Net income............................................. $156,574 $142,364 $147,551
======== ======== ========
</TABLE>
- -------------------------
* Eliminated in consolidation.
76
<PAGE> 78
Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
*Demand balances due from bank subsidiary................... $ 27 $ 25
Demand balances due from banks.............................. -- 25
Investment in U. S. Treasury and Federal agency
securities................................................ 230,303 202,607
*Securities purchased from bank subsidiary under agreement
to resell................................................. 126,294 --
*Advances to bank subsidiaries.............................. 340,000 325,000
Advances to affiliates...................................... 10,000 10,000
*Interest-bearing deposits at bank subsidiaries............. -- 152,799
*Equity investments in wholly-owned subsidiaries:
*Banks..................................................... 1,590,383 1,482,549
*Nonbanks.................................................. 61,038 57,503
Equity investments in partially-owned non-bank
subsidiary:............................................... 1,099 --
Other assets................................................ 9,997 7,206
---------- ----------
Total assets......................................... $2,369,141 $2,237,714
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Commercial paper outstanding................................ $ 351,427 $ 334,653
Other liabilities........................................... 5,921 8,788
Long-term notes............................................. 379,278 379,107
---------- ----------
Total liabilities.................................... 736,626 722,548
Stockholders equity......................................... 1,632,515 1,515,166
Total liabilities and stockholders equity............ $2,369,141 $2,237,714
========== ==========
</TABLE>
- -------------------------
*Eliminated in consolidation
77
<PAGE> 79
Statement of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 156,574 $ 142,364 $ 147,551
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed net income of subsidiaries............... (93,716) (73,885) (88,782)
Accretion and amortization............................. (11,825) (10,712) (7,069)
Deferred income tax (benefit) provision................ (33) (65) (52)
Net (increase)/decrease in interest receivable......... (812) 966 (812)
Other, net............................................. (6,255) 4,434 (268)
----------- --------- ---------
Net cash provided by operating activities......... 43,933 63,102 50,568
=========== ========= =========
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks............................................... 152,799 (127,799) --
Net (increase) decrease in securities purchased under
agreement to resell................................. (126,294) 138,475 (1,563)
Proceeds from maturities of portfolio securities....... 1,135,139 865,880 774,155
Purchases of portfolio securities...................... (1,151,010) (894,510) (729,552)
Additional capital invested in bank subsidiaries....... -- (325,000) --
Net increase in advances to subsidiaries............... (15,000) (30,000) (60,000)
Net increase in advances to affiliates................. -- (10,000) --
Other, net............................................. 3 5 (1,193)
----------- --------- ---------
Net cash (used) provided by investing act......... (4,363) (382,949) (18,153)
=========== ========= =========
FINANCING ACTIVITIES:
Net increase (decrease) in commercial paper
outstanding......................................... 16,774 42,631 (14,715)
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........................ 2,226 280,422 --
Cash dividends paid Series A preferred stock........... (13,050) (13,195) --
Cash dividends paid Series B preferred stock........... (3,543) (1,811) --
Cash dividends paid on common stock.................... (42,000) (48,200) (262,700)
----------- --------- ---------
Net cash provided (used) by financing act......... (39,593) 319,847 (32,415)
----------- --------- ---------
Net decrease in demand balances due from banks........... (23) -- --
Demand balances due from banks at January 1.............. 50 50 50
----------- --------- ---------
Demand balances due from banks at December 31............ $ 27 $ 50 $ 50
=========== ========= =========
</TABLE>
20. BUSINESS COMBINATIONS AND DISPOSITIONS/INTANGIBLES
At December 31, 1997 and 1996, intangible assets, including goodwill
resulting from business combinations, amounted to $292,981,000 and $310,663,000,
respectively. Amortization of these intangibles amounted to $27,839,000 in 1997,
$18,168,000 in 1996, and $9,350,000 in 1995. 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
78
<PAGE> 80
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 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.
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 page 80).
79
<PAGE> 81
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 $16.5
million at December 31, 1997 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 1997, 1996 and 1995, 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 1997, 1996 and 1995, the
Corporation received from BMO approximately $20.9 million, $14.3 million and
$15.7 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
assumed responsibility for potential costs (subject to limits) related to
certain litigation matters involving HTSB. As part of this agreement, Bankmont
incurred $1.3 million of costs in 1997 and $2.7 million of costs in 1996. 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 1997 and 1996 on this debt totaled $0.8 million
and $0.2 million, respectively.
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. 1997, 1996 and 1995 foreign exchange
revenues included $5.4 million, $10.0 million and $8.8 million of net profit,
respectively, under this agreement.
80
<PAGE> 82
22. SUBSEQUENT EVENTS
On September 4, 1997, HTSB announced that it had entered into a contract to
transfer its credit card portfolio to a company to be owned by BankBoston
Corporation, First Annapolis Consulting, Inc. and Bankmont. That transaction
closed January 29, 1998. At closing, the assets sold had a carrying value of
$693 million, representing less than 5% of the Corporation's total consolidated
assets. Upon completion of the transfer, HTSB received cash and an equity
interest in the newly formed company, which it immediately sold for cash to
Bankmont. The impact of this transaction on the Corporation's financial position
and future results of operations is not expected to be material.
Effective February 11, 1998, Harris Preferred Capital Corporation ("HPCC"),
a subsidiary of HTSB, issued $250 million of 7 3/8 percent noncumulative,
exchangeable Series A preferred stock. The preferred stock, which is listed and
traded on the New York Stock Exchange, is nonvoting except in certain
circumstances as outlined in HPCC's Form S-11 Registration Statement ("S-11")
filed with the Securities and Exchange Commission. Dividends on the preferred
stock are noncumulative and are payable at the rate of 7 3/8 percent per annum
of the $25 per share liquidation preference. The preferred shares can be
redeemed in whole or in part at HPCC's option on or after March 30, 2003 or upon
the occurrence of a tax event as defined in the S-11. Upon the occurrence of
specific events described in the S-11, including HTSB becoming less than
"adequately capitalized," HTSB being placed into conservatorship or receivership
or the Board of Governors of the Federal Reserve Bank directing such an
exchange, each preferred share would be exchanged automatically for one newly
issued HTSB preferred share. The Series A preferred shares will qualify as Tier
1 capital at both HTSB and Bankcorp for U.S. banking regulatory purposes under
relevant regulatory capital guidelines. The impact of this transaction on the
Corporation's financial position and future results of operations is not
expected to be material.
81
<PAGE> 83
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, 1997, 1996 and 1995.
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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
January 30, 1998
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, 1994.
82
<PAGE> 84
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Bankcorp's Board of Directors consists of twelve 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 at least
the past 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.
PASTORA SAN JUAN CAFFERTY, age 57, Professor, University of Chicago School
of Social Service Administration and a Director of WMX Technologies, Peoples
Energy Corporation and Kimberly-Clark Corporation. Elected in 1997.
F. ANTHONY COMPER, age 52, President and Chief Operating Officer and a
Director of Bank of Montreal. Elected in 1990.
SUSAN T. CONGALTON, age 51, Managing Director, Lupine Partners (private
investments). Elected in 1988.
WILBUR H. GANTZ, age 60, Chairman of the Board 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 63, 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 and Stone
Container Corporation. Elected in 1980.
DR. LEO M. HENIKOFF, age 58, President and Chief Executive Officer of
Rush-Presbyterian-St. Luke's Medical Center (health care and related services).
Elected in 1986.
RICHARD M. JAFFEE, age 62, Chairman, Oil-Dri Corporation of America (a
developer, manufacturer and marketer of sorbent products). Elected in 1995.
EDWARD W. LYMAN, JR., age 55, Vice Chair of the Board of Bankcorp and
Harris Trust and Savings Bank. Elected in 1995.
ALAN G. MCNALLY, age 52, Chairman of the Board and Chief Executive Officer
of Bankcorp and Harris Trust and Savings Bank. Elected in 1993.
CHARLES H. SHAW, age 65, Chairman, The Charles H. Shaw Company (real estate
development). Elected in 1990.
RICHARD E. TERRY, age 60, Chairman and Chief Executive Officer, Peoples
Energy Corporation (public utility) and a Director of Amsted Industries. Elected
in 1992.
JAMES O. WEBB, age 66, President, James O. Webb & Associates, Inc.
(consultant in new ventures and business development). Elected in 1995.
In addition to Messrs. McNally and Lyman, the Corporation had fourteen
executive officers at December 31, 1997 -- Harry G. Ackstein, age 59, Jeffrey D.
Butterfield, age 51, Charles H. Davis, age 55, Michael E. Godwin, age 48, Pierre
O. Greffe, age 45, Louis F. Lanwermeyer, age 49, Michael B. Lowe, age 52, Scott
B. McCallum, age 38, Richard J. Moreland, age 51, Paul V. Reagan, age 51,
William E. Thonn, age 49, Charles R. Tonge, age 50, Edward J. Williams, age 55
and Sohrab Zargham, age 56. 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 at least the past
five years.
83
<PAGE> 85
ITEM 11 -- OMITTED PURSUANT TO GENERAL INSTRUCTION (I) (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 (I)(2) (c) OF FORM 10-K.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with Report:
(l) Financial Statements (See page 1 for a listing of all financial
statements included in Item 8)
(2) Financial Statement Schedules
All Schedules normally required by Form 10-K are omitted since they are either
not applicable or the required information is shown in the financial statements
or the notes thereto.
(3) Exhibits:
3. Articles of Incorporation and By-laws
a) Restated Certificate of Incorporation (filed as an Exhibit to
Bankcorp's 1987 Form 10-K and incorporated herein by
reference)
b) By-laws of Bankcorp (filed as an Exhibit to Bankcorp's 1996
Form 10-K and incorporated herein by reference)
4. Indenture dated as of June 1, 1989 relating to Bankcorp's
9 3/8% Subordinated Notes Due 2001 (filed as an Exhibit to
Bankcorp's May 24, 1989 Registration Statement on Form S-3 and
incorporated herein by reference). In addition, Bankcorp has
issued three Floating Rate Subordinated Notes 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) Managerial Incentive Plan, as amended (filed as an Exhibit
to Bankcorp's 1996 Form 10-K and incorporated herein by
reference)
b) Harris Growth Incentive Plan (filed as an Exhibit to
Bankcorp's 1991 Form 10-K and incorporated herein by
reference)
c) Employees' Savings and Profit Sharing Plan (filed as an
Exhibit to Bankcorp's 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)
84
<PAGE> 86
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 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) A Current Report on Form 8-K dated October 28, 1997 was filed on behalf
of Harris Bankcorp, Inc., reporting on Item 5 -- Other Events.
- -------------------------
* 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.
85
<PAGE> 87
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 23rd
day of March 1998.
<TABLE>
<C> <S>
Chairman of the Board and Chief Executive
- -------------------------------------------- Officer
Alan G. McNally
Chief Financial Officer
- --------------------------------------------
Pierre O. Greffe
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 23rd day of March 1998.
<TABLE>
<S> <C> <C>
Pastora San Juan Cafferty Leo M. Henikoff Charles H. Shaw
F. Anthony Comper Richard M. Jaffee Richard E. Terry
Susan T. Congalton Edward W. Lyman, Jr. James O. Webb
Wilbur H. Gantz
Alan G. McNally
Attorney-In-Fact
</TABLE>
Supplemental Information
No annual report or proxy statement will be sent to security holders in
1998.
86
<PAGE> 1
Ex. 23
EXHIBIT 23: CONSENT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors of Harris Bankcorp, Inc.:
We consent to the incorporation by reference in Registration Statement No.
33-28909 on Form S-3 of Harris Bankcorp, Inc. of our report dated January 30,
1998, relating to the consolidated statements of condition of Harris Bankcorp,
Inc. and Subsidiaries as of December 31, 1997 and 1996, 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, 1997,
which report appears on page 82 of the December 31, 1997 Annual Report on Form
10-K of Harris Bankcorp, Inc.
KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
March 23, 1998
<PAGE> 1
EX. 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, Vice
Chair 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 1997 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.
PASTORA SAN JUAN CAFFERTY RICHARD M. JAFFEE
-------------------------------- ---------------------------
Pastora San Juan Cafferty Richard M. Jaffee
Director
F. ANTHONY COMPER EDWARD W. LYMAN, JR.
-------------------------------- ---------------------------
F. Anthony Comper Edward W. Lyman, Jr.
Director Vice Chair and Director
SUSAN T. CONGALTON ALAN G. MCNALLY
-------------------------------- ---------------------------
Susan T. Congalton Alan G. McNally
Director Chairman of the Board,
Chief Executive Officer,
and Director
WILBUR H. GANTZ CHARLES H. SHAW
-------------------------------- ---------------------------
Wilbur H. Gantz Charles H. Shaw
Director Director
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
Dated: March 18, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,304,374
<INT-BEARING-DEPOSITS> 598,070
<FED-FUNDS-SOLD> 80,782
<TRADING-ASSETS> 53,209
<INVESTMENTS-HELD-FOR-SALE> 5,229,390
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,868,250
<ALLOWANCE> 130,876
<TOTAL-ASSETS> 20,133,461
<DEPOSITS> 14,432,063
<SHORT-TERM> 3,406,620
<LIABILITIES-OTHER> 236,505
<LONG-TERM> 379,278
225,000
0
<COMMON> 53,340
<OTHER-SE> 1,354,175
<TOTAL-LIABILITIES-AND-EQUITY> 20,133,461
<INTEREST-LOAN> 927,090
<INTEREST-INVEST> 294,626
<INTEREST-OTHER> 47,908
<INTEREST-TOTAL> 1,269,624
<INTEREST-DEPOSIT> 475,657
<INTEREST-EXPENSE> 698,598
<INTEREST-INCOME-NET> 571,026
<LOAN-LOSSES> 58,447
<SECURITIES-GAINS> 13,207
<EXPENSE-OTHER> 663,677
<INCOME-PRETAX> 226,650
<INCOME-PRE-EXTRAORDINARY> 156,574
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,574
<EPS-PRIMARY> 21.00
<EPS-DILUTED> 21.00
<YIELD-ACTUAL> 3.56
<LOANS-NON> 17,790
<LOANS-PAST> 27,083
<LOANS-TROUBLED> 598
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 142,211
<CHARGE-OFFS> 82,555
<RECOVERIES> 12,773
<ALLOWANCE-CLOSE> 130,876
<ALLOWANCE-DOMESTIC> 130,876
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
