<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1998
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, 1998 COMMISSION FILE NUMBER 0-18179
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
HARRIS BANKCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<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)
</TABLE>
312/461-2121
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $8 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
All voting stock (6,667,490 shares of Common Stock, $8 par value) is owned by
Bankmont Financial Corp., a wholly-owned Delaware subsidiary of Bank of
Montreal.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
FORM 10-K CROSS REFERENCE INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 5
Item 3 Legal Proceedings........................................... 6
Item 4 Submission of Matters to a Vote of Security Holders
(during the fourth quarter of 1998)......................... 6
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.................................... 45
Consolidated Statements of Income........................... 46
Consolidated Statements of Comprehensive Income............. 47
Consolidated Statements of Condition........................ 48
Statements of Changes in Stockholder's Equity............... 49
Consolidated Statements of Cash Flows....................... 50
Notes to Financial Statements............................... 51
Joint Independent Auditors.................................. 85
Independent Auditors' Report................................ 85
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 85
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 86
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 87
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 87
Signatures............................................................... 89
</TABLE>
1
<PAGE> 3
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 had agreed to merge with
Royal Bank of Canada as equal partners, subject to regulatory and shareholder
approval. On December 14, 1998, Canada's Minister of Finance announced that he
would not allow the proposed merger to proceed. As a result of this
announcement, on December 15, 1998, BMO and the Royal Bank of Canada terminated
their agreement to merge.
Bankcorp provides banking, trust and other financial services domestically
and internationally through 14 bank and 18 active nonbank subsidiaries and an
Edge Act Subsidiary. 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 and Bank of Montreal Trust Company. The trust
companies provide specialized nondeposit services, notably stock transfer,
personal trust and indenture trust. 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, 53 domestic branch
offices and 94 automated teller machines ("ATMs") located in the Chicago area.
Additionally, HTSB has representative offices in Dallas, Houston, Los Angeles,
New York, San Francisco 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, principally to manage its risk exposure. 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 the time of the sale, HTSB's charge card portfolio
balance amounted to approximately $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
2
<PAGE> 4
formed company, Partner's First Holdings, LLC, which it immediately sold for
cash to Bankmont. The impact of this transaction on the Corporation's financial
position and results of operations was not material.
HTSB's overseas activities are conducted through its representative
offices, a foreign branch and HBIC. Services include various types of loans and
deposits, letters of credit, personal trust services, export and import
financing and foreign exchange products. See the International Banking section
on page 42.
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
January 1996, HTSB sold its securities custody and related trustee services
business for large institutions to Citibank.
The Corporation has three primary operating segments, identified by the
customers served, the products and services they offer and the channels by which
the products and services are delivered. Corporate and Institutional Financial
Services is comprised of the Corporation's corporate banking distribution to
middle-market companies across the Midwest and nationally in selected
specialties and corporate trust activities, including national stock transfer
and indenture trust distribution. Chicagoland Banking comprises community
banking, which serves individuals through a Chicagoland retail bank network;
private banking, which serves the needs of affluent individuals in Chicagoland
and nationally through the integrated delivery of a comprehensive portfolio of
wealth management services, including personal trust, investment management,
customized lending and financial planning; and small business/lower
middle-market banking. Electronic Financial Services includes cash management
services, mbanx(SM), the Corporation's virtual banking unit, and the bankcard
business unit, including merchant services and, until its sale in January 1998,
the Corporation's charge card business. For further information on operating
results by segment, see the Operating Segment Review section on page 12.
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, unforeseen business risks related to year 2000
computer systems issues and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements. The Corporation assumes no obligation to update any such
forward-looking statements.
VISION 2002
The Corporation and BMO have previously 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 Canada, the United States and Mexico. 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, with the Harris organization as the centerpiece of BMO's U.S. expansion.
Services to individuals and small businesses will be expanded throughout
Chicago, Illinois and services to mid-market corporations will be provided to
customers throughout the midwest. Additionally, trust, cash management,
investment management and special industries services will continue to grow
nationwide.
3
<PAGE> 5
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 Household Bank branches and 250,000 customers in the greater
Chicago area. With the acquisition and ongoing growth, Harris now serves over
850,000 customers and has 139 locations opened or planned at the end of 1998,
creating one of the top three retail banking networks in the Chicago area. Four
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.
The process of building a cost-effective operations and staff support
infrastructure, started in 1994, continued in 1998 with an additional $20
million in annual cost savings (following $60 million in cumulative annual cost
reductions during 1994-97). Infrastructure costs were reduced and redeployed
into marketing, sales and service over the four-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, 1998 accomplishments included the implementation of
strategic sourcing and the continued centralization and standardization of
community banking operating processes. These two initiatives will continue in
1999, planned to result in additional cost savings for Harris. Harris continues
to expand its retail banking services throughout the greater Chicago area
through PC banking, telephone banking and bill payment offered by mbanx(SM). In
1997, Harris was one of the first banks in Chicago to offer Internet banking and
an integrated telephone and Internet bill payment service. Customers and
prospective customers can call in 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
phones 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. These policies have a significant influence on overall growth and
distribution of bank loans, investments and deposits, and affect interest rates
charged on loans and earned on investments or paid for time, savings and other
deposits. Federal Reserve Board monetary policies have had a significant effect
on the operating results of commercial banks in the past and this is expected to
continue. The effect of such policies upon the future business and earnings of
the Corporation cannot accurately be predicted.
REGULATION AND SUPERVISION
Bankcorp is a legal entity, separate and distinct from its subsidiaries.
There are various legal limitations on the ability of its banking subsidiaries
to finance or otherwise supply funds to Bankcorp or various of its other
affiliates. Notes 15 and 16 to Financial Statements on pages 75 through 77 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.
4
<PAGE> 6
Bankcorp and its banking subsidiaries are subject to regulation by various
state and Federal authorities. Applicable laws and regulations relate to
reserves, deposit insurance, investments, loans, mergers and consolidations,
issuance of securities, payment of dividends, capital adequacy and other aspects
of their operations. Bankcorp and its nonbank subsidiaries are affiliates of the
banking subsidiaries within the meaning of the Federal Reserve Act and the
Illinois Banking Act. Certain nonbank subsidiaries including the trust
companies; Harris Investment Management, Inc.; Harris Investors Direct, Inc. and
others are subject to a variety of State and Federal regulations.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("the Act")
was signed into law. Along with numerous provisions pertaining to the U.S.
banking industry, the legislation addressed resolution of the bank and thrift
deposit insurance funds. This provision of the Act had three components. The
first 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 of $16.7 million pretax ($10.0
million after-tax) in 1996.
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 has increased
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 6,170 and
4,914, respectively, at December 31, 1998.
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 60 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, which is used by all of the Corporation's
segments.
HTSB also owns an operations center. This 15-story building contains
approximately 415,000 gross square feet and is totally dedicated to bank use and
supports all segments. It is located at 311 West Monroe Street, Chicago. In
addition, HTSB owns premises used to conduct certain branch banking activities
which are part of the Chicagoland Banking segment.
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.
5
<PAGE> 7
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 have been deferred.
ITEM 3 -- LEGAL PROCEEDINGS
For information on the Corporation's legal proceedings, see Note 17 to
Financial Statements on page 77 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 1998.
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 1998,
Bankcorp declared and paid to Bankmont approximately $181.5 million in cash
dividends on common stock and $16.6 million in cash dividends on preferred
stock. 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. At December
31, 1998, 1997 and 1996, the Corporation's equity capital included $225 million
of preferred stock, respectively.
Effective February 11, 1998, HPCC issued $250 million of 7 3/8%
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"). Dividends on the preferred stock are noncumulative and are payable at
the rate of 7 3/8% 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. During 1998, HPCC paid
$16.4 million of dividends on preferred stock.
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.
6
<PAGE> 8
ITEM 6 -- SELECTED FINANCIAL DATA
HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(FULLY TAXABLE EQUIVALENT (FTE) BASIS, DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees................................... $ 904,746 $ 928,155 $ 838,789 $ 778,770 $594,265
Money market assets:
Deposits at banks..................................... 10,833 31,464 30,483 38,617 30,739
Federal funds sold and securities purchased under
agreement to resell................................. 8,980 12,692 11,918 19,330 21,523
Trading account......................................... 4,965 4,638 4,968 4,556 2,796
Securities held-to-maturity............................. -- -- -- 77,820 87,740
Securities available-for-sale........................... 386,397 319,475 276,077 162,867 121,372
---------- ---------- ---------- ---------- --------
Total interest income................................. 1,315,921 1,296,424 1,162,235 1,081,960 858,435
---------- ---------- ---------- ---------- --------
INTEREST EXPENSE
Domestic deposits....................................... 442,542 378,825 284,301 215,276 160,357
Foreign deposits........................................ 66,555 96,832 113,866 143,310 89,645
Short-term borrowings................................... 176,083 156,559 160,790 168,993 108,485
Senior notes............................................ 47,689 39,883 22,425 31,125 --
Minority interest -- dividends on preferred stock of
subsidiary............................................ 16,389 -- -- -- --
Long-term notes......................................... 29,495 26,499 26,067 23,005 19,520
---------- ---------- ---------- ---------- --------
Total interest expense................................ 778,753 698,598 607,449 581,709 378,007
---------- ---------- ---------- ---------- --------
Net Interest Income..................................... 537,168 597,826 554,786 500,251 480,428
Provision for loan losses............................... 26,957 58,447 56,540 42,995 45,040
---------- ---------- ---------- ---------- --------
Net Interest Income after Provision for Loan Losses..... 510,211 539,379 498,246 457,256 435,388
---------- ---------- ---------- ---------- --------
NONINTEREST INCOME
Trust and investment management fees.................... 143,724 133,714 117,762 149,979 148,094
Money market and bond trading........................... 10,512 7,269 7,992 5,110 (396)
Foreign exchange........................................ 6,772 5,364 9,992 14,248 19,769
Merchant and charge card fees........................... 26,772 50,085 47,244 41,788 37,402
Service fees and charges................................ 109,372 96,324 82,802 69,333 73,621
Portfolio securities gains.............................. 26,953 13,207 8,786 23,379 5,254
Gain on sale of charge card portfolio................... 12,000 -- -- -- --
Other................................................... 114,936 71,785 54,729 34,436 30,700
---------- ---------- ---------- ---------- --------
Total noninterest income.............................. 451,041 377,748 329,307 338,273 314,444
---------- ---------- ---------- ---------- --------
NONINTEREST EXPENSES
Employment.............................................. 387,009 372,142 326,994 318,302 312,570
Net occupancy........................................... 51,342 56,462 47,690 46,099 45,052
Equipment............................................... 52,622 48,119 41,715 42,541 42,284
Marketing............................................... 25,896 25,675 29,342 25,583 24,632
Communication and delivery.............................. 22,595 24,129 20,954 20,251 17,732
Trust customer charge................................... -- -- -- -- 51,335
Other................................................... 115,036 109,311 109,133 97,977 100,257
---------- ---------- ---------- ---------- --------
654,500 635,838 575,828 550,753 593,862
Goodwill and other valuation intangibles................ 24,104 27,839 18,168 9,350 10,266
---------- ---------- ---------- ---------- --------
Total noninterest expenses............................ 678,604 663,677 593,996 560,103 604,128
---------- ---------- ---------- ---------- --------
FTE pretax income....................................... 282,648 253,450 233,557 235,426 145,704
Applicable income taxes................................. 69,901 70,076 65,812 70,175 24,528
FTE adjustment.......................................... 30,122 26,800 25,381 17,700 23,830
---------- ---------- ---------- ---------- --------
Net Income............................................ 182,625 156,574 142,364 147,551 97,346
Dividends on preferred stock............................ 16,594 16,594 15,006 -- --
---------- ---------- ---------- ---------- --------
Net income applicable to common stock................... $ 166,031 $ 139,980 $ 127,358 $ 147,551 $ 97,346
========== ========== ========== ========== ========
PER COMMON SHARE STATISTICS
Net income applicable to common stock................... $24.91 $21.00 $19.10 $22.13 $14.60
Common stock dividends.................................. 27.22 6.30 7.23 39.40 5.21
Average common shares outstanding (in thousands)........ 6,667 6,667 6,667 6,667 6,667
PROFITABILITY RATIOS
Net income:
% Average total assets................................ 0.86% 0.82% 0.83% 0.95% 0.68%
% Average common stockholder's equity................. 11.92 10.54 11.55 13.61 9.70
% Average total assets (cash flow).................... 0.94 0.92 0.91 1.00 0.74
% Average common stockholder's equity (cash flow)..... 16.24 15.43 15.15 14.88 11.07
NUMBER OF EMPLOYEES AT YEAR-END
(full-time equivalent basis)............................ 6,170 6,425 6,363 5,749 5,655
</TABLE>
7
<PAGE> 9
HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DAILY AVERAGES, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and demand balances due from banks....... $ 1,270,509 $ 1,225,644 $ 1,147,075 $ 1,206,234 $ 1,173,266
Money market assets:
Interest-bearing deposits at banks.......... 297,705 601,672 576,913 566,072 686,995
Federal funds sold and securities purchased
under agreement to resell................. 162,429 229,572 213,939 330,783 536,185
Portfolio securities:
Held-to-maturity............................ -- -- -- 962,245 963,690
Available-for-sale.......................... 6,126,443 4,895,735 4,219,179 2,611,707 2,269,171
Trading account assets........................ 78,805 68,336 70,452 64,777 39,812
Domestic loans, net of unearned income........ 11,536,285 10,870,692 9,888,591 8,735,388 7,629,399
Foreign office loans, net of unearned
income...................................... 123,705 90,584 59,235 50,183 43,176
----------- ----------- ----------- ----------- -----------
Total loans............................. 11,659,990 10,961,276 9,947,826 8,785,571 7,672,575
Allowance for possible loan losses............ (134,896) (136,760) (134,310) (126,041) (129,377)
Premises and equipment........................ 332,393 293,879 247,521 224,205 223,538
Customers' liability on acceptances........... 42,864 62,547 87,972 104,994 80,813
Bank-owned insurance investments.............. 592,460 236,704 162,819 42,428 --
Goodwill and other valuation intangibles...... 277,106 308,746 185,673 48,531 53,400
Other assets.................................. 521,366 472,301 452,971 693,565 647,275
----------- ----------- ----------- ----------- -----------
Total assets............................ $21,227,174 $19,219,652 $17,178,030 $15,515,071 $14,217,343
=========== =========== =========== =========== ===========
LIABILITIES
Demand deposits............................... $ 3,287,124 $ 3,020,864 $ 2,812,007 $ 2,808,747 $ 2,859,643
Interest checking deposits.................... 334,633 853,800 815,853 629,448 663,598
Money market accounts......................... 3,106,277 1,964,212 1,434,293 1,037,963 1,170,181
Savings deposits and certificates............. 4,630,387 4,734,360 3,626,767 2,442,101 2,189,049
Other time deposits........................... 1,733,510 914,836 674,985 682,320 722,373
Deposits in foreign offices................... 1,279,126 1,795,952 2,159,909 2,435,124 2,110,342
----------- ----------- ----------- ----------- -----------
Total deposits.......................... 14,371,057 13,284,024 11,523,814 10,035,703 9,715,186
Short-term borrowings......................... 3,417,420 3,000,177 3,220,570 3,010,753 2,654,891
Senior notes.................................. 855,366 695,329 392,283 512,204 --
Acceptances outstanding....................... 42,866 62,561 87,969 105,064 80,818
Other liabilities............................. 286,490 245,448 275,925 465,145 463,736
Minority interest -- preferred stock of
subsidiary.................................. 221,918 -- -- -- --
Long-term notes............................... 413,869 379,192 371,734 299,771 298,745
----------- ----------- ----------- ----------- -----------
Total liabilities....................... 19,608,986 17,666,731 15,872,295 14,428,640 13,213,376
Preferred stock............................... 225,000 225,000 203,115 2,466 --
Common stockholder's equity................... 1,393,188 1,327,921 1,102,620 1,083,965 1,003,967
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's
equity................................ $21,227,174 $19,219,652 $17,178,030 $15,515,071 $14,217,343
=========== =========== =========== =========== ===========
RATIOS (PERCENTAGE OF TOTAL AVERAGE ASSETS)
Money market assets........................... 2.2% 4.3% 4.6% 5.8% 8.6%
Portfolio securities and trading account
assets...................................... 29.2 25.8 25.0 23.5 23.0
Loans, net of unearned income................. 54.9 57.0 57.9 56.6 54.0
Deposits...................................... 67.7 69.1 67.1 64.7 68.3
Short-term borrowings......................... 16.1 15.6 18.7 19.4 18.7
Common stockholder's equity................... 6.56 6.91 6.42 6.99 7.06
SELECTED YEAR-END DATA
Loans, net of unearned income................. $12,228,400 $10,868,250 $10,744,653 $ 9,517,797 $ 8,229,254
Allowance for possible loan losses............ 140,608 130,876 142,211 129,259 124,734
Total assets.................................. 22,797,830 20,133,461 18,228,740 15,676,201 15,331,539
Deposits...................................... 15,322,842 14,432,063 12,990,301 10,228,782 9,919,732
Long-term notes............................... 454,387 379,278 379,107 363,952 298,810
Preferred stock -- Series A................... 180,000 180,000 180,000 180,000 --
Preferred stock -- Series B................... 45,000 45,000 45,000 -- --
Common stockholder's equity................... 1,426,032 1,407,515 1,290,166 965,776 1,021,154
YEAR-END COMMON STOCKHOLDER'S EQUITY PER
COMMON SHARE................................ $213.88 $211.10 $193.50 $144.85 $153.15
</TABLE>
8
<PAGE> 10
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SUMMARY
1998 COMPARED TO 1997
The Corporation had 1998 earnings of $182.6 million, a 17 percent increase
from $156.6 million in 1997. Earnings comparability was affected by the sale of
the Corporation's credit card portfolio in January 1998. Excluding the results
from credit card activities sold, "core earnings" increased 24 percent in 1998
compared to 1997. "Core revenue" on the same basis increased by 11 percent for
the current year.
For 1998, return on average common equity ("ROE") was 11.92 percent
compared to ROE of 10.54 percent for 1997. Return on average assets ("ROA") was
0.86 percent in 1998 compared to 0.82 percent in the prior year. Cash flow
return on average common stockholder's equity ("cash flow ROE") 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 gross average intangible assets. For the current year,
cash flow ROE was 16.24 percent compared to cash flow ROE of 15.43 percent in
1997. Cash flow return on average assets ("cash flow ROA") is calculated as net
income plus after-tax amortization expenses of goodwill and other valuation
intangibles divided by average assets less average intangible assets. Cash flow
ROA was 0.94 percent in 1998 compared to 0.92 percent a year ago.
Net interest income on a fully taxable equivalent basis was $537.2 million,
down $60.7 million or 10 percent from $597.8 million in 1997. Net interest
margin declined from 3.56 percent to 2.93 percent currently, reflecting the
impact of the credit card portfolio sale in January 1998. Average earning assets
rose $1.56 billion or 9 percent to $18.34 billion in the current year,
attributable to an increase of 6 percent or $699 million in average loans and
$1.17 billion in the investment securities portfolio. Excluding the charge card
portfolio, average loans rose $1.50 billion or 15 percent. Commercial loans and
residential mortgages were the primary contributors to this growth.
Noninterest income of $451.0 million was up $73.3 million or 19 percent in
1998 from last year despite a $23.3 million decline in merchant and credit card
fees resulting from the 1998 first quarter card portfolio sale. Trust and
investment management fees rose 7 percent from the prior year while service
charge fees rose 14 percent. Other income, which includes syndication fees,
gains on mortgage sales and other gains and fee income, increased $55.2 million
from 1997. Net debt portfolio securities gains were $27.0 million currently
compared to $13.2 million in 1997, while money market and bond trading profits
were up $3.2 million in 1998.
1998 noninterest expenses of $678.6 million rose 2 percent from last year.
Excluding the costs associated with the credit card portfolio, expenses
increased 7 percent year-to-year, reflecting modest growth in employment-related
expenses, partially offset by reductions in non-employment costs.
Income taxes increased $3.1 million during the current year, reflecting
higher pretax income somewhat offset by a reduction in the Corporation's
effective tax rate.
The 1998 provision for loan losses of $27.0 million was down from $58.4
million in 1997. Net loan charge-offs during the current year were $17.2 million
compared to $69.8 million in the same period last year, with the difference
primarily attributable to lower write-offs as a result of the credit card
portfolio sale.
Nonperforming assets at December 31, 1998 totaled $21 million, or 0.2
percent of total loans, compared to $36 million or 0.3 percent at September 30,
1998, and $20 million or 0.2 percent a year ago. At December 31, 1998, the
allowance for possible loan losses was $141 million, equal to 1.2 percent of
loans outstanding compared to $131 million at the end of 1997, equal to 1.2
percent of loans outstanding. As a result, the ratio of the allowance for
possible loan losses to nonperforming assets of 677 percent at December 31, 1998
remained essentially unchanged from December 31, 1997.
9
<PAGE> 11
At December 31, 1998, consolidated equity capital of the Corporation
amounted to $1.65 billion, up from $1.63 billion at December 31, 1997. Bankcorp
paid $181.5 million in dividends on common stock and $16.6 million of preferred
dividends. At December 31, 1998, the Corporation's equity capital includes $225
million of preferred stock.
The Corporation's regulatory capital leverage ratio was 7.26 percent
compared to 6.81 percent in 1997. Regulators require most banking institutions
to maintain capital leverage ratios of not less than 4.0 percent. At December
31, 1998, the Corporation's Tier 1 and Total risk-based capital ratios were 8.66
percent and 11.57 percent, respectively, compared to respective ratios of 7.94
percent and 10.72 percent at December 31, 1997. The 1998 year-end ratios
substantially exceeded minimum required regulatory ratios of 4.0 percent and 8.0
percent, respectively.
In February 1998, HPCC, a subsidiary of HTSB, issued $250 million of
noncumulative preferred stock in a public offering (See Note 15 to Financial
Statements on page 75 of this Report). The preferred stock qualifies as Tier 1
capital of the Corporation for U.S. banking regulatory purposes.
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 of
1996 the Corporation realized a $2.4 million after-tax 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 flow basis is the
most relevant measure of performance. Earnings before amortization of goodwill
and other valuation intangibles ("cash earnings") were $174.8 million in 1997
compared to $154.8 million in 1996. On a cash basis, return on equity and return
on assets were 15.43 percent and 0.92 percent, respectively compared to cash
flow ROE of 15.15 percent and cash flow 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 investments.
Total noninterest expenses were $663.7 million in 1997. 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
10
<PAGE> 12
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 in 1996. 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 dividends on
common stock and $16.6 million of preferred dividends. At December 31, 1997, the
Corporation's equity capital included $225 million of preferred stock.
The Corporation's regulatory capital leverage ratio was 6.81 percent
compared to 6.88 percent in 1996. 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.
11
<PAGE> 13
OPERATING SEGMENT REVIEW
The Corporation's segments are identified by the customers served, products
and services they offer and the channels by which the products and services are
delivered. Corporate and Institutional Financial Services is comprised of the
Corporation's corporate banking distribution to middle-market companies across
the Midwest and nationally in selected specialties and corporate trust
activities, including national stock transfer and indenture trust distribution.
Chicagoland Banking comprises community banking, which serves individuals
through a Chicagoland retail bank network; private banking, which serves the
needs of affluent individuals in Chicagoland and nationally through the
integrated delivery of a comprehensive portfolio of wealth management services,
including personal trust, investment management, customized lending and
financial planning; and small business/lower middle-market banking. Electronic
Financial Services includes cash management services, mbanx(sm), the
Corporation's virtual banking unit, and the bankcard business unit, including
merchant services and, until its sale in January 1998, the Corporation's charge
card business.
Other is comprised of a smaller segment, Global Asset Management, and the
Corporation's Treasury unit, which serves as the Corporation's
investment/funding unit, as well as inter-segment eliminations and residual
revenues and expenses, representing the difference between actual amounts
incurred and the amounts allocated to operating segments.
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
CORPORATE AND
INSTITUTIONAL ELECTRONIC
FINANCIAL CHICAGOLAND FINANCIAL CONSOLIDATED
SERVICES BANKING SERVICES OTHER TOTAL
------------- ----------- ---------- ----- ------------
<S> <C> <C> <C> <C> <C>
1998
(in thousands)
Net interest income (FTE basis)...... $ 170.3 $ 292.0 $ 69.7 $ 5.2 $ 537.2
Noninterest income................... 99.8 155.5 108.4(1) 87.3 451.0
Provision for loan losses............ 21.1 5.9 0.1 (0.1) 27.0
Noninterest expense.................. 135.3 369.2 131.0 43.1 678.6
-------- -------- -------- --------- ---------
Income before income taxes........... 113.7 72.4 47.0 49.5 282.6
Income taxes......................... 45.2 30.2 19.1 5.5 100.0
-------- -------- -------- --------- ---------
Net income........................... $ 68.5 $ 42.2 $ 27.9 $ 44.0 $ 182.6
======== ======== ======== ========= =========
(in millions)
Average Assets....................... $6,331.1 $9,157.0 $1,231.8 $ 4,507.3 $21,227.2
======== ======== ======== ========= =========
Average Loans........................ $6,159.3 $7,111.0 $ 97.3(1) $(1,707.6) $11,660.0
======== ======== ======== ========= =========
Average Deposits..................... $ 406.9 $8,840.0 $2,998.6 $ 2,125.6 $14,371.1
======== ======== ======== ========= =========
1997
(in thousands)
Net interest income (FTE basis)...... $ 145.4 $ 280.3 $ 143.8 $ 28.3 $ 597.8
Noninterest income................... 83.9 128.3 113.9 51.6 377.7
Provision for loan losses............ 15.0 1.9 50.0 (8.5) 58.4
Noninterest expense.................. 127.9 346.6 149.1 40.1 663.7
-------- -------- -------- --------- ---------
Income before income taxes........... 86.4 60.1 58.6 48.3 253.4
Income taxes......................... 34.4 25.0 24.0 13.4 96.8
-------- -------- -------- --------- ---------
Net income........................... $ 52.0 $ 35.1 $ 34.6 $ 34.9 $ 156.6
======== ======== ======== ========= =========
(in millions)
Average Assets....................... $5,292.8 $8,778.7 $1,847.9 $ 3,300.3 $19,219.7
======== ======== ======== ========= =========
Average Loans........................ $5,032.4 $7,039.7 $ 805.7 $(1,916.5) $10,961.3
======== ======== ======== ========= =========
Average Deposits..................... $ 549.4 $8,188.9 $2,556.1 $ 1,989.6 $13,284.0
======== ======== ======== ========= =========
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
CORPORATE AND
INSTITUTIONAL ELECTRONIC
FINANCIAL CHICAGOLAND FINANCIAL CONSOLIDATED
SERVICES BANKING SERVICES OTHER TOTAL
------------- ----------- ---------- ----- ------------
<S> <C> <C> <C> <C> <C>
1996
(in thousands)
Net interest income (FTE basis)...... $ 131.5 $ 242.0 $ 145.5 $ 35.8 $ 554.8
Noninterest income................... 72.3(2) 101.0 103.2 52.8 329.3
Provision for loan losses............ 17.9 (0.5) 39.4 (0.3) 56.5
Noninterest expense.................. 115.9 287.1(3) 146.0 45.0 594.0
-------- -------- -------- --------- ---------
Income before income taxes........... 70.0 56.4 63.3 43.9 233.6
Income taxes......................... 27.8 23.8 24.9 14.7 91.2
-------- -------- -------- --------- ---------
Net income........................... $ 42.2 $ 32.6 $ 38.4 $ 29.2 $ 142.4
======== ======== ======== ========= =========
(in millions)
Average Assets....................... $4,450.1 $6,882.2 $1,280.4 $ 4,565.3 $17,178.0
======== ======== ======== ========= =========
Average Loans........................ $4,363.7 $5,159.6 $ 962.4 $ (537.9) $ 9,947.8
======== ======== ======== ========= =========
Average Deposits..................... $ 462.2 $6,390.4 $1,655.0 $ 3,016.2 $11,523.8
======== ======== ======== ========= =========
</TABLE>
- -------------------------
(1) Includes gain on sale of charge card portfolio. A $12 million gain was
reported in January 1998 and average loans decreased by $693 million.
(2) Includes $4 million gain on sale of securities custody and related trustee
services business for large institutions in January 1996.
(3) Includes $16.7 million one-time assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") in September 1996, since deposits
assumed as a result of the Household transaction were SAIF-insured.
CORPORATE AND INSTITUTIONAL FINANCIAL SERVICES
Net income for Corporate and Institutional Financial Services in 1998 was
$68.5 million, up 32 percent from 1997. Total revenue of $270.1 million
represented a growth of 18 percent from $229.3 million in 1997. The growth of
$24.9 million or 17 percent, in net interest income was primarily the result of
a 22 percent or $1.13 billion increase in the corporate banking loan portfolio
from $5.03 billion in 1997 to $6.16 billion in 1998, offset somewhat by lower
margins. The growth in noninterest income of $15.9 million or 19 percent was
largely due to increased syndication, corporate trust, letter of credit and
foreign exchange fees. The increase in the provision for loan losses of $6.1
million is attributable to the growth in the corporate loan portfolio.
Noninterest expense increased $7.4 million or 6 percent to $135.3 million from
$127.9 million in 1997, primarily in support of business volume growth. Income
taxes increased by $10.8 million during the year, reflecting higher pretax
income.
On a comparative basis Corporate and Institutional Financial Services' 1997
net income increased 23 percent or $9.8 million to $52.0 million from 1996.
During the first quarter of 1996 the Bank realized a $2.4 million after-tax
($4.0 million pre-tax) gain on the sale of its securities custody and related
trustee services business for large institutions. Excluding the gain on sale,
1997 net income increased 31 percent. Total revenue increased $25.5 million or
13 percent to $229.3 million from $203.8 million in 1996. From year-to-year, the
11 percent or $13.9 million growth in net interest revenue was primarily
attributed to a 15 percent or $669 million increase in the corporate banking
loan portfolio. The noninterest revenue increase of $11.6 million or 16 percent,
was comprised primarily of the $4.0 million pre-tax gain on the sale of the
securities custody and trustee services business in 1996, together with
increased corporate trust fees. Excluding the gain on sale, noninterest income
increased 23 percent or $15.6 million. Noninterest expense increased by 10
percent or $12.0 million to $127.9 million from $115.9 million in 1996, due to
expenses associated with increased business volumes. Income taxes increased by
24 percent to $34.4 million in 1997, primarily due to higher pretax earnings.
13
<PAGE> 15
CHICAGOLAND BANKING
Net income for Chicagoland Banking in 1998 was $42.2 million, up 20 percent
from 1997. Total revenue of $447.5 million represented a growth of $38.9 million
or 10 percent from $408.6 million in 1997. Net interest income increased by
$11.7 million or 4 percent from $280.3 million, largely generated by loan volume
growth. Noninterest income of $155.5 million increased $27.2 million or 21
percent over 1997 levels, primarily due to higher mortgage loan originations in
1998 and increased personal trust and investment management revenue. The
increase in the provision for loan losses of $4.0 million was primarily
attributable to community banking activities and reflected growth in the retail
loan portfolio and lower recoveries in 1998 compared to 1997. Noninterest
expense increased $22.6 million or 7 percent to $369.2 million from $346.6
million in 1997. The increase was primarily due to continuing increased
investments in various retail initiatives including completing the conversion,
begun in 1995, of remaining retail accounts to a common retail banking platform;
expansion of the centralized operations facility and consumer loan utility in
support of increased business volumes; creation of a distinct mortgage loan
utility; and expansion of private banking activities in Arizona and Florida.
Income taxes increased by $5.2 million during 1998, reflecting higher pretax
income.
On a comparative basis Chicagoland Banking's 1997 net income increased 8
percent or $2.5 million to $35.1 million from 1996. The Corporation purchased
Household's Chicagoland retail banking business in June 1996 and incurred a
one-time after-tax charge of $10.0 million ($16.7 million pre-tax), resulting
from 1996 legislation to recapitalize SAIF. Total revenue increased $65.6
million or 19 percent to $408.6 million from $343.0 million in 1996. Net
interest income increased of $38.3 million or 16 percent to $280.3 million in
1997. The purchase of Household branches and growth in existing community and
private banking loan volumes drove the $1.88 billion or 36 percent loan growth
and corresponding increase in net interest income. Noninterest income increased
$27.3 million or 27 percent to $128.3 million in 1997 from $101.0 million in
1996. This increase was primarily due to an increased focus on sales efforts and
expanded delivery of personal trust and investment products to community banking
clients, and a full year of revenues from the former Household branches in 1997
compared to 1996. Provision for loan losses increased $2.4 million primarily due
to the loan growth associated with the Household acquisition. Noninterest
expense increased by 21 percent or $59.5 million to $346.6 million from $287.1
million in 1996. Excluding the pre-tax SAIF charge of $16.7 million, expenses
increased 28 percent. The increase in expense was mostly the result of a full
year of expenses associated with the acquisition and operation of the former
Household branches, including goodwill amortization, in 1997 compared to 1996;
increased investments in support of the expanded community bank network,
including creation of a centralized operations facility and a call center;
development of a consumer loan utility and standardized credit approval process;
conversion of 95 percent of retail accounts to a common systems platform; and
expansion of the distribution of trust and investment products in the community
bank network. Income taxes increased by 5 percent to $25.0 million in 1997,
primarily due to higher pretax earnings.
ELECTRONIC FINANCIAL SERVICES
Net income for Electronic Financial Services was $27.9 million in 1998,
reflecting a decrease of $6.7 million or 19 percent from $34.6 million in 1997.
Comparability between years is impacted by the first quarter 1998 sale of the
Corporation's credit card portfolio. Total revenue of $178.1 million decreased
by $79.6 million or 31 percent from $257.7 million in 1997. Net interest income
fell by $74.1 million or 52 percent from $143.8 million, attributable to the
charge card sale, which resulted in a decline in average loan balances from $806
million to $97 million year-over-year. Noninterest income declined $5.5 million
or 5 percent due to reduced fee income from the credit card portfolio, partly
offset by the $12 million pre-tax ($7.2 million after-tax) gain on sale of the
credit card portfolio and an increase in cash management service fees. The
decrease in the provision for loan losses of $49.9 million was attributable to
the sale of the credit card portfolio. Noninterest expense decreased $18.1
million or 12 percent to $131.0 million from $149.1 million in 1997, primarily
due to a reduction in operating expenses related to the credit card sale. This
was partly offset by the cost of support for business volume increases in cash
management services. Income taxes decreased by $4.9 million during the year,
reflecting lower pretax income.
14
<PAGE> 16
On a comparative basis, net income for Electronic Financial Services in
1997 decreased by $3.8 million, or 10 percent from 1996. Total revenue of $257.7
million represented an increase of 4 percent from $248.7 million in 1996. Net
interest income of $143.8 million declined slightly in 1997 from 1996 due to a
decrease in charge card loans. The $10.7 million increase in noninterest revenue
was primarily attributable to growth of cash management fees. The increase in
the provision for loan losses of $10.6 million was due mainly to increased
reserves for estimated future losses in the credit card portfolio. Noninterest
expense increased $3.1 million or 2 percent to $149.1 million from $146.0
million in 1996, resulting from growth in cash management volumes. Income taxes
decreased by $0.9 million during 1997, reflecting lower pretax income.
15
<PAGE> 17
NET INTEREST INCOME
HARRIS BANKCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
INTEREST 1998 VS. 1997
--------------------------
INCREASE
(DECREASE)
DUE TO CHANGE IN
AVERAGE AVERAGE NET ----------------
BALANCE INTEREST RATE CHANGE VOLUME RATE
------- -------- ------- ------ ------ ----
(FULLY TAXABLE EQUIVALENT BASIS, DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
DOMESTIC OFFICES:
Loans, including fees...................................... $11,536 $ 890 7.71% $(33) $ 54 $ (87)
Securities:
U.S. Treasury and Federal agency......................... 5,627 352 6.26 65 71 (6)
State and municipal...................................... 302 25 8.20 (1) -- (1)
Other.................................................... 73 5 6.57 3 2 1
------- ------ ----
Total securities..................................... 6,002 382 6.36 67 74 (7)
Trading account assets..................................... 79 5 6.30 -- -- --
Interest-bearing deposits at banks......................... 151 2 1.51 2 2 --
Federal funds sold and securities purchased under agreement
to resell................................................ 139 8 5.60 (3) (3) --
Assets held for sale....................................... 54 8 15.33 8 8 --
------- ------ ----
Total domestic earning assets/interest income........ 17,961 1,295 7.20 41 148 (107)
------- ------ ----
FOREIGN OFFICES:
Loans, including fees...................................... 124 7 5.55 2 2 --
Securities:
U.S. Treasury and Federal agency......................... 81 4 5.53 (1) -- (1)
Interest-bearing deposits at banks......................... 147 9 5.81 (22) (26) 4
Federal funds sold and securities purchased under agreement
to resell................................................ 24 1 5.12 -- -- --
------- ------ ----
Total foreign earning assets/ interest income........ 376 21 5.63 (21) (21) --
------- ------ ----
Total domestic and foreign earning assets/interest
income................................................... $18,337 1,316 7.18 20 116 (96)
======= ====== ====
SUPPORTING LIABILITIES/INTEREST EXPENSE DOMESTIC OFFICES:
Interest checking deposits................................. $ 335 8 2.43 (7) (11) 4
Money market accounts...................................... 3,106 113 3.63 34 42 (8)
Savings deposits and certificates.......................... 4,631 227 4.89 (8) (5) (3)
Other interest-bearing time deposits....................... 1,710 95 5.55 45 46 (1)
------- ------ ----
Total interest-bearing deposits...................... 9,782 443 4.52 64 60 4
Short-term borrowings...................................... 3,317 172 5.19 19 21 (2)
Senior notes............................................... 855 48 5.58 9 9 --
Minority interest -- dividends on preferred stock of
subsidiary............................................... 222 16 7.39 16 16 --
Long-term notes............................................ 414 29 7.13 2 2 --
------- ------ ----
Total domestic interest-bearing liabilities/interest
expense............................................ 14,590 708 4.86 110 105 5
------- ------ ----
FOREIGN OFFICES:
Time deposits.............................................. 1,250 67 5.33 (30) (28) (2)
Short-term borrowings...................................... 100 4 3.84 1 1 --
------- ------ ----
Total foreign interest-bearing liabilities/interest
expense............................................ 1,350 71 5.22 (29) (27) (2)
------- ------ ----
Total domestic and foreign interest-bearing
liabilities/interest expense............................. 15,940 779 4.89 81 80 1
Other noninterest-bearing supporting liabilities........... 2,397 -- -- -- -- --
------- ------ ----
TOTAL DOMESTIC AND FOREIGN SUPPORTING LIABILITIES/INTEREST
EXPENSE.................................................. $18,337 779 4.25 81 66 15
======= ------ ----
TOTAL NET INTEREST INCOME FROM DOMESTIC AND FOREIGN
OFFICES.................................................. $ 537 2.93% $(61) $ 52 $ (113)
====== ===== ==== ==== ======
</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 1998, 1997 and 1996. This adjustment also includes
a state tax component.
2. Interest income
The impact of restructured and nonaccrual loans is reflected in all average
balance, net interest income and related yield calculations. Average balances
include restructured and nonaccrual loans. Interest income and yields on
these assets reflect income recorded on a cash basis.
3. Volume and rate variances
The change in interest income/expense attributable to volume is calculated by
multiplying the annual change in volume by the prior year's rate. The rate
variance is calculated by multiplying the annual change in rate by the prior
year's volume. Any variance attributable jointly to volume and rate changes
is prorated on a weighted basis between volume and rate.
4. Average rate on portfolio securities
Yields on securities classified as available-for-sale are based on amortized
cost.
16
<PAGE> 18
NET INTEREST INCOME
HARRIS BANKCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------- ----------------------------
INTEREST 1997 VS. 1996
------------------------
INCREASE
(DECREASE) DUE
TO CHANGE IN
AVERAGE AVERAGE NET --------------- AVERAGE AVERAGE
BALANCE INTEREST RATE CHANGE VOLUME RATE BALANCE INTEREST RATE
------- -------- ------- ------ ------ ---- ------- -------- -------
(FULLY TAXABLE EQUIVALENT BASIS, DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
DOMESTIC OFFICES:
Loans, including fees................. $10,871 $ 923 8.49% $ 87 $ 83 $ 4 $ 9,889 $ 836 8.45%
Securities:
U.S. Treasury and Federal agency.... 4,499 287 6.38 41 39 2 3,895 246 6.31
State and municipal................. 305 26 8.68 (1) 1 (2) 299 27 9.22
Other............................... 33 2 4.81 (1) (1) -- 50 3 5.43
------- ------ ---- ---- ------- ------
Total securities................ 4,837 315 6.51 39 39 -- 4,244 276 6.50
Trading account assets................ 68 5 6.79 -- -- -- 71 5 7.05
Interest-bearing deposits at banks.... -- -- -- -- -- -- -- -- --
Federal funds sold and securities
purchased under agreement to
resell.............................. 198 11 5.68 1 2 (1) 166 10 5.97
------- ------ ---- ---- ------- ------
Total domestic earning
assets/interest income........ 15,974 1,254 7.85 127 126 1 14,370 1,127 7.84
------- ------ ---- ---- ------- ------
FOREIGN OFFICES:
Loans, including fees................. 90 5 5.24 2 2 -- 59 3 4.89
Securities:
U.S. Treasury and Federal agency.... 80 5 5.76 5 5 -- -- -- --
Interest-bearing deposits at banks.... 602 31 5.22 1 1 -- 577 30 5.28
Federal funds sold and securities
purchased under agreement to
resell.............................. 32 1 4.61 (1) (1) -- 48 2 4.19
------- ------ ---- ---- ------- ------
Total foreign earning
assets/interest income........ 804 42 5.26 7 6 1 684 35 5.17
------- ------ ---- ---- ------- ------
Total domestic and foreign earning
assets/interest income.............. $16,778 1,296 7.72 134 133 1 $15,054 1,162 7.72
======= ====== ==== ==== ======= ======
SUPPORTING LIABILITIES/INTEREST
EXPENSE
DOMESTIC OFFICES:
Interest checking deposits............ $ 854 15 1.73 -- 1 (1) $ 816 15 1.87
Money market accounts................. 1,964 79 4.03 23 21 2 1,434 56 3.91
Savings deposits and certificates..... 4,735 235 4.97 57 55 2 3,627 178 4.90
Other interest-bearing time
deposits............................ 890 50 5.59 15 13 2 649 35 5.42
------- ------ ---- ---- ------- ------
Total interest-bearing
deposits...................... 8,443 379 4.49 95 86 9 6,526 284 4.36
Short-term borrowings................. 2,910 153 5.27 (5) (11) 6 3,126 158 5.04
Senior notes.......................... 695 39 5.57 16 17 (1) 392 22 5.72
Minority interest -- dividends on
preferred stock of subsidiary....... -- -- -- -- -- -- -- -- --
Long-term notes....................... 379 27 7.29 2 1 1 372 26 7.01
------- ------ ---- ---- ------- ------
Total domestic interest-bearing
liabilities/interest
expense....................... 12,427 598 4.82 108 96 12 10,416 490 4.71
------- ------ ---- ---- ------- ------
FOREIGN OFFICES:
Time deposits......................... 1,768 97 5.48 (17) (19) 2 2,121 114 5.37
Short-term borrowings................. 90 3 3.65 -- -- -- 94 3 3.44
------- ------ ---- ---- ------- ------
Total foreign interest-bearing
liabilities/interest
expense....................... 1,858 100 5.39 (17) (19) 2 2,215 117 5.29
------- ------ ---- ---- ------- ------
Total domestic and foreign
interest-bearing
liabilities/interest expense........ 14,285 698 4.89 91 81 10 12,631 607 4.81
Other noninterest-bearing supporting
liabilities......................... 2,493 -- -- -- -- -- 2,423 -- --
------- ------ ---- ---- ------- ------
TOTAL DOMESTIC AND FOREIGN SUPPORTING
LIABILITIES/INTEREST EXPENSE........ $16,778 698 4.16 91 71 20 $15,054 607 4.04
======= ------ ---- ======= ------
TOTAL NET INTEREST INCOME FROM
DOMESTIC AND FOREIGN OFFICES........ $ 598 3.56% $ 43 $ 62 $(19) $ 555 3.69%
====== ==== ==== ==== ==== ====== ====
</TABLE>
17
<PAGE> 19
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
1998, the Corporation's FTE net interest income was $537.2 million, down 10
percent from $597.8 million in 1997.
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
1998, the Corporation's average earning assets grew 9 percent, while net
interest margin decreased 63 basis points from 3.56 percent in 1997 to 2.93
percent in 1998.
Average earning assets in 1998 totaled $18.34 billion, up $1.56 billion, or
9 percent, from $16.78 billion in 1997. This growth is primarily the result of
an increase in average loans of $699 million, or 6 percent, to $11.66 billion.
Excluding the credit card portfolio, average loans rose $1.50 billion or 15
percent led by increases in average commercial and real estate loan outstandings
of $872 million (13 percent) and $685 million (29 percent), respectively. At the
time of the January 1998 credit card sale, outstanding credit card loans
amounted to approximately $693 million, resulting in a reduction in net interest
income compared to the prior year. 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
$1.17 billion, or 24 percent, to $6.08 billion primarily as a result of
increased holdings of Federal agency securities amounting to $1.33 billion.
Loans and portfolio securities, as a percent of earning assets, were 63.6
percent and 33.2 percent, respectively, compared to 65.3 percent and 29.3
percent, respectively, in 1997. Average Federal funds sold and securities
purchased under agreement to resell decreased 29 percent or $67 million compared
to 1997.
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. In 1998, Federal funds purchased and
securities sold under agreement to repurchase increased $420 million or 16
percent, which resulted in an increase in short-term borrowings of $417 million
or 14 percent from 1997 levels. Domestic interest-bearing deposits increased
$1.34 billion, or 16 percent, from 1997. Average foreign office time deposits
totaled $1.25 billion, down 29 percent or $518 million, compared to $1.77
billion in 1997. Noninterest-bearing funds supporting earning assets decreased
$96 million, but was unchanged year to year as a percentage of average
supporting liabilities of 15 percent.
The Corporation's consolidated net interest margin declined to 2.93 percent
from 3.56 percent in 1997. This decrease primarily reflects the sale of the card
business in January of 1998 in addition to continued reliance on
interest-bearing funds to support growth in earning assets.
18
<PAGE> 20
NONINTEREST INCOME
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1998 VS. 1997 1997 VS. 1996
-------------------------------- --------------- -------------
1998 1997 1996 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment management
fees.......................... $143,724 $133,714 $117,762 $ 10,010 7 $15,952 14
Money market and bond trading... 10,512 7,269 7,992 3,243 45 (723) (9)
Foreign exchange................ 6,772 5,364 9,992 1,408 26 (4,628) (46)
Merchant and charge card fees... 26,772 50,085 47,244 (23,313) (47) 2,841 6
Service fees and charges........ 109,372 96,324 82,802 13,048 14 13,522 16
Portfolio securities gains...... 26,953 13,207 8,786 13,746 104 4,421 50
Gain on sale of charge card
portfolio..................... 12,000 -- -- 12,000 100 -- --
Bank-owned insurance
investments................... 32,339 12,917 8,484 19,422 150 4,433 52
Foreign fees.................... 19,575 18,182 16,144 1,393 8 2,038 13
Other........................... 63,022 40,686 30,101 22,336 55 10,585 35
-------- -------- -------- -------- --- ------- ---
Total noninterest income...... $451,041 $377,748 $329,307 $ 73,293 19 $48,441 15
======== ======== ======== ======== === ======= ===
</TABLE>
Noninterest income for the year was $451.0 million in 1998, up $73.3
million or 19 percent from 1997. In the first quarter of 1998, the Corporation
realized a gain of $12.0 million on the sale of the credit card portfolio.
Merchant and charge card fees declined as a result of the sale by $23.3 million.
The other primary contributors to the increase are trust and investment
management fees, service fees and charges, securities gains, income on
bank-owned insurance investments and other income.
Trust and investment management fees were $143.7 million, up $10.0 million
or 7 percent from the prior year, primarily from increased personal trust and
corporate trust revenue. Service fees and charges were $109.4 million in 1998,
up $13.0 million or 14 percent over 1997 due primarily to product growth. Net
gains reported from the sale of debt securities totaled $27.0 million, up $13.7
million or 104 percent from 1997, due to opportunities in the market for
periodic sale and profitable reinvestment of proceeds in 1998. Income on
bank-owned insurance investments increased $19.4 million or 150 percent from
1997 due to increased investment balances. Other income, which included
syndication fees and mortgage loan sales, increased $22.3 million or 55 percent.
Trading account gains, primarily from municipal bond trading, totaled $10.5
million, up $3.2 million from 1997. Financial results from trading activities
will typically exhibit greater fluctuations over time than other business
activities. Foreign exchange revenues were $6.8 million, up $1.4 million or 26
percent from 1997. In 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.
19
<PAGE> 21
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1998 VS. 1997 1997 VS. 1996
-------------------------------- -------------- ---------------
1998 1997 1996 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation.................. $326,103 $314,719 $273,849 $11,384 4 $ 40,870 15
Pension, profit sharing and
other employee benefits....... 60,906 57,423 53,145 3,483 6 4,278 8
Net occupancy................... 51,342 56,462 47,690 (5,120) (9) 8,772 18
Equipment....................... 52,622 48,119 41,715 4,503 9 6,404 15
Marketing....................... 25,896 25,675 29,342 221 1 (3,667) (12)
Communication and delivery...... 22,595 24,129 20,954 (1,534) (6) 3,175 15
Deposit insurance............... 3,082 2,988 18,189 94 3 (15,201) (84)
Expert services................. 33,440 31,159 19,382 2,281 7 11,777 61
Contract programming............ 23,633 14,047 7,069 9,586 68 6,978 99
Other........................... 54,881 61,117 64,493 (6,236) (10) (3,376) (5)
-------- -------- -------- ------- --- -------- ---
654,500 635,838 575,828 18,662 3 60,010 10
Amortization of goodwill and
other valuation intangibles... 24,104 27,839 18,168 (3,735) (13) 9,671 53
-------- -------- -------- ------- --- -------- ---
Total noninterest
expenses................. $678,604 $663,677 $593,996 $14,927 2 $ 69,681 12
======== ======== ======== ======= === ======== ===
</TABLE>
Noninterest expenses totaled $678.6 million, up $14.9 million or 2 percent
from 1997. Employment-related expenses totaled $387.0 million, an increase of
$14.9 million or 4 percent. Net occupancy expenses totaled $51.3 million, down
$5.1 million from 1997. Equipment expenses totaled $52.6 million, up $4.5
million or 9 percent from 1997. Expert services and contract programmers
increased $2.3 million and $9.6 million, respectively, primarily due to Year
2000 compliance activities (see the Risk Management Summary section of this
Report on page 34 for further information). Other noninterest expenses decreased
$6.2 million or 10 percent from 1997. Amortization of goodwill and other
valuation intangibles decreased $3.7 million or 13 percent from 1997, due to the
credit card sale in the first quarter of 1998 which removed previously recorded
credit card intangibles from the Corporation's balance sheet.
INCOME TAXES
The Corporation recorded income tax expense of $69.9 in 1998, compared to
$70.1 million in 1997. The Corporation's effective tax rate decreased to 27.7
percent in 1998 from 30.9 percent in 1997.
At December 31, 1998, the Corporation's Federal and Illinois net deferred
tax assets were $60.1 million and $12.4 million, respectively. The Corporation
has fully recognized both its Federal and Illinois deferred tax assets. Current
taxable income and taxable income generated in the statutory carryback period is
sufficient to support the entire Federal and Illinois deferred tax assets.
The deferred taxes reported on the Corporation's Statement of Condition at
December 31, 1998 also includes a $25.0 million liability for the tax effect of
unrealized gains or losses associated with marking to market certain securities
designated as available-for-sale.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income". This statement established standards
for the 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
20
<PAGE> 22
separate component of equity. The Corporation adopted this Statement in 1998 and
it had no impact on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The Statement established 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 Corporation adopted this Statement in 1998 and it did not have
a material impact on the Corporation's financial position and results of
operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The Statement revised
financial statement disclosure requirements for pension and other postretirement
benefit plans. It standardizes the disclosure requirements for pension and other
postretirement benefits, requires additional disclosure information regarding
changes in benefit obligations and fair values of plan assets and eliminates
certain disclosures that are no longer considered useful. The Statement does not
change the measurement or recognition of the benefit plans. The Statement is
effective for fiscal years beginning after December 15, 1997. The Corporation
adopted this statement in 1998 and it did not have a material effect on the
Corporation's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial position and to be measured at fair value. The Statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Corporation is in the process of assessing the impact of adopting this
Statement on its financial position and results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." The Statement requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. The Statement is effective for all fiscal quarters of fiscal years
beginning after December 15, 1998. The Corporation intends to adopt this
statement in 1999 and does not expect it to have a material effect on the
Corporation's financial position or results of operations.
In March 1998, the AICPA (American Institute of Certified Public
Accountants) issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal-use for all nongovernmental entities, including non-for-profit
organizations. It also provides guidance for determining when computer software
is for internal-use and when it is considered to be for external sale or
licensing under SFAS 86. The SOP indicates that internal-use software is
software that is acquired, internally developed or modified solely to meet an
entity's internal needs and for which there is no substantive plan to market
externally that has a reasonable possibility for being implemented. The
Corporation had adopted this statement in January 1998 and it did not 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 ("ROA"), measured by net income as a percentage of average
total assets, was 0.86 percent in 1998 compared with 0.82 percent in 1997. The
current year's ROA was higher than the average ROA of 0.83 percent for the
five-year period ended December 31, 1998. 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 6.56
percent in 1998 compared to 6.91 percent in 1997. For 1998, the return on common
stockholder's equity ("ROE") was 11.92 percent, up from the 10.54 percent
achieved in 1997 and the 11.46 percent five-year average return for the period
ended December 31, 1998.
21
<PAGE> 23
Cash flow ROA was 0.94 percent in 1998 and 0.92 percent in 1997. Cash flow
ROE was 16.24 percent and 15.43 percent in 1998 and 1997, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1998 1997 1996
---- ---- ----
(BASED ON NET INCOME AND
DAILY AVERAGES)
<S> <C> <C> <C>
Return on assets(1)......................................... 0.86% 0.82% 0.83%
Cash flow return on assets(2)............................... 0.94 0.92 0.91
Common stockholder's equity as a percentage of total
assets(1)................................................. 6.56 6.91 6.42
Return on common stockholder's equity(1).................... 11.92 10.54 11.55
Cash flow return on common stockholder's equity(3).......... 16.24 15.43 15.15
Dividend payout ratio(4).................................... 108.47 38.99 44.40
Earnings retained as a percentage of common stockholder's
equity(5)................................................. (1.11) 7.38 7.18
Percentage growth in total average assets................... 10.45 11.89 10.72
</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 flow 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 flow 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 gross average intangible assets.
(4) Dividends on common and preferred stock as a percent of net income. 1997
includes both cash and noncash dividends. 1998 ratio includes impact of
special dividends of $125 million. Excluding the payment of the special
dividends as part of a capital restructuring and the sale of HTSB's credit
card portfolio, the dividend payout ratio would have been 40.02%.
(5) Earnings retained is defined as net income minus dividends. 1998 includes
the impact of special dividends of $125 million. Excluding the payment of
the special dividends, earnings retained as a percentage of common
stockholder's equity would have been 7.86%.
CAPITAL POSITION
The Corporation's equity capital of $1.65 billion at December 31, 1998, has
increased significantly from five years earlier when equity capital amounted to
$1.02 billion. During 1998 and 1997, Bankcorp declared and paid common dividends
of $181.5 million and $44.5 million, respectively, and preferred dividends of
$16.6 million in both years. 1998 common dividends included special dividends of
$125 million related to the sale of HTSB's credit card portfolio. 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 1996, the Corporation declared and paid common
dividends of $48.2 million and preferred dividends of $15.0 million. During 1998
and 1997, the Corporation's equity capital was increased by $26.7 million and
$19.6 million, respectively, representing after-tax unrealized holding gains
related to the Corporation's securities available-for-sale. Average consolidated
equity capital for 1998 was $1.6 billion, compared with the 1997 average of $1.6
billion and the 1996 average of $1.3 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 110 percent at December
31, 1998, up from 101 percent at December 31, 1997. This ratio generally
measures the extent to which holding company equity investments are supported,
in part, by parent-issued debt instruments. A double leverage ratio greater than
100 percent indicates that parent company equity investments are supported, in
part, by parent-issued debt. In the case of Bankcorp, outstanding long-term debt
is sufficient to fund equity investments not otherwise covered by equity
capital.
22
<PAGE> 24
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. The guidelines specify
minimum ratios for Tier 1 capital to risk-weighted assets of 4.0 percent and
total regulatory capital to risk-weighted assets of 8.0 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. The portion of the
allowance for possible loan losses includable in Tier 2 capital is limited to
1.25 percent of risk-weighted assets. The Corporation's Tier 1 and total
risk-based capital ratios were 8.66 percent and 11.57 percent, respectively, at
December 31, 1998.
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 7.26 percent for fourth quarter 1998
and 6.81 percent for fourth quarter 1997.
In February 1998, Harris Preferred Capital Corporation, a subsidiary of
HTSB, issued $250 million of noncumulative preferred stock in a public offering
(see Note 15 to Financial Statements). The preferred stock qualifies as Tier 1
capital of the Bank for U.S. banking regulatory purposes.
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 75 of this Report. Based on those regulations effective at
December 31, 1998 all of the Corporation's subsidiary banks were designated as
"well capitalized" at year-end 1998, 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 certain percentage limitations are not
violated. 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, 1998 the Corporation's intangible assets
totaled $268.2 million, including approximately $255.6 million of intangibles
excluded under capital guidelines. The Corporation's tangible Tier 1 leverage
ratio (which excludes all intangibles) was 7.20 percent for the fourth quarter
of 1998.
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 $38.2 million and $11.5 million at December 31, 1998 and 1997,
respectively.
23
<PAGE> 25
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
---------------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets (end of period)........................ $22,797,830 $20,133,461 $18,228,740
=========== =========== ===========
Average assets (fourth quarter)..................... $22,265,475 $19,978,660 $18,159,800
=========== =========== ===========
Risk-based on-balance-sheet assets.................. $14,077,289 $13,051,738 $11,975,359
=========== =========== ===========
Risk-based off-balance-sheet assets................. $ 4,559,231 $ 4,112,859 $ 3,508,486
=========== =========== ===========
Total risk-based assets, net of deductions
(based on regulatory accounting
principles).................................. $18,374,480 $16,883,446 $15,191,093
=========== =========== ===========
Tier 1 capital...................................... $ 1,591,846 $ 1,339,949 $ 1,230,628
=========== =========== ===========
Supplementary capital............................... $ 535,363 $ 470,443 $ 501,497
=========== =========== ===========
Total capital, net of deductions (based on
regulatory accounting principles)............ $ 2,126,585 $ 1,809,767 $ 1,731,448
=========== =========== ===========
Tier 1 leverage ratio............................... 7.26% 6.81% 6.88%
Risk-based capital ratios:
Tier 1......................................... 8.66% 7.94% 8.10%
Total.......................................... 11.57% 10.72% 11.40%
</TABLE>
LIQUIDITY AND SOURCES OF FUNDS
SUMMARY
Effective liquidity management allows a banking institution to accommodate
the changing net funds flow requirements of customers who may deposit or
withdraw funds, or modify their credit requirements. One of the principal
obligations of the banking system, and individual banks, is to provide for the
legitimate credit demands of customers. The liquidity of the banking system as a
whole may be viewed as the ability of the system to satisfy aggregate credit
demand; however, individual banks experience changes in liquidity resulting from
interbank transfers of deposits which do not affect the liquidity of the banking
system. Therefore, liquidity management within individual banks must deal with
the potential for greater volatility of net deposit flows which have little or
no impact on the banking system itself.
The Corporation manages its liquidity position through continuous
monitoring of profitability trends, asset quality, interest rate sensitivity,
maturity schedules of earning assets and supporting liabilities, the composition
of managed and other (primarily demand) liabilities, and prospective customer
credit demand based upon knowledge of major customers and overall economic
conditions. Appropriate responses to changes in these conditions preserve
customer confidence in the ability of the Corporation to continually serve their
credit and deposit withdrawal requirements. The Corporation maintains a
liquidity risk policy within its comprehensive risk management framework and
manages and monitors liquidity risk within the parameters of this policy.
Some level of liquidity is provided by maintaining assets which mature
within a short time-frame or could be sold quickly without significant loss. The
Corporation's liquid assets include cash and demand balances due from banks,
money market assets, portfolio securities available for sale and trading account
assets. Liquid assets represented approximately 39 percent of the Corporation's
total assets and amounted to $8.83 billion at December 31, 1998 compared to
liquid assets of $7.27 billion or approximately 36 percent of total assets one
year earlier. However, the most important source of liquidity is the ability to
raise funds, as required, in a variety of markets using multiple instruments.
This fund-raising activity involves the identification of broadly distributed
sources of funds, typically referred to as managed liabilities, which are varied
by type, maturity and
24
<PAGE> 26
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, 1998, $940
million of short-term notes were outstanding with original maturities ranging
from 31 to 182 days (remaining maturities ranging from 22 to 130 days) and
stated interest rates ranging from 5.00 percent to 5.50 percent. 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.
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 $10.63 billion or 63 percent of total
non-equity funding at December 31, 1997 to $11.41 billion or 61 percent of total
non-equity funding at December 31, 1998. Total wholesale deposits and short-term
borrowings increased from $6.35 billion or 37 percent of total non-equity
funding at December 31, 1997 to $7.23 billion or 39 percent of total non-equity
funding at December 31, 1998.
Average money market liabilities increased 14 percent to $3.42 billion from
$3.00 billion for 1997, primarily as a result of increases in Federal funds
borrowed and securities sold under repurchase agreements. Average money market
assets decreased $371.1 million or 45 percent from 1997. These assets
represented 3 percent of average earning assets in 1998 compared to 5 percent in
1997, primarily reflecting decreases in interest bearing deposits at banks.
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 1998 or 1997.
The maintenance of an appropriate balance of maturity and interest rate
sensitivity risks between assets and liabilities is an integral component of
overall liquidity management. Mismatches of actual asset and liability
maturities, or interest rate sensitivity of assets and liabilities, will
increase the potential for profit or loss relative to changes in the general
level of interest rates. Asset and liability mismatches result in the normal
course of servicing customer credit and deposit requirements. The Corporation
uses interest rate swaps and financial futures, as appropriate, to reduce the
level of financial risk inherent in asset and liability mismatches. Gross cash
flows from the Corporation's derivative positions as an end-user were not
material to gross cash flows from financing and investing activities. The
Corporation's Asset/Liability Management Committee monitors and adjusts its
strategies in response to changing liquidity demands.
INTEREST SENSITIVITY
Interest rate sensitivity information, in the form of interest sensitivity
gap schedules and simulations reflecting exposure of earnings to future changes
in interest rates, is used in conjunction with other data by the Corporation's
banking subsidiaries to monitor and manage their individual interest rate
exposures. The Corporation uses various derivative products, including interest
rate swaps, forward rate agreements, futures,
25
<PAGE> 27
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, 1998
----------------------------------------------------------------------------------------
REPRICING PERIOD
--------------------------------------------------------------- NONREPRICING
1-31 DAYS 32-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS ITEMS TOTAL
--------- ---------- ----------- --------- ------------ ------------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans............................ $ 6,150 $ 1,863 $ 1,272 $2,412 $ 531 $ -- $12,228
Portfolio and trading account
securities..................... 764 395 1,496 2,182 2,243 4 7,084
Interest-bearing deposits at
banks.......................... -- 99 -- -- -- -- 99
Federal funds sold and securities
purchased under agreement to
resell......................... 156 -- -- -- -- -- 156
Other assets..................... -- -- -- -- -- 3,231 3,231
------- ------- ------- ------ ------ ------- -------
Total assets....................... 7,070 2,357 2,768 4,594 2,774 3,235 $22,798
------- ------- ------- ------ ------ ------- =======
LIABILITIES AND STOCKHOLDER'S
EQUITY
Time deposits.................... 2,246 1,414 1,773 537 9 -- 5,979
Savings and interest checking
deposits....................... 5,344 -- -- -- -- -- 5,344
Noninterest-bearing deposits..... -- -- -- -- -- 4,000 4,000
------- ------- ------- ------ ------ ------- -------
Total deposits..................... 7,590 1,414 1,773 537 9 4,000 15,323
Federal funds purchased and
securities sold under agreement
to repurchase.................. 3,127 307 7 -- -- -- 3,441
Minority interest-preferred stock
of subsidiary.................. -- -- -- -- -- 250 250
Other interest-bearing
liabilities.................... 888 254 428 99 155 -- 1,824
Other noninterest-bearing
liabilities.................... -- -- -- -- -- 309 309
Stockholder's equity............. -- -- -- -- -- 1,651 1,651
------- ------- ------- ------ ------ ------- -------
Total liabilities and stockholder's
equity........................... 11,605 1,975 2,208 636 164 6,210 $22,798
------- ------- ------- ------ ------ ------- =======
Interest sensitivity gap before
net interest rate swaps,
derivative products and forward
commitments.................... (4,535) 382 560 3,958 2,610 (2,975)
Net interest rate swaps............ (83) (51) 9 111 14 --
------- ------- ------- ------ ------ -------
Interest sensitivity gap......... $(4,618) $ 331 $ 569 $4,069 $2,624 $(2,975)
======= ======= ======= ====== ====== =======
Cumulative gap................... $(4,287) $(3,718) $ 352 $2,975
======= ======= ====== ======
</TABLE>
The schedule above presents the Corporation's consolidated interest
sensitivity gap at December 31, 1998. 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
scheduled 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, 1998, the Corporation had a cumulative negative one-year interest
rate gap of $3.7 billion. 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
26
<PAGE> 28
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, 1998, for an immediate 100
basis point upward movement in interest rates net interest income would decrease
by approximately $17.5 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 $152.8 million. Conversely, a decline in rates would
have approximately the same absolute impacts but in the opposite direction. At
December 31, 1997, the same analysis using similar assumptions indicated that
net income would have decreased by approximately $7.0 million and the net equity
value of all interest-sensitive positions would have decreased by $73.8 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 Statements of Cash
Flows can be found on page 50 of this Report. These financial statements are
based on period-end balances and do 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 Statements of Cash Flows divides its
activities into three main categories: operating, investing and financing.
Operating activities consist of those activities not categorized as investing or
financing and generally include cash revenues and expenses associated with
providing services to customers. Investing cash flows are defined as those
arising from the acquisition or disposal of loans, portfolio securities, money
market assets, subsidiaries, and fixed assets. Financing cash flows include
deposits, both infusions from and dividend payments to the stockholder, along
with borrowings and principal repayments to bondholders or other creditors.
Cash flows from operations are a significant source of operating capital.
Since applicable accounting statements require that cash transactions involving
assets held for sale and trading assets be included with operating cash flows,
normal year-end fluctuations in these holdings may not appropriately portray the
company's cash flows generated from operations. Core operating cash flows,
consisting of net income before provision for loan losses and depreciation and
amortization, decreased by $4 million. Year-end trading account assets increased
$67 million year to year, while loans held for sale (primarily residential
mortgages) increased $167 million.
In 1998, the Corporation's investing activities utilized a total of $2.96
billion in net cash. Portfolio securities, the primary use of new funds,
increased $1.66 billion. Interest-bearing deposits at banks decreased $499
million, investments in bank owned insurance increased $458 million and Federal
funds sold and securities purchased under agreement to resell increased $75
million.
27
<PAGE> 29
In 1998, the Corporation's financing activities included accepting customer
deposits, purchasing Federal funds and issuing short-term senior notes.
Financing activities provided $3.14 billion of net cash available to the
Corporation in 1998. Deposits increased $891 million and short-term senior notes
of $840 million were issued, 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 two significant noncash
transactions. As of December 31, 1997, credit card loan balances were
transferred to assets held for sale in anticipation of their sale in January
1998. In July 1997, 80 percent ownership of Harris Trust/Bank of Montreal
(formerly Harris Trust Company of Florida) was transferred by way of a noncash
dividend to Bankmont. See Portfolio Securities section below for further
information. Noncash portions of these transactions were excluded from the
Corporation's Consolidated Statements of Cash Flows.
SELECTED LOAN MATURITY SPREAD
Variable rate loans, excluding consumer loans, accounted for 60 percent of
total loans in 1998 compared to 58 percent in 1997. Excluding consumer loans,
term loans (those with a remaining contractual maturity in excess of one year)
totaled $1.19 billion. Of these loans, $1.0 billion or 86 percent are due within
five years. Overall, the average FTE yield on total loans excluding the credit
card portfolio decreased to 7.69 percent in 1998 from 7.96 percent in 1997. The
Corporation's average prime rate in 1998 was 8.35 percent compared to 8.44
percent in 1997. The primary cause for the decline in yields from 1997 was the
January, 1998 sale of HTSB's credit card portfolio.
Type of loan, by maturity*
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
WITHIN 1 THROUGH OVER
1 YEAR 5 YEARS 5 YEARS TOTAL
------ --------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural.......... $7,023,159 $1,011,810 $159,617 $8,194,586
Real estate construction........................ 127,268 19,785 2,189 149,242
Foreign......................................... 81,803 64 -- 81,867
---------- ---------- -------- ----------
$7,232,230 $1,031,659 $161,806 $8,425,695
========== ========== ======== ==========
Loans with:
Predetermined interest rates.................. $ 561,116 $ 417,646 $ 75,091 $1,053,853
Floating interest rates....................... 6,671,114 614,013 86,715 7,371,842
---------- ---------- -------- ----------
$7,232,230 $1,031,659 $161,806 $8,425,695
========== ========== ======== ==========
</TABLE>
- -------------------------
*Excludes installment loans to individuals, real estate mortgages and lease
financing.
SECURITIES
Debt and marketable equity securities are classified into two categories.
Trading account securities include those securities purchased for sale in the
near term. The remaining securities are classified as "available-for-sale."
These securities are classified as available-for-sale, even if the company has
no current intent to dispose of them. Available-for-sale securities are carried
at fair value, with net unrealized gains and losses (after-tax) reported as a
separate component of equity.
At December 31, 1998, available-for-sale securities included $63.2 million
of fair value above amortized cost and stockholder's equity included $38.2
million of unrealized (after tax effect) holding gains. 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.
Securities averaged $6.1 billion in 1998. On an FTE basis, interest income
from securities increased $66.9 million to $386.4 million. The overall FTE yield
on the Corporation's securities averaged 6.35 percent
28
<PAGE> 30
during 1998. Yields on the portion of average securities classified as
available-for-sale are based on amortized cost.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
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........................ $1,601,437 6.21% $1,738,220 6.37% $1,585,333 6.37%
Federal agency....................... 4,139,620 6.26 2,810,739 6.38 2,271,859 6.26
State and municipal.................. 312,320 8.19 313,896 8.68 311,202 9.22
Other................................ 73,066 6.63 32,880 4.81 50,785 5.43
---------- ---- ---------- ---- ---------- ----
Total portfolio securities
available-for-sale........... $6,126,443 6.35% $4,895,735 6.51% $4,219,179 6.50%
========== ==== ========== ==== ========== ====
</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 1998,
the Corporation purchased $17.4 billion of available-for-sale securities, sold
$2.6 billion of available-for-sale securities and had $13.2 billion of
available-for-sale securities mature. During 1997, the Corporation purchased
$14.2 billion of available-for-sale securities, sold $1.31 billion of
available-for-sale securities and had $11.7 billion of available-for-sale
securities mature. The aforementioned sales of securities generated a pretax net
gain of $27.0 million during 1998 compared to a net gain of $13.2 million during
1997 and a net gain of $8.8 million in 1996. On an after-tax basis, the
Corporation recorded a net gain from securities sales of $16.5 million in 1998
compared to $8.1 million in 1997 and $5.4 million in 1996. In some cases,
security gains are taken in order to realize otherwise unrealized profits in
anticipation of near-term increases in interest rates.
Unrealized holding gains for available-for-sale securities, as of December
31, 1998, amounted to $63.2 million compared to unrealized holding gains of
$19.0 million as of December 31, 1997. The change in unrealized gains and losses
of $44.2 million was due to gains in market value as a result of fluctuations in
interest rates at year-end 1998 versus year-end 1997, and a change in the mix of
the portfolio.
Carrying Value
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Portfolio securities available-for-sale
U.S. Treasury.......................... $1,545,642 22.1 $1,628,882 31.1 $1,282,218 32.2
Federal agency......................... 4,942,196 71.0 3,253,819 62.2 2,357,726 59.2
State and municipal.................... 337,672 4.9 312,564 6.0 312,843 7.8
Other.................................. 138,144 2.0 34,125 0.7 32,396 0.8
---------- ----- ---------- ----- ---------- -----
Total portfolio securities
available-for-sale................ $6,963,654 100.0 $5,229,390 100.0 $3,985,183 100.0
========== ===== ========== ===== ========== =====
</TABLE>
At year-end 1998, the weighted average maturity of the Corporation's
portfolio securities was 8 years and 3 months, an increase of 2 years and 11
months from the average maturity at the end of 1997. The maturity distribution
of the investment portfolio at December 31, 1998, 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
29
<PAGE> 31
amortization of premiums, by the amortized cost of the securities outstanding at
December 31, 1998. 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........ $ 371,800 5.90% $1,987,115 5.38% $ 44,655 9.04% $2,403,570 5.53%
1 to 5 years......... 592,168 5.67 823,990 5.92 171,808 7.66 1,587,966 6.02
5 to 10 years........ 539,766 5.50 168,222 6.02 95,406 7.55 803,394 5.85
Over 10 years........ -- -- 1,948,285 6.44 16,250 8.01 1,964,535 6.45
No stated maturity... -- -- -- -- 140,975 7.04 140,975 7.04
---------- ---- ---------- ---- -------- ---- ---------- ----
1998 Total........... $1,503,734 5.67% $4,927,612 5.91% $469,094 7.60% $6,900,440 5.97%
========== ==== ========== ==== ======== ==== ========== ====
1997 Total........... $1,624,891 4.78% $3,249,562 6.19% $335,896 8.02% $5,210,349 5.87%
========== ==== ========== ==== ======== ==== ========== ====
1998 Average
maturity............. 4 years 8 months 10 years 5 months 0 years 3 months 8 years 3 months
1997 Average
maturity............. 4 years 6 months 5 years 11 months 3 years 9 months 5 years 4 months
</TABLE>
Other than securities of the U.S. Government and its agencies and
corporations, at December 31, 1998, there were no portfolio securities of any
one issuer aggregating more than 10 percent of stockholders 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, 1998.
DEPOSITS
Total deposits in 1998 averaged $14.37 billion, up $1.09 billion or 8
percent from 1997. 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 $785 million or 7
percent to $11.41 billion. Money market accounts experienced the largest growth,
up $1.14 billion or 58 percent over 1997 levels, followed by demand deposits
which increased by $266 million or 9 percent to 3.29 billion. Interest checking
deposits and savings certificates decreased by $519 million or 61 percent and by
$101 million or 3 percent over 1997 levels, respectively. Passbook and statement
savings accounts totaling $1.40 billion remained at relatively the same level as
1997. Deposits in foreign offices decreased by $518 million or 29 percent to
$1.25 billion. Other time deposits reflected an increase of $820 million or 92
percent from 1997. Daily averages and year-to-year comparisons are summarized
below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 VS. 1997 1997 VS. 1996
--------------------------------------- ---------------- ----------------
1998 1997 1996 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DAILY AVERAGES, DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits......... $ 3,287,124 $ 3,020,864 $ 2,812,007 $ 266,260 9 $ 208,857 7
Interest checking
deposits.............. 334,633 853,799 815,853 (519,166) (61) 37,946 5
Money market accounts... 3,106,277 1,964,212 1,434,293 1,142,065 58 529,919 37
Passbook and statement
savings accounts...... 1,401,687 1,404,897 1,134,912 (3,210) (0) 269,985 24
Savings certificates.... 3,281,333 3,382,441 2,555,894 (101,108) (3) 826,547 32
Other time deposits..... 1,710,364 890,277 650,205 820,087 92 240,072 37
Deposits in foreign
offices............... 1,249,639 1,767,534 2,120,650 (517,895) (29) (353,116) (17)
----------- ----------- ----------- ---------- --- ---------- ---
Total deposits........ $14,371,057 $13,284,024 $11,523,814 $1,087,033 8 $1,760,210 15
=========== =========== =========== ========== === ========== ===
</TABLE>
Interest expense on deposits increased by $33.4 million or 7 percent in
1998 primarily due to higher average deposit balances. Interest expense on
domestic deposits rose 17 percent from 1997, while interest on
30
<PAGE> 32
foreign office deposits decreased by 31 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
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest checking deposits............................. 2.43% 1.73% 1.87%
Money market accounts.................................. 3.63 4.03 3.91
Passbook and statement savings accounts................ 3.32 3.29 3.29
Savings certificates................................... 5.57 5.67 5.64
Other interest-bearing time deposits................... 5.55 5.59 5.42
Time deposits in foreign offices....................... 5.33 5.48 5.37
Total interest-bearing deposits...................... 4.62% 4.66% 4.61%
==== ==== ====
</TABLE>
Certificates of deposit in denominations of $100,000 or more issued by
domestic offices totaled $2.99 billion at December 31, 1998. Total 1998 interest
expense on domestic office certificates of deposit of $100,000 or more amounted
to approximately $150.7 million compared to $115.1 million in 1997 and $70.1
million in 1996. Virtually all time deposits in foreign offices were in
denominations of $100,000 or more.
The remaining maturity of domestic office certificates of deposit of
$100,000 or more is as follows:
Domestic Office Certificates of Deposit
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Maturities:
3 months or less.................................. $2,223 $1,132 $402
3 to 6 months..................................... 427 229 250
6 to 12 months.................................... 210 178 139
Over 12 months.................................... 126 98 123
------ ------ ----
Total........................................... $2,986 $1,637 $914
====== ====== ====
</TABLE>
MONEY MARKET ASSETS AND LIABILITIES
The Corporation conducts most of its money market activities through HTSB.
Average money market assets, consisting primarily of interest-bearing deposits
at banks, Federal funds sold and securities purchased under agreement to resell,
decreased 45 percent to $460 million in 1998 from $831 million in 1997. The
average yield on money market assets decreased from 5.31 percent in 1997 to 4.31
percent in 1998. Interest income earned on these assets decreased 55 percent to
$19.8 million in 1998. At December 31, 1998, interest-bearing deposits at banks
and Federal funds sold totaled $98.9 million and $156 million, respectively,
compared to $598 million and $81 million at year-end 1997. There were no reverse
repurchase agreements outstanding at December 31, 1998 or December 31, 1997.
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 1998, money market liabilities averaged $4.27 billion, an increase of 16
percent from 1997, when money market liabilities averaged $3.70 billion. The
average rate paid on these borrowings decreased from 5.32 percent in 1997 to
5.24 percent in 1998, reflecting generally lower short-term interest rates
experienced by the market during 1998. At December 31, 1998, repurchase
agreements totaled $2.46 billion compared to $1.87 billion at year-end 1997.
Federal funds purchased and securities sold under agreement to repurchase
consist of overnight Federal funds borrowed and securities sold to banks,
brokers and
31
<PAGE> 33
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 1998, 1997 and 1996:
Federal funds purchased and securities sold under agreement to repurchase
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year...................... $3,440,832 $2,451,873 $1,983,047
Average interest rate of outstanding borrowings at end
of year.............................................. 4.55% 5.65% 6.64%
Highest amount outstanding as of any month-end during
the year............................................. $3,445,461 $3,633,014 $3,116,382
Daily average amount outstanding during the year....... $2,920,337 $2,610,976 $2,524,176
Daily average annualized rate of interest.............. 5.14% 5.22% 5.00%
</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 1998, 1997 and 1996:
Short-term borrowings
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................... $168,151 $503,320 $347,690
Average interest rate of outstanding borrowings at end of
year...................................................... 5.61% 5.96% 5.27%
Highest amount outstanding as of any month-end during the
year...................................................... $443,499 $503,320 $858,381
Daily average amount outstanding during the year............ $188,575 $ 68,396 $421,200
Daily average annualized rate of interest................... 5.25% 5.09% 4.88%
</TABLE>
Commercial paper has been sold directly by Bankcorp to a number of
investors, including individuals, partnerships, corporations, banks and other
financial institutions in various amounts with initial terms not exceeding 270
days. The following amounts and rates applied during 1998, 1997 and 1996:
Commercial paper
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................... $261,905 $351,427 $334,653
Average interest rate of outstanding commercial paper at end
of year................................................... 4.50% 5.31% 5.06%
Highest amount outstanding as of any month-end during the
year...................................................... $350,070 $390,739 $334,653
Daily average amount outstanding during the year............ $308,508 $320,805 $275,194
Daily average annualized rate of interest................... 5.23% 5.23% 5.08%
</TABLE>
Senior notes are short- and medium-term notes issued to institutional
investors from time-to-time. During 1998, 1997 and 1996 only short-term notes
were outstanding. The following amounts and rates applied during 1998, 1997 and
1996:
Senior notes
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................ $ 940,000 $ 100,000 $350,000
Average interest rate of outstanding senior notes at end
of year................................................ 5.22% 5.90% 5.61%
Highest amount outstanding as of any month-end during the
year................................................... $1,231,000 $1,325,000 $589,000
Daily average amount outstanding during the year......... $ 855,366 $ 695,329 $392,283
Daily average annualized rate of interest................ 5.58% 5.57% 5.72%
</TABLE>
32
<PAGE> 34
SUMMARY
In 1998, significant year-to-year loan growth occurred among the following
loan categories: manufacturing and processing, public and private service
industries, other commercial, other financial institutions and mortgages secured
by residential and commercial property.
DISTRIBUTION OF LOANS BY TYPE OF BORROWER
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Manufacturing and processing............ $ 2,480.1 $ 2,343.5 $ 1,817.0 $1,437.7 $1,065.5
Public and private service industries... 2,527.0 2,383.6 2,073.0 1,968.4 1,738.7
Mining (including oil and gas).......... 12.3 14.5 24.8 27.8 8.0
Farmers................................. 139.2 163.6 148.3 35.5 35.3
Individuals (single payment)............ 551.0 534.7 402.0 344.5 394.3
Loans to purchase and carry
securities........................... 23.9 25.6 41.4 76.4 62.7
State and political subdivisions,
including industrial revenue bonds... 11.4 12.9 18.3 28.5 37.5
Other commercial........................ 774.1 494.5 583.0 607.5 568.4
--------- --------- --------- -------- --------
Total Commercial..................... 6,519.0 5,972.9 5,107.8 4,526.3 3,910.4
--------- --------- --------- -------- --------
Finance companies....................... 195.8 217.5 233.7 215.4 207.3
Commercial banks........................ -- 1.5 111.9 15.8 14.7
Investment companies.................... 140.7 93.8 74.7 77.4 66.8
Mortgage companies...................... 90.4 68.4 3.4 5.1 4.6
Other financial institutions............ 726.4 631.4 505.3 393.1 247.8
--------- --------- --------- -------- --------
Total Financial Institutions......... 1,153.3 1,012.6 929.0 706.8 541.2
--------- --------- --------- -------- --------
Total Brokers and Dealers............ 522.3 437.3 447.4 331.4 392.5
--------- --------- --------- -------- --------
Construction............................ 149.2 163.9 186.9 195.7 175.5
Mortgages secured by residential
property............................. 2,605.6 2,218.2 1,947.6 1,511.8 1,252.9
Mortgages secured by commercial
property............................. 579.7 424.3 436.1 485.0 374.6
--------- --------- --------- -------- --------
Total Real Estate............... 3,334.5 2,806.4 2,570.6 2,192.5 1,803.0
--------- --------- --------- -------- --------
Charge card............................. -- -- 1,041.9 1,095.8 898.3
Other installment....................... 602.4 531.5 484.1 478.4 436.8
--------- --------- --------- -------- --------
Total Installment (to individuals)... 602.4 531.5 1,526.0 1,574.2 1,335.1
--------- --------- --------- -------- --------
Total Lease Financing................ 16.9 23.0 29.9 -- --
--------- --------- --------- -------- --------
Total Domestic Loans................. 12,148.4 10,783.7 10,610.7 9,331.2 7,982.2
--------- --------- --------- -------- --------
Foreign Loans:
Governments and official institutions... 0.8 0.9 1.0 1.0 1.0
Banks and other financial
institutions......................... 52.9 51.0 137.6 160.8 250.6
Other, primarily commercial and
industrial........................... 28.2 37.1 3.0 40.9 16.2
--------- --------- --------- -------- --------
Total Foreign Loans.................. 81.9 89.0 141.6 202.7 267.8
--------- --------- --------- -------- --------
Less unearned income...................... 1.9 4.4 7.6 16.1 20.7
--------- --------- --------- -------- --------
Loans, net of unearned income........... $12,228.4 $10,868.3 $10,744.7 $9,517.8 $8,229.3
========= ========= ========= ======== ========
</TABLE>
- -------------------------
33
<PAGE> 35
Average loans increased by 6 percent during 1998 compared to 1997. Daily
average loans over the last five years were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DAILY AVERAGES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................... $ 7,834,410 $ 6,965,201 $6,462,497 $5,716,282 $5,107,563
Real estate construction......... 144,148 196,864 178,338 164,575 185,101
Real estate mortgages............ 2,908,755 2,171,475 1,686,435 1,257,370 1,062,828
Installment...................... 680,588 708,045 451,430 503,073 418,166
Charge card...................... -- 806,085 965,043 971,565 740,088
Foreign.......................... 77,010 92,390 214,767 190,816 180,830
Lease financing.................. 18,060 26,883 1,986 -- 10
----------- ----------- ---------- ---------- ----------
Total loans............ 11,662,971 10,966,943 9,960,496 8,803,681 7,694,586
Less unearned income............. 2,981 5,667 12,670 18,110 22,011
----------- ----------- ---------- ---------- ----------
Loans, net of unearned
income...................... $11,659,990 $10,961,276 $9,947,826 $8,785,571 $7,672,575
=========== =========== ========== ========== ==========
</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 $9.02 billion
and $3.21 billion, respectively, of total loans at 1998 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, 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 that 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.
34
<PAGE> 36
4) Fiduciary risk, which arises when the Corporation, or its employees
acting purportedly on its behalf, take actions which violate the trust and
confidence properly placed in the Corporation by the client.
The Corporation applies a comprehensive risk assessment framework to
monitor these risks by line of business, customer and product line. The roles
and relationships of the Corporation's management committees and the Board of
Directors' oversight committees are well-defined and ensure comprehensive risk
management and oversight. The Risk Management and Fiduciary Risk Management
Committees are manned by senior managers from various business units of the
Corporation who bring specialized expertise to bear on risk management issues.
Through this risk management structure, the Corporation evaluates risks,
establishes 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 68 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 1998 fourth
quarter at 4.4 percent and projected to increase to 4.6 percent in 1999, 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
35
<PAGE> 37
employed to reduce certain types of exposure. Management reviews the magnitude
and quality of outstanding commitments and contingent liabilities.
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 25 of this Report.
YEAR 2000
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs, operating systems
and other systems can accommodate the date value for the year 2000. The year
2000 issue is pervasive, as almost all date-sensitive systems will be affected
to some degree by the rollover of the two-digit year from 99 to 00. Potential
risks of not addressing this issue include business interruption, financial
loss, reputation loss and/or legal liability.
The Corporation and its parent company, Bank of Montreal, have undertaken
an enterprise-wide initiative to address the year 2000 issue and have developed
a comprehensive plan to prepare, as appropriate, the Corporation's computer and
other systems to recognize the date change on January 1, 2000. An assessment of
the readiness of third parties that the Corporation interfaces with, such as
vendors, counterparties, customers, payment systems, and others, is ongoing to
mitigate the potential risks that year 2000 poses to the Corporation. In
addition, the Corporation is assessing the readiness of companies that have
borrowed from the Corporation's subsidiaries to ensure that incremental year
2000-related credit risks are addressed as part of the Corporation's existing
credit risk management framework. The Corporation's objective is to ensure that
all aspects of the year 2000 issue affecting the Corporation, including those
related to the efforts of third parties, will be fully resolved in time. The
Corporation has consistently maintained contingency plans for mission critical
systems and business processes to protect the Corporation's assets against
unplanned events that would prevent normal operations. The millennium changeover
presents unique risks, some of which would not be effectively addressed by the
existing plans. The Corporation is examining these risks and developing
additional plans to mitigate the effect of potential impacts and ensure
continuity of operation throughout the year 2000 and beyond. The use of the
existing contingency planning infrastructure will assist in providing optimum
coverage and re-usability of existing arrangements and responsibility
assignments. The Corporation expects all year 2000-specific contingency plans to
be completed by April 30, 1999 and related testing to continue throughout the
year. However, it is not possible to be sure that all aspects of the year 2000
issue that may affect the Corporation, including those related to the effects of
customers, suppliers, or other third parties with whom the Corporation conducts
business, will not have a material impact on the Corporation's operations or
financial condition.
Emfisys, the Corporation's operations group, acting in support of all of
the operating segments, has overall responsibility for converting systems to
accommodate the calendar change. Each of the Corporation's lines of business is
responsible for remediation of the assets used to conduct its operations and
provide services or products to its clients, while attempting to ensure that
both the technical and the business risks imposed by the year 2000 issue are
addressed. A governance structure has been established to deal with this issue,
which includes a Year 2000 Project Office and regular monitoring of progress by
the Corporation's Risk Management Committee, Year 2000 Steering Committees and
the Board of Directors.
The process for year 2000 compliance is following four major steps:
inventory, impact assessment and plan, implementation and integration testing.
The implementation step includes verification, conversion and replacement or
retirement of the asset. If an asset is not retired, it is tested and verified,
and only once it is verified does it progress to the integration testing step.
Integration testing is to confirm that the business functions work accurately
and without disruption under year 2000-specific dates, with all applications
functioning correctly with interfaces and infrastructure. As of December 31,
1998, the Corporation had substantially completed the implementation of critical
systems. The implementation of non-critical business assets and the integration
testing of critical systems is planned to be completed by June 30, 1999. The
36
<PAGE> 38
Corporation expects that the principal costs will be those associated with the
remediation and testing of computer applications. A major portion of these costs
will be met from existing resources, through a reprioritization of technology
development initiatives, with the remainder representing incremental costs. As a
result, the Corporation's management does not anticipate significant cost
savings to occur after the year 2000 issue is satisfactorily remedied. In total,
the Corporation expects the cost of solving the year 2000 issue to be
approximately $52.1 million, including $10.5 million of capital costs, as
follows:
<TABLE>
<S> <C> <C>
Estimated spending for Year 2000 system changes for
mainframe and centrally supported client server
applications over 5 years (1996 to 2000).................. $28.0 million
Estimated business unit costs, including end-user developed
applications, and embedded systems, e.g., elevators,
security access systems, etc.............................. $13.6 million
Estimated capital costs for central information technology
and business units........................................ $10.5 million
-----
Total estimated spending.................................... $52.1 million
=====
</TABLE>
The total costs of the Corporation's year 2000 program in 1998, 1997 and
1996 were $22.9 million, $11.1 million and $1.1 million, respectively, of which
$5.1 million, $2.8 million and $0.7 million, respectively, was capitalized.
NONACCRUAL, RESTRUCTURED AND PAST DUE LOANS
Management closely monitors nonperforming assets, including assets received
in satisfaction of debt. Nonperforming assets were 0.17 percent of total loans
at December 31, 1998, compared with 0.18 percent at year-end 1997. All
nonperforming loans are domestic.
Interest shortfall is the difference between the gross amount of interest
that would have been recorded if all year-end nonperforming loans had been
accruing at their original terms and the cash-basis interest income actually
recognized. Interest shortfall was $1.4 million in 1998 compared to $1.0 million
in 1997.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................... $18,695 $17,790 $28,153 $50,503 $83,803
Restructured loans............................. 1,523 598 1,512 2,059 2,889
------- ------- ------- ------- -------
Total nonperforming loans...................... 20,218 18,388 29,665 52,562 86,692
Other assets received in satisfaction of
debt......................................... 559 1,300 1,562 2,470 8,071
------- ------- ------- ------- -------
Total nonperforming assets................ $20,777 $19,688 $31,227 $55,032 $94,763
======= ======= ======= ======= =======
90-day past due loans, still accruing interest
(all domestic)............................... $21,964 $27,083 $46,369 $28,302 $31,071
======= ======= ======= ======= =======
Gross amount of interest that would have been
recorded if all year-end nonperforming loans
had been accruing interest at their original
terms........................................ $ 1,457 $ 1,061 $ 3,134 $ 4,500 $ 5,278
Interest income actually recognized............ 75 51 76 1,572 1,348
------- ------- ------- ------- -------
Interest shortfall, before consideration of any
income tax effect............................ $ 1,382 $ 1,010 $ 3,058 $ 2,928 $ 3,930
======= ======= ======= ======= =======
Nonperforming loans to total loans at
year-end..................................... 0.17% 0.17% 0.28% 0.55% 1.05%
Nonperforming assets to total loans at
year-end..................................... 0.17 0.18 0.29 0.58 1.15
======= ======= ======= ======= =======
</TABLE>
37
<PAGE> 39
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, 1998 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 $6.52 billion, or 53 percent of total outstandings at year-end
1998. 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 34 percent of all service-related credits and 7
percent of total loans.
Foreign loans totaled $82 million at year-end 1998, accounting for 0.7
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 $3.33 billion
at December 31, 1998, or 27 percent of total outstandings. Mortgage loans
collateralized by residential property totaled $2.61 billion, or 21 percent of
loans. Commercial real estate mortgages and construction loans totaled $729
million at the end of 1998, representing 6 percent of loans. Further details on
the Corporation's commercial real estate outstandings can be found on page 39 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, 1998, substantially all foreign
outstandings represented U.S. dollar claims. Foreign outstandings of certain
countries are net of: a) written guarantees by domestic or other non-local third
parties or b) the value of tangible, liquid collateral deemed realizable by the
Corporation. A significant portion of the Corporation's foreign outstandings are
placed with major financial institutions and governments and their agencies. The
Corporation continually monitors its risk related to foreign outstandings and
imposes internal limits on its foreign exposure.
Information provided in the table on foreign outstandings is presented in
accordance with guidelines of the Securities and Exchange Commission and is not
intended to be indicative of prudent lending levels.
<TABLE>
<CAPTION>
BANKS AND OTHER, PRIMARILY
OTHER FINANCIAL COMMERCIAL AND
TOTAL INSTITUTIONS INDUSTRIAL
----- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Outstandings (including accrued interest) to one
country in excess of 1% of total consolidated assets
at year-end:
None.............................................. $ -- $ -- $ --
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 $ --
</TABLE>
At December 31, 1998, 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.
38
<PAGE> 40
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, 1998, the Corporation, primarily through its banking
subsidiaries, had outstanding commercial real estate loans of approximately $729
million which included both construction loans and commercial credits
collateralized by commercial real estate. The vast majority of these loans are
collateralized by real estate located in the Chicago metropolitan area. Of the
outstanding commercial real estate loans, approximately $1.3 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 1998 or 1997. 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 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 4
percent, 5 percent, 5 percent, 12 percent and 11 percent of the consolidated
allowance for possible loan losses was represented by doubtful portions of loans
at December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
39
<PAGE> 41
At December 31, 1998, the Corporation had allocated $6.4 million to loans
internally categorized as doubtful, compared to $6.5 million at year-end 1997.
At December 31, 1998 and 1997, the Corporation designated all of the
allocated portion of the allowance to cover total domestic credit exposure only;
accordingly, no allocation was deemed necessary for foreign exposure.
During 1998, the provision for loan losses decreased to $27.0 million,
compared to $58.4 million in 1997, primarily due to the change in the risk
profile of the portfolio due to the sale of the credit card loans in January
1998. At year-end 1998, the allowance for possible loan losses was $140.6
million, or 1.15 percent of total loans outstanding, compared to $130.9 million
or 1.20 percent of total loans in 1997. 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
1998, the ratios of the allowance for possible loan losses to total loans and to
nonperforming loans were 1.15 percent and 695 percent, respectively.
Net charge-offs in 1998 were $17.2 million, or 0.15 percent of average
loans outstanding as compared to $69.8 million, or 0.64 percent of average loans
outstanding in 1997. Net charge-offs of domestic commercial loans amounted to
$11.0 million in 1998, or 0.14 percent of average domestic commercial loans
outstanding, a decrease from $11.5 million, or 0.17 percent of average domestic
commercial loans outstanding in 1997. Installment loans, including real estate
mortgages, had net charge-offs of $6.2 million in 1998, or 0.17 percent of
average outstandings, and $5.2 million, or 0.18 percent of average outstandings
in 1997. Over the five-year period ending December 31, 1998, combined total net
charge-offs were 0.48 percent of average total loans outstanding.
The Board has established rules requiring banking institutions to establish
special reserves against the risks presented in certain international assets, as
determined by the Board. At December 31, 1998 and 1997, 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>
1998 1997 1996
------------------------- ------------------------- -------------------------
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................... $ 58,639 73.0% $ 38,102 73.7% $ 45,901 66.1%
Retail....................... 4,781 26.4 4,681 25.5 40,578 32.6
Foreign...................... -- 0.6 -- 0.8 -- 1.3
-------- ----- -------- ----- -------- -----
Total Allocated Portion........ 63,420 100.0% 42,783 100.0% 86,479 100.0%
===== ===== =====
Unallocated Portion............ 77,188 N/A 88,093 N/A 55,732 N/A
-------- -------- --------
Total.......................... $140,608 $130,876 $142,211
======== ======== ========
</TABLE>
40
<PAGE> 42
Analysis of Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance................ $ 130,876 $ 142,211 $ 129,259 $ 124,734 $ 131,676
Charge-offs:
Commercial, financial and
agricultural................ 19,897 16,545 12,808 20,967 31,900
Real estate construction....... 1 719 803 2,644 65
Installment and real estate
mortgages................... 9,219 6,393 2,757 2,442 7,581
Charge card.................... -- 58,898 46,627 35,914 30,360
----------- ----------- ----------- ---------- ----------
Total charge-offs........... 29,117 82,555 62,995 61,967 69,906
----------- ----------- ----------- ---------- ----------
Recoveries:
Commercial, financial and
agricultural................ 8,869 5,030 4,799 11,063 7,216
Real estate construction....... -- 622 1,465 2,867 21
Installment and real estate
mortgages................... 3,023 1,228 1,065 1,093 1,646
Charge card.................... -- 5,893 7,278 8,474 9,041
----------- ----------- ----------- ---------- ----------
Total recoveries............ 11,892 12,773 14,607 23,497 17,924
----------- ----------- ----------- ---------- ----------
Net charge-offs............. 17,225 69,782 48,388 38,470 51,982
----------- ----------- ----------- ---------- ----------
Provisions charged (credited) to
expense:
Domestic....................... 26,957 58,447 56,540 46,814 44,922
Foreign........................ -- -- -- (3,819) 118
----------- ----------- ----------- ---------- ----------
Total provisions............ 26,957 58,447 56,540 42,995 45,040
----------- ----------- ----------- ---------- ----------
Allowance related to acquired
loans.......................... -- -- 4,800 -- --
----------- ----------- ----------- ---------- ----------
Ending balance................... $ 140,608 $ 130,876 $ 142,211 $ 129,259 $ 124,734
=========== =========== =========== ========== ==========
Net loans, end of period......... $12,228,400 $10,868,250 $10,744,653 $9,517,797 $8,229,254
=========== =========== =========== ========== ==========
Net loans, daily averages........ $11,659,990 $10,961,276 $ 9,947,826 $8,785,571 $7,672,575
=========== =========== =========== ========== ==========
Ratios:
Net charge-offs to average
loans outstanding........... 0.15% 0.64% 0.49% 0.44% 0.68%
Allowance for possible loan
losses to loans outstanding
(end of period)............. 1.15 1.20 1.32 1.36 1.52
Allowance for possible loan
losses to nonperforming
loans (end of period)....... 695 712 479 246 144
Allowance for possible loan
losses to nonperforming
assets...................... 677 665 455 235 132
Net charge-offs to allowance
for possible loan losses
(beginning of period)....... 13 49 37 31 39
</TABLE>
41
<PAGE> 43
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 $25.4 million, or 14 percent, of
the Corporation's 1998 consolidated net income, compared to $28.9 million or 18
percent in 1997. International operating income was $53.7 million in 1998 and
represented 3 percent of the Corporation's total operating income. In 1997 and
1996, international operating income represented 4 and 3 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
--------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans:
Governments and official institutions..................... $ 812 $ 937 $ 984
Banks and other financial institutions.................... 52,855 50,960 137,560
Other, primarily commercial and industrial................ 28,200 37,079 2,976
-------- -------- --------
Total loans............................................ 81,867 88,976 141,520
-------- -------- --------
Allowance for possible loan losses..................... -- -- --
-------- -------- --------
Deposits in banks located outside the United States:
Interest-bearing.......................................... 98,929 598,062 651,508
Other..................................................... 11,987 1,728 6,331
-------- -------- --------
Total deposits in banks................................ 110,916 599,790 657,839
-------- -------- --------
Acceptances and other identifiable assets................... 27,103 27,782 36,298
-------- -------- --------
Total identifiable foreign assets...................... $219,886 $716,548 $835,657
======== ======== ========
Deposit liabilities:
Banks located in foreign countries........................ $ 88,374 $ 80,579 $ 76,886
Foreign governments and official institutions............. 6,089 22 45
Other demand.............................................. 74,936 97,848 78,514
Other time and savings.................................... 39,518 41,044 271,717
-------- -------- --------
Total deposit liabilities.............................. 208,917 219,493 427,162
Short-term borrowings....................................... 176,876 82,724 32,676
Acceptances outstanding..................................... 26,934 27,511 36,024
-------- -------- --------
Total identifiable foreign liabilities................. $412,727 $329,728 $495,862
======== ======== ========
</TABLE>
42
<PAGE> 44
GEOGRAPHIC DISTRIBUTION
As of year-end 1998, 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, 1998
Continental Europe.............................. $ 20,667 $ 172 $ 34,721 $ 55,560 31
Pacific and Far East............................ 1,441 9 50,576 52,026 29
United Kingdom and Ireland...................... 11 51,546 97 51,654 28
Western Hemisphere (excluding U.S. and
Canada)....................................... 1,592 812 1,010 3,414 2
Canada.......................................... 5,530 -- 12,191 17,721 10
Middle East and Africa.......................... -- 87 334 421 --
-------- ------- -------- -------- ---
Total international banking................ $ 29,241 $52,626 $ 98,929 $180,796 100
======== ======= ======== ======== ===
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 15
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
======== ======= ======== ======== ===
</TABLE>
FOURTH QUARTER 1998 COMPARED WITH FOURTH QUARTER 1997
Net income for the fourth quarter of 1998 was $45.7 million, up 15 percent
from fourth quarter 1997 earnings of $39.7 million. The earnings increase is
attributable primarily to strong business growth across corporate, private and
retail banking. ROE for fourth quarter 1998 was 11.66 percent and ROA was 0.82
percent, compared to respective returns of 10.17 percent and 0.79 percent in
last year's fourth quarter. Cash earnings were $49.5 million in the fourth
quarter of 1998, a 12 percent increase compared to the corresponding quarter in
1997. Cash flow ROE and cash flow ROA were 15.74 percent and 0.89 percent,
respectively, compared to cash flow ROE and cash flow ROA of 14.56 percent and
0.89 percent, respectively, in the same quarter a year ago.
Fourth quarter 1998 net interest income on a fully taxable equivalent basis
was $136.6 million, down $13.9 million or 9 percent from $150.5 million in
1997's fourth quarter. Average earning assets rose 10 percent to $19.09 billion
from $17.42 billion in fourth quarter 1997 attributable to an increase of $1.39
billion, or 27 percent in portfolio securities available-for-sale and an 8
percent or $846 million increase in average loans. Commercial and residential
mortgage lending were the strongest contributors to this growth. Net interest
43
<PAGE> 45
margin declined to 2.84 percent from 3.43 percent in the same quarter last year.
This decrease primarily reflects the sale of the card business in January 1998.
Noninterest income of $116.0 million rose 18 percent in fourth quarter 1998
from the same quarter last year. In the current quarter trust fees rose $2.3
million and service charge fees increased $3.3 million. Securities gains rose
$4.0 million. Other income, which includes syndication fees, income from
bank-owned insurance investments, gains on mortgage sales and other gains and
fee income, increased $16.7 million from 1997.
Fourth quarter 1998 noninterest expenses of $175.0 million rose $2.1
million or 1 percent from fourth quarter last year. Excluding the costs
associated with the credit card portfolio, expenses increased 5 percent quarter
to quarter. Employment expense increased $5.0 million, or 5 percent from the
prior year. Income taxes increased by $2.0 million during the current quarter
primarily reflecting higher pretax income.
The fourth quarter 1998 provision for loan losses of $7.2 million was down
$5.9 million from $13.1 million in the fourth quarter of 1997. Net loan
charge-offs during the current quarter were $3.4 million, compared to $21.1
million in the same period last year, primarily reflecting lower write-offs as a
result of the credit card portfolio sale.
44
<PAGE> 46
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>
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
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....... $324.9 $328.7 $319.9 $312.3 $329.5 $319.7 $320.7 $300.5 $298.9 $293.4 $278.0 $266.5
Interest expense...... 195.9 205.8 195.9 181.2 186.2 178.8 174.4 159.2 160.5 154.2 149.3 143.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income... 129.0 122.9 124.0 131.1 143.3 140.9 146.3 141.3 138.4 139.2 128.7 123.1
FTE adjustment........ 7.6 7.7 7.5 7.3 7.2 6.6 6.8 6.1 6.3 7.6 5.9 5.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest income --
FTE basis............ 136.6 130.6 131.5 138.4 150.5 147.5 153.1 147.4 144.7 146.8 134.6 128.7
Provision for loan
losses............. 7.2 7.0 7.2 5.5 13.1 15.0 16.4 13.9 14.3 15.0 13.7 13.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income
after Provision for
Loan Losses.......... 129.4 123.6 124.3 132.9 137.4 132.5 136.7 133.5 130.4 131.8 120.9 115.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Income
Trust and investment
management fees.... 36.9 37.1 36.0 33.7 34.6 34.3 33.2 31.6 29.4 29.1 29.4 29.8
Money market and bond
trading............ 2.1 3.6 3.2 1.5 3.9 0.8 1.6 0.9 3.7 0.7 2.7 1.0
Foreign exchange..... 1.8 1.7 1.7 1.7 1.9 1.3 1.2 0.9 1.3 1.7 3.5 3.5
Merchant and charge
card fees.......... 6.3 6.9 6.4 7.2 12.7 12.9 12.8 11.6 13.0 13.1 11.1 10.0
Service fees and
charges............ 28.0 27.4 27.2 26.7 24.7 25.1 23.7 23.4 23.0 23.6 19.3 17.1
Portfolio securities
gains.............. 7.3 7.7 3.9 8.0 3.3 5.9 2.6 1.3 4.5 0.7 0.1 3.4
Gain on sale of
charge card
portfolio.......... -- -- -- 12.0 -- -- -- -- -- -- -- --
Bank-owned insurance
investments........ 9.9 10.1 8.3 4.1 3.2 3.2 3.0 3.5 3.1 2.0 1.6 1.8
Foreign fees......... 5.1 4.4 4.7 5.5 4.3 4.5 4.4 5.0 4.5 4.2 3.6 3.9
Other................ 18.5 17.5 17.5 9.4 9.4 12.4 8.0 9.6 5.7 5.4 8.8 10.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total noninterest
income........... 115.9 116.4 108.9 109.8 98.0 100.4 90.5 87.8 88.2 80.5 80.1 80.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Expenses
Employment........... 100.1 97.2 97.1 92.5 95.1 94.1 92.8 90.1 82.5 84.9 81.2 78.4
Net occupancy........ 13.3 12.4 13.3 12.4 13.5 14.9 13.6 14.5 13.2 12.9 10.9 10.7
Equipment............ 13.8 13.0 13.1 12.8 13.0 12.3 12.3 10.6 11.3 10.3 10.3 9.8
Marketing............ 6.5 6.8 6.9 5.7 6.7 6.0 7.0 6.0 9.0 7.7 7.1 5.7
Communication and
delivery........... 6.2 5.3 5.1 6.0 6.7 6.1 6.0 5.4 5.7 4.7 5.2 5.3
Deposit insurance.... 0.8 0.7 0.8 0.8 0.8 0.7 0.8 0.6 (0.2) 18.3 -- --
Expert services...... 10.8 8.9 6.9 6.9 8.4 9.1 8.3 5.2 6.9 4.3 3.5 4.7
Contract
programmers........ 5.8 7.0 6.2 4.6 4.3 3.5 3.0 3.3 3.2 2.2 1.2 0.4
Other................ 11.6 13.1 8.3 21.8 17.6 14.5 14.6 14.3 18.2 15.1 16.7 14.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
168.9 164.4 157.7 163.5 166.1 161.2 158.4 150.0 149.8 160.4 136.1 129.6
Goodwill and other
valuation
intangibles........ 6.1 6.0 5.9 6.2 6.9 7.0 6.9 7.0 6.8 6.9 2.2 2.2
Total noninterest
expenses......... 175.0 170.4 163.6 169.7 173.0 168.2 165.3 157.0 156.6 167.3 138.3 131.8
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
FTE income --
pretax............... 70.3 69.6 69.6 73.0 62.4 64.7 61.9 64.3 62.0 45.0 62.7 63.9
Applicable income
taxes................ 17.0 15.8 16.7 20.4 15.5 18.0 17.7 18.9 17.9 10.9 18.0 19.1
FTE adjustment........ 7.6 7.7 7.5 7.3 7.2 6.6 6.8 6.1 6.3 7.6 5.9 5.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income............ 45.7 46.1 45.4 45.3 39.7 40.1 37.4 39.3 37.8 26.5 38.8 39.2
Dividends on preferred
stock................ 4.1 4.2 4.1 4.1 4.1 4.2 4.1 4.1 4.1 4.2 3.3 3.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income applicable
to common stock...... $ 41.6 $ 41.9 $ 41.3 $ 41.2 $ 35.6 $ 35.9 $ 33.3 $ 35.2 $ 33.7 $ 22.3 $ 35.5 $ 35.8
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per common
share (based on
average shares
outstanding)......... $ 6.24 $ 6.29 $ 6.19 $ 6.19 $ 5.33 $ 5.39 $ 4.99 $ 5.28 $ 5.05 $ 3.35 $ 5.33 $ 5.37
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net Interest Margin
Yield on earning
assets............. 6.92% 7.14% 7.24% 7.43% 7.68% 7.70% 7.84% 7.71% 7.70% 7.77% 7.65% 7.80%
Rate on supporting
liabilities........ 4.08 4.37 4.33 4.21 4.25 4.22 4.17 4.01 4.05 3.98 4.03 4.11
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest
margin............. 2.84% 2.77% 2.91% 3.22% 3.43% 3.48% 3.67% 3.70% 3.65% 3.79% 3.62% 3.69%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Rows may not add to annual amounts because of rounding.
45
<PAGE> 47
FINANCIAL STATEMENTS
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $ 904,016 $ 927,090 $ 837,057
Money market assets:
Deposits at banks......................................... 10,833 31,464 30,483
Federal funds sold and securities purchased under
agreement to resell..................................... 8,980 12,692 11,918
Trading account............................................. 3,775 3,752 3,959
Securities available-for-sale:
U.S. Treasury and federal agency.......................... 337,700 275,489 232,571
State and municipal....................................... 16,609 17,564 18,149
Other..................................................... 3,886 1,573 2,717
---------- ---------- ----------
Total interest income..................................... 1,285,799 1,269,624 1,136,854
---------- ---------- ----------
INTEREST EXPENSE
Deposits.................................................... 509,097 475,657 398,167
Short-term borrowings....................................... 176,083 156,559 160,790
Senior notes................................................ 47,689 39,883 22,425
Minority interest -- dividends on preferred stock of
subsidiary................................................ 16,389 -- --
Long-term notes............................................. 29,495 26,499 26,067
---------- ---------- ----------
Total interest expense.................................... 778,753 698,598 607,449
---------- ---------- ----------
Net Interest Income......................................... 507,046 571,026 529,405
Provision for loan losses................................... 26,957 58,447 56,540
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses......... 480,089 512,579 472,865
---------- ---------- ----------
NONINTEREST INCOME
Trust and investment management fees........................ 143,724 133,714 117,762
Money market and bond trading............................... 10,512 7,269 7,992
Foreign exchange............................................ 6,772 5,364 9,992
Merchant and charge card fees............................... 26,772 50,085 47,244
Service fees and charges.................................... 109,372 96,324 82,802
Securities gains............................................ 26,953 13,207 8,786
Gain on sale of charge card portfolio....................... 12,000 -- --
Bank-owned insurance investments............................ 32,339 12,917 8,484
Foreign fees................................................ 19,575 18,182 16,144
Other....................................................... 63,022 40,686 30,101
---------- ---------- ----------
Total noninterest income.................................. 451,041 377,748 329,307
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and other compensation............................. 326,103 314,719 273,849
Pension, profit sharing and other employee benefits......... 60,906 57,423 53,145
Net occupancy............................................... 51,342 56,462 47,690
Equipment................................................... 52,622 48,119 41,715
Marketing................................................... 25,896 25,675 29,342
Communication and delivery.................................. 22,595 24,129 20,954
Deposit insurance........................................... 3,082 2,988 18,189
Expert services............................................. 33,440 31,159 19,382
Contract programming........................................ 23,633 14,047 7,069
Other....................................................... 54,881 61,117 64,493
---------- ---------- ----------
654,500 635,838 575,828
Goodwill and other valuation intangibles.................... 24,104 27,839 18,168
---------- ---------- ----------
Total noninterest expenses................................ 678,604 663,677 593,996
---------- ---------- ----------
Income before income taxes.................................. 252,526 226,650 208,176
Applicable income taxes..................................... 69,901 70,076 65,812
---------- ---------- ----------
Net Income.................................................. 182,625 156,574 142,364
Dividends on preferred stock................................ 16,594 16,594 15,006
---------- ---------- ----------
Net income applicable to common stock....................... $ 166,031 $ 139,980 $ 127,358
========== ========== ==========
Basic Earnings per Common Share (based on 6,667,490 average
shares outstanding) Net income applicable to common
stock..................................................... $24.91 $21.00 $19.10
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
46
<PAGE> 48
FINANCIAL STATEMENTS
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net income.................................................. $182,625 $156,574 $142,364
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains/(losses) arising during
period, net of tax expense(benefit) of $27,947 in 1998,
$18,056 in 1997 and ($19,750) in 1996.................. 43,187 27,667 (29,822)
Less reclassification adjustment for realized gains
included in income statement, net of tax expense of
$10,485 in 1998, $5,137 in 1997 and $3,418 in 1996..... (16,468) (8,070) (5,368)
-------- -------- --------
Other comprehensive income (loss)......................... 26,719 19,597 (35,190)
-------- -------- --------
Comprehensive income...................................... $209,344 $176,171 $107,174
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
47
<PAGE> 49
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
---- ----
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,492,270 $ 1,304,374
Money market assets:
Interest-bearing deposits at banks........................ 98,937 598,070
Federal funds sold and securities purchased under
agreement to resell.................................... 155,709 80,782
Securities available-for-sale............................... 6,963,654 5,229,390
Trading account assets...................................... 120,668 53,209
Loans, net of unearned income............................... 12,228,400 10,868,250
Allowance for possible loan losses.......................... (140,608) (130,876)
----------- -----------
Net loans................................................. 12,087,792 10,737,374
Premises and equipment...................................... 369,802 314,642
Customers' liability on acceptances......................... 30,829 46,480
Assets held for sale........................................ -- 725,760
Bank-owned insurance investments............................ 725,302 267,463
Goodwill and other valuation intangibles.................... 268,203 292,981
Other assets................................................ 484,664 482,936
----------- -----------
Total assets........................................... $22,797,830 $20,133,461
=========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 3,930,920 $ 4,192,454
-- interest-bearing............ 10,473,612 8,489,732
Deposits in foreign offices -- noninterest-bearing.......... 69,215 18,431
-- interest-bearing.............. 849,095 1,731,446
----------- -----------
Total deposits......................................... 15,322,842 14,432,063
Federal funds purchased and securities sold under agreement
to repurchase............................................. 3,440,832 2,451,873
Commercial paper outstanding................................ 261,905 351,427
Short-term borrowings....................................... 168,151 503,320
Senior notes................................................ 940,000 100,000
Acceptances outstanding..................................... 30,829 46,480
Accrued interest, taxes and other expenses.................. 182,097 154,373
Other liabilities........................................... 95,755 82,132
Minority interest -- preferred stock of subsidiary.......... 250,000 --
Long-term notes............................................. 454,387 379,278
----------- -----------
Total liabilities...................................... 21,146,798 18,500,946
----------- -----------
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..................................................... 493,812 486,545
Retained earnings........................................... 840,683 856,152
Accumulated other comprehensive income...................... 38,197 11,478
----------- -----------
Total stockholder's equity............................. 1,651,032 1,632,515
----------- -----------
Total liabilities and stockholder's equity............. $22,797,830 $20,133,461
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
48
<PAGE> 50
HARRIS BANKCORP, INC. (CONSOLIDATED AND PARENT COMPANY ONLY)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
SERIES A SERIES B COMPREHENSIVE TOTAL
PREFERRED PREFERRED COMMON RETAINED INCOME STOCKHOLDER'S
STOCK STOCK STOCK SURPLUS EARNINGS (LOSS) EQUITY
--------- --------- ------ ------- -------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Other comprehensive income...... -- -- -- -- -- (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)
Other comprehensive income...... -- -- -- -- -- 19,597 19,597
-------- ------- ------- -------- --------- -------- ----------
Balance at December 31, 1997...... 180,000 45,000 53,340 486,545 856,152 11,478 1,632,515
Contribution to capital
surplus....................... -- -- -- 7,267 -- -- 7,267
Net income...................... -- -- -- -- 182,625 -- 182,625
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
($27.72 per share)............ -- -- -- -- (181,500) -- (181,500)
Other comprehensive income...... -- -- -- -- -- 26,719 26,719
-------- ------- ------- -------- --------- -------- ----------
Balance at December 31, 1998...... $180,000 $45,000 $53,340 $493,812 $ 840,683 $ 38,197 $1,651,032
======== ======= ======= ======== ========= ======== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
49
<PAGE> 51
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................................. $ 182,625 $ 156,574 $ 142,364
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Provision for loan losses................................. 26,957 58,447 56,540
Depreciation and amortization, including intangibles...... 69,545 67,849 57,031
Deferred tax expense (benefit)............................ 3,423 2,343 (3,755)
Gain on sales of securities............................... (26,953) (13,207) (8,786)
Gain on sale of credit card portfolio..................... (12,000) -- --
Trading account net cash (purchases) sales................ (67,459) 57,146 (11,717)
Decrease (increase) in interest receivable................ 18,080 (32,385) (13,639)
Increase (decrease) in interest payable................... 18,519 (5,709) (188)
Increase in loans held for sale........................... (167,317) (12,202) (63,836)
Other, net................................................ (48,822) (35,555) 877
----------- ----------- -----------
Net cash (used) provided by operating activities...... (3,402) 243,301 154,891
----------- ----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks................................................... 499,133 60,187 (200,555)
Net (increase) decrease in Federal funds sold and
securities purchased under agreement to resell.......... (74,927) 214,010 (115,100)
Proceeds from sales of securities available-for-sale...... 2,551,839 1,314,938 1,462,522
Proceeds from maturities of securities
available-for-sale...................................... 13,203,430 11,667,783 6,634,038
Purchases of securities available-for-sale................ (17,412,439) (14,181,204) (8,741,345)
Net increase in loans and assets held for sale............ (1,177,462) (906,937) (870,493)
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............. 31,019 28,735 20,532
Purchases of premises and equipment....................... (133,907) (108,296) (82,794)
Net increase in bank-owned insurance investments.......... (457,839) (36,947) (102,484)
Other, net................................................ 17,750 (3,622) 93,651
----------- ----------- -----------
Net cash (used) provided by investing activities...... (2,953,403) (1,951,353) 341,981
----------- ----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 890,779 1,441,762 (129,685)
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 988,959 468,826 86,230
Net (decrease) increase in commercial paper outstanding... (89,522) 16,774 42,631
Net (decrease) increase in other short-term borrowings.... (335,169) 155,630 (495,359)
Proceeds from issuance of senior notes.................... 8,347,080 6,710,000 1,239,436
Repayment of senior notes................................. (7,507,080) (6,960,000) (1,367,436)
Proceeds from the sale of the credit card portfolio....... 722,748 -- --
Proceeds from issuance of long-term notes................. 75,000 -- 15,000
Proceeds from issuance of preferred stock................. -- -- 45,000
Proceeds from issuance of preferred stock of subsidiary... 250,000 -- --
Proceeds from contribution to capital surplus............. -- -- 280,000
Cash dividends paid on preferred stock.................... (16,594) (16,594) (15,006)
Cash dividends paid on common stock....................... (181,500) (42,000) (48,200)
Other, net................................................ -- -- (433,873)
----------- ----------- -----------
Net cash provided (used) by financing activities...... 3,144,701 1,774,398 (781,262)
----------- ----------- -----------
Net increase (decrease) in cash and demand balances due
from banks.............................................. 187,896 66,346 (284,390)
Cash and demand balances due from banks at January 1...... 1,304,374 1,238,028 1,522,418
----------- ----------- -----------
Cash and demand balances due from banks at December 31.... $ 1,492,270 $ 1,304,374 $ 1,238,028
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized).................... $ 760,234 $ 704,307 $ 596,939
Income taxes............................................ $ 55,161 $ 75,224 $ 71,626
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
50
<PAGE> 52
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 21 for additional information on business
combinations and Note 22 for additional information on related party
transactions on pages 82-84 of this Report.
The Corporation provides banking, trust and other services domestically and
internationally through 14 bank and 18 active nonbank subsidiaries and an Edge
Act subsidiary. 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 Statements 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 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
51
<PAGE> 53
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 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 Statements 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 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. 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. 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.
Interest income on securities, including amortization of discount or
premium, is included in earnings. Realized gains and losses, as a result of
securities sales, are included in securities gains, with the cost of securities
sold determined on the specific identification basis.
52
<PAGE> 54
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, 1998 and 1997, the Corporation's
Consolidated Statement of Condition included approximately $13.6 million and
$17.1 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. 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.
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. 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.
Commercial and real estate loans are placed on nonaccrual status when the
collection of interest is doubtful or when principal or interest is 90 days past
due, unless the credit is adequately collateralized and the past due amount is
in process of collection. When a loan is placed on nonaccrual status, all
interest accrued but not yet collected which is deemed uncollectible is charged
against interest income in the current year. Interest on nonaccrual loans is
recognized as income only when cash is received and the Corporation expects to
collect the entire principal balance of the loan. Interest income on
restructured loans is accrued according to the most recently agreed upon
contractual terms.
Commercial and real estate loans are charged off when, in management's
opinion, the loan is deemed uncollectible. Charge card and consumer installment
loans are charged off when 180 days past due. Accrued interest on these loans is
charged to interest income. Such loans are not normally placed on nonaccrual
status.
Loan commitments and letters of credit are executory contracts and are not
reflected on the Corporation's Consolidated Statements 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 estimated 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
53
<PAGE> 55
loss experience, management's evaluation of the loan portfolio under current
economic conditions and management's estimate of losses inherent in the
portfolio. 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. In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use. The Bank adopted this
statement in January 1998 and it did not have a material effect on the financial
position or results of operations of the Bank. 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 21 to Financial Statements on page 82 of this
Report. These assets are carried at the lower of original cost or current market
value, on a portfolio basis.
Goodwill and Other Valuation Intangibles
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.
Other assets
Property or other assets received in satisfaction of debt are included in
"Other Assets" on the Corporation's Consolidated Statements of Condition and are
recorded at the lower of remaining cost or fair value. Fair values for other
real estate owned generally are reduced by estimated costs to sell. Losses
arising from subsequent write-downs to fair value are charged directly to
expense.
Retirement and other postemployment benefits
The Corporation has noncontributory defined benefit pension plans covering
virtually all its employees. For its primary plan, the policy of the Corporation
is to, at a minimum, fund annually an amount necessary to satisfy the
requirements under the Employee Retirement Income Security Act ("ERISA"),
without regard to prior years' contributions in excess of the minimum.
Postemployment benefits provided to former or inactive employees after
employment but before retirement are accrued if they meet the conditions for
accrual of compensated absences. Otherwise, postemployment benefits are recorded
when expenses are incurred.
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 21 to
Financial Statements on page 82 of this Report. This transfer was
54
<PAGE> 56
a noncash transaction and was excluded from the Consolidated Statements 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 Statements 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.
Segment Information
In 1998, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires disclosure of operating segments based on the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Corporation's reportable segments.
The adoption of SFAS 131 did not affect the Corporation's results of operations
or financial position. See Note 18 to Financial Statements on page 77 of this
Report.
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. SECURITIES
The amortized cost and estimated fair value of securities
available-for-sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------------- -------------------------------------------------
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.......... $1,503,734 $42,116 $ 208 $1,545,642 $1,624,891 $ 4,192 $ 201 $1,628,882
Federal agency......... 4,929,000 14,188 992 4,942,196 3,249,562 6,492 2,235 3,253,819
State and municipal.... 326,811 10,968 107 337,672 301,769 10,992 197 312,564
Other.................. 140,895 6 2,757 138,144 34,127 14 16 34,125
---------- ------- ------ ---------- ---------- ------- ------ ----------
Total securities....... $6,900,440 $67,278 $4,064 $6,963,654 $5,210,349 $21,690 $2,649 $5,229,390
========== ======= ====== ========== ========== ======= ====== ==========
</TABLE>
At December 31, 1998 and 1997, portfolio and trading account securities
having a par value of $3.1 billion and $3.7 billion, respectively, were pledged
as collateral for certain liabilities, securities sold under agreement to
repurchase, public and trust deposits, trading account activities and for other
purposes where permitted or required by law. Securities carried at approximately
$2.46 billion and $1.87 billion were sold under agreement to repurchase at
December 31, 1998 and 1997, respectively.
55
<PAGE> 57
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1998, 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, 1998
------------------------
AMORTIZED FAIR
COST VALUE
--------- -----
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Within 1 year............................................. $2,403,570 $2,407,339
1 to 5 years.............................................. 1,587,966 1,609,873
5 to 10 years............................................. 803,394 833,532
Over 10 years............................................. 1,964,535 1,974,766
Other securities without stated............................. 140,975 138,145
---------- ----------
Total securities............................................ $6,900,440 $6,963,655
========== ==========
</TABLE>
In 1998, 1997 and 1996, proceeds from the sale of securities
available-for-sale amounted to $2.55 billion, $1.31 billion and $1.46 billion,
respectively. Gross gains of $28.4 million and gross losses of $1.5 million were
realized on these sales in 1998, while gross gains of $13.5 million and gross
losses of $0.3 million were realized on these sales in 1997, and gross gains of
$9.3 million and gross losses of $0.5 million were realized in 1996. Net
unrealized holding gain or loss on trading securities included in earnings
during 1998 was unchanged from an unrealized gain of $0.8 million at December
31, 1997.
3. LOANS
The following table summarizes loan balances by category:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and
dealers.......................................... $ 8,194,586 $ 7,422,883 $ 6,484,249
Real estate construction............................ 149,242 163,886 186,912
Real estate mortgages............................... 3,185,279 2,642,536 2,383,659
Installment......................................... 602,421 531,331 484,104
Charge card......................................... -- -- 1,041,886
Direct lease financing.............................. 16,884 23,028 29,947
Foreign loans:
Governments and official institutions............... 812 937 984
Banks and other financial institutions.............. 52,855 50,960 137,560
Other, primarily commercial and industrial.......... 28,200 37,079 2,976
----------- ----------- -----------
Total loans...................................... 12,230,279 10,872,640 10,752,277
Less unearned income.................................. 1,879 4,390 7,624
----------- ----------- -----------
Loans, net of unearned income.................... 12,228,400 10,868,250 10,744,653
Less allowance for possible loan losses............... 140,608 130,876 142,211
----------- ----------- -----------
Loans, net of allowance for possible loan
losses......................................... $12,087,792 $10,737,374 $10,602,442
=========== =========== ===========
</TABLE>
56
<PAGE> 58
Nonaccrual loans, restructured loans and other nonperforming assets are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans............................................ $18,695 $17,790 $28,153
Restructured loans.......................................... 1,523 598 1,512
------- ------- -------
Total nonperforming loans................................... 20,218 18,388 29,665
Other assets received in satisfaction of debt............... 559 1,300 1,562
------- ------- -------
Total nonperforming assets................................ $20,777 $19,688 $31,227
======= ======= =======
Gross amount of interest income that would have been
recorded if year-end nonperforming loans had been accruing
interest at their original terms.......................... $ 1,457 $ 1,061 $ 3,134
Interest income actually recognized......................... 75 51 76
------- ------- -------
Interest shortfall, before consideration of any income tax
effect................................................. $ 1,382 $ 1,010 $ 3,058
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, 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 38 of this Report.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights, included in other assets, of $9.3 million and
$3.2 million were capitalized in 1998 and 1997, respectively. Amortization
expense associated with these mortgage servicing rights was $1.2 million and
$0.5 million in 1998 and 1997, respectively. The net remaining capitalized
servicing rights of $13.3 million and $5.2 million at December 31, 1998 and
1997, respectively, had a corresponding valuation allowance of $4.1 million and
$1.2 million at December 31, 1998 and 1997, respectively. Accordingly, the
valuation allowance was increased by $2.9 million in 1998; there were no
reductions or direct write-downs in 1998 or 1997. The net capitalized assets of
$9.2 million and $4.0 million at December 31, 1998 and 1997, respectively, are
reflective of the fair value of those rights.
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $130,876 $142,211 $129,259
-------- -------- --------
Charge-offs................................................. (29,117) (82,555) (62,995)
Recoveries.................................................. 11,892 12,773 14,607
-------- -------- --------
Net charge-offs........................................... (17,225) (69,782) (48,388)
Provisions charged to operations............................ 26,957 58,447 56,540
Allowance related to acquired loans......................... -- -- 4,800
-------- -------- --------
Balance, end of year........................................ $140,608 $130,876 $142,211
======== ======== ========
</TABLE>
57
<PAGE> 59
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, 1998
Balance......................................... $13,542 $ 5,153 $18,695
Related allowance............................... 2,661 -- 2,661
------- ------- -------
Balance, net of allowance....................... $10,881 $ 5,153 $16,034
======= ======= =======
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired loans...................................... $30,077 $27,945 $41,624
======= ======= =======
Total interest income on impaired loans..................... $ 91 $ 115 $ 160
======= ======= =======
Interest income on impaired loans recorded on a cash
basis..................................................... $ 91 $ 115 $ 160
======= ======= =======
</TABLE>
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
--------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 39,750 $ 39,619
Premises.................................................... 327,054 322,850
Equipment................................................... 320,174 322,812
Leasehold improvements...................................... 32,247 32,785
-------- --------
Total.................................................. 719,225 718,066
Accumulated depreciation and amortization................... 349,423 403,424
-------- --------
Premises and equipment................................. $369,802 $314,642
======== ========
</TABLE>
The provision for depreciation and amortization was $44.3 million in 1998,
$40.0 million in 1997, and $38.1 million in 1996.
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 Statements of Condition. There were no
securities purchased under agreement to resell outstanding at December 31, 1998
and December 31, 1997. 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.
58
<PAGE> 60
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 Statements of Condition. Securities
sold under agreement to repurchase totaled $2.46 billion and $1.87 billion at
December 31, 1998 and 1997, respectively. Securities sold under agreement to
repurchase are transferred via book-entry to the counterparty, if transacted
with a financial institution or a broker-dealer, or are delivered to customer
safekeeping accounts
<TABLE>
<CAPTION>
1998 1997
---- ----
(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................................................... 159,000 856,000
Daily average amount outstanding during the year.......... 30,954 17,651
Daily average annualized rate of interest................. 4.88% 6.26%
Securities sold under agreement to repurchase
Amount outstanding at end of year......................... $2,458,444 $1,865,739
Highest amount outstanding as of any month-end during the
year................................................... 2,458,444 2,718,101
Daily average amount outstanding during the year.......... 1,967,856 1,855,231
Daily average annualized rate of interest................. 5.24% 5.34%
</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
--------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Fixed rate 9 3/8% subordinated notes due June 1, 2001
($100,000 par value)...................................... $ 99,387 $ 99,278
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
Fixed rate 6 1/8% subordinated note to Bankmont due August
31, 2010.................................................. 75,000 --
-------- --------
Total.................................................. $454,387 $379,278
======== ========
</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 1998, 180 day LIBOR was 5.07
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 1998 or 1997.
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, 1998, $940 million of senior notes were outstanding with original maturities
ranging from 31 to 182 days (remaining maturities ranging from 22 to 130 days)
and stated interest rates ranging from 5.00 percent to 5.50 percent. As of
December 31, 1997, $100 million of senior notes were outstanding with original
maturities of 14 days (remaining maturities of 4 days) and stated interest rate
of 5.90 percent.
59
<PAGE> 61
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require the disclosure of
estimated fair values for both on- and off-balance-sheet financial instruments.
The Corporation's fair values are based on quoted market prices when available.
For financial instruments not actively traded, such as certain loans, deposits,
off-balance-sheet transactions and long term borrowings, fair values have been
estimated using various valuation methods and assumptions. Although management
used its best judgment in estimating these values, there are inherent
limitations in any estimation methodology. In addition, accounting
pronouncements require that fair values be estimated on an item-by-item basis,
thereby ignoring the impact a large sale would have on a thin market and
intangible values imbedded in established lines of business. Therefore, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Corporation could realize in an actual transaction. The fair value
estimation methodologies employed by the Corporation were as follows:
The carrying amounts for cash and demand balances due from banks along with
short-term money market assets and liabilities reported on the Corporation's
Consolidated Statements 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 Statements 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 bank-owned insurance investments approximate carrying
value, because upon liquidation of these investments the Corporation would
receive the cash surrender value, which equals carrying value.
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 senior notes approximates carrying value because the
average maturity on these notes is less than a year.
The fair value of minority interest -- preferred stock of subsidiary
(Harris Preferred Capital Corporation) approximates carrying value as the
preferred stock has a liquidation preference that equals book value.
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.
60
<PAGE> 62
The estimated fair values of the Corporation's financial instruments at
December 31, 1998 and 1997 are presented in the following table. See Note 9 to
Financial Statements on page 62 of this Report for additional information
regarding fair values of off-balance-sheet financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------
1998 1997
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and demand balances due from banks... $ 1,492,270 $ 1,492,270 $ 1,304,374 $ 1,304,374
Money market assets:
Interest-bearing deposits at banks...... 98,937 98,937 598,070 598,070
Federal funds sold and securities
purchased under agreement to
resell............................... 155,709 155,709 80,782 80,782
Securities available-for-sale............. 6,963,654 6,963,654 5,229,390 5,229,390
Trading account assets.................... 120,668 120,668 53,209 53,209
Loans, net of unearned income and
allowance for possible loan losses*..... 12,087,792 12,087,792 10,737,374 10,725,544
Customers' liability on acceptances....... 30,829 30,829 46,480 46,480
Accrued interest receivable............... 147,316 147,316 165,396 165,396
Assets held for sale...................... -- -- 725,760 745,760
Bank-owned insurance investments.......... 725,302 725,302 267,463 267,463
----------- ----------- ----------- -----------
Total on-balance-sheet financial
assets.......................... $21,822,477 $21,822,477 $19,208,298 $19,208,298
=========== =========== =========== ===========
LIABILITIES
Deposits:
Demand deposits......................... $ 9,297,644 $ 9,297,644 $ 8,659,384 $ 8,659,384
Time deposits........................... 6,025,198 6,059,299 5,772,679 5,775,870
Federal funds purchased and securities
sold under agreement to repurchase...... 3,440,832 3,440,832 2,451,873 2,451,873
Commercial paper outstanding.............. 261,905 261,905 351,427 351,427
Other short-term borrowings............... 168,151 168,151 503,320 503,320
Acceptances outstanding................... 30,829 30,829 46,480 46,480
Accrued interest payable.................. 56,610 56,610 38,091 38,091
Senior notes.............................. 940,000 940,000 100,000 100,000
Minority interest -- preferred stock of
subsidiary.............................. 250,00 250,000 -- --
Long-term notes........................... 454,387 469,393 379,278 390,185
----------- ----------- ----------- -----------
Total on-balance-sheet financial
liabilities..................... $20,925,556 $20,974,663 $18,302,532 $18,316,630
=========== =========== =========== ===========
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
(POSITIVE POSITIONS/(OBLIGATIONS))
Credit facilities......................... $ (13,551) $ (13,551) $ (17,756) $ (17,756)
Interest rate contracts:
Dealer and trading contracts............ (351) (351) 525 525
Risk management contracts............... (297) (4,701) 13,076 10,300
----------- ----------- ----------- -----------
Total off-balance-sheet financial
instruments..................... $ (14,199) (18,603) $ (4,155) $ (6,931)
=========== =========== =========== ===========
</TABLE>
- -------------------------
* In anticipation of HTSB's sale of its credit card portfolio in January 1998,
credit card loan balances were reclassified as of December 31, 1997 to assets
held for sale. See Note 21 to Financial Statements on page 82 of this Report.
61
<PAGE> 63
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation utilizes various financial instruments with
off-balance-sheet risk in the normal course of business to a) meet its
customers' financing and risk management needs, b) reduce its own risk exposure,
and c) produce fee income and trading profits. The Corporation's major
categories of financial instruments with off-balance-sheet risk include credit
facilities, interest rate and foreign exchange contracts and various
securities-related activities. Fair values of off-balance-sheet instruments are
based on fees currently charged to enter into similar agreements, market prices
of comparable instruments, pricing models using year-end rates and counterparty
credit ratings.
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 $8.32 billion and $10.48 billion at December 31, 1998 and 1997,
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, 1998, totaled $408 million and at
December 31, 1997, totaled $297 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 $2.07 billion at December 31, 1998 and
$1.73 billion at December 31, 1997. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $491 million
at December 31, 1998 and $437 million at December 31, 1997.
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 $101
million at December 31, 1998 and $86 million at December 31, 1997.
Credit risks associated with all of these facilities are mitigated by
reviewing customers' creditworthiness on a case-by-case basis, obtaining
collateral, limiting loans to individual borrowers, setting restrictions on
long-duration maturities and establishing stringent covenant terms outlining
performance expectations which, if not met, may cause the Corporation to
terminate the contract. Credit risks are further mitigated by monitoring and
maintaining portfolios that are well-diversified.
Collateral is required to support certain of these credit facilities when
they are drawn down and may include equity and debt securities, commodities,
inventories, receivables, certificates of deposit, savings instruments, fixed
assets, real estate, life insurance policies and seats on national or regional
exchanges. Requirements are based upon the risk inherent in the credit and are
more stringent for firms and individuals with greater default risks. The
Corporation monitors collateral values and appropriately perfects its security
interest. Periodic evaluations of collateral adequacy are performed by
Corporation personnel.
The fair value of credit facilities (i.e. deferred income) is approximately
equal to their carrying value of $13.6 million at December 31, 1998 and $17.1
million at December 31, 1997.
62
<PAGE> 64
Interest rate contracts
Interest rate contracts include futures, forward rate agreements, option
contracts, guarantees (caps, floors and collars) and swaps. The Corporation
enters into these contracts for dealer, trading and risk management purposes.
Dealer and trading activity
As dealer, the Corporation serves customers seeking to manage interest rate
risk by entering into contracts as a counterparty to their (customer)
transactions. In its trading activities, the Corporation uses interest rate
contracts to profit from expected future market movements.
These contracts may create exposure to both credit and market risk.
Replacement risk, the primary component of credit risk, is the risk of loss
should a counterparty default following unfavorable market movements and is
measured as the Corporation's cost of replacing contracts at current market
rates. The Corporation manages credit risk by establishing credit limits for
customers and products through an independent corporate-wide credit review
process and continually monitoring exposure against those limits to ensure they
are not exceeded. Credit risk is, in many cases, further mitigated by the
existence of netting agreements which provide for netting of contractual
receivables and payables in the event of default or bankruptcy.
Market risk is the risk of loss as a result of changes in interest rates.
The Corporation manages market risk by establishing limits which are based on
dollars at risk given a parallel shift in the yield curve. Limits are
established by product, maturity and volatility. Limits are approved by
management and monitored independently of the traders on a regular basis. Market
risk is further diminished by entering into offsetting positions. Senior
management oversees all dealer risk-related activities.
Futures and forward contracts are agreements in which the Corporation is
obligated to make or take delivery, at a specified future date, of a specified
instrument, at a specified price or yield. Futures contracts are exchange traded
and, because of exchange requirements that gains and losses be settled daily,
create negligible exposure to credit risk.
Forward rate agreements are arrangements between two parties to exchange
amounts, at a specified future date, based on the difference between an agreed
upon interest rate and reference rate applied to a notional principal amount.
These agreements enable purchasers and sellers to fix interest costs and
returns.
Options are contracts that provide the buyer the right (but not the
obligation) to purchase or sell a financial instrument, at a specified price,
either within a specified period of time or on a certain date. Interest rate
guarantees (caps, floors and collars) are agreements between two parties that,
in general, establish for the purchaser a maximum level of interest expense or a
minimum level of interest revenue based on a notional principal amount for a
specified term. Options and guarantees written create exposure to market risk.
As a writer of interest rate options and guarantees, the Corporation receives a
premium at the outset of the agreement and bears the risk of an unfavorable
change in the price of the financial instrument underlying the option or
guarantee. Options and guarantees purchased create exposure to credit risk and,
to the extent of the premium paid 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
63
<PAGE> 65
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
------------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards.............................. $ 272,658 $ 210,266 $ 123 $ 81
Forward rate agreements........................... 146,800 272,120 558 438
Options written................................... -- -- -- --
Options purchased................................. -- -- -- --
Guarantees written................................ 735,221 594,760 91 118
Guarantees purchased.............................. 735,221 594,760 2,647 1,368
Swaps............................................. 2,727,942 1,817,508 33,909 8,432
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
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......................... $ 123 $ -- $ 81 $ --
Unrealized losses........................ -- -- (24) --
Forward rate agreements
Unrealized gains......................... 558 192 438 19
Unrealized losses........................ (558) (192) (438) (26)
Options
Purchased................................ -- -- -- --
Written.................................. -- -- -- --
Guarantees
Purchased................................ 2,556 2,087 1,250 1,802
Written.................................. (2,556) (2,087) (1,249) (1,778)
Swaps
Unrealized gains......................... 33,909 43,790 8,432 13,827
Unrealized losses........................ (34,384) (42,672) (7,965) (12,388)
-------- -------- ------- --------
Total Interest Rate Contracts....... $ (352) $ 1,118 $ 525 $ 1,456
======== ======== ======= ========
</TABLE>
64
<PAGE> 66
Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31, 1998,
1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards...................................... $ 788 $ (649) $ 926
Forward rate agreements................................... -- -- --
Options................................................... (16) 54 (66)
Guarantees................................................ -- (6) (1,215)
Swaps..................................................... 210 42 69
Debt Instruments............................................ 9,530 7,828 8,278
------- ------- --------
Total Trading Revenue..................................... $10,512 $ 7,269 $ 7,992
======= ======= ========
</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, 1998
--------------------------------------------------------------------------------------
WITHIN 1 TO 3 3 TO 5 5 TO 10 GREATER THAN
1 YEAR YEARS YEARS YEARS 10 YEARS TOTAL
------ ------ ------ ------- ------------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount.......... $140,102 $380,438 $ 821,319 $ 58,408 $ 64,000 $1,464,267
Average pay rate......... 5.91% 5.92% 6.10% 6.33% 5.94% 6.04%
Average receive.......... 4.70% 4.87% 5.16% 5.19% 5.00% 5.03%
Receive Fixed Swaps:
Notional amount.......... $140,102 $380,298 $ 613,755 $ 65,520 $ 64,000 $1,263,675
Average pay rate......... 4.70% 4.87% 5.20% 5.18% 5.00% 5.03%
Average receive.......... 5.98% 5.93% 6.00% 6.24% 5.94% 5.99%
Basis swaps:
Notional amount.......... -- -- -- -- -- --
Average pay rate......... -- -- -- -- -- --
Average receive.......... -- -- -- -- -- --
Total notional
amount.............. $280,204 $760,736 $1,435,074 $123,928 $ 128,000 $2,727,942
</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 1998 and 1997, 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 $152 million
notional amount of swap contracts, used for risk management purposes,
outstanding at December 31, 1998 with a loss in fair value of $4.7 million and a
zero replacement cost. At December 31, 1997, the Corporation had $483 million
notional amount of swap contracts outstanding with a fair value of $10.3 million
and a replacement cost of $13.0 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 $0.1 million and
$4.5 million, respectively, at December 31, 1998 and $0.2 and $2.9 million,
respectively, at December 31, 1997. Risk management activity, including the
related cash positions, had no material effect on the Corporation's net income
for the year ended December 31, 1998 or 1997. There were no deferred gains or
losses on terminated contracts at December 31, 1998 or 1997.
65
<PAGE> 67
The following table summarizes swap activity for risk management purposes:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------
(IN THOUSANDS)
<S> <C>
Amount, December 31, 1996................................... $ 584,081
Additions................................................... 802,440
Maturities.................................................. (903,489)
Terminations................................................ --
---------
Amount, December 31, 1997................................... 483,032
Additions................................................... 57,517
Maturities.................................................. (388,915)
Terminations................................................ --
---------
Amount, December 31, 1998................................... $ 151,634
=========
</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, 1998
-----------------------------------------------------------
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............................ $6,902 $40,905 $74,694 $26,060 $148,561
Average pay rate........................... 6.78% 6.23% 6.00% 6.69% 6.22%
Average receive rate....................... 5.30% 5.32% 5.33% 5.29% 5.32%
Receive Fixed Swaps:
Notional amount............................ -- -- $ 3,073 -- $ 3,073
Average pay rate........................... -- -- -- -- --
Average receive rate....................... -- -- 5.10% -- 5.10%
Total notional amount................... $6,902 $40,905 $77,767 $26,060 $151,634
</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. FX revenues are reported net of
expenses. This agreement did not have a material impact on the Corporation's
1998, 1997 or 1996 net income or financial position.
At December 31, 1998, approximately 87 percent of the Corporation's gross
notional positions in foreign currency contracts are represented by seven
currencies: English pounds, German deutsche marks, Japanese yen, French francs,
Swiss francs, Canadian dollars, and Italian lira.
Foreign exchange contracts include spot, future, forward and option
contracts that enable customers to manage their foreign exchange risk. Spot,
future and forward contracts are agreements to exchange currencies at a future
date, at a specified rate of exchange. Foreign exchange option contracts give
the buyer the right and
66
<PAGE> 68
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 REPLACEMENT
NOTIONAL AMOUNT COST
------------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards.................. $1,734,546 $1,820,769 $12,370 $13,772
Options written............................. 184,615 88,440 -- --
Options purchased........................... 184,615 88,440 3,885 3,772
Cross currency swaps........................ 123,906 -- 2,996 --
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the years ended December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
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............................ $ 19,991 $ 35,056 $ 37,394 $ 34,076
Unrealized losses........................... (19,991) (35,056) (37,394) (34,076)
Options
Purchased................................... 3,885 3,304 3,772 2,783
Written..................................... (3,885) (3,304) (3,772) (2,783)
Cross currency swaps
Unrealized gains............................ 2,996 2,913 -- --
Unrealized losses........................... (2,996) (2,913) -- --
-------- -------- -------- --------
Total Foreign Exchange........................ $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
At December 31, 1998, spot, futures and forward contracts with BMO
represent $8.7 million and $11.5 million of unrealized gains and unrealized
losses, respectively. Options contracts with BMO represent $3.9 million and no
options purchased and options written, respectively. Cross currency swaps with
BMO represent $2.8 million and $0.2 million of unrealized gains and unrealized
losses, respectively.
Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1998, 1997 and 1996 totaled $6.8 million, $5.4 million
and $10.0 million, respectively, of net profit under the aforementioned
agreement with BMO. All profits related to spot, futures and forward contracts.
Securities activities
The Corporation's securities activities that have off-balance-sheet risk
include municipal bond underwriting and short selling of securities.
Through its municipal bond underwriting activities, the Corporation commits
to buy and offer for resale newly issued bonds. The Corporation is exposed to
market risk because it may be unable to resell its inventory of bonds profitably
as a result of unfavorable market conditions. In syndicate arrangements, the
Corporation is obligated to fulfill syndicate members' commitments should they
default. The syndicates of which the
67
<PAGE> 69
Corporation was a member had underwriting commitments totaling $83 million at
December 31, 1998 and $30 million at December 31, 1997.
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, 1998
or 1997.
10. CONCENTRATIONS OF CREDIT RISK IN FINANCIAL INSTRUMENTS
The Corporation had one concentration of credit risk arising from financial
statements at December 31, 1998 and 1997. This concentration was the Midwest
geographic area. This 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 $15.1 billion or 49 percent of the Corporation's total credit
exposure at December 31, 1998 and $15.5 billion or 50 percent of the
Corporation's total credit exposure at December 31, 1997.
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 to Financial Statements on page 62 of this Report for information on
collateral supporting credit facilities.
11. EMPLOYEE BENEFIT PLANS
The Corporation had noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1998. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1998. The benefit formula
for this plan is based upon length of service and an employee's highest
qualifying compensation during five consecutive years of active employment. The
plan is a multiple-employer plan covering the Corporation's employees as well as
persons employed by certain affiliated entities.
The policy for this plan is to have the participating entities, at a
minimum, fund annually an amount necessary to satisfy the requirements under
ERISA, without regard to prior years' contributions in excess of the minimum.
For 1998 and 1997, 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 total consolidated pension expense of the Bank, including the
supplemental plan, for 1998, 1997 and 1996 was $10.0 million, $8.7 million and
$11.4 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
68
<PAGE> 70
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).
The following tables set forth the change in benefit obligation and plan
assets for the pension and postretirement medical care benefit plans:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT MEDICAL BENEFITS
------------------------------ ---------------------------------
1998*** 1997*** 1996*** 1998*** 1997*** 1996***
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION*
Benefit obligation at beginning of
year.............................. $229,474 $209,871 $212,772 $ 39,757 $ 38,550 $ 39,266
Service cost........................ 11,043 9,862 10,076 1,758 1,552 1,735
Interest cost....................... 17,319 15,108 15,206 2,805 2,645 2,644
Benefits Paid (net of participant
contributions).................... (21,326) (15,942) (19,055) (2,953) (1,704) (2,086)
Actuarial (gain) or loss............ 38,564 10,575 (9,128) (237) (1,286) (3,009)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year... $275,074 $229,474 $209,871 $ 41,130 $ 39,757 $ 38,550
======== ======== ======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year................. $266,589 $217,175 $206,539 $ 18,031 $ 12,133 $ 8,350
Actual return on plan assets........ (10,749) 58,246 21,864 (1,005) 3,663 1,067
Employer contribution............... 9,269 7,111 7,827 2,726 2,235 3,568
Benefits paid....................... (21,325) (15,943) (19,055) -- -- (852)
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end of
year**............................ $243,784 $266,589 $217,175 $ 19,752 $ 18,031 $ 12,133
======== ======== ======== ======== ======== ========
Funded Status....................... $(31,290) $ 37,115 $ 7,304 $(21,378) $(21,726) $(26,417)
Contributions made between
measurement date (September 30)
and end of year................... 10,017 9,269 7,111 -- -- --
Unrecognized actuarial (gain) or
loss.............................. 40,980 (29,079) 812 (13,897) (16,783) (13,430)
Unrecognized transition (asset) or
obligation........................ (1,159) (1,513) (1,868) 27,490 29,497 31,463
Unrecognized prior service cost..... (6,292) (7,127) (7,962) 2,398 2,592 2,788
-------- -------- -------- -------- -------- --------
Prepaid (accrued) benefit cost...... $ 12,256 $ 8,665 $ 5,397 $ (5,387) $ (6,420) $ (5,596)
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT MEDICAL
PENSION BENEFITS BENEFITS
--------------------- ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate.................................. 7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
Expected return on plan assets................. 9.00% 9.00% 8.00% 8.00% 8.00% 8.00%
Rate of compensation increase.................. 5.50% 5.70% 5.70% N/A N/A N/A
</TABLE>
For measurement purposes, a 8.0 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 6.0 percent in 2001 and
69
<PAGE> 71
remain level thereafter. For 1997 and 1996, the weighted average annual rate of
increase in the per capita cost of covered benefits was assumed to be 8.0
percent and 8.5 percent, respectively.
<TABLE>
<CAPTION>
POSTRETIREMENT MEDICAL
PENSION BENEFITS BENEFITS
--------------------------- ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................. $11,043 $ 9,862 $10,270 $1,758 $1,552 $1,735
Interest cost............................ 17,319 15,108 15,206 2,805 2,645 2,644
Expected return on plan assets........... (20,749) (17,780) (15,721) (1,490) (1,047) (755)
Amortization of prior service cost....... (835) (835) (835) 195 195 195
Amortization of transition (asset) or
obligation............................. (354) (354) (354) 1,966 1,966 1,966
Recognized actuarial (gain) or loss...... -- -- 434 (583) (547) (425)
------- ------- ------- ------ ------ ------
Net periodic benefit cost.............. $ 6,424 $ 6,001 $ 9,000 $4,651 $4,764 $5,360
======= ======= ======= ====== ====== ======
</TABLE>
- -------------------------
* Benefit obligation is projected for Pension Benefits and accumulated for
Postretirement Medical Benefits.
** Plan assets consist primarily of participation units in collective trust
funds or mutual funds administered by HTSB.
*** Plan assets and obligation measured as of September 30.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost
components........................................ $1,014 $ (713)
Effect on postretirement benefit obligation......... $6,475 $(5,093)
</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
----------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated benefit obligation.............................. $ 9,508 $ 5,767 $ 7,293
Projected benefit obligation for service rendered to date... $ 24,698 $13,056 $15,598
Accrued pension (liability) asset........................... $(11,593) $ 9,510 $ 8,891
Net periodic pension expense................................ $ 3,581 $ 2,691 $ 2,465
Assumptions used:
Discount rate............................................. 6.00% 6.00% 5.25%
Rate of increase in compensation.......................... 5.70% 5.70% 5.70%
</TABLE>
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 performance of the Corporation relative to predefined targets.
The Corporation's total expense for this plan was $10.6 million, $10.3 million
and $9.4 million in 1998, 1997 and 1996, respectively.
70
<PAGE> 72
12. STOCK OPTIONS
The Corporation has two stock-based compensation plans, which are accounted
for under the fair value based method of accounting for stock based compensation
plans and are described below.
The Harris Bank Stock Option Program was established under the Bank of
Montreal Stock Option Plan 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%.
On December 18, 1998, the Corporation granted 879,300 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 $60.35 per
share, equal to the market price on the date of grant (equivalent to U.S.
$39.06). The estimated grant date fair value of the options granted on December
18, 1998 was Canadian $12.33, equivalent to U.S. $7.98. The fair value of the
option grant was estimated using the Bloomberg model with the following
assumptions: risk-free interest rate of 4.87%, expected life of 7.5 years,
expected volatility of 19.82% and compound annual dividend growth of 8.82%.
71
<PAGE> 73
The following table summarizes the stock option activity for 1998, 1997 and
1996 and provides details of stock options outstanding at December 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 1,076,300 $30.63 902,100 $25.48 --
Granted................... 879,300 39.06 263,750 46.33 910,900 $25.45
Exercised................. -- -- --
Forfeited, cancelled...... -- (89,550) 25.03 (8,800) 22.55
Transferred............... 5,600 22.55 -- --
Expired................... -- -- --
--------- --------- -------
Outstanding at end of
year.................... 1,961,200 34.39 1,076,300 30.63 902,100 25.48
========= ========= =======
Options exercisable at
year-end................ None None None
Weighted-average fair
value of options granted
during the year......... $7.98 $9.53 $4.88
</TABLE>
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$22-30 818,150 7.51 year $25.51
35-42 879,300 9.96 39.06
46-50 263,750 8.95 46.33
---------
22-50 1,961,200 8.81 34.39
=========
</TABLE>
Compensation expense related to the Harris Bank Stock Option Program
totaled $1.3 million, $0.8 million and $0.4 million in 1998, 1997 and 1996
respectively.
Stock Appreciation Rights
The Bank 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. Compensation
expense for the Harris Bank Stock Appreciation Rights Plan totaled $0.6 million,
$5.9 million and $4.2 million in 1998, 1997 and 1996 respectively.
The following table details the rights outstanding at December 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Outstanding beginning of the year.............. 398,000 611,000 611,000
Granted........................................ -- -- --
Exercised...................................... (24,000) (143,000) --
Cancelled...................................... -- (70,000) --
Transferred.................................... 4,200 -- --
------- -------- -------
Outstanding end of the year.................... 378,200 398,000 611,000
======= ======== =======
</TABLE>
13. LEASE EXPENSE AND OBLIGATIONS
Rental expense for all operating leases was $17.6 million in 1998, $20.8
million in 1997 and $19.6 million in 1996. These amounts include real estate
taxes, maintenance and other rental-related operating costs of
72
<PAGE> 74
$3.1 million, $4.3 million and $4.7 million for 1998, 1997 and 1996,
respectively, paid under net lease arrangements. Lease commitments are primarily
for office space.
Minimum rental commitments as of December 31, 1998 for all noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ $12,646
2000........................................................ 11,279
2001........................................................ 9,405
2002........................................................ 6,753
2003........................................................ 4,944
2004 and thereafter......................................... 34,898
-------
Total minimum future rentals........................... $79,925
=======
</TABLE>
Occupancy expenses for 1998, 1997 and 1996 have been reduced by $14.0
million, $14.3 million and $14.5 million, respectively, for rental income from
leased premises.
14. INCOME TAXES
The 1998, 1997, and 1996 applicable income tax expense (benefit) was as
follows:
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998:
Current................................................ $67,296 $ (841) $ 23 $66,478
Deferred............................................... 1,949 1,474 -- 3,423
------- ------- ------ -------
Total............................................. $69,245 $ 633 $ 23 $69,901
======= ======= ====== =======
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
======= ======= ====== =======
</TABLE>
73
<PAGE> 75
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Gross deferred tax assets:
Allowance for possible loan losses........................ $56,547 $51,283 $54,963
Deferred employee compensation............................ 10,272 8,224 6,101
Intangible assets......................................... 8,896 7,669 7,221
Deferred expense and prepaid income....................... -- 7,256 4,920
Pension and medical trust................................. 5,811 4,028 4,702
Other assets.............................................. 1,006 2,465 4,312
------- ------- -------
Deferred tax assets.................................... 82,532 80,925 82,219
------- ------- -------
Gross deferred tax liabilities:
Depreciable assets........................................ (6,077) (2,686) (2,873)
Other liabilities......................................... (3,988) (2,349) (1,113)
------- ------- -------
Deferred tax liabilities............................... (10,065) (5,035) (3,986)
------- ------- -------
Net deferred tax assets................................... 72,467 75,890 78,233
------- ------- -------
Tax effect of adjustment related to available-for-sale
securities................................................ (25,017) (7,563) 5,364
------- ------- -------
Net deferred tax assets including adjustment related to
available-for-sale securities............................. $47,450 $68,327 $83,597
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, the respective net deferred tax assets of
$72 million and $76 million included $60 million and $62 million for Federal tax
and $12 million and $14 million for Illinois tax, respectively. No valuation
allowance for deferred tax assets was required at December 31, 1998 or 1997.
Management has determined that it is more likely than not that the net deferred
tax asset can be supported by current taxable income and taxable income
generated in the statutory carryback and carryforward period. The deferred taxes
reported on the Corporation's Consolidated Statement of Condition at December
31, 1998 and 1997 also include a $25 million deferred tax liability and an $8
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 in accordance with SFAS No. 115.
Total income tax expense of $69.9 million for 1998, $70.1 million for 1997,
and $65.8 million for 1996 reflects effective tax rates of 27.7 percent, 30.9
percent, and 31.6 percent, respectively. The reasons for the differences between
actual tax expense and the amount determined by applying the U.S. Federal income
tax rate of 35 percent to income before income taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- ---------------------
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................ $ 88,384 35.0% $79,327 35.0% $72,862 35.0%
Increase (reduction) in income tax
expense due to:
Tax-exempt income from loans and
investments net of municipal
interest expense
disallowance................... (6,121) (2.4) (6,591) (2.9) (7,240) (3.5)
Bank owned insurance
investments.................... (11,319) (4.5) (4,518) (2.0) -- --
Other, net........................ (1,043) (0.4) 1,858 0.8 190 0.1
-------- ----- ------- ---- ------- ----
Actual tax expense.................. $ 69,901 27.7% $70,076 30.9% $65,812 31.6%
======== ===== ======= ==== ======= ====
</TABLE>
The tax expense from net gains on security sales amounted to $10.5 million,
$5.1 million, and $3.4 million in 1998, 1997, and 1996, respectively.
74
<PAGE> 76
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 1998,
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.
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, 1998, 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, 1998 that have changed the capital
category of the Corporation and HTSB.
Effective February 11, 1998, Harris Preferred Capital Corporation ("HPCC"),
an indirect, wholly-owned subsidiary of HTSB, issued $250 million of 7 3/8%
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"). Dividends on the preferred stock are noncumulative and are payable at
the rate of 7 3/8% 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
System directing such an exchange, each preferred share would be exchanged
automatically for one newly issued HTSB preferred share.
75
<PAGE> 77
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
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ------------------------------- -------------------------------
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital to
Risk-Weighted Assets
Corporation............ $2,126,585 11.57% * $1,470,413 * 8.00% * $1,838,016 * 10.00%
HTSB................... $1,626,429 10.77% * $1,208,118 * 8.00% * $1,510,148 * 10.00%
Tier 1 Capital to
Risk-Weighted Assets
Corporation............ $1,591,846 8.66% * $ 735,264 * 4.00% * $1,012,896 * 6.00%
HTSB................... $1,293,206 8.57% * $ 603,597 * 4.00% * $ 905,395 * 6.00%
Tier 1 Capital to Average
Assets
Corporation............ $1,591,846 7.26% * $ 877,050 * 4.00% * $1,096,313 * 5.00%
HTSB................... $1,293,206 7.50% * $ 689,710 * 4.00% * $ 862,137 * 5.00%
As of December , 1997:
Total Capital to
Risk-Weighted Assets
Corporation............ $1,809,767 10.72% * $1,350,572 * 8.00% * $1,688,215 * 10.00%
HTSB................... $1,431,338 10.36% * $1,105,280 * 8.00% * $1,381,600 * 10.00%
Tier 1 Capital to
Risk-Weighted Assets
Corporation............ $1,339,949 7.94% * $ 675,037 * 4.00% * $1,012,556 * 6.00%
HTSB................... $1,006,763 7.29% * $ 552,408 * 4.00% * $ 828,612 * 6.00%
Tier 1 Capital to Average
Assets
Corporation............ $1,339,949 6.81% * $ 787,048 * 4.00% * $ 983,810 * 5.00%
HTSB................... $1,006,763 6.54% * $ 615,757 * 4.00% * $ 769,696 * 5.00%
</TABLE>
*Represents "Greater Than or Equal To", which cannot be reproduced in EDGAR
character set.
16. INVESTMENTS IN SUBSIDIARIES AND STATUTORY RESTRICTIONS
Bankcorp's investment in the combined net assets of its wholly-owned
subsidiaries was $1.74 billion and $1.65 billion at December 31, 1998 and 1997,
respectively.
Provisions of both Illinois and Federal banking laws place restrictions
upon the amount of dividends that can be paid to Bankcorp by its bank
subsidiaries. Illinois law requires that no dividends may be paid in an amount
greater than the net profits then on hand, reduced by certain loan losses (as
defined). In addition to these restrictions, Federal Reserve member banking
subsidiaries require prior approval of Federal banking authorities if dividends
declared by a subsidiary bank, in any calendar year, will exceed its net profits
(as defined in the applicable statute) for that year, combined with its retained
net profits, as so defined, for the preceding two years. Based on these and
certain other prescribed regulatory limitations, Bankcorp subsidiaries could
have declared, without regulatory approval, $233.4 million of dividends at
December 31, 1998. Actual dividends paid, however, would be subject to prudent
capital maintenance. Cash dividends paid to Bankcorp by its subsidiaries
amounted to $134.3 million and $65.7 million in 1998 and 1997, 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.
76
<PAGE> 78
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 1998 and
1997, daily average reserve balances of $225 million and $254 million,
respectively, were required for those subsidiaries of Bankcorp that must
maintain such balances. At year-end 1998 and 1997, balances on deposit at the
Federal Reserve Bank totaled $195 million and $233 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 and results of operations.
18. SEGMENT INFORMATION
The Corporation's segments are identified by the customers served, the
products and services they offer and the channels by which the products and
services are delivered. The Corporation's reportable segments are Corporate and
Institutional Financial Services, Chicagoland Banking and Electronic Financial
Services. Corporate and Institutional Financial Services is comprised of the
Corporation's corporate banking distribution to middle-market companies across
the Midwest and nationally in selected specialties and corporate trust
activities, including national stock transfer and indenture trust distribution.
Chicagoland Banking comprises community banking, which serves individuals
through a Chicagoland retail bank network; private banking, which serves the
needs of affluent individuals in Chicagoland and nationally through the
integrated delivery of a comprehensive portfolio of wealth management services,
including personal trust, investment management, customized lending and
financial planning; and small business/lower middle-market banking. Electronic
Financial Services includes cash management services, mbanxsm, the Corporation's
virtual banking unit, and the bankcard business unit, including merchant
services and, until its sale in January 1998, the Corporation's charge card
business.
Other is comprised of a smaller segment, Global Asset Management, and the
Corporation's Treasury unit, which serves as the Corporation's
investment/funding unit, as well as inter-segment eliminations and residual
revenues and expenses, representing the difference between actual amounts
incurred and the amounts allocated to operating segments.
The accounting policies of the segments are the same as those described in
Note 1 to Financial Statements, Summary of Significant Accounting Policies,
except that segment results are presented on a fully taxable equivalent ("FTE")
basis and income tax expense is allocated to the segments by an application of
the Corporation's statutory tax rate to the pretax FTE basis profit or loss of
each segment. Segment data includes intersegment revenues, as well as corporate
overhead costs allocated to each segment based upon estimated usage of centrally
provided services. The Corporation evaluates the performance of its segments and
allocates
77
<PAGE> 79
resources to them based on FTE basis income before income taxes. Selected
segment information is included in the following table.
<TABLE>
<CAPTION>
CORPORATE AND
INSTITUTIONAL ELECTRONIC
FINANCIAL CHICAGOLAND FINANCIAL CONSOLIDATED
SERVICES BANKING SERVICES OTHER TOTAL
------------- ----------- ---------- ----- ------------
<S> <C> <C> <C> <C> <C>
1998
(In thousands)
Net interest income (FTE basis)............ $ 170.3 $ 292.0 $ 69.7 $ 5.2 $ 537.2
Noninterest income......................... 99.8 155.5 108.4(1) 87.3 451.0
Provision for loan losses.................. 21.1 5.9 0.1 (0.1) 27.0
Noninterest expense........................ 135.3 369.2 131.0 43.1 678.6
-------- -------- -------- --------- ---------
Income before income taxes................. 113.7 72.4 47.0 49.5 282.6
Income taxes............................... 45.2 30.2 19.1 5.5 100.0
-------- -------- -------- --------- ---------
Net income................................. $ 68.5 $ 42.2 $ 27.9 $ 44.0 $ 182.6
======== ======== ======== ========= =========
(In millions)
Average Assets............................. $6,331.1 $9,157.0 $1,231.8 $ 4,507.3 $21,227.2
======== ======== ======== ========= =========
Average Loans.............................. $6,159.3 $7,111.0 $ 97.3(1) $(1,707.6) $11,660.0
======== ======== ======== ========= =========
Average Deposits........................... $ 406.9 $8,840.0 $2,998.6 $ 2,125.6 $14,371.1
======== ======== ======== ========= =========
1997
(In thousands)
Net interest income (FTE basis)............ $ 145.4 $ 280.3 $ 143.8 $ 28.3 $ 597.8
Noninterest income......................... 83.9 128.3 113.9 51.6 377.7
Provision for loan losses.................. 15.0 1.9 50.0 (8.5) 58.4
Noninterest expense........................ 127.9 346.6 149.1 40.1 663.7
-------- -------- -------- --------- ---------
Income before income taxes................. 86.4 60.1 58.6 48.3 253.4
Income taxes............................... 34.4 25.0 24.0 13.4 96.8
-------- -------- -------- --------- ---------
Net income................................. $ 52.0 $ 35.1 $ 34.6 $ 34.9 $ 156.6
======== ======== ======== ========= =========
(In millions)
Average Assets............................. $5,292.8 $8,778.7 $1,847.9 $ 3,300.3 $19,219.7
======== ======== ======== ========= =========
Average Loans.............................. $5,032.4 $7,039.7 $ 805.7 $(1,916.5) $10,961.3
======== ======== ======== ========= =========
Average Deposits........................... $ 549.4 $8,188.9 $2,556.1 $ 1,989.6 $13,284.0
======== ======== ======== ========= =========
1996
(In thousands)
Net interest income (FTE basis)............ $ 131.5 $ 242.0 $ 145.5 $ 35.8 $ 554.8
Noninterest income......................... 72.3(2) 101.0 103.2 52.8 329.3
Provision for loan losses.................. 17.9 (0.5) 39.4 (0.3) 56.5
Noninterest expense........................ 115.9 287.1(3) 146.0 45.0 594.0
-------- -------- -------- --------- ---------
Income before income taxes................. 70.0 56.4 63.3 43.9 233.6
Income taxes............................... 27.8 23.8 24.9 14.7 91.2
-------- -------- -------- --------- ---------
Net income................................. $ 42.2 $ 32.6 $ 38.4 $ 29.2 $ 142.4
======== ======== ======== ========= =========
(In millions)
Average Assets............................. $4,450.1 $6,882.2 $1,280.4 $ 4,565.3 $17,178.0
======== ======== ======== ========= =========
Average Loans.............................. $4,363.7 $5,159.6 $ 962.4 $ (537.9) $ 9,947.8
======== ======== ======== ========= =========
Average Deposits........................... $ 462.2 $6,390.4 $1,655.0 $ 3,016.2 $11,523.8
======== ======== ======== ========= =========
</TABLE>
- -------------------------
(1) Includes gain on sale of charge card portfolio. A $12 million gain was
reported in January 1998 and average loans decreased $693 million.
(2) Includes $4 million gain on sale of securities custody and related trustee
services business for large institutions in January 1996.
(3) Includes $16.7 million one-time assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") in September 1996, since deposits
assumed as a result of the Household transaction were SAIF-insured.
78
<PAGE> 80
19. 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>
1998
Total operating income................................... $ 53,747 $ 1,683,093 $ 1,736,840
Total expenses........................................... 11,627 1,472,687 1,484,314
-------- ----------- -----------
Income before taxes...................................... 42,120 210,406 252,526
Applicable income taxes.................................. 16,741 53,160 69,901
-------- ----------- -----------
Net income............................................... $ 25,379 $ 157,246 $ 182,625
======== =========== ===========
Identifiable assets at year-end.......................... $219,886 $22,577,944 $22,797,830
======== =========== ===========
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
======== =========== ===========
</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, 1998, 1997 and 1996,
identifiable foreign assets accounted for 1, 4 and 5 percent, respectively, of
total consolidated assets.
79
<PAGE> 81
20. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Presented below are the statements of income, balance sheets and statements
of cash flows for Harris Bankcorp, Inc. (parent company only):
Statement of Income
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
*Interest on securities purchased from bank subsidiary under
agreement to resell....................................... $ 7,641 $ 6,332 $ 5,473
Interest on advances to affiliates.......................... 763 763 203
*Interest on advances to bank subsidiaries.................. 18,573 22,462 20,807
Interest on investments in Federal agency securities........ 13,055 11,825 10,466
Interest on investments in foreign securities............... -- -- 246
*Interest on deposits at bank subsidiaries.................. -- 22 62
*Dividends from bank subsidiaries........................... 134,300 65,662 75,884
Other operating income...................................... -- 234 159
-------- -------- --------
Total operating income................................. 174,332 107,300 113,300
-------- -------- --------
Interest expense on commercial paper........................ 16,136 16,771 13,969
Interest expense on long-term notes......................... 29,495 26,499 26,067
Other operating expense..................................... 4,907 6,932 10,215
-------- -------- --------
Total operating expenses............................... 50,538 50,202 50,251
-------- -------- --------
Income before income taxes and equity in undistributed net
income of subsidiaries.................................... 123,794 57,098 63,049
Applicable income tax benefit............................... (5,153) (5,760) (5,430)
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries.............................................. 128,947 62,858 68,479
*Equity in undistributed net income of bank subsidiaries.... 47,046 88,574 68,268
*Equity in undistributed net income of nonbank
subsidiaries.............................................. 6,717 5,142 5,617
Equity in undistributed net loss of partially-owned bank
subsidiary................................................ (85) -- --
-------- -------- --------
Net income............................................. $182,625 $156,574 $142,364
======== ======== ========
</TABLE>
- -------------------------
* Eliminated in consolidation.
80
<PAGE> 82
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
*Demand balances due from bank subsidiary................... $ 272 $ 27
Investment in U. S. Treasury and Federal agency
securities................................................ 143,422 230,303
*Securities purchased from bank subsidiary under agreement
to resell................................................. 128,771 126,294
*Advances to bank subsidiaries.............................. 240,000 340,000
Advances to affiliates...................................... 10,000 10,000
Equity investments in wholly-owned subsidiaries:
*Banks.................................................... 1,676,117 1,590,383
*Nonbanks................................................. 67,966 61,038
Equity investment in partially-owned bank subsidiary........ 1,362 1,099
Other assets................................................ 107,029 9,997
---------- ----------
Total assets......................................... $2,374,939 $2,369,141
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper outstanding................................ $ 261,905 $ 351,427
Other liabilities........................................... 7,615 5,921
Long-term notes............................................. 454,387 379,278
---------- ----------
Total liabilities.................................... 723,907 736,626
Stockholder's equity........................................ 1,651,032 1,632,515
---------- ----------
Total liabilities and stockholder's equity........... $2,374,939 $2,369,141
========== ==========
</TABLE>
- -------------------------
*Eliminated in consolidation
81
<PAGE> 83
Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
--------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $ 182,625 $ 156,574 $ 142,364
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiaries............ (53,763) (93,716) (73,885)
Accretion and amortization.......................... (10,821) (11,825) (10,712)
Deferred income tax (benefit) provision............. (129) (33) (65)
Net decrease (increase) in interest receivable...... 1,069 (812) 966
Other, net.......................................... (1,667) (6,255) 4,434
---------- ----------- ---------
Net cash provided by operating activities......... 117,314 43,933 63,102
---------- ----------- ---------
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............................... (2,477) (126,294) 138,475
Proceeds from maturities of portfolio securities.... 1,033,782 1,135,139 865,880
Purchases of portfolio securities................... (936,080) (1,151,010) (894,510)
Additional capital invested in bank subsidiaries.... (3,310) -- (325,000)
Net decrease(increase) in advances to
subsidiaries...................................... 100,000 (15,000) (30,000)
Net increase in advances to affiliates.............. -- -- (10,000)
Other, net.......................................... (97,675) 3 5
---------- ----------- ---------
Net cash provided (used) by investing
activities..................................... 94,240 (4,363) (382,949)
---------- ----------- ---------
FINANCING ACTIVITIES:
Net (decrease)increase in commercial paper
outstanding....................................... (89,522) 16,774 42,631
Proceeds from issuance of long-term notes........... 75,000 -- 15,000
Proceeds from issuance of Series B preferred
stock............................................. -- -- 45,000
Contribution to capital surplus..................... 1,307 2,226 280,422
Cash dividends paid on Series A preferred stock..... (13,050) (13,050) (13,195)
Cash dividends paid on Series B preferred stock..... (3,544) (3,543) (1,811)
Cash dividends paid on common stock................. (181,500) (42,000) (48,200)
---------- ----------- ---------
Net cash (used) provided by financing
activities..................................... (211,309) (39,593) 319,847
---------- ----------- ---------
Net increase(decrease) in demand balances due from
banks.................................................. 245 (23) --
Demand balances due from banks at January 1.............. 27 50 50
---------- ----------- ---------
Demand balances due from banks at December 31............ $ 272 $ 27 $ 50
========== =========== =========
</TABLE>
21. BUSINESS COMBINATIONS AND DISPOSITIONS/INTANGIBLES
At December 31, 1998 and 1997, intangible assets, including goodwill
resulting from business combinations, amounted to $268 million and $293 million,
respectively. Amortization of these intangibles amounted to $24.1 million in
1998, $27.8 million in 1997, and $18.2 million in 1996. The impact of purchase
accounting adjustments, other than amortization of intangibles, was not material
to the Corporation's reported results.
On January 29, 1998, HTSB sold its credit card portfolio to Partners First
Holdings, LLC ("PFH"), a corporation owned by BankBoston Corporation, First
Annapolis Consulting, Inc. and Bankmont. At the time of the sale, the credit
card portfolio had a carrying value of $693 million, representing less than 5
percent of the Corporation's total consolidated assets. Upon completion of the
sale, HTSB received cash and an equity interest in the newly formed company,
which it immediately sold for cash to Bankmont. The Corporation recorded a
pretax gain of $12.0 million on this transaction.
82
<PAGE> 84
On June 28, 1996, HTSB completed the acquisition of 54 branches previously
owned by Household Bank, f.s.b. ("Household"), a wholly-owned subsidiary of
Household International, Inc. The 54 branches are located throughout the
metropolitan Chicago area. In addition to acquiring real and personal property,
HTSB has assumed certain deposit liabilities and purchased other assets,
primarily consumer loans. The transaction has been accounted for as a purchase
and the Corporation's consolidated financial statements include the results of
the acquired branches from the date of acquisition. In anticipation of this
transaction, on June 27, 1996 the Corporation increased its capital base by $340
million, in part through the issuance of $45 million of Series B non-voting,
callable perpetual preferred stock and an additional $15 million of long term
subordinated 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 was 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 22 to Financial
Statements below). In 1998 Bankmont received revenue of $2.9 million based on
the provision in the contract that measured certain levels of customer retention
achieved by the purchaser by the business.
22. 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 $14.0
million at December 31, 1998 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 1998, 1997 and 1996, 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 1998, 1997 and 1996, the
Corporation received from BMO approximately $17.1 million, $20.9 million and
$14.3 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 21 to Financial
Statements on page 82 of this Report) 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 through the date of the agreement. Any
costs incurred subsequent to December 31, 1997 exceeded the limits specified in
the
83
<PAGE> 85
agreement, thus HTSB incurred these costs. In return for assuming this
obligation, Bankmont received $2.9 million in 1998 from a contingent revenue
arrangement between HTSB and Citibank. Bankmont paid HTSB $480,000 in 1997 as
consideration for accepting this arrangement, which was recorded as income.
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. FX revenues are reported net of
expenses. 1998, 1997 and 1996 foreign exchange revenues included $6.8 million,
$5.4 million and $10.0 million of net profit, respectively, under this
agreement.
84
<PAGE> 86
JOINT INDEPENDENT AUDITORS
The Board of Directors of Harris Bankcorp, Inc. engaged the firms of KPMG
LLP and PricewaterhouseCoopers LLP to serve as joint auditors for each of the
three years in the three year period ended December 31, 1998. 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, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
stockholder's equity and cash flows for each of the years in the three year
period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP PricewaterhouseCoopers LLP
Chicago, Illinois
January 29, 1999
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements between the Corporation and its independent
auditors related to accounting matters and/or financial disclosures. There were
no changes in independent auditors since December 31, 1993.
85
<PAGE> 87
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 has been employed in an executive
capacity by his or her employer for more than five years. Set forth below is
certain biographical information concerning each director, including principal
occupation, age, the year first elected a director of Bankcorp and HTSB and
other directorships.
PASTORA SAN JUAN CAFFERTY, age 58, 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 53, President and Chief Operating Officer and a
Director of Bank of Montreal. Elected in 1990.
SUSAN T. CONGALTON, age 52, Managing Director, Lupine L.L.C. (consulting
and private investments). Elected in 1988.
WILBUR H. GANTZ, age 61, 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 64, 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 59, 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 63, Chairman, Oil-Dri Corporation of America (a
developer, manufacturer and marketer of sorbent products). Elected in 1995.
EDWARD W. LYMAN, JR., age 56, Vice Chair of the Board of Bankcorp and
Harris Trust and Savings Bank. Elected in 1995.
ALAN G. MCNALLY, age 53, Chairman of the Board and Chief Executive Officer
of Bankcorp and Harris Trust and Savings Bank and a Director of Walgreen Co.
Elected in 1993.
CHARLES H. SHAW, age 66, Chairman, The Charles H. Shaw Company (real estate
development). Elected in 1990.
RICHARD E. TERRY, age 61, Chairman and Chief Executive Officer, Peoples
Energy Corporation (public utility) and a Director of Amsted Industries. Elected
in 1992.
JAMES O. WEBB, age 67, 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 twenty-one
executive officers at December 31, 1998 -- Jeffrey D. Butterfield, age 52;
Charles H. Davis, age 56; Dennis L. Dean, age 47; Emilia DiMenco, age 44; Pierre
O. Greffe, age 46; Louis F. Lanwermeyer, age 50; Michael W. Lewis, age 49;
Michael B. Lowe, age 53; Erin E. McInerney, age 43; Peter B. McNitt, age 44;
Richard J. Moreland, age 52; Charles R. Piermarini, age 42; Paul V. Reagan, age
52; Steven R. Rothbloom, age 43; Randall W. Teteak, age 54; William E. Thonn,
age 50; Charles R. Tonge, age 51; Philip A. Washburn, age 52; William W.
Whipple, age 46; Edward J. Williams, age 56; and Sohrab Zargham, age 57. Each
officer, other than Messrs. Piermarini, Reagan and Teteak, has held executive
positions with the Corporation or an affiliate for at least the past five years.
Prior to 1997, Mr. Piermarini was Senior Vice President, Portfolio Management,
NationsBank. Prior to 1995, Mr. Reagan was Managing Director and Counsel with
Bankers Trust Company. Prior to 1997, Mr. Teteak was Senior Vice President at
First Union National Bank responsible for technology and automation planning.
86
<PAGE> 88
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 three Fixed
Rate Subordinated Notes to its parent company, Bankmont. The
principal amount of these notes totals $200 million for the
floating rate notes and $155 million for the fixed rate notes,
respectively. The floating rate notes mature in 2004, 2005 and
2006, respectively. The fixed rate notes mature in 2007, 2008
and 2010, 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) 1998 Managerial Incentive Plan (filed as an Exhibit to
Bankcorp's 1997 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)
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)
87
<PAGE> 89
23. Consents of Experts and Counsel (consents of Independent
Auditors)
24. Power of Attorney
27. Financial Data Schedule
(b) No Current Report on Form 8-K was filed during the quarter ended
December 31, 1998.
- -------------------------
* 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.
88
<PAGE> 90
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 22nd
day of March 1999.
<TABLE>
<C> <S>
/s/ ALAN G. MCNALLY Chairman of the Board and Chief Executive
- -------------------------------------------- Officer
Alan G. McNally
/s/ PIERRE O. GREFFE Chief Financial Officer
- --------------------------------------------
Pierre O. Greffe
/s/ PAUL R. SKUBIC Chief Accounting Officer
- --------------------------------------------
Paul R. Skubic
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by Alan G. McNally, Chairman of the Board and Chief
Executive Officer of the Corporation, as attorney-in-fact for the following
Directors on behalf of Harris Bankcorp, Inc. on the 22nd day of March 1999.
<TABLE>
<S> <C> <C>
Pastora San Juan Cafferty James J. Glasser Charles H. Shaw
Susan T. Congalton Leo M. Henikoff Richard E. Terry
Wilbur H. Gantz Richard M. Jaffee James O. Webb
Edward W. Lyman, Jr.
Alan G. McNally
Attorney-In-Fact
</TABLE>
Supplemental Information
No annual report or proxy statement will be sent to security holders in
1999.
89
<PAGE> 1
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 29,
1999, relating to the consolidated statements of condition of Harris Bankcorp,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, changes in
stockholder's equity and cash flows for each of the years in the three year
period ended December 31, 1998, which report appears on page 85 of the December
31, 1998 Annual Report on Form 10-K of Harris Bankcorp, Inc.
KPMG LLP PricewaterhouseCoopers LLP
Chicago, Illinois
March 22, 1999
<PAGE> 1
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 1998 Harris Bankcorp,
Inc. Annual Report to the Securities and Exchange Commission on Form 10-K
pursuant to the requirements of the Securities Exchange Act of 1934.
/s/ PASTORA SAN JUAN CAFFERTY /s/ RICHARD M. JAFFEE
------------------------------ ----------------------------
Pastora San Juan Cafferty Richard M. Jaffee
Director Director
/s/ F. ANTHONY COMPER /s/ EDWARD W. LYMAN, JR.
------------------------------ ----------------------------
F. Anthony Comper Edward W. Lyman, Jr.
Director Vice Chair and Director
/s/ SUSAN T. CONGALTON /s/ ALAN G. MCNALLY
------------------------------ ----------------------------
Susan T. Congalton Alan G. McNally
Director Chairman of the Board,
Chief Executive Officer,
and Director
/s/ WILBUR H. GANTZ /s/ CHARLES H. SHAW
------------------------------ ----------------------------
Wilbur H. Gantz Charles H. Shaw
Director Director
/s/ JAMES J. GLASSER /s/ RICHARD E. TERRY
------------------------------ ----------------------------
James J. Glasser Richard E. Terry
Director Director
/s/ LEO M. HENIKOFF /s/ JAMES O. WEBB
------------------------------ ----------------------------
Leo M. Henikoff James O. Webb
Director Director
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1492270
<INT-BEARING-DEPOSITS> 98937
<FED-FUNDS-SOLD> 155709
<TRADING-ASSETS> 120668
<INVESTMENTS-HELD-FOR-SALE> 6963654
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12228400
<ALLOWANCE> 140608
<TOTAL-ASSETS> 22797830
<DEPOSITS> 15322842
<SHORT-TERM> 4810888
<LIABILITIES-OTHER> 277852
<LONG-TERM> 454387
225000
0
<COMMON> 53340
<OTHER-SE> 1372692
<TOTAL-LIABILITIES-AND-EQUITY> 22797830
<INTEREST-LOAN> 904016
<INTEREST-INVEST> 358195
<INTEREST-OTHER> 23588
<INTEREST-TOTAL> 1285799
<INTEREST-DEPOSIT> 509097
<INTEREST-EXPENSE> 778753
<INTEREST-INCOME-NET> 507046
<LOAN-LOSSES> 26957
<SECURITIES-GAINS> 26953
<EXPENSE-OTHER> 678604
<INCOME-PRETAX> 252526
<INCOME-PRE-EXTRAORDINARY> 182625
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182625
<EPS-PRIMARY> 24.91
<EPS-DILUTED> 24.91
<YIELD-ACTUAL> 2.93
<LOANS-NON> 18695
<LOANS-PAST> 21964
<LOANS-TROUBLED> 1523
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 130876
<CHARGE-OFFS> 29117
<RECOVERIES> 11892
<ALLOWANCE-CLOSE> 140608
<ALLOWANCE-DOMESTIC> 140608
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
