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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
1999
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, 1999 COMMISSION FILE NUMBER 0-18179
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
HARRIS BANKCORP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 36-2722782
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
111 WEST MONROE STREET, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
</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
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FORM 10-K CROSS REFERENCE INDEX
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PAGE
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PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 5
Item 3 Legal Proceedings........................................... 6
Item 4 Submission of Matters to a Vote of Security Holders
(during the fourth quarter of 1999)......................... 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.................................... 43
Consolidated Statements of Income........................... 44
Consolidated Statements of Comprehensive Income............. 45
Consolidated Statements of Condition........................ 46
Statements of Changes in Stockholder's Equity............... 47
Consolidated Statements of Cash Flows....................... 48
Notes to Financial Statements............................... 49
Joint Independent Auditors.................................. 84
Independent Auditors' Report................................ 84
Item 9 Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 84
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 85
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 86
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 86
Signatures................................................................ 88
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PART I
ITEM 1 -- BUSINESS
BUSINESS OVERVIEW
Harris Bankcorp, Inc. ("Bankcorp") is a Delaware multibank holding company
headquartered in Chicago. Bankcorp is a wholly-owned subsidiary of Bankmont
Financial Corp. ("Bankmont"), a wholly-owned U.S. subsidiary of Bank of Montreal
("BMO").
Bankcorp provides banking, trust and other financial services domestically
and internationally through 14 bank and 15 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 and
Harris Trust Company of New York. The trust companies provide specialized
nondeposit services, notably stock transfer, personal trust and indenture trust.
On February 1, 2000, Bankcorp announced its agreement to sell its subsidiaries'
stock transfer and indenture trust businesses in separate transactions. 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, 57 domestic branch
offices and 97 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.
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; 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 January 29, 1998, HTSB transferred its credit card portfolio to a
company to be owned by BankBoston Corporation, First Annapolis Consulting, Inc.
and Bankmont. At the time of the sale, HTSB's charge card portfolio balance
amounted to approximately $693 million, representing less than 5 percent of the
Corporation's total consolidated assets. Upon completion of the transfer, HTSB
received cash and an equity interest in the newly formed company, Partner's
First Holdings, LLC, which it immediately sold for cash to Bankmont.
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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 40.
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, until the sale of these
businesses as noted, acts as stock and bond registrar and transfer agent,
dividend reinvestment agent and paying agent.
The Corporation has four 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. Chicagoland Banking comprises community banking, which serves
individuals through a Chicagoland retail bank network and small business/lower
middle-market banking. The Private Client Group 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. 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 11.
FORWARD-LOOKING INFORMATION
This Report contains certain forward-looking statements and information
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," "target" 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
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.
HARRIS BANK GROWTH STRATEGY
The Corporation is a key strategic asset and competitive advantage for BMO
in the United States. Harris Bank (which includes both the Corporation and its
sister company, Harris Bankmont, Inc.) has announced a growth strategy to
continue to aggressively build value -- becoming the dominant full-service bank
in "Chicagoland"; the premier mid-market corporate/investment bank in the
Midwest; and expand in fast-growing "Sunbelt" markets.
The first component of Harris Bank's strategy is continued strong organic
growth in three advantaged core businesses: community banking, private banking,
and mid-market corporate banking. Community banking is reflected in the
Chicagoland Banking operating segment, while private banking and mid-market
corporate banking are reflected in the Private Client Group and Corporate and
Institutional Financial Services operating segments, respectively. See Operating
Segment Review section on page 11 of this Report. Harris Bank has experienced
sustained market momentum in large, high opportunity markets: the extremely
fragmented and under-served Chicagoland marketplace where the largest banks
combine for a 30% market share of retail deposits; a strong and diversified
Midwest mid-market, which is broadly defined from Ohio west
3
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to Colorado, and Minnesota south to Missouri; and more broadly in the U.S. in
private banking, mid-market specialized industry sectors and cash management
nation-wide.
Since 1994, Harris Bank has turned in consistent growth in earnings and
profitability. Net income has more than doubled to $227 million and cash ROE has
increased from the 10-11% level to the 17-18% range. Since 1994, in Chicagoland,
Harris Bank has substantially built a retail bank. It has tripled its customer
base from 300,000 to 900,000; increased market penetration from 1 household in
14 in 1994 to 1 household in 5 today; and tripled distribution from 40 to 140
branches, including state-of-the-art "multi-channel" delivery, call center,
internet, and data mining capability. Retail deposit share has more than tripled
from 2.7% to 8.4% during the period, and Harris Bank is the number two home
equity and mortgage lender in Chicagoland.
Harris Bank has carved out a unique "locally rooted/centrally leveraged"
market position by keeping local bank charters; stripping out and centralizing
overhead and operations and creating a network of local marketing, sales and
service units. At the same time Harris Bank is achieving a reduction in branch
headcount of 30% over a three year period (1998-2000) with levels of customer
satisfaction which surveys show to be substantially above Harris Bank's large
bank competitors and the only one of the major banks gaining market share.
Harris Bank has set a goal to become the dominant full-service bank in
Chicagoland, through building small business, private, commercial and corporate
mid-market segments across Chicagoland, on top of a retail distribution system
already in place. Specifically, Harris Bank is importing BMO's small business
capability from Canada; and Hispanic banking capability from its Mexican
affiliate, Bancomer, to serve the rapidly growing and underserved market of 1.2
million Hispanics in Chicagoland. Harris is one of the premier mid-market
corporate banks in the Midwest. As a major growth initiative, Harris is
combining its mid-market corporate banking activity with BMO's investment bank,
Nesbitt Burns, to create a fully integrated mid-market corporate/investment bank
focused on the Midwest and specialized industry sectors nation-wide. In the
Sunbelt, Harris will be leveraging its "multi-channel" platform in Chicago, its
investment and strategic alliance with Bancomer, and its current operations in
Arizona and Florida -- to build its business in fast growing Sunbelt markets.
While Harris Bank has an internal growth strategy for various U.S. lines of
business, it will continue to assess selective merger, acquisition and joint
venture opportunities, to strategically enhance organic growth. This includes
the recent acquisitions of Chicago-based discount broker, Burke, Christensen &
Lewis Securities, Inc. and Village Banc of Naples in Florida by Bankmont which
will extend Harris Bank's participation in U.S. markets. It also encompasses
exiting those lines of business in which it lacks the scale and competitive
advantages, such as its corporate trust business. Harris Bank will continue to
grow and expand in Chicagoland, the Midwest and beyond -- and the combined
target for the Corporation and Harris Bankmont remains sustained double-digit
growth in earnings, with cash ROE rising to the 20% level by 2003.
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.
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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 74 through 76 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. The Gramm-Leach-Bliley Financial Modernization Act of
1999 generally broadens the ability of eligible bank holding companies,
including Bankcorp, to affiliate with other industries, particularly insurance
and investment banking. Regulatory authorities have issued or will issue
regulations implementing the Act's provisions. The Corporation's ongoing
strategic analysis will include the impact of the regulations on its business.
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.
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 6,164 and
4,886, respectively, at December 31, 1999.
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. 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.
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ITEM 3 -- LEGAL PROCEEDINGS
For information on the Corporation's legal proceedings, see Note 17 to
Financial Statements on page 76 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 1999.
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 1999,
Bankcorp declared and paid to Bankmont approximately $66 million in cash
dividends on common stock and $17 million in cash dividends on preferred stock.
In 1998, Bankcorp declared and paid to Bankmont approximately $182 million in
cash dividends on common stock and $17 million in cash dividends on preferred
stock. In 1997, Bankcorp declared and paid to Bankmont approximately $42 million
in cash dividends and $3 million in noncash dividends on common stock and $17
million in cash dividends on preferred stock. At December 31, 1999, 1998 and
1997, 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 1999 and 1998,
HPCC paid $18 million and $16 million of dividends on preferred stock,
respectively.
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ITEM 6 -- SELECTED FINANCIAL DATA
HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENTS OF INCOME
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FOR THE YEARS ENDED DECEMBER 31
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1999 1998 1997 1996 1995
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(FULLY TAXABLE EQUIVALENT (FTE) BASIS)
(IN THOUSANDS EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)
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INTEREST INCOME
Loans, including fees...................................... $ 928,907 $ 904,746 $ 928,155 $ 838,789 $ 778,770
Money market assets:
Deposits at banks......................................... 1,486 10,833 31,464 30,483 38,617
Federal funds sold and securities purchased under
agreement to resell..................................... 10,383 8,980 12,692 11,918 19,330
Trading account............................................ 5,609 4,965 4,638 4,968 4,556
Securities held-to-maturity................................ -- -- -- -- 77,820
Securities available-for-sale.............................. 455,326 386,397 319,475 276,077 162,867
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Total interest income..................................... 1,401,711 1,315,921 1,296,424 1,162,235 1,081,960
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INTEREST EXPENSE
Domestic deposits.......................................... 411,188 442,542 378,825 284,301 215,276
Foreign deposits........................................... 79,420 66,555 96,832 113,866 143,310
Short-term borrowings...................................... 215,080 176,083 156,559 160,790 168,993
Senior notes............................................... 69,027 47,689 39,883 22,425 31,125
Minority interest -- dividends on preferred stock of
subsidiary................................................ 18,437 16,389 -- -- --
Long-term notes............................................ 31,186 29,495 26,499 26,067 23,005
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Total interest expense.................................... 824,338 778,753 698,598 607,449 581,709
---------- ---------- ---------- ---------- ----------
Net Interest Income........................................ 577,373 537,168 597,826 554,786 500,251
Provision for loan losses.................................. 25,034 26,957 58,447 56,540 42,995
---------- ---------- ---------- ---------- ----------
Net Interest Income after Provision for Loan Losses........ 552,339 510,211 539,379 498,246 457,256
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NONINTEREST INCOME
Trust and investment management fees....................... 155,810 143,724 133,714 117,762 149,979
Money market and bond trading.............................. 8,892 10,512 7,269 7,992 5,110
Foreign exchange........................................... 8,314 6,772 5,364 9,992 14,248
Merchant and charge card fees.............................. 30,189 26,772 50,085 47,244 41,788
Service fees and charges................................... 116,423 109,372 96,324 82,802 69,333
Portfolio securities gains................................. 14,075 26,953 13,207 8,786 23,379
Gain on sale of credit card portfolio...................... -- 12,000 -- -- --
Bank-owned insurance investments........................... 41,414 32,339 12,917 8,484 --
Other...................................................... 87,865 82,597 58,868 46,245 34,436
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Total noninterest income.................................. 462,982 451,041 377,748 329,307 338,273
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NONINTEREST EXPENSES
Employment................................................. 422,162 387,009 372,142 326,994 318,302
Net occupancy.............................................. 48,573 51,342 56,462 47,690 46,099
Equipment.................................................. 61,812 52,622 48,119 41,715 42,541
Marketing.................................................. 30,732 25,896 25,675 29,342 25,583
Other...................................................... 126,454 137,631 133,440 130,087 118,228
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689,733 654,500 635,838 575,828 550,753
Goodwill and other valuation intangibles................... 25,036 24,104 27,839 18,168 9,350
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Total noninterest expenses................................ 714,769 678,604 663,677 593,996 560,103
---------- ---------- ---------- ---------- ----------
FTE pretax income.......................................... 300,552 282,648 253,450 233,557 235,426
Applicable income taxes.................................... 65,138 69,901 70,076 65,812 70,175
FTE adjustment............................................. 32,361 30,122 26,800 25,381 17,700
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Net Income................................................ 203,053 182,625 156,574 142,364 147,551
Dividends on preferred stock............................... 16,594 16,594 16,594 15,006 --
---------- ---------- ---------- ---------- ----------
Net income applicable to common stock...................... $ 186,459 $ 166,031 $ 139,980 $ 127,358 $ 147,551
========== ========== ========== ========== ==========
PER COMMON SHARE STATISTICS
Net income applicable to common stock...................... $27.97 $24.91 $21.00 $19.10 $22.13
Common stock dividends..................................... 9.85 27.22 6.30 7.23 39.40
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% 0.86% 0.82% 0.83% 0.95%
% Average common stockholder's equity..................... 13.56 11.92 10.54 11.55 13.61
% Average total assets (cash basis*)...................... 0.94 0.94 0.92 0.91 1.00
% Average common stockholder's equity (cash basis*)....... 18.14 16.24 15.43 15.15 14.88
NUMBER OF EMPLOYEES AT YEAR-END
(full-time equivalent basis)............................... 6,164 6,170 6,425 6,363 5,749
</TABLE>
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* See the Return on Assets and Common Stockholder's Equity section of this
Report on page 20 for further information.
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HARRIS BANKCORP, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENTS OF CONDITION
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<CAPTION>
YEARS ENDED DECEMBER 31
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1999 1998 1997 1996 1995
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(DAILY AVERAGES, IN THOUSANDS EXCEPT PER SHARE DATA)
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ASSETS
Cash and demand balances due from banks......... $ 1,321,662 $ 1,270,509 $ 1,225,644 $ 1,147,075 $ 1,206,234
Money market assets:
Interest-bearing deposits at banks............ 167,207 297,705 601,672 576,913 566,072
Federal funds sold and securities purchased
under agreement to resell................... 199,662 162,429 229,572 213,939 330,783
Portfolio securities:
Held-to-maturity.............................. -- -- -- -- 962,245
Available-for-sale............................ 7,391,635 6,126,443 4,895,735 4,219,179 2,611,707
Trading account assets.......................... 82,691 78,805 68,336 70,452 64,777
Domestic loans, net of unearned income.......... 12,372,917 11,536,285 10,870,692 9,888,591 8,735,388
Foreign office loans, net of unearned income.... 139,798 123,705 90,584 59,235 50,183
----------- ----------- ----------- ----------- -----------
Total loans............................... 12,512,715 11,659,990 10,961,276 9,947,826 8,785,571
Allowance for possible loan losses.............. (144,579) (134,896) (136,760) (134,310) (126,041)
----------- ----------- ----------- ----------- -----------
Net loans................................. 12,657,294 11,794,886 11,098,036 10,082,136 8,911,612
Premises and equipment.......................... 386,145 332,393 293,879 247,521 224,205
Customers' liability on acceptances............. 41,893 42,864 62,547 87,972 104,994
Bank-owned insurance investments................ 744,573 592,460 236,704 162,819 42,428
Goodwill and other valuation intangibles........ 259,473 277,106 308,746 185,673 48,531
Other assets.................................... 551,607 521,366 472,301 452,971 693,565
----------- ----------- ----------- ----------- -----------
Total assets.............................. $23,514,684 $21,227,174 $19,219,652 $17,178,030 $15,515,071
=========== =========== =========== =========== ===========
LIABILITIES
Demand deposits................................. $ 3,075,139 $ 3,287,124 $ 3,020,864 $ 2,812,007 $ 2,808,747
Interest checking deposits...................... 265,046 334,633 853,800 815,853 629,448
Money market accounts........................... 4,061,648 3,106,277 1,964,212 1,434,293 1,037,963
Savings deposits and certificates............... 4,408,294 4,630,387 4,734,360 3,626,767 2,442,101
Other time deposits............................. 1,700,593 1,733,510 914,836 674,985 682,320
Deposits in foreign offices..................... 1,627,569 1,279,126 1,795,952 2,159,909 2,435,124
----------- ----------- ----------- ----------- -----------
Total deposits............................ 15,138,289 14,371,057 13,284,024 11,523,814 10,035,703
Short-term borrowings........................... 4,434,176 3,417,420 3,000,177 3,220,570 3,010,753
Senior notes.................................... 1,322,518 855,366 695,329 392,283 512,204
Acceptances outstanding......................... 41,906 42,866 62,561 87,969 105,064
Other liabilities............................... 273,350 286,490 245,448 275,925 465,145
Minority interest -- preferred stock of
subsidiary.................................... 250,000 221,918 -- -- --
Long-term notes................................. 454,512 413,869 379,192 371,734 299,771
----------- ----------- ----------- ----------- -----------
Total liabilities......................... 21,914,751 19,608,986 17,666,731 15,872,295 14,428,640
Preferred stock................................. 225,000 225,000 225,000 203,115 2,466
Common stockholder's equity..................... 1,374,933 1,393,188 1,327,921 1,102,620 1,083,965
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's
equity.................................. $23,514,684 $21,227,174 $19,219,652 $17,178,030 $15,515,071
=========== =========== =========== =========== ===========
RATIOS (PERCENTAGE OF TOTAL AVERAGE ASSETS)
Money market assets............................. 1.6% 2.2% 4.3% 4.6% 5.8%
Portfolio securities and trading account
assets........................................ 31.8 29.2 25.8 25.0 23.5
Loans, net of unearned income................... 53.2 54.9 57.0 57.9 56.6
Deposits........................................ 64.4 67.7 69.1 67.1 64.7
Short-term borrowings........................... 18.9 16.1 15.6 18.7 19.4
Common stockholder's equity..................... 5.85 6.56 6.91 6.42 6.99
SELECTED YEAR-END DATA
Loans, net of unearned income................... $13,114,029 $12,228,400 $10,868,250 $10,744,653 $ 9,517,797
Allowance for possible loan losses.............. 147,235 140,608 130,876 142,211 129,259
Total assets.................................... 24,862,878 22,797,830 20,133,461 18,228,740 15,676,201
Deposits........................................ 15,294,956 15,322,842 14,432,063 12,990,301 10,228,782
Long-term notes................................. 454,673 454,387 379,278 379,107 363,952
Preferred stock -- Series A..................... 180,000 180,000 180,000 180,000 180,000
Preferred stock -- Series B..................... 45,000 45,000 45,000 45,000 --
Common stockholder's equity..................... 1,355,757 1,426,032 1,407,515 1,290,166 965,776
YEAR-END COMMON STOCKHOLDER'S EQUITY PER COMMON
SHARE......................................... $203.34 $213.88 $211.10 $193.50 $144.85
</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
1999 COMPARED TO 1998
The Corporation had 1999 earnings of $203.1 million, an 11 percent increase
from $182.6 million in 1998. 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 16 percent in 1999
compared to 1998. "Core revenue" on the same basis increased by 7 percent for
the current year.
For 1999, return on average common equity ("ROE") was 13.56 percent
compared to ROE of 11.92 percent for 1998. Return on average assets ("ROA") was
0.86 percent in 1999 compared to 0.86 percent in the prior year. Cash return on
average common stockholder's equity ("cash ROE") represents net income
applicable to common stock plus after-tax amortization expense of goodwill and
other valuation intangibles, divided by average common stockholder's equity less
gross average intangible assets. For the current year, cash ROE was 18.14
percent compared to cash ROE of 16.24 percent in 1998.
Net interest income on a fully taxable equivalent basis was $577.4 million,
up $40.2 million or 7 percent from $537.2 million in 1998. Net interest margin
declined from 2.93 percent to 2.82 percent currently, reflecting a relatively
greater use of wholesale funding sources to support earning asset growth.
Average earning assets rose $2.12 billion or 12 percent to $20.46 billion in the
current year, attributable to an increase of 7 percent or $853 million in
average loans and $1.42 billion in investment securities. Commercial loans and
residential mortgages were the primary contributors to the growth in loans.
Noninterest income of $463.0 million was up $11.9 million or 3 percent
year-to-year, due to strong growth in trust and investment management fees and
service charge fees. Trust and investment management fees rose $12.1 million or
8 percent from the prior year while service fees and charges rose $7.1 million
or 6 percent. Income from bank-owned insurance investments increased $9.1
million or 28 percent from 1998 due to increased investment balances. Other
income, which includes syndication fees, mortgage loan sales and other gains and
fee income, increased $5.3 million from 1998. Gains from sales of securities
were substantially less in 1999, $14.1 million compared to $27.0 million in
1998. Money market and bond trading profits declined $1.6 million in 1999.
The 1999 noninterest expenses of $714.8 million rose $36.2 million or 5
percent from last year. The major categories reflecting increases were
employment expense and equipment/systems expense. The increase in employment
related expenses reflects both salary adjustments and growth in benefit costs.
Employee benefits increases were in part a function of lower discount rates
applied to projected retirement liabilities. The increase in equipment expense
primarily reflects expenditures related to the Y2K issue. Income taxes declined
$4.8 million during the current year, reflecting a lower effective tax rate in
1999.
The 1999 provision for loan losses of $25.0 million was down $1.9 million
from 1998. Net loan charge-offs during the current year were $18.4 million
compared to $17.2 million in the same period last year, with the difference
primarily reflecting lower recoveries in the commercial portfolio in the current
year, partially offset by lower write-offs in both the consumer and commercial
loan portfolios.
Nonperforming assets at December 31, 1999 totaled $27 million, or 0.21
percent of total loans, compared to $27 million or 0.21 percent at September 30,
1999, and $21 million or 0.17 percent a year ago. At December 31, 1999, the
allowance for possible loan losses was $147 million, equal to 1.12 percent of
loans outstanding compared to $141 million at the end of 1998, equal to 1.15
percent of loans outstanding. As a result, the ratio of the allowance for
possible loan losses to nonperforming assets was 536 percent at December 31,
1999 compared to 677 percent at December 31, 1998.
At December 31, 1999, consolidated equity capital of the Corporation
amounted to $1.58 billion, down from $1.65 billion at December 31, 1998.
Bankcorp paid $66 million in dividends on common stock and
9
<PAGE> 11
$17 million of preferred dividends. Unrealized securities losses, net of tax,
were $156 million at December 31, 1999 compared to unrealized securities gains,
net of tax, of $38 million at December 31, 1998. At December 31, 1999 and 1998,
the Corporation's equity capital included $225 million of preferred stock.
The Corporation's regulatory capital leverage ratio was 7.07 percent in
1999 compared to 7.26 percent in 1998. Regulators require most banking
institutions to maintain capital leverage ratios of not less than 4.0 percent.
At December 31, 1999, the Corporation's Tier 1 and total risk-based capital
ratios were 8.88 percent and 11.54 percent, respectively, compared to respective
ratios of 8.66 percent and 11.57 percent at December 31, 1998. The 1999 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 74 of this Report). The preferred stock qualifies as Tier 1
capital of the Corporation for U.S. banking regulatory purposes.
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 in
1998.
For 1998, ROE was 11.92 percent compared to ROE of 10.54 percent for 1997.
ROA was 0.86 percent in 1998 compared to 0.82 percent in 1997. For 1998, cash
ROE was 16.24 percent compared to cash ROE of 15.43 percent in 1997.
Net interest income on a fully taxable equivalent basis was $537.2 million
in 1998, down $60.7 million or 10 percent from $597.8 million in 1997. Net
interest margin declined from 3.56 percent in 1997 to 2.93 percent in 1998,
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 1998,
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 1997 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 1997 while service fees and charges 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. Securities
gains were $27.0 million in 1998 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 1997.
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 1998, 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 1998 were $17.2 million compared to
$69.8 million in the same period in 1997, 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 0.17
percent of total loans, compared to $36 million or 0.30 percent at September 30,
1998, and $20 million or 0.20 percent at December 31, 1997. At December 31,
1998, the allowance for possible loan losses was $141 million, equal to 1.15
percent of loans outstanding compared to $131 million at the end of 1997, equal
to 1.20 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.
10
<PAGE> 12
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 $182 million in dividends on common stock and $17 million of preferred
dividends. At December 31, 1998, the Corporation's equity capital included $225
million of preferred stock.
The Corporation's regulatory capital leverage ratio was 7.26 percent in
1998 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.
OPERATING SEGMENT REVIEW
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. 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 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. The Private Client Group
serves the needs of affluent individuals both within Chicagoland and nationally
through the integrated delivery of a comprehensive offering of wealth management
services, including investment management, personal trust, customized lending
and financial planning. Businesses within this group include private banking,
mutual fund management, retirement plan services and Harris Investment
Management, Inc. (the Corporation's institutional investment manager).
The "Other" category is comprised of the Corporation's Treasury unit, which
serves as the Corporation's funding unit, as well as income from bank-owned
insurance investments and inter-segment eliminations and residual revenues and
expenses, representing the difference between actual amounts incurred and the
amounts allocated to operating segments.
11
<PAGE> 13
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
CORPORATE AND
INSTITUTIONAL ELECTRONIC
FINANCIAL CHICAGOLAND FINANCIAL PRIVATE CLIENT CONSOLIDATED
SERVICES BANKING SERVICES GROUP OTHER TOTAL
------------- ----------- ---------- -------------- ----- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1999
Net interest income (FTE
basis)..................... $198.3 $255.6 $ 67.2 49.0 $ 7.3 $ 577.4
Noninterest income........... 108.5 74.4 104.4 131.2 44.5 463.0
Provision for loan losses.... 18.2 6.6 -- 0.3 (0.1) 25.0
Noninterest expense.......... 137.8 281.6 134.2 150.8 10.4 714.8
------ ------ ------ ------ ------- -------
Income before income taxes... 150.8 41.8 37.4 29.1 41.5 300.6
Income taxes................. 60.3 17.4 14.9 11.7 (6.8) 97.5
------ ------ ------ ------ ------- -------
Net income................... $ 90.5 $ 24.4 $ 22.5 $ 17.4 $ 48.3 $ 203.1
====== ====== ====== ====== ======= =======
Average Assets............... $6,875 $8,015 $1,255 $1,240 $ 6,130 $23,515
====== ====== ====== ====== ======= =======
Average Loans................ $6,797 $6,276 $ 36 $1,087 $(1,683) $12,513
====== ====== ====== ====== ======= =======
Average Deposits............. $ 394 $7,957 $2,421 $1,260 $ 3,106 $15,138
====== ====== ====== ====== ======= =======
1998
Net interest income (FTE
basis)..................... $178.0 $240.8 $ 68.1 45.5 $ 4.8 $ 537.2
Noninterest income........... 100.7 69.0 108.4(1) 121.8 51.1 451.0
Provision for loan losses.... 21.1 5.7 0.1 0.3 (0.2) 27.0
Noninterest expense.......... 123.1 271.3 132.0 131.3 20.9 678.6
------ ------ ------ ------ ------- -------
Income before income taxes... 134.5 32.8 44.4 35.7 35.2 282.6
Income taxes................. 53.5 14.5 17.8 14.5 (0.3) 100.0
------ ------ ------ ------ ------- -------
Net income................... $ 81.0 $ 18.3 $ 26.6 $ 21.2 $ 35.5 $ 182.6
====== ====== ====== ====== ======= =======
Average Assets............... $6,330 $7,835 $1,230 $1,090 $ 4,742 $21,227
====== ====== ====== ====== ======= =======
Average Loans................ $6,159 $6,157 $ 59(1) $ 954 $(1,669) $11,660
====== ====== ====== ====== ======= =======
Average Deposits............. $ 407 $7,633 $2,999 $1,216 $ 2,116 $14,371
====== ====== ====== ====== ======= =======
1997
Net interest income (FTE
basis)..................... $125.5 $234.2 $135.1 $ 37.7 $ 65.3 $ 597.8
Noninterest income........... 83.9 49.9 113.9 108.1 21.9 377.7
Provision for loan losses.... 15.0 1.8 50.0 0.2 (8.6) 58.4
Noninterest expense.......... 117.8 258.7 153.2 124.8 9.2 663.7
------ ------ ------ ------ ------- -------
Income before income taxes... 76.6 23.6 45.8 20.8 86.6 253.4
Income taxes................. 30.6 10.3 18.7 7.9 29.3 96.8
------ ------ ------ ------ ------- -------
Net income................... $ 46.0 $ 13.3 $ 27.1 $ 12.9 $ 57.3 $ 156.6
====== ====== ====== ====== ======= =======
Average Assets............... $5,293 $7,656 $1,836 $ 865 $ 3,570 $19,220
====== ====== ====== ====== ======= =======
Average Loans................ $5,033 $6,295 $ 841 $ 745 $(1,953) $10,961
====== ====== ====== ====== ======= =======
Average Deposits............. $ 549 $7,007 $2,556 $1,189 $ 1,983 $13,284
====== ====== ====== ====== ======= =======
</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.
12
<PAGE> 14
CORPORATE AND INSTITUTIONAL FINANCIAL SERVICES
Net income for Corporate and Institutional Financial Services in 1999 was
$90.5 million, up 12 percent from 1998. Total revenue of $306.8 million
represented a growth of 10 percent from $278.7 million in 1998. The growth of
$20.3 million or 11 percent in net interest income was primarily the result of a
10 percent or $638 million increase in the corporate banking loan portfolio from
$6.16 billion in 1998 to $6.80 billion in 1999, along with an increase in
margins. The growth in noninterest income of $7.8 million or 8 percent was
largely due to increased corporate trust, foreign exchange, cash management and
other fees. The decrease in the provision for loan losses of $2.9 million is
primarily attributable to continued high credit quality of the existing
portfolio. Noninterest expense increased $14.7 million or 12 percent to $137.8
million from $123.1 million in 1998, primarily in support of business volume
growth. Income taxes increased by $6.8 million during the year, reflecting
higher pretax income.
Corporate and Institutional Financial Services' 1998 net income increased
76 percent or $35.0 million to $81.0 million from 1997. Total revenue increased
$69.3 million or 33 percent to $278.7 million from $209.4 million in 1997. The
42 percent or $52.5 million year-to-year growth in net interest revenue was
primarily attributed to a 22 percent or $1.13 billion increase in the corporate
banking loan portfolio. The growth in noninterest revenue of $16.8 million or 20
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 by $5.3 million to $123.1 million from $117.8
million in 1997, primarily in support of business volume growth. Income taxes
increased by $22.9 million in 1998, primarily due to higher pretax earnings.
On February 1, 2000, the Corporation announced the sale of its corporate
trust businesses. In separate and unrelated transactions, the indenture trust
business is being sold to a subsidiary of The Bank of New York Company, Inc.,
and the shareholder services business to Computershare Limited. The combined
sales will result in an estimated pre-tax gain to Bankcorp of approximately $50
million in first quarter 2000, not including revenue contingent upon the outcome
of certain events, expected in second half 2000. The sales are subject to
regulatory approval and are expected to close during first quarter 2000. In
1999, noninterest revenue from the corporate trust businesses amounted to $51.7
million. The Corporation does not believe that the sale of these businesses will
have a material impact on the results of operations for this segment in future
periods.
CHICAGOLAND BANKING
Net income for Chicagoland Banking in 1999 was $24.4 million, up 33 percent
from 1998. Total revenue of $330.0 million represented a growth of $20.2 million
or 7 percent from $309.8 million in 1998. Net interest income increased by $14.8
million or 6 percent from $240.8 million, largely generated by increased spreads
on earning assets. Noninterest income of $74.4 million increased $5.4 million or
8 percent over 1998 levels, primarily due to higher service charges. The
increase in the provision for loan losses of $0.9 million was primarily
attributable to community banking activities and reflected growth in the retail
loan portfolio. Noninterest expense increased $10.3 million or 4 percent to
$281.6 million from $271.3 million in 1998. The increase was primarily due to
continuing costs related to various retail initiatives including the enhancement
of products and services for retail and business banking customers. Income taxes
increased by $2.9 million during 1999, reflecting higher pretax income.
Net income for Chicagoland Banking in 1998 was $18.3 million, up 38 percent
from 1997. Total revenue of $309.8 million represented a growth of $25.7 million
or 9 percent from $284.1 million in 1997. Net interest income increased by $6.6
million or 3 percent from $234.2 million, largely generated by an increase in
the investment portfolio. Noninterest income of $69.0 million increased $19.1
million or 38 percent over 1997 levels, primarily due to higher mortgage loan
originations in 1998. The increase in the provision for loan losses of $3.9
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 $12.6 million or 5 percent to $271.3 million
from $258.7 million in 1997. The increase was primarily due to 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
13
<PAGE> 15
support of increased business volumes and the creation of a distinct mortgage
loan utility. Income taxes increased by $4.2 million during 1998, reflecting
higher pretax income.
ELECTRONIC FINANCIAL SERVICES
Net income for Electronic Financial Services was $22.5 million in 1999,
reflecting a decrease of $4.1 million or 15 percent from $26.6 million in 1998.
Comparability between years was impacted by the first quarter 1998 sale of the
Corporation's credit card portfolio. Excluding the gain, net income on a
comparative basis increased $3.1 million from 1998. Total revenue of $171.6
million decreased by $4.9 million or 3 percent from $176.5 million in 1998. Net
interest income fell by $0.9 million or 1 percent from $68.1 million in 1998.
Noninterest income declined $4.0 million or 4 percent. Excluding the gain on the
sale of the credit card portfolio, noninterest income growth was $8.0 million or
8 percent primarily due to growth in service charges. Noninterest expense
increased $2.2 million or 2 percent to $134.2 million from $132.0 million in
1998. Income taxes decreased by $2.9 million during the year, reflecting lower
pretax income.
Net income for Electronic Financial Services was $26.6 million in 1998,
reflecting a decrease of $0.5 million or 2 percent from $27.1 million in 1997.
Comparability between years is impacted by the first quarter 1998 sale of the
Corporation's credit card portfolio. Total revenue of $176.5 million decreased
by $72.5 million or 29 percent from $249.0 million in 1997. Net interest income
fell by $67.0 million or 50 percent from $135.1 million in 1997, attributable to
the charge card sale, which resulted in a decline in average loan balances from
$841 million in 1997 to $59 million in 1998. Noninterest income declined $5.5
million or 5 percent due to reduced fee income from the credit card portfolio,
partly offset by the $12.0 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 $21.2
million or 14 percent to $132.0 million from $153.2 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.
PRIVATE CLIENT GROUP
Net income for Private Client Group in 1999 was $17.4 million, down 18
percent from 1998. Total revenue of $180.2 million represented a growth of $12.9
million or 8 percent from $167.3 million in 1998. Net interest income increased
by $3.5 million or 8 percent from $45.5 million, reflecting the 14 percent
growth in loan volume. Noninterest income of $131.2 million increased $9.4
million or 8 percent over 1998 levels, primarily due to increased personal trust
and investment management revenue. Noninterest expense increased $19.5 million
or 15 percent to $150.8 million from $131.3 million in 1998. The increase was
due to the expansion of private banking activities in Chicagoland, the opening
of two new full service banking facilities in Florida, and investments made in
marketing and distribution of the Harris Insight Mutual Funds. Income taxes
decreased by $2.8 million during 1999, reflecting lower pretax income.
Net income for Private Client Group in 1998 was $21.2 million, up 64
percent from 1997. Total revenue of $167.3 million represented growth of $21.5
million or 15 percent from $145.8 million in 1997. Net interest income increased
by $7.8 million or 21 percent from $37.7 million, largely the result of loan
volume growth. Noninterest income of $121.8 million increased $13.7 million or
13 percent over 1997 levels, due to a combination of increased personal trust
and investment management revenue and growth in mortgage origination and sale
fees. Noninterest expense increased $6.5 million or 5 percent to $131.3 million
from $124.8 million in 1997. The increase represents minimal investments in all
private client business. Income taxes increased by $6.6 million during 1998,
reflecting higher pretax income.
OTHER
The results for this segment include income from bank-owned insurance,
which increased $9.1 million or 28 percent in 1999 compared to 1998 and $19.4
million in 1998 compared to 1997. In addition, the tax benefits from the
bank-owned insurance program reduced the effective tax rate in both 1999 and
1998 compared to 1997.
14
<PAGE> 16
HARRIS BANKCORP, INC. AND SUBSIDIARIES
NET INTEREST INCOME
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
INTEREST 1999 VS. 1998
----------------------------
INCREASE
(DECREASE)
DUE TO CHANGE IN
AVERAGE AVERAGE NET ----------------
BALANCE INTEREST RATE CHANGE VOLUME RATE
------- -------- ------- ------ ------ ----
(FULLY TAXABLE EQUIVALENT BASIS, IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME DOMESTIC OFFICES:
Loans, including fees....................................... $12,373 $ 921 7.45% $32 $63 $(31)
Securities:
U.S. Treasury and Federal agency.......................... 6,928 415 5.99 63 78 (15)
State and municipal....................................... 334 25 7.52 -- 2 (2)
Other..................................................... 153 11 7.24 6 6 --
------- ------ ---
Total securities...................................... 7,415 451 6.08 69 87 (18)
Trading account assets...................................... 83 5 6.78 -- -- --
Interest-bearing deposits at banks.......................... 166 2 1.22 -- -- --
Federal funds sold and securities purchased under agreement
to resell................................................. 158 9 5.49 1 1 --
Assets held for sale........................................ -- -- -- (8) (8) --
------- ------ ---
Total domestic earning assets/ interest income........ 20,195 1,388 6.88 94 155 (61)
------- ------ ---
FOREIGN OFFICES:
Loans, including fees....................................... 140 8 5.37 1 1 --
Securities:
U.S. Treasury and Federal agency.......................... 81 4 5.20 -- -- --
Interest-bearing deposits at banks.......................... 1 -- -- (9) (1) (8)
Federal funds sold and securities purchased under agreement
to resell................................................. 41 1 4.11 -- 1 (1)
------- ------ ---
Total foreign earning assets/interest income.......... 263 13 4.88 (8) (7) (1)
------- ------ ---
TOTAL DOMESTIC AND FOREIGN EARNING ASSETS/INTEREST INCOME... $20,458 1,401 6.85 86 147 (61)
======= ====== ===
SUPPORTING LIABILITIES/INTEREST EXPENSE DOMESTIC OFFICES:
Interest checking deposits.................................. $ 265 6 2.11 (2) (2) --
Money market accounts....................................... 3,730 125 3.35 12 21 (9)
Savings deposits and certificates........................... 4,408 194 4.40 (33) (10) (23)
Other interest-bearing time deposits........................ 1,674 87 5.19 (8) (2) (6)
------- ------ ---
Total interest-bearing deposits....................... 10,077 412 4.08 (31) 13 (44)
Short-term borrowings....................................... 4,318 211 4.89 39 49 (10)
Senior notes................................................ 1,323 69 5.22 21 25 (4)
Minority interest -- dividends on preferred stock of
subsidiary................................................ 250 18 7.38 2 (14) 16
Long-term notes............................................. 455 31 6.86 2 3 (1)
------- ------ ---
Total domestic interest-bearing liabilities/interest
expense............................................. 16,423 741 4.51 33 85 (52)
------- ------ ---
FOREIGN OFFICES:
Time deposits............................................... 1,595 79 4.98 13 17 (4)
Short-term borrowings....................................... 115 4 3.40 -- 1 (1)
------- ------ ---
Total foreign interest-bearing liabilities/ interest
expense............................................. 1,710 83 4.87 13 18 (5)
------- ------ ---
Total domestic and foreign interest-bearing
liabilities/interest expense.............................. 18,133 824 4.55 46 102 (56)
Other noninterest-bearing supporting liabilities............ 2,325 -- -- -- -- --
------- ------ ---
TOTAL DOMESTIC AND FOREIGN SUPPORTING LIABILITIES/INTEREST
EXPENSE................................................... $20,458 824 4.03 46 87 (41)
======= ====== ===
TOTAL NET INTEREST INCOME FROM DOMESTIC AND FOREIGN
OFFICES................................................... $ 577 2.82% $40 $59 $(19)
====== ===== === === ====
</TABLE>
- -------------------------
NOTES TO NET INTEREST INCOME TABLES:
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt interest income (for Federal purposes) has been restated to a
comparable taxable level. The Federal statutory tax rate used for this
purpose was 35 percent in 1999, 1998 and 1997. 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 SECURITIES
Yields on securities classified as available-for-sale are based on amortized
cost.
15
<PAGE> 17
HARRIS BANKCORP, INC. AND SUBSIDIARIES
NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------ ----------------------------
INTEREST 1998 VS. 1997
-----------------------
INCREASE
(DECREASE) DUE
TO CHANGE IN
AVERAGE AVERAGE NET -------------- AVERAGE AVERAGE
BALANCE INTEREST RATE CHANGE VOLUME RATE BALANCE INTEREST RATE
------- -------- ------- ------ ------ ---- ------- -------- -------
(FULLY TAXABLE EQUIVALENT BASIS, IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
DOMESTIC OFFICES:
Loans, including fees................ $11,536 $ 890 7.71% $(33) $ 54 $ (87) $10,871 $ 923 8.49%
Securities:
U.S. Treasury and Federal agency... 5,627 352 6.26 65 71 (6) 4,499 287 6.38
State and municipal................ 302 25 8.20 (1) -- (1) 305 26 8.68
Other.............................. 73 5 6.57 3 2 1 33 2 4.81
------- ------ ---- ------- ------
Total securities............... 6,002 382 6.36 67 74 (7) 4,837 315 6.51
Trading account assets............... 79 5 6.30 -- -- -- 68 5 6.79
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) -- 198 11 5.68
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) 15,974 1,254 7.85
------- ------ ---- ------- ------
FOREIGN OFFICES:
Loans, including fees................ 124 7 5.55 2 2 -- 90 5 5.24
Securities:
U.S. Treasury and Federal agency... 81 4 5.53 (1) -- (1) 80 5 5.76
Interest-bearing deposits at banks... 147 9 5.81 (22) (26) 4 602 31 5.22
Federal funds sold and securities
purchased under agreement to
resell............................. 24 1 5.12 -- -- -- 32 1 4.61
------- ------ ---- ------- ------
Total foreign earning
assets/interest income....... 376 21 5.63 (21) (21) -- 804 42 5.26
------- ------ ---- ------- ------
TOTAL DOMESTIC AND FOREIGN EARNING
ASSETS/INTEREST INCOME............. $18,337 1,316 7.18 20 116 (96) $16,778 1,296 7.72
======= ====== ==== ======= ======
SUPPORTING LIABILITIES/INTEREST
EXPENSE
DOMESTIC OFFICES:
Interest checking deposits........... $ 335 8 2.43 (7) (11) 4 $ 854 15 1.73
Money market accounts................ 3,106 113 3.63 34 42 (8) 1,964 79 4.03
Savings deposits and certificates.... 4,631 227 4.89 (8) (5) (3) 4,735 235 4.97
Other interest-bearing time
deposits........................... 1,710 95 5.55 45 46 (1) 890 50 5.59
------- ------ ---- ------- ------
Total interest-bearing
deposits..................... 9,782 443 4.52 64 60 4 8,443 379 4.49
Short-term borrowings................ 3,317 172 5.19 19 21 (2) 2,910 153 5.27
Senior notes......................... 855 48 5.58 9 9 -- 695 39 5.57
Minority interest -- dividends on
preferred stock of subsidiary...... 222 16 7.39 16 16 -- -- -- --
Long-term notes...................... 414 29 7.13 2 2 -- 379 27 7.29
------- ------ ---- ------- ------
Total domestic interest-bearing
liabilities/interest
expense...................... 14,590 708 4.86 110 105 5 12,427 598 4.82
------- ------ ---- ------- ------
FOREIGN OFFICES:
Time deposits........................ 1,250 67 5.33 (30) (28) (2) 1,768 97 5.48
Short-term borrowings................ 100 4 3.84 1 1 -- 90 3 3.65
------- ------ ---- ------- ------
Total foreign interest-bearing
liabilities/ interest
expense...................... 1,350 71 5.22 (29) (27) (2) 1,858 100 5.39
------- ------ ---- ------- ------
Total domestic and foreign interest-
bearing liabilities/interest
expense............................ 15,940 779 4.89 81 80 1 14,285 698 4.89
Other noninterest-bearing supporting
liabilities........................ 2,397 -- -- -- -- -- 2,493 -- --
------- ------ ---- ------- ------
TOTAL DOMESTIC AND FOREIGN SUPPORTING
LIABILITIES/INTEREST EXPENSE....... $18,337 779 4.25 81 66 15 $16,778 698 4.16
======= ------ ---- ======= ------
TOTAL NET INTEREST INCOME FROM
DOMESTIC AND FOREIGN OFFICES....... $ 537 2.93% $(61) $ 50 $(111) $ 598 3.56%
====== ===== ==== ==== ===== ====== ====
</TABLE>
16
<PAGE> 18
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 a fully taxable equivalent (FTE) basis,
which, in effect, restates tax-advantaged income to a comparable level with
nontax-advantaged income. In 1999, the Corporation's FTE net interest income was
$577.4 million, up 8 percent from $537.2 million in 1998.
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
1999, the Corporation's average earning assets grew 12 percent, while net
interest margin decreased 11 basis points from 2.93 percent in 1998 to 2.82
percent in 1999.
Average earning assets in 1999 totaled $20.46 billion, up $2.12 billion, or
12 percent, from $18.34 billion in 1998. This growth is primarily the result of
an increase in average securities of $1.41 billion, or 23 percent, to $7.50
billion, led by increased holdings of Federal agency securities amounting to
$1.34 billion. Average loans increased $853 million, or 7 percent, to $12.51
billion, led by increases in average commercial and real estate loan
outstandings of $672 million (9 percent) and $167 million (5 percent),
respectively. The growth in average loans is attributable to a growing demand
for credit in the U.S. economy coupled with an aggressive marketing effort by
the Corporation. Loans and investment securities, as a percent of earning
assets, were 61 percent and 37 percent, respectively, compared to 64 percent and
33 percent, respectively, in 1998. Average Federal funds sold and securities
purchased under agreement to resell increased 23 percent or $37 million compared
to 1998.
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 1999, Federal funds purchased and
securities sold under agreement to repurchase increased $1.02 billion or 34
percent, which resulted in an increase in short-term borrowings of $1.02 billion
or 30 percent from 1998 levels. Domestic interest-bearing deposits increased
$296 million, or 3 percent, from 1998. Average foreign office time deposits
totaled $1.59 billion, up 28 percent or $345 million, compared to $1.25 billion
in 1998. Noninterest-bearing funds supporting earning assets decreased $72
million, and declined from 15 percent to 11 percent year to year as a percentage
of average supporting liabilities.
The Corporation's consolidated net interest margin declined to 2.82 percent
from 2.93 percent in 1998. This decrease primarily reflects the continued
reliance on wholesale interest-bearing funds to support growth in earning
assets.
17
<PAGE> 19
NONINTEREST INCOME
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1999 VS. 1998 1998 VS. 1997
-------------------------------- ---------------- ---------------
1999 1998 1997 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees............. $155,810 $143,724 $133,714 $ 12,086 8 $ 10,010 7
Money market and bond
trading..................... 8,892 10,512 7,269 (1,620) (15) 3,243 45
Foreign exchange.............. 8,314 6,772 5,364 1,542 23 1,408 26
Merchant and charge card
fees........................ 30,189 26,772 50,085 3,417 13 (23,313) (47)
Service fees and charges...... 116,423 109,372 96,324 7,051 6 13,048 14
Securities gains.............. 14,075 26,953 13,207 (12,878) (48) 13,746 104
Gain on sale of credit card
portfolio................... -- 12,000 -- (12,000) (100) 12,000 100
Bank-owned insurance
investments................. 41,414 32,339 12,917 9,075 28 19,422 150
Foreign fees.................. 18,850 19,575 18,182 (725) (4) 1,393 8
Other......................... 69,015 63,022 40,686 5,993 10 22,336 55
-------- -------- -------- -------- ---- -------- ---
Total noninterest income.... $462,982 $451,041 $377,748 $ 11,941 3 $ 73,293 19
======== ======== ======== ======== ==== ======== ===
</TABLE>
Noninterest income for the year was $463.0 million in 1999, up $11.9
million or 3 percent from 1998. In the first quarter of 1998, the Corporation
realized a gain of $12.0 million on the sale of the credit card portfolio.
Excluding the credit card gain, noninterest income increased 5 percent over
1998. The primary contributors to the increase were trust and investment
management fees and service fees and charges. Gains from sales of securities of
$14.1 million were substantially less in 1999 compared to the $27.0 million in
1998.
Trust and investment management fees were $155.8 million, up $12.1 million
or 8 percent from the prior year, primarily from increased personal trust and
corporate trust revenue. Service fees and charges were $116.4 million in 1999,
up $7.1 million or 6 percent over 1998 due primarily to product growth. Income
from bank-owned insurance investments increased $9.1 million or 28 percent from
1998 due to increased investment balances. Other income, which includes
syndication fees and mortgage loan sales, increased $6.0 million or 10 percent.
Trading account gains, primarily from municipal bond trading, totaled $8.9
million, down $1.6 million from 1998. Financial results from trading activities
will typically exhibit greater fluctuations over time than other business
activities. Foreign exchange revenues (FX) were $8.3 million, up $1.5 million or
23 percent from 1998. HTSB and BMO combine their U.S. FX trading. 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.
On February 1, 2000, the Corporation announced the sale of its corporate
trust businesses. In separate and unrelated transactions, the indenture trust
business is being sold to a subsidiary of The Bank of New York Company, Inc.,
and the shareholder services business to Computershare Limited. The combined
sales will result in an estimated pre-tax gain to Bankcorp of approximately $50
million in first quarter 2000, not including revenue contingent upon the outcome
of certain events, expected in second half 2000. The sales are subject to
regulatory approval and are expected to close during first quarter 2000. In
1999, noninterest revenue from the corporate trust businesses amounted to $51.7
million. The Corporation does not believe that the sale of these businesses will
have a material impact on the results of operations for future periods.
18
<PAGE> 20
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1999 VS. 1998 1998 VS. 1997
------------------------------ -------------- -------------
1999 1998 1997 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation..... $351,251 $326,103 $314,719 $ 25,148 8 $11,384 4
Pension, profit sharing and other
employee benefits................. 70,911 60,906 57,423 10,005 16 3,483 6
Net occupancy....................... 48,573 51,342 56,462 (2,769) (5) (5,120) (9)
Equipment........................... 61,812 52,622 48,119 9,190 17 4,503 9
Marketing........................... 30,732 25,896 25,675 4,836 19 221 1
Communication and delivery.......... 25,163 22,595 24,129 2,568 11 (1,534) (6)
Deposit insurance................... 3,310 3,082 2,988 228 7 94 3
Expert services..................... 28,455 33,440 31,159 (4,985) (15) 2,281 7
Contract programming................ 12,195 23,633 14,047 (11,438) (48) 9,586 68
Other............................... 57,331 54,881 61,117 2,450 4 (6,236) (10)
-------- -------- -------- -------- --- ------- ---
689,733 654,500 635,838 35,233 5 18,662 3
Goodwill and other valuation
intangibles....................... 25,036 24,104 27,839 932 4 (3,735) (13)
-------- -------- -------- -------- --- ------- ---
Total noninterest expenses..... $714,769 $678,604 $663,677 $ 36,165 5 $14,927 2
======== ======== ======== ======== === ======= ===
</TABLE>
Noninterest expenses totaled $714.8 million, up $36.2 million or 5 percent
from 1998. Employment-related expenses totaled $422.2 million, an increase of
$35.2 million or 9 percent. The increase reflects both salary adjustments and
growth in benefit costs. Employee benefit increases were in part a function of
lower discount rates applied to projected retirement liabilities. Net occupancy
expenses totaled $48.6 million, down $2.8 million from 1998. Equipment expenses
totaled $61.8 million, up $9.2 million or 17 percent from 1998 primarily due to
additional depreciation from a new retail applications system and a new trust
applications system, both placed in service during 1999. Expert services and
contract programming decreased $5.0 million and $11.4 million, respectively,
primarily due to limits on new systems development in order to devote resources
to ensuring that all current systems were Y2K compliant. Amortization of
goodwill and other valuation intangibles increased $0.9 million or 4 percent
from 1998.
INCOME TAXES
The Corporation recorded income tax expense of $65.1 million in 1999,
compared to $69.9 million in 1998. The Corporation's effective tax rate
decreased to 24.3 percent in 1999 from 27.7 percent in 1998 primarily as a
result of an increase in tax-advantaged assets.
At December 31, 1999, the Corporation's Federal and state net deferred tax
assets were $68 million and $10 million, respectively. The Corporation has
recognized its Federal and state deferred tax assets as management believes that
it is more likely than not that the deferred tax assets will be realized.
The deferred taxes reported on the Corporation's Statement of Condition at
December 31, 1999 also include a $103 million asset for the tax effect of
unrealized losses associated with marking to market certain securities
designated as available-for-sale.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. As issued, the Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for
19
<PAGE> 21
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." The Statement was effective upon issuance and
amended SFAS No. 133 to be effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, which for the Corporation would be the quarter
ending March 31, 2001. The Corporation is in the process of assessing the impact
of adopting the Statements on its financial position and 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 1999, remaining unchanged from 1998. The
current year's ROA was equal to the average ROA of 0.86 percent for the
five-year period ended December 31, 1999. 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 5.85
percent in 1999 compared to 6.56 percent in 1998. For 1999, the return on
average common stockholder's equity ("ROE") was 13.56 percent, up from the 11.92
percent achieved in 1998 and the 12.24 percent five-year average return for the
period ended December 31, 1999.
Cash ROA of 0.94 percent in 1999 remained unchanged from 1998. Cash ROE was
18.14 percent and 16.24 percent in 1999 and 1998, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1999 1998 1997
---- ---- ----
(BASED ON NET INCOME AND
DAILY AVERAGES)
<S> <C> <C> <C>
Return on average assets(1)................................. 0.86% 0.86% 0.82%
Cash return on average assets(2)............................ 0.94 0.94 0.92
Average common stockholder's equity as a percentage of total
assets(1)................................................. 5.85 6.56 6.91
Return on average common stockholder's equity(1)............ 13.56 11.92 10.54
Cash return on average common stockholder's equity(3)....... 18.14 16.24 15.43
Dividend payout ratio(4).................................... 40.53 108.47 38.99
Earnings retained as a percentage of average common
stockholder's equity(5)................................... 8.78 (1.11) 7.38
Percentage growth in total average assets................... 10.78 10.45 11.89
</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 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 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 equal to $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 1998 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% in 1998.
CAPITAL POSITION
The Corporation's equity capital of $1.58 billion at December 31, 1999 has
increased significantly from five years earlier when equity capital amounted to
$1.02 billion. During 1999 and 1998, Bankcorp declared and paid common dividends
of $66 million and $182 million, respectively, and preferred dividends of $17
million in both years. 1998 common dividends included special dividends of $125
million of which $50 million related to
20
<PAGE> 22
the sale of HTSB's credit card portfolio. During 1999, the Corporation's equity
capital was reduced by $194 million representing after-tax unrealized holding
losses related to the Corporation's securities available-for-sale. During 1998,
equity capital was increased by $27 million of after-tax unrealized holding
gains. Average consolidated equity capital was $1.60 billion in 1999 compared to
$1.62 billion in 1998.
Bankcorp's double leverage ratio, which is the Bankcorp parent company only
net equity investment in bank and nonbank subsidiaries as a percentage of its
equity capital, was 106 percent at December 31, 1999, down from 110 percent at
December 31, 1998. This ratio generally measures the extent to which holding
company equity investments are supported, in part, by parent-issued debt
instruments. A double leverage ratio greater than 100 percent indicates that
parent company equity investments are supported, in part, by parent-issued debt.
In the case of Bankcorp, outstanding long-term debt is sufficient to fund equity
investments not otherwise covered by equity capital.
RISK-BASED CAPITAL
U.S. banking regulators have issued risk-based capital guidelines, based on
the international "Basle Committee" agreement, which are applicable to all U.S.
banks and bank holding companies. These guidelines serve to: 1) establish a
uniform capital framework which is more sensitive to risk factors, including
off-balance-sheet exposures; 2) promote the strengthening of capital positions;
and 3) diminish a source of competitive inequality arising from differences in
supervisory requirements among countries. Bankcorp, as a U.S. bank holding
company, and HTSB, as a state-member bank, must each adhere to the guidelines of
the Federal Reserve Board (the "Board"), which are not significantly different
than those published by other U.S. banking regulators. 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. 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 8.88 percent and 11.54 percent, respectively, at
December 31, 1999.
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 are
expected to maintain a minimum ratio of 4 percent. The Corporation's Tier 1
leverage ratio was 7.07 percent for fourth quarter 1999.
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 on page 74 of this Report). The preferred
stock qualifies as Tier 1 capital at both HTSB and the Corporation 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 74 of this Report. Based on those regulations effective at
December 31, 1999 all of the Corporation's subsidiary banks were designated as
"well capitalized" at year-end 1999, 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
21
<PAGE> 23
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, 1999 the Corporation's intangible assets totaled $250 million,
including approximately $233 million of intangibles excluded under capital
guidelines. The Corporation's tangible Tier 1 leverage ratio (which excludes all
intangibles) was 7.01 percent for the fourth quarter of 1999.
Risk-based capital guidelines exclude from Tier 1 capital net unrealized
holding gains (losses) associated with marking to market debt securities
designated as available-for-sale. Net unrealized losses on marketable equity
securities are deducted from Tier 1 capital. Up to 45 percent of the pretax net
unrealized holding gains on available-for-sale equity securities may be included
in Tier 2 capital. Net unrealized holding gains (losses) excluded from Tier 1
capital for risk-based capital purposes amounted to ($155) million and $38
million at December 31, 1999 and 1998, respectively.
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
---------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets (end of period).......................... $24,862,878 $22,797,830 $20,133,461
=========== =========== ===========
Average assets (fourth quarter)....................... $24,574,252 $22,265,475 $19,978,660
=========== =========== ===========
Risk-based on-balance-sheet assets.................... $15,118,070 $14,077,289 $13,051,738
=========== =========== ===========
Risk-based off-balance-sheet assets................... $ 4,718,669 $ 4,559,231 $ 4,112,859
=========== =========== ===========
Total risk-based assets, net of deductions (based
on regulatory accounting principles)........... $19,598,872 $18,374,480 $16,883,446
=========== =========== ===========
Tier 1 capital........................................ $ 1,739,753 $ 1,591,846 $ 1,339,949
=========== =========== ===========
Supplementary capital................................. $ 522,170 $ 535,363 $ 470,443
=========== =========== ===========
Total capital, net of deductions (based on
regulatory accounting principles).............. $ 2,261,292 $ 2,126,585 $ 1,809,767
=========== =========== ===========
Tier 1 leverage ratio................................. 7.07% 7.26% 6.81%
Risk-based capital ratios:
Tier 1........................................... 8.88% 8.66% 7.94%
Total............................................ 11.54% 11.57% 10.72%
</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
22
<PAGE> 24
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, securities available-for-sale and trading account assets.
Liquid assets represented approximately 40 percent of the Corporation's total
assets and amounted to $9.89 billion at December 31, 1999 compared to liquid
assets of $8.83 billion or approximately 39 percent of total assets one year
earlier. However, the most important source of liquidity is the ability to raise
funds, as required, in a variety of markets using multiple instruments. This
fund-raising activity involves the identification of broadly distributed sources
of funds, typically referred to as managed liabilities, which are varied by
type, maturity and geographical location of customers. The Corporation monitors
and controls the sources of these funds to avoid unwarranted market activity or
customer concentrations.
The principal sources of external funds available to the Corporation are
retail and wholesale liabilities. Retail liabilities are comprised of demand
deposits, money market accounts, NOW accounts, passbook savings and
nonnegotiable certificates of deposit, typically of small denomination.
Wholesale funding sources include Eurodollar deposits in foreign offices,
Federal funds borrowed, securities sold under agreement to repurchase,
negotiable large denomination certificates of deposit and commercial paper. HTSB
offers to institutional investors from time to time, unsecured short-term and
medium-term bank notes in an aggregate principal amount of up to $1.50 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, 1999, $1.50
billion of senior notes were outstanding with original maturities ranging from
366 to 385 days (remaining maturities ranging from 18 to 223 days) and stated
interest rates ranging from 5.00 percent to 5.85 percent. 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.
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 $11.41 billion or 61 percent of total
non-equity funding at December 31, 1998 to $11.87 billion or 57 percent of total
non-equity funding at December 31, 1999. Total wholesale deposits and short-term
borrowings increased from $7.23 billion or 39 percent of total non-equity
funding at December 31, 1998 to $9.03 billion or 43 percent of total non-equity
funding at December 31, 1999.
Average money market liabilities increased 30 percent to $4.43 billion from
$3.42 billion for 1998, primarily as a result of increases in Federal funds
borrowed and securities sold under repurchase agreements. Average money market
assets decreased $93 million or 20 percent from 1998. These assets represented 2
percent of average earning assets in 1999 compared to 3 percent in 1998,
primarily reflecting decreases in interest bearing deposits at banks.
The Corporation, in connection with the issuance of commercial paper and
for other corporate purposes, had a $150 million revolving credit agreement with
five nonaffiliated banks and BMO that terminated on December 18, 1999. At that
time, the Corporation entered into a new $150 million revolving credit agreement
with five nonaffiliated banks and BMO that terminates on December 8, 2000. There
were no borrowings under either credit facility in 1999 or 1998.
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
23
<PAGE> 25
flows from financing and investing activities. The Corporation's Asset/Liability
Management Committee monitors and adjusts its strategies in response to changing
liquidity demands.
INTEREST SENSITIVITY
Interest rate sensitivity information, in the form of interest sensitivity
gap schedules and simulations reflecting exposure of earnings to future changes
in interest rates, is used in conjunction with other data by the Corporation's
banking subsidiaries to monitor and manage their individual interest rate
exposures. The Corporation uses various derivative products, including interest
rate swaps, forward rate agreements, futures, options, and forward commitments
to manage interest rate sensitivities corresponding to various balance sheet
items, thereby modifying its exposure to changing interest rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------------------------
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.................. $ 6,218 $ 2,356 $ 1,290 $ 2,470 $ 780 $ -- $13,114
Available-for-sale and
trading account
securities........... 365 677 1,361 2,892 2,565 3 7,863
Interest-bearing
deposits at banks.... -- 240 -- -- -- -- 240
Federal funds sold and
securities purchased
under agreement to
resell............... 306 -- -- -- -- -- 306
Other assets........... -- -- -- -- -- 3,340 3,340
------- ------- ------- ------- ------ ------- -------
Total assets............. 6,889 3,273 2,651 5,362 3,345 3,343 $24,863
------- ------- ------- ------- ------ ------- =======
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------------------------
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>
LIABILITIES AND
STOCKHOLDER'S EQUITY
Time deposits.......... 2,784 678 1,634 547 21 -- 5,664
Savings and interest
checking deposits.... 5,866 -- -- -- -- -- 5,866
Noninterest-bearing
deposits............. -- -- -- -- -- 3,765 3,765
------- ------- ------- ------- ------ ------- -------
Total deposits........... 8,650 678 1,634 547 21 3,765 15,295
Federal funds purchased
and securities sold
under agreement to
repurchase........... 4,224 305 8 -- -- -- 4,537
Minority interest-
preferred stock of
subsidiary........... -- -- -- -- -- 250 250
Other interest-bearing
liabilities.......... 1,189 617 903 100 75 -- 2,884
Other
noninterest-bearing
liabilities.......... -- -- -- -- -- 316 316
Stockholder's equity... -- -- -- -- -- 1,581 1,581
------- ------- ------- ------- ------ ------- -------
Total liabilities and
stockholder's equity... 14,063 1,600 2,545 647 96 5,912 $24,863
------- ------- ------- ------- ------ ------- =======
Interest sensitivity
gap before net
interest rate swaps,
derivative products
and forward
commitments.......... (7,174) 1,673 106 4,715 3,249 (2,569)
Net interest rate
swaps.................. (41) (61) 8 87 7 --
------- ------- ------- ------- ------ -------
Interest sensitivity
gap.................. $(7,215) $ 1,612 $ 114 $ 4,802 $3,256 $(2,569)
======= ======= ======= ======= ====== =======
Cumulative gap......... $(5,603) $(5,489) $ (687) $2,569
======= ======= ======= ======
</TABLE>
The schedule above presents the Corporation's consolidated interest
sensitivity gap at December 31, 1999. 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, 1999, the Corporation had a cumulative negative one-year interest
rate gap of $5.5 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 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
25
<PAGE> 27
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 99%
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, 1999, for an immediate 100
basis point upward movement in interest rates, net interest income would
decrease by approximately $19.2 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 $126.6 million. Conversely, a decline in rates would
have approximately the same absolute impacts but in the opposite direction. At
December 31, 1998, the same analysis using similar assumptions indicated that
net interest income would have decreased by approximately $17.5 million and the
net equity value of all interest-sensitive positions would have decreased by
$152.8 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 48 of this Report. This financial statement is based
on period-end balances and does not reflect average investment or financing
levels.
As a bank holding company, the Corporation regularly receives and disperses
large volumes of cash and cash equivalents. Since these gross numbers provide
little additional information to financial statement users, the FASB permits
bank holding companies to net certain cash receipts and payments in their cash
flow statements. The Corporation has adopted this net presentation for loans and
deposits.
The Corporation's Consolidated Statements of Cash Flows divide 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, securities, money market
assets, subsidiaries, and fixed assets. Financing cash flows include deposits,
both infusions from and dividend payments to the stockholder, along with
borrowings and principal repayments to bondholders or other creditors.
Cash flows from operations are a significant source of operating capital.
Since applicable accounting statements require that cash transactions involving
assets held for sale and trading assets be included with operating cash flows,
normal year-end fluctuations in these holdings may not appropriately portray the
company's cash flows generated from operations. Core operating cash flows,
consisting of net income before provision for loan losses and depreciation and
amortization, increased by $27 million. Year-end trading account assets
decreased $52 million year to year, while loans held for sale (primarily
residential mortgages) decreased $153 million.
In 1999, the Corporation's investing activities utilized a total of $2.54
billion in net cash. Securities, the primary use of new funds, increased $1.14
billion. Interest-bearing deposits at banks increased $141 million, investments
in bank-owned insurance increased $47 million and Federal funds sold and
securities purchased under agreement to resell increased $150 million.
In 1999, the Corporation's financing activities included accepting customer
deposits, purchasing Federal funds and issuing short-term senior notes.
Financing activities provided $2.04 billion of net cash available to the
Corporation in 1999. Deposits decreased $28 million and short-term senior notes
of $560 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.
26
<PAGE> 28
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 the 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 1999 remaining unchanged from 1998. Excluding consumer loans,
term loans (those with a remaining contractual maturity in excess of one year)
totaled $1.28 billion. Of these loans, $1.09 billion or 85 percent are due
within five years. Overall, the average FTE yield on total loans increased to
7.92 percent in 1999 from 7.40 percent in 1998. The Corporation's average prime
rate in 1999 was 8.00 percent compared to 8.35 percent in 1998.
Type of Loan, by Maturity*
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
WITHIN 1 THROUGH OVER
1 YEAR 5 YEARS 5 YEARS TOTAL
------ --------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural........ $7,322,734 $1,063,529 $192,257 $8,578,520
Real estate construction...................... 93,484 24,812 1,421 119,717
Foreign....................................... 36,476 149 1,520 38,145
---------- ---------- -------- ----------
$7,452,694 $1,088,490 $195,198 $8,736,382
========== ========== ======== ==========
Loans with:
Predetermined interest rates................ $ 375,163 $ 347,457 $ 80,496 $ 803,116
Floating interest rates..................... 7,077,531 741,033 114,702 7,933,266
---------- ---------- -------- ----------
$7,452,694 $1,088,490 $195,198 $8,736,382
========== ========== ======== ==========
</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, 1999, the fair value of available-for-sale securities was
$258 million below amortized cost. As a result, stockholder's equity included
$156 million of unrealized (after tax effect) holding losses. At December 31,
1998, the fair value of available-for-sale securities was $63 million above
amortized cost, and stockholder's equity included $38 million of unrealized
(after tax effect) holding gains.
27
<PAGE> 29
Securities averaged $7.39 billion in 1999. On an FTE basis, interest income
from securities increased $68.9 million to $455.3 million. The overall FTE yield
on the Corporation's securities averaged 6.07 percent during 1999. Yields on
average available-for-sale securities are based on amortized cost.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ -----
(FULLY TAXABLE EQUIVALENT YIELDS)
(DAILY BALANCE SHEET AVERAGES, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury...................... $1,519,674 5.80% $1,601,437 6.21% $1,738,220 6.37%
Federal agency..................... 5,384,491 6.03 4,139,620 6.26 2,810,739 6.38
State and municipal................ 340,665 7.52 312,320 8.19 313,896 8.68
Other.............................. 146,805 7.26 73,066 6.63 32,880 4.81
---------- ---- ---------- ---- ---------- ----
Total securities
available-for-sale............ $7,391,635 6.07% $6,126,443 6.35% $4,895,735 6.51%
========== ==== ========== ==== ========== ====
</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 1999,
the Corporation purchased $12.73 billion of available-for-sale securities, sold
$879 million of available-for-sale securities and had $10.71 billion of
available-for-sale securities mature. During 1998, the Corporation purchased
$17.41 billion of available-for-sale securities, sold $2.55 billion of
available-for-sale securities and had $13.20 billion of available-for-sale
securities mature. The aforementioned sales of securities generated a pretax net
gain of $14.1 million during 1999 compared to a net gain of $27.0 million during
1998 and a net gain of $13.2 million in 1997. On an after-tax basis, the
Corporation recorded a net gain from securities sales of $8.6 million in 1999
compared to $16.5 million in 1998 and $8.1 million in 1997. 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 losses for available-for-sale securities, as of December
31, 1999, amounted to $258 million compared to unrealized holding gains of $63
million as of December 31, 1998. The change in unrealized gains and losses of
$321 million was due to losses in market value as a result of increases in
interest rates at year-end 1999 versus year-end 1998, and a change in the mix of
the portfolio.
Carrying Value
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT
------ - ------ - ------ %
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury...................... $1,673,773 21.5 $1,545,642 22.1 $1,628,882 31.1
Federal agency..................... 5,623,783 72.2 4,942,196 71.0 3,253,819 62.2
State and municipal................ 338,797 4.3 337,672 4.9 312,564 6.0
Other.............................. 157,346 2.0 138,144 2.0 34,125 0.7
---------- ----- ---------- ----- ---------- -----
Total securities
available-for-sale............ $7,793,699 100.0 $6,963,654 100.0 $5,229,390 100.0
========== ===== ========== ===== ========== =====
</TABLE>
At year-end 1999, the weighted average maturity of the Corporation's
available-for-sale securities was 5 years and 2 months, a decrease of 3 years
and 1 month from the average maturity at the end of 1998. The maturity
distribution of the investment portfolio at December 31, 1999, 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
28
<PAGE> 30
amortization of premiums, by the amortized cost of the securities outstanding at
December 31, 1999. 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, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
available-for-sale
Within 1 year........ $ 162,045 5.34% $2,105,450 5.57% $ 69,614 7.78% $2,337,109 5.62%
1 to 5 years......... 940,614 5.52 1,243,038 5.97 184,354 6.96 2,368,006 5.87
5 to 10 years........ 634,442 5.45 880,949 6.38 98,612 7.37 1,614,003 6.07
Over 10 years........ -- -- 1,570,685 6.46 11,201 7.87 1,581,886 6.47
No stated maturity... -- -- -- -- 150,803 8.27 150,803 8.27
---------- ---- ---------- ---- -------- ---- ---------- ----
1999 Total........... $1,737,101 5.48% $5,800,122 6.02% $514,584 7.56% $8,051,807 6.00%
========== ==== ========== ==== ======== ==== ========== ====
1998 Total........... $1,503,734 5.67% $4,927,612 5.91% $469,094 7.60% $6,900,440 5.97%
========== ==== ========== ==== ======== ==== ========== ====
1999 Average
maturity............. 4 years 9 months 5 years 6 months 2 years 5 months 5 years 2 months
1998 Average
maturity............. 4 years 8 months 10 years 5 months 0 years 3 months 8 years 3 months
</TABLE>
Other than securities of the U.S. Government and its agencies and
corporations, at December 31, 1999, there were no securities of any one issuer
aggregating more than 10 percent of stockholder's equity of the Corporation. In
the opinion of management, there were no material investments in securities
which would have constituted an unusual risk or uncertainty for the Corporation
at December 31, 1999.
DEPOSITS
Total deposits in 1999 averaged $15.14 billion, up $767 million or 5
percent from 1998. 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 $459 million or 4
percent to $11.87 billion. Money market accounts experienced the largest growth,
up $955 million or 31 percent over 1998 levels. Interest checking deposits and
savings certificates decreased by $70 million or 21 percent and by $270 million
or 8 percent over 1998 levels, respectively. Demand deposits also experienced a
decrease of $209 million or 6 percent over 1998 levels to $3.11 billion.
Passbook and statement savings accounts and other time deposits totaling $1.45
and $1.67 billion respectively, remained at relatively the same level as 1998.
Deposits in foreign offices increased by $345 million or 28 percent to $1.59
billion. Daily averages and year-to-year comparisons are summarized below.
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
YEARS ENDED DECEMBER 31 1999 VS. 1998 1998 VS. 1997
--------------------------------------- --------------- ----------------
1999 1998 1997 AMOUNT % AMOUNT %
---- ---- ---- ------ - ------ -
(DAILY AVERAGES, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits.......... $ 3,107,787 $ 3,316,611 $ 3,049,283 $(208,824) (6) $ 267,328 9
Interest checking
deposits............... 265,046 334,633 853,799 (69,587) (21) (519,166) (61)
Money market accounts.... 4,061,648 3,106,277 1,964,212 955,371 31 1,142,065 58
Passbook and statement
savings accounts....... 1,453,141 1,401,687 1,404,897 51,454 4 (3,210) (0)
Savings certificates..... 2,982,186 3,251,846 3,354,022 (269,660) (8) (102,176) (3)
Other time deposits...... 1,673,560 1,710,364 890,277 (36,804) (2) 820,087 92
Deposits in foreign
offices................ 1,594,921 1,249,639 1,767,534 345,282 28 (517,895) (29)
----------- ----------- ----------- --------- --- ---------- ---
Total deposits......... $15,138,289 $14,371,057 $13,284,024 $ 767,232 5 $1,087,033 8
=========== =========== =========== ========= === ========== ===
</TABLE>
29
<PAGE> 31
Interest expense on deposits decreased by $18.5 million or 4 percent in
1999 primarily due to lower interest rates. Interest expense on domestic
deposits decreased 7 percent from 1998, while interest on foreign office
deposits increased by 19 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
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest checking deposits............................... 2.11% 2.43% 1.73%
Money market accounts.................................... 3.07 3.63 4.03
Passbook and statement savings accounts.................. 3.01 3.32 3.29
Savings certificates..................................... 5.08 5.57 5.67
Other interest-bearing time deposits..................... 5.19 5.55 5.59
Time deposits in foreign offices......................... 4.98 5.33 5.48
Total interest-bearing deposits........................ 4.09% 4.62% 4.66%
==== ==== ====
</TABLE>
Certificates of deposit in denominations of $100,000 or more issued by
domestic offices totaled $2.35 billion at December 31, 1999. Total interest
expense on domestic office certificates of deposit of $100,000 or more amounted
to approximately $136.7 million compared to $150.7 million in 1998 and $115.1
million in 1997. 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
------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Maturities:
3 months or less................................... $1,706 $2,223 $1,132
3 to 6 months...................................... 247 427 229
6 to 12 months..................................... 273 210 178
Over 12 months..................................... 127 126 98
------ ------ ------
Total............................................ $2,353 $2,986 $1,637
====== ====== ======
</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 20 percent to $367 million in 1999 from $460 million in 1998. The
average yield on money market assets decreased from 4.31 percent in 1998 to 3.31
percent in 1999. Interest income earned on these assets decreased 40 percent to
$11.9 million in 1999. At December 31, 1999, interest-bearing deposits at banks
and Federal funds sold totaled $240 million and $306 million, respectively,
compared to $99 million and $156 million at year-end 1998. There were no reverse
repurchase agreements outstanding at December 31, 1999 or December 31, 1998.
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 1999, money market liabilities averaged $5.76 billion, an increase of 35
percent from 1998, when money market liabilities averaged $4.27 billion. The
average rate paid on these borrowings decreased from 5.24 percent in 1998 to
4.94 percent in 1999, reflecting generally lower short-term
30
<PAGE> 32
interest rates experienced by the market during 1999. At December 31, 1999,
repurchase agreements totaled $3.26 billion compared to $2.46 billion at
year-end 1998. Federal funds purchased and securities sold under agreement to
repurchase consist of overnight Federal funds borrowed and securities sold to
banks, brokers and corporations under agreement to repurchase. The repurchase
agreements are generally outstanding for periods ranging from one day to six
months. The following amounts and rates applied during 1999, 1998 and 1997:
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year...................... $4,536,831 $3,440,832 $2,451,873
Average interest rate of outstanding borrowings at end
of year.............................................. 4.66% 4.55% 5.65%
Highest amount outstanding as of any month-end during
the year............................................. $4,536,831 $3,445,461 $3,633,014
Daily average amount outstanding during the year....... $3,635,503 $2,920,337 $2,610,976
Daily average annualized rate of interest.............. 4.81% 5.14% 5.22%
</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 1999, 1998 and 1997:
Short-Term Borrowings
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year......................... $ 684,127 $168,151 $503,320
Average interest rate of outstanding borrowings at end of
year.................................................... 6.44% 5.61% 5.96%
Highest amount outstanding as of any month-end during
the year................................................ $1,044,098 $443,499 $503,320
Daily average amount outstanding during the year.......... $ 512,311 $188,575 $ 68,396
Daily average annualized rate of interest................. 5.16% 5.25% 5.09%
</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 1999, 1998 and 1997:
Commercial Paper
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year........................... $245,050 $261,905 $351,427
Average interest rate of outstanding commercial paper at end
of year................................................... 4.67% 4.50% 5.31%
Highest amount outstanding as of any month-end during the
year...................................................... $332,479 $350,070 $390,739
Daily average amount outstanding during the year............ $286,362 $308,508 $320,805
Daily average annualized rate of interest................... 4.85% 5.23% 5.23%
</TABLE>
Senior notes are short- and medium-term notes issued to institutional
investors from time-to-time. During 1999, 1998 and 1997 only short-term notes
were outstanding. The following amounts and rates applied during 1999, 1998 and
1997:
Senior Notes
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at end of year...................... $1,500,000 $ 940,000 $ 100,000
Average interest rate of outstanding senior notes at
end
of year.............................................. 5.40% 5.22% 5.90%
Highest amount outstanding as of any month-end during
the year............................................. $1,500,000 $1,231,000 $1,325,000
Daily average amount outstanding during the year....... $1,322,518 $ 855,366 $ 695,329
Daily average annualized rate of interest.............. 5.22% 5.58% 5.57%
</TABLE>
31
<PAGE> 33
DISTRIBUTION OF LOANS BY TYPE OF BORROWER
SUMMARY
In 1999, significant year-to-year loan growth occurred among the following
loan categories: manufacturing and processing, public and private service
industries, other commercial, mortgages secured by residential and commercial
property and other installment.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Manufacturing and processing........... $ 2,662.9 $ 2,480.1 $ 2,343.5 $ 1,817.0 $1,437.7
Public and private service
industries.......................... 2,663.3 2,527.0 2,383.6 2,073.0 1,968.4
Mining (including oil and gas)......... 29.1 12.3 14.5 24.8 27.8
Farmers................................ 170.9 139.2 163.6 148.3 35.5
Individuals (single payment)........... 473.7 551.0 534.7 402.0 344.5
Loans to purchase and carry
securities.......................... 20.9 23.9 25.6 41.4 76.4
State and political subdivisions,
including industrial revenue
bonds............................... 8.2 11.4 12.9 18.3 28.5
Other commercial....................... 906.8 774.1 494.5 583.0 607.5
--------- --------- --------- --------- --------
Total Commercial.................... 6,935.8 6,519.0 5,972.9 5,107.8 4,526.3
--------- --------- --------- --------- --------
Finance companies...................... 191.1 195.8 217.5 233.7 215.4
Commercial banks....................... 4.6 -- 1.5 111.9 15.8
Investment companies................... 92.3 140.7 93.8 74.7 77.4
Mortgage companies..................... 60.5 90.4 68.4 3.4 5.1
Other financial institutions........... 769.6 726.4 631.4 505.3 393.1
--------- --------- --------- --------- --------
Total Financial Institutions........ 1,118.1 1,153.3 1,012.6 929.0 706.8
--------- --------- --------- --------- --------
Total Brokers and Dealers........... 524.7 522.3 437.3 447.4 331.4
--------- --------- --------- --------- --------
Construction........................... 119.7 149.2 163.9 186.9 195.7
Mortgages secured by residential
property............................ 2,777.8 2,605.6 2,218.2 1,947.6 1,511.8
Mortgages secured by commercial
property............................ 760.2 579.7 424.3 436.1 485.0
--------- --------- --------- --------- --------
Total Real Estate................... 3,657.7 3,334.5 2,806.4 2,570.6 2,192.5
--------- --------- --------- --------- --------
Charge card............................ -- -- -- 1,041.9 1,095.8
Other installment...................... 824.5 602.4 531.5 484.1 478.4
--------- --------- --------- --------- --------
Total Installment (to
individuals)...................... 824.5 602.4 531.5 1,526.0 1,574.2
--------- --------- --------- --------- --------
Total Lease Financing............... 15.9 16.9 23.0 29.9 --
--------- --------- --------- --------- --------
Total Domestic Loans................ 13,076.7 12,148.4 10,783.7 10,610.7 9,331.2
--------- --------- --------- --------- --------
Foreign Loans:
Governments and official
institutions........................ 0.5 0.8 0.9 1.0 1.0
Banks and other financial
institutions........................ 10.8 52.9 51.0 137.6 160.8
Other, primarily commercial and
industrial.......................... 26.9 28.2 37.1 3.0 40.9
--------- --------- --------- --------- --------
Total Foreign Loans................. 38.2 81.9 89.0 141.6 202.7
--------- --------- --------- --------- --------
Less unearned income..................... 0.9 1.9 4.4 7.6 16.1
--------- --------- --------- --------- --------
Loans, net of unearned income.......... $13,114.0 $12,228.4 $10,868.3 $10,744.7 $9,517.8
========= ========= ========= ========= ========
</TABLE>
32
<PAGE> 34
Average loans increased by 7 percent during 1999 compared to 1998. daily
average loans over the last five years were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DAILY AVERAGES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural.................. $ 8,506,467 $ 7,834,410 $ 6,965,201 $6,462,497 $5,716,282
Real estate construction........ 134,117 144,148 196,864 178,338 164,575
Real estate mortgages........... 3,086,162 2,908,755 2,171,475 1,686,435 1,257,370
Installment..................... 738,787 680,588 708,045 451,430 503,073
Charge card..................... -- -- 806,085 965,043 971,565
Foreign......................... 33,627 77,010 92,390 214,767 190,816
Lease financing................. 14,849 18,060 26,883 1,986 --
----------- ----------- ----------- ---------- ----------
Total loans........... 12,514,009 11,662,971 10,966,943 9,960,496 8,803,681
Less unearned income............ 1,294 2,981 5,667 12,670 18,110
----------- ----------- ----------- ---------- ----------
Loans, net of unearned
income..................... $12,512,715 $11,659,990 $10,961,276 $9,947,826 $8,785,571
=========== =========== =========== ========== ==========
</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 $9.77 billion
and $3.34 billion, respectively, of total loans at 1999 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,
operations, 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) Market risk (also often referred to as Position Risk), is the risk
of a potential negative impact on the Bank's balance sheet and income
statement resulting from adverse changes in the price or value of open or
unhedged market positions.
33
<PAGE> 35
3) Operational Risk is defined as the risk of loss resulting from an
internal control breakdown, for example in communications, information or
transactional processing, legal/compliance issues, technology/systems or
procedural failures, human errors, disasters or criminal activity.
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 67 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.
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 are charged
off when 180 days past due. Consumer 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
34
<PAGE> 36
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 (referred to as Position
Risk) is primarily managed within the Corporation's Treasury Group. The
Corporation follows the Treasury Group Directives to define the maximum
potential exposures that are permissible for activities involving interest rate
risk. 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 24 of this Report.
YEAR 2000
The Corporation's systems and other date sensitive assets successfully
transitioned to the Year 2000. Since the identification of the Year 2000 issue,
the Corporation's objective was to ensure that all aspects of the Year 2000
issue affecting the Corporation were fully resolved. Therefore, the Corporation
continues to monitor the compliance of its own actions, as well as third parties
that it interfaces with, such as vendors, counterparties, customers, and payment
systems, to mitigate the potential risks that Year 2000 poses. In addition, the
Corporation continues to monitor the compliance of companies that have borrowed
from or are counterparties of the Corporation or its subsidiaries to ensure that
incremental Year 2000-related credit risks are addressed as part of the
Corporation's existing credit risk management framework.
The principal costs of solving the Year 2000 issue were those associated
with the remediation and testing of computer applications. A major portion of
these costs was 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 1999 when the Year 2000 issue was satisfactorily
remedied. In total the cost of solving the Year 2000 issue amounted to
approximately $50.8 million, including $11.2 million of capital costs. A more
detailed breakdown follows:
<TABLE>
<S> <C> <C>
Total spending for Year 2000 system changes for mainframe
and centrally supported client server applications over 5
years (1996 to 2000)...................................... $26.4 million
Total business unit costs, including end-user developed
applications, and embedded systems, e.g., elevators,
security access systems, etc. ............................ 13.2 million
Total capital costs for central information technology and
business units............................................ 11.2 million
-----
Total spending over five years.............................. $50.8 million
=====
</TABLE>
NONACCRUAL, RESTRUCTURED AND PAST DUE LOANS
Management closely monitors nonperforming assets, including assets received
in satisfaction of debt. Nonperforming assets were 0.21 percent of total loans
at December 31, 1999, compared with 0.17 percent at year-end 1998. All
nonperforming loans are domestic.
35
<PAGE> 37
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 $1.2 million in 1999 compared to $1.4 million
in 1998.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................. $23,558 $18,695 $17,790 $28,153 $50,503
Restructured loans........................... 2,975 1,523 598 1,512 2,059
------- ------- ------- ------- -------
Total nonperforming loans.................... 26,533 20,218 18,388 29,665 52,562
Other assets received in satisfaction of
debt....................................... 946 559 1,300 1,562 2,470
------- ------- ------- ------- -------
Total nonperforming assets.............. $27,479 $20,777 $19,688 $31,227 $55,032
======= ======= ======= ======= =======
90-day past due loans, still accruing
interest (all domestic).................... $35,899 $21,964 $27,083 $46,369 $28,302
======= ======= ======= ======= =======
Gross amount of interest that would have been
recorded if all year-end nonperforming
loans had been accruing interest at their
original terms............................. $ 1,285 $ 1,457 $ 1,061 $ 3,134 $ 4,500
Interest income actually recognized.......... 86 75 51 76 1,572
------- ------- ------- ------- -------
Interest shortfall........................... $ 1,199 $ 1,382 $ 1,010 $ 3,058 $ 2,928
======= ======= ======= ======= =======
Nonperforming loans to total loans at
year-end................................... 0.20% 0.17% 0.17% 0.28% 0.55%
Nonperforming assets to total loans at
year-end................................... 0.21 0.17 0.18 0.29 0.58
======= ======= ======= ======= =======
</TABLE>
LOAN CONCENTRATIONS
Management monitors industry loan concentrations in an effort to maintain a
well-diversified loan portfolio. Excluding total residential mortgage loans, at
December 31, 1999 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 $6.94 billion, or 53 percent of total outstandings at year-end
1999. Most of these credits were extended to manufacturing and service-related
companies. Outstandings to food and beverage industries represented 24 percent
of all manufacturing loans and 5 percent of total consolidated loans. The
largest concentration within service-related industries was services (business
and personal), which accounted for 38 percent of all service-related credits and
8 percent of total loans.
Foreign loans totaled $38 million at year-end 1999, accounting for 0.3
percent of the Corporation's total outstandings.
Real estate loans, including residential mortgages, totaled $3.66 billion
at December 31, 1999, or 28 percent of total outstandings. Mortgage loans
collateralized by residential property totaled $2.78 billion, or 21 percent of
loans. Commercial real estate mortgages and construction loans totaled $880
million at the end of 1999, representing 7 percent of loans. Further details on
the Corporation's commercial real estate outstandings can be found below.
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 loan
losses resulting from commercial real estate transactions. This phenomenon tends
to be cyclical and varies by location.
As of December 31, 1999, the Corporation, primarily through its banking
subsidiaries, had outstanding commercial real estate loans of approximately $880
million which included both construction loans and
36
<PAGE> 38
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 $0.6 million were classified as nonperforming assets representing
less than 1 percent of total consolidated loans. There were no material
charge-offs related to commercial real estate loans during 1999 or 1998.
Management does not currently anticipate the need to increase its allowance for
possible loan 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. 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 8
percent, 4 percent, 5 percent, 5 percent and 12 percent of the consolidated
allowance for possible loan losses was represented by doubtful portions of loans
at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. At December 31,
1999, the Corporation had allocated $10.2 million to loans internally
categorized as doubtful, compared to $6.4 million at year-end 1998.
At December 31, 1999 and 1998, 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 1999, the provision for loan losses decreased to $25.0 million,
compared to $27.0 million in 1998. At year-end 1999, the allowance for possible
loan losses was $147.2 million, or 1.12 percent of total loans
37
<PAGE> 39
outstanding, compared to $140.6 million or 1.15 percent of total loans in 1998.
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 1999, the ratios of the allowance for possible loan losses to
total loans and to nonperforming loans were 1.12 percent and 555 percent,
respectively.
Net charge-offs in 1999 were $18.4 million, or 0.15 percent of average
loans outstanding as compared to $17.2 million, or 0.15 percent of average loans
outstanding in 1998. Net charge-offs of domestic commercial loans amounted to
$13.9 million in 1999, or 0.16 percent of average domestic commercial loans
outstanding, an increase from $11.0 million, or 0.14 percent of average domestic
commercial loans outstanding in 1998. Installment loans, including real estate
mortgages, had net charge-offs of $4.5 million in 1999, or 0.12 percent of
average outstandings, and $6.2 million, or 0.17 percent of average outstandings
in 1998. Over the five-year period ending December 31, 1999, combined total net
charge-offs were 0.37 percent of average total loans outstanding.
The Federal Reserve 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, 1999
and 1998, 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>
1999 1998 1997
------------------------- ------------------------- -------------------------
LOAN CATEGORY LOAN CATEGORY LOAN CATEGORY
AS A % OF AS A % OF AS A % OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ------------- --------- ------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated Portion:
Commercial................. $ 59,201 72.1% $ 58,639 73.0% $ 38,102 73.7%
Retail..................... 6,129 27.6 4,781 26.4 4,681 25.5
Foreign.................... -- 0.3 -- 0.6 -- 0.8
-------- ----- -------- ----- -------- -----
Total Allocated Portion...... 65,330 100.0% 63,420 100.0% 42,783 100.0%
===== ===== =====
Unallocated Portion.......... 81,905 N/A 77,188 N/A 88,093 N/A
-------- -------- --------
Total........................ $147,235 $140,608 $130,876
======== ======== ========
</TABLE>
38
<PAGE> 40
Analysis of Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance............... $ 140,608 $ 130,876 $ 142,211 $ 129,259 $ 124,734
----------- ----------- ----------- ----------- ----------
Charge-offs:
Commercial, financial and
agricultural............... 18,412 19,897 16,545 12,808 20,967
Real estate construction...... -- 1 719 803 2,644
Installment and real estate
mortgages.................. 7,994 9,219 6,393 2,757 2,442
Charge card................... -- -- 58,898 46,627 35,914
----------- ----------- ----------- ----------- ----------
Total charge-offs.......... 26,406 29,117 82,555 62,995 61,967
----------- ----------- ----------- ----------- ----------
Recoveries:
Commercial, financial and
agricultural............... 4,484 8,869 5,030 4,799 11,063
Real estate construction...... -- -- 622 1,465 2,867
Installment and real estate
mortgages.................. 3,515 3,023 1,228 1,065 1,093
Charge card................... -- -- 5,893 7,278 8,474
----------- ----------- ----------- ----------- ----------
Total recoveries........... 7,999 11,892 12,773 14,607 23,497
----------- ----------- ----------- ----------- ----------
Net charge-offs............ 18,407 17,225 69,782 48,388 38,470
----------- ----------- ----------- ----------- ----------
Provisions charged (credited) to
expense:
Domestic...................... 25,034 26,957 58,447 56,540 46,814
Foreign....................... -- -- -- -- (3,819)
----------- ----------- ----------- ----------- ----------
Total provisions........... 25,034 26,957 58,447 56,540 42,995
----------- ----------- ----------- ----------- ----------
Allowance related to acquired
loans......................... -- -- -- 4,800 --
----------- ----------- ----------- ----------- ----------
Ending balance.................. $ 147,235 $ 140,608 $ 130,876 $ 142,211 $ 129,259
=========== =========== =========== =========== ==========
Net loans, end of period........ $13,114,029 $12,228,400 $10,868,250 $10,744,653 $9,517,797
=========== =========== =========== =========== ==========
Net loans, daily averages....... $12,512,715 $11,659,990 $10,961,276 $ 9,947,826 $8,785,571
=========== =========== =========== =========== ==========
Ratios:
Net charge-offs to average
loans outstanding.......... 0.15% 0.15% 0.64% 0.49% 0.44%
Allowance for possible loan
losses to loans outstanding
(end of period)............ 1.12 1.15 1.20 1.32 1.36
Allowance for possible loan
losses to nonperforming
loans (end of period)...... 555 695 712 479 246
Allowance for possible loan
losses to nonperforming
assets..................... 536 677 665 455 235
Net charge-offs to allowance
for possible loan losses
(beginning of period)...... 13 13 49 37 31
</TABLE>
39
<PAGE> 41
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 $19.4 million, or 10 percent, of
the Corporation's 1999 consolidated net income, compared to $25.4 million or 14
percent in 1998. International operating income was $47.0 million in 1999 and
represented 3 percent of the Corporation's total operating income. In 1998 and
1997, international operating income represented 3 and 4 percent, respectively,
of the Corporation's total operating income. Assets and liabilities associated
with foreign domiciled customers are summarized as follows:
Foreign Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans:
Governments and official institutions..................... $ 504 $ 812 $ 937
Banks and other financial institutions.................... 10,751 52,855 50,960
Other, primarily commercial and industrial................ 26,890 28,200 37,079
-------- -------- --------
Total loans............................................ 38,145 81,867 88,976
-------- -------- --------
Deposits in banks located outside the United States:
Interest-bearing.......................................... 239,832 98,929 598,062
Other..................................................... 4,704 11,987 1,728
-------- -------- --------
Total deposits in banks................................ 244,536 110,916 599,790
-------- -------- --------
Acceptances and other identifiable assets................... 39,616 27,103 27,782
-------- -------- --------
Total identifiable foreign assets...................... $322,297 $219,886 $716,548
======== ======== ========
Deposit liabilities:
Banks located in foreign countries........................ $ 83,014 $ 88,374 $ 80,579
Foreign governments and official institutions............. -- 6,089 22
Other demand.............................................. 105,384 74,936 97,848
Other time and savings.................................... 66,290 39,518 41,044
-------- -------- --------
Total deposit liabilities.............................. 254,688 208,917 219,493
Short-term borrowings....................................... 143,333 176,876 82,724
Acceptances outstanding..................................... 39,447 26,934 27,511
-------- -------- --------
Total identifiable foreign liabilities................. $437,468 $412,727 $329,728
======== ======== ========
</TABLE>
40
<PAGE> 42
GEOGRAPHIC DISTRIBUTION
As of year-end 1999, 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 %
-------- ------- ---------------- ----- -
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Continental Europe............................... $10,483 $ 213 $ 28,333 $ 39,029 14
Pacific and Far East............................. -- -- 135,968 135,968 49
United Kingdom and Ireland....................... 1,744 214 24,827 26,785 10
Western Hemisphere (excluding U.S. and Canada)... 10,589 504 30,881 41,974 15
Canada........................................... 4,156 -- 18,914 23,070 8
Middle East and Africa........................... -- 10,242 909 11,151 4
------- ------- -------- -------- ---
Total international banking................. $26,972 $11,173 $239,832 $277,977 100
======= ======= ======== ======== ===
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
======= ======= ======== ======== ===
</TABLE>
FOURTH QUARTER 1999 COMPARED WITH FOURTH QUARTER 1998
Net income for the fourth quarter of 1999 was $50.9 million, up 11 percent
from fourth quarter 1998 earnings of $45.7 million. The earnings increase is
attributable primarily to strong earnings momentum in community banking, private
banking and mid-market corporate banking reflecting continued growth and
expansion, cost control and top tier asset quality. ROE for fourth quarter 1999
was 13.70 percent and ROA was 0.82 percent, compared to respective returns of
11.66 percent and 0.82 percent in last year's fourth quarter. Cash ROE and cash
ROA were 18.28 percent and 0.90 percent, respectively, compared to cash ROE and
cash ROA of 15.74 percent and 0.89 percent, respectively, in the same quarter a
year ago.
Fourth quarter 1999 net interest income on a fully taxable equivalent basis
was $153.0 million, up $16.4 million or 12 percent from $136.6 million in 1998's
fourth quarter. Average earning assets rose 13 percent to $21.56 billion from
$19.09 billion in fourth quarter 1998 attributable to an increase of $1.45
billion, or 22 percent in securities available-for-sale and an 8 percent or $960
million increase in average
41
<PAGE> 43
loans. Commercial lending was the strongest contributor to this loan growth. Net
interest margin declined slightly to 2.81 percent from 2.84 percent in the same
quarter last year.
Noninterest income of $110.7 million decreased 5 percent in fourth quarter
1999 from the same quarter last year despite higher trust income, merchant and
charge card fees and service charge fees. In the current quarter trust fees rose
$2.5 million, merchant and charge card fees rose $1.7 million and service charge
fees increased $1.7 million. There were virtually no net securities gains in the
current quarter compared to net securities gains of $7.3 million in the
year-earlier quarter. Other income, which includes syndication fees, income from
tax-advantaged investments, gains on mortgage sales and other gains and fee
income, declined $4.1 million from 1998.
Fourth quarter 1999 noninterest expenses of $183.2 million rose $8.2
million or 5 percent from fourth quarter last year. Employment expense increased
$6.7 million, or 7 percent from the prior year. Equipment expense increased $2.7
million or 20 percent. Income taxes declined by $1.4 million during the current
quarter primarily reflecting a lower effective tax rate due to an increase in
tax-advantaged assets.
The fourth quarter 1999 provision for loan losses of $5.2 million was down
$2.0 million from $7.2 million in the fourth quarter of 1998. Net loan
charge-offs during the current quarter of $3.6 million were slightly higher,
compared to $3.4 million in the same period last year.
42
<PAGE> 44
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>
1999 1998 1997
--------------------------------- --------------------------------- ------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST 4TH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
---- ---- ---- ---- ---- ---- ---- ---- ----
(FULLY TAXABLE EQUIVALENT (FTE) BASIS, IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income..................... $373.7 $344.3 $330.9 $320.4 $324.9 $328.7 $319.9 $312.3 $329.5
Interest expense.................... 229.4 206.5 197.5 190.9 195.9 205.8 195.9 181.2 186.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income................. 144.3 137.8 133.4 129.5 129.0 122.9 124.0 131.1 143.3
FTE adjustment...................... 8.7 8.1 7.8 7.7 7.6 7.7 7.5 7.3 7.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest income --
FTE basis.......................... 153.0 145.9 141.2 137.2 136.6 130.6 131.5 138.4 150.5
Provision for loan losses........... 5.2 6.3 6.4 7.2 7.2 7.0 7.2 5.5 13.1
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income after Provision
for Loan Losses.................... 147.8 139.6 134.8 130.0 129.4 123.6 124.3 132.9 137.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Income
Trust and investment management
fees............................. 39.4 41.1 37.5 37.8 36.9 37.1 36.0 33.7 34.6
Money market and bond trading...... 2.0 3.9 1.1 1.9 2.1 3.6 3.2 1.5 3.9
Foreign exchange................... 2.1 1.9 1.8 2.5 1.8 1.7 1.7 1.7 1.9
Merchant and charge card fees...... 8.0 8.1 8.1 6.1 6.3 6.9 6.4 7.2 12.7
Service fees and charges........... 29.8 30.6 28.5 27.6 28.0 27.4 27.2 26.7 24.7
Securities gains................... -- 0.1 6.1 7.9 7.3 7.7 3.9 8.0 3.3
Gain on sale of credit card
portfolio........................ -- -- -- -- -- -- -- 12.0 --
Bank-owned insurance investments... 10.7 10.2 10.7 9.8 9.9 10.1 8.3 4.1 3.2
Foreign fees....................... 4.4 4.4 4.4 5.6 5.1 4.4 4.7 5.5 4.3
Other.............................. 14.3 16.3 20.2 18.2 18.5 17.5 17.5 9.4 9.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Total noninterest income......... 110.7 116.6 118.4 117.4 115.9 116.4 108.9 109.8 98.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Noninterest Expenses
Employment......................... 106.8 105.5 105.9 104.0 100.1 97.2 97.1 92.5 95.1
Net occupancy...................... 12.7 13.6 12.9 9.3 13.3 12.4 13.3 12.4 13.5
Equipment.......................... 16.5 15.4 15.3 14.6 13.8 13.0 13.1 12.8 13.0
Marketing.......................... 9.6 8.1 6.8 6.2 6.5 6.8 6.9 5.7 6.7
Communication and delivery......... 6.7 5.6 6.1 6.8 6.2 5.3 5.1 6.0 6.7
Deposit insurance.................. 0.8 0.8 0.9 0.8 0.8 0.7 0.8 0.8 0.8
Expert services.................... 6.3 5.7 9.0 7.5 10.8 8.9 6.9 6.9 8.4
Contract programming............... 3.3 3.5 2.1 3.3 5.8 7.0 6.2 4.6 4.3
Other.............................. 14.1 16.7 12.7 13.8 11.6 13.1 8.3 21.8 17.6
------ ------ ------ ------ ------ ------ ------ ------ ------
176.8 174.9 171.7 166.3 168.9 164.4 157.7 163.5 166.1
Goodwill and other valuation
intangibles...................... 6.4 6.3 6.2 6.1 6.1 6.0 5.9 6.2 6.9
Total noninterest expenses....... 183.2 181.2 177.9 172.4 175.0 170.4 163.6 169.7 173.0
------ ------ ------ ------ ------ ------ ------ ------ ------
FTE income -- pretax................ 75.3 75.0 75.3 75.0 70.3 69.6 69.6 73.0 62.4
Applicable income taxes............. 15.6 14.7 16.9 17.9 17.0 15.8 16.7 20.4 15.5
FTE adjustment...................... 8.7 8.1 7.8 7.7 7.6 7.7 7.5 7.3 7.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income.......................... 51.0 52.2 50.6 49.4 45.7 46.1 45.4 45.3 39.7
Dividends on preferred stock........ 4.2 4.2 4.2 4.1 4.1 4.2 4.1 4.1 4.1
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income applicable to common
stock.............................. $ 46.8 $ 48.0 $ 46.4 $ 45.3 $ 41.6 $ 41.9 $ 41.3 $ 41.2 $ 35.6
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per common share (based on
average shares outstanding)........ $ 7.02 $ 7.20 $ 6.96 $ 6.78 $ 6.24 $ 6.29 $ 6.19 $ 6.19 $ 5.33
====== ====== ====== ====== ====== ====== ====== ====== ======
Net Interest Margin
Yield on earning assets............ 7.04% 6.86% 6.69% 6.80% 6.92% 7.14% 7.24% 7.43% 7.68%
Rate on supporting liabilities..... 4.23 4.02 3.90 3.95 4.08 4.37 4.33 4.21 4.25
------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest margin................ 2.81% 2.84% 2.79% 2.85% 2.84% 2.77% 2.91% 3.22% 3.43%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
1997
------------------------
3RD 2ND 1ST
QTR. QTR. QTR.
---- ---- ----
(FULLY TAXABLE EQUIVALENT (FTE) BASIS, IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income..................... $319.7 $320.7 $300.5
Interest expense.................... 178.8 174.4 159.2
------ ------ ------
Net Interest Income................. 140.9 146.3 141.3
FTE adjustment...................... 6.6 6.8 6.1
------ ------ ------
Net interest income --
FTE basis.......................... 147.5 153.1 147.4
Provision for loan losses........... 15.0 16.4 13.9
------ ------ ------
Net Interest Income after Provision
for Loan Losses.................... 132.5 136.7 133.5
------ ------ ------
Noninterest Income
Trust and investment management
fees............................. 34.3 33.2 31.6
Money market and bond trading...... 0.8 1.6 0.9
Foreign exchange................... 1.3 1.2 0.9
Merchant and charge card fees...... 12.9 12.8 11.6
Service fees and charges........... 25.1 23.7 23.4
Securities gains................... 5.9 2.6 1.3
Gain on sale of credit card
portfolio........................ -- -- --
Bank-owned insurance investments... 3.2 3.0 3.5
Foreign fees....................... 4.5 4.4 5.0
Other.............................. 12.4 8.0 9.6
------ ------ ------
Total noninterest income......... 100.4 90.5 87.8
------ ------ ------
Noninterest Expenses
Employment......................... 94.1 92.8 90.1
Net occupancy...................... 14.9 13.6 14.5
Equipment.......................... 12.3 12.3 10.6
Marketing.......................... 6.0 7.0 6.0
Communication and delivery......... 6.1 6.0 5.4
Deposit insurance.................. 0.7 0.8 0.6
Expert services.................... 9.1 8.3 5.2
Contract programming............... 3.5 3.0 3.3
Other.............................. 14.5 14.6 14.3
------ ------ ------
161.2 158.4 150.0
Goodwill and other valuation
intangibles...................... 7.0 6.9 7.0
Total noninterest expenses....... 168.2 165.3 157.0
------ ------ ------
FTE income -- pretax................ 64.7 61.9 64.3
Applicable income taxes............. 18.0 17.7 18.9
FTE adjustment...................... 6.6 6.8 6.1
------ ------ ------
Net Income.......................... 40.1 37.4 39.3
Dividends on preferred stock........ 4.2 4.1 4.1
------ ------ ------
Net income applicable to common
stock.............................. $ 35.9 $ 33.3 $ 35.2
====== ====== ======
Earnings per common share (based on
average shares outstanding)........ $ 5.39 $ 4.99 $ 5.28
====== ====== ======
Net Interest Margin
Yield on earning assets............ 7.70% 7.84% 7.71%
Rate on supporting liabilities..... 4.22 4.17 4.01
------ ------ ------
Net interest margin................ 3.48% 3.67% 3.70%
====== ====== ======
</TABLE>
Rows may not add to annual amounts because of rounding.
43
<PAGE> 45
FINANCIAL STATEMENTS
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $ 928,219 $ 904,016 $ 927,090
Money market assets:
Deposits at banks......................................... 1,486 10,833 31,464
Federal funds sold and securities purchased under
agreement to resell..................................... 10,383 8,980 12,692
Trading account............................................. 4,054 3,775 3,752
Securities available-for-sale:
U.S. Treasury and federal agency.......................... 399,842 337,700 275,489
State and municipal....................................... 17,066 16,609 17,564
Other..................................................... 8,300 3,886 1,573
---------- ---------- ----------
Total interest income..................................... 1,369,350 1,285,799 1,269,624
---------- ---------- ----------
INTEREST EXPENSE
Deposits.................................................... 490,608 509,097 475,657
Short-term borrowings....................................... 215,080 176,083 156,559
Senior notes................................................ 69,027 47,689 39,883
Minority interest -- dividends on preferred stock of
subsidiary................................................ 18,437 16,389 --
Long-term notes............................................. 31,186 29,495 26,499
---------- ---------- ----------
Total interest expense.................................... 824,338 778,753 698,598
---------- ---------- ----------
NET INTEREST INCOME......................................... 545,012 507,046 571,026
Provision for loan losses................................... 25,034 26,957 58,447
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses......... 519,978 480,089 512,579
---------- ---------- ----------
NONINTEREST INCOME
Trust and investment management fees........................ 155,810 143,724 133,714
Money market and bond trading............................... 8,892 10,512 7,269
Foreign exchange............................................ 8,314 6,772 5,364
Merchant and charge card fees............................... 30,189 26,772 50,085
Service fees and charges.................................... 116,423 109,372 96,324
Securities gains............................................ 14,075 26,953 13,207
Gain on sale of credit card portfolio....................... -- 12,000 --
Bank-owned insurance investments............................ 41,414 32,339 12,917
Foreign fees................................................ 18,850 19,575 18,182
Other....................................................... 69,015 63,022 40,686
---------- ---------- ----------
Total noninterest income.................................. 462,982 451,041 377,748
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and other compensation............................. 351,251 326,103 314,719
Pension, profit sharing and other employee benefits......... 70,911 60,906 57,423
Net occupancy............................................... 48,573 51,342 56,462
Equipment................................................... 61,812 52,622 48,119
Marketing................................................... 30,732 25,896 25,675
Communication and delivery.................................. 25,163 22,595 24,129
Deposit insurance........................................... 3,310 3,082 2,988
Expert services............................................. 28,455 33,440 31,159
Contract programming........................................ 12,195 23,633 14,047
Other....................................................... 57,331 54,881 61,117
---------- ---------- ----------
689,733 654,500 635,838
Goodwill and other valuation intangibles.................... 25,036 24,104 27,839
---------- ---------- ----------
Total noninterest expenses................................ 714,769 678,604 663,677
---------- ---------- ----------
Income before income taxes.................................. 268,191 252,526 226,650
Applicable income taxes..................................... 65,138 69,901 70,076
---------- ---------- ----------
Net Income.................................................. 203,053 182,625 156,574
Dividends on preferred stock................................ 16,594 16,594 16,594
---------- ---------- ----------
Net income applicable to common stock....................... $ 186,459 $ 166,031 $ 139,980
========== ========== ==========
Basic Earnings per Common Share (based on 6,667,490 average
shares outstanding) Net income applicable to common
stock..................................................... $27.97 $24.91 $21.00
====== ====== ======
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
44
<PAGE> 46
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net income.................................................. $ 203,053 $182,625 $156,574
Other comprehensive income:
Unrealized gains/(losses) on available-for-sale
securities:
Unrealized holding (losses)/gains arising during
period, net of tax (benefit) expense of ($122,133) in
1999, $27,947 in 1998 and $18,056 in 1997.............. (185,112) 43,187 27,667
Less reclassification adjustment for realized gains
included in income statement, net of tax expense of
$5,475 in 1999, $10,485 in 1998 and $5,137 in 1997..... (8,600) (16,468) (8,070)
--------- -------- --------
Other comprehensive (loss) income......................... (193,712) 26,719 19,597
--------- -------- --------
Comprehensive income...................................... $ 9,341 $209,344 $176,171
========= ======== ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
45
<PAGE> 47
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1999 1998
---- ----
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,485,408 $ 1,492,270
Money market assets:
Interest-bearing deposits at banks........................ 239,980 98,937
Federal funds sold and securities purchased under
agreement to resell.................................... 305,890 155,709
Securities available-for-sale............................... 7,793,699 6,963,654
Trading account assets...................................... 68,910 120,668
Loans, net of unearned income............................... 13,114,029 12,228,400
Allowance for possible loan losses.......................... (147,235) (140,608)
----------- -----------
Net loans................................................. 12,966,794 12,087,792
Premises and equipment...................................... 392,811 369,802
Customers' liability on acceptances......................... 43,599 30,829
Bank-owned insurance investments............................ 772,579 725,302
Goodwill and other valuation intangibles.................... 249,899 268,203
Other assets................................................ 543,309 484,664
----------- -----------
Total assets........................................... $24,862,878 $22,797,830
=========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... 3,729,096 3,930,920
-- interest-bearing........... 10,215,332 10,473,612
Deposits in foreign offices -- noninterest-bearing........ 35,537 69,215
-- interest-bearing........... 1,314,991 849,095
----------- -----------
Total deposits......................................... 15,294,956 15,322,842
Federal funds purchased and securities sold under agreement
to repurchase............................................. 4,536,831 3,440,832
Commercial paper outstanding................................ 245,050 261,905
Short-term borrowings....................................... 684,127 168,151
Senior notes................................................ 1,500,000 940,000
Acceptances outstanding..................................... 43,599 30,829
Accrued interest, taxes and other expenses.................. 213,574 182,097
Other liabilities........................................... 59,311 95,755
Minority interest -- preferred stock of subsidiary.......... 250,000 250,000
Long-term notes............................................. 454,673 454,387
----------- -----------
Total liabilities...................................... 23,282,121 21,146,798
----------- -----------
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..................................................... 496,490 493,812
Retained earnings........................................... 961,442 840,683
Accumulated other comprehensive (loss) income............... (155,515) 38,197
----------- -----------
Total stockholder's equity............................. 1,580,757 1,651,032
----------- -----------
Total liabilities and stockholder's equity............. $24,862,878 $22,797,830
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
46
<PAGE> 48
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 SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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
Contribution to capital
surplus....................... -- -- -- 2,678 -- -- 2,678
Net income...................... -- -- -- -- 203,053 -- 203,053
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
($9.85 per share)............. -- -- -- -- (65,700) -- (65,700)
Other comprehensive loss........ -- -- -- -- -- (193,712) (193,712)
-------- ------- ------- -------- --------- --------- ----------
Balance at December 31, 1999...... $180,000 $45,000 $53,340 $496,490 $ 961,442 $(155,515) $1,580,757
======== ======= ======= ======== ========= ========= ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
47
<PAGE> 49
HARRIS BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................................. $ 203,053 $ 182,625 $ 156,574
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses................................. 25,034 26,957 58,447
Depreciation and amortization, including intangibles...... 77,901 69,545 67,849
Deferred tax (benefit) expense............................ (5,109) 3,423 2,343
Gain on sales of securities............................... (14,075) (26,953) (13,207)
Gain on sale of credit card portfolio..................... -- (12,000) --
Trading account net cash sales (purchases)................ 51,758 (67,459) 57,146
(Increase) decrease in interest receivable................ (40,495) 18,080 (32,385)
Increase (decrease) in interest payable................... 33,883 18,519 (5,709)
Decrease (increase) in loans held for sale................ 152,521 (167,317) (12,202)
Other, net................................................ 7,582 (48,822) (35,555)
------------ ------------ ------------
Net cash provided (used) by operating activities...... 492,053 (3,402) 243,301
------------ ------------ ------------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks................................................... (141,043) 499,133 60,187
Net (increase) decrease in Federal funds sold and
securities purchased under agreement to resell.......... (150,181) (74,927) 214,010
Proceeds from sales of securities available-for-sale...... 878,898 2,551,839 1,314,938
Proceeds from maturities of securities
available-for-sale...................................... 10,710,133 13,203,430 11,667,783
Purchases of securities available-for-sale................ (12,726,322) (17,412,439) (14,181,204)
Net increase in loans and assets held for sale............ (1,056,557) (1,177,462) (906,937)
Proceeds from sales of premises and equipment............. 580 31,019 28,735
Purchases of premises and equipment....................... (76,454) (133,907) (108,296)
Net increase in bank-owned insurance investments.......... (47,277) (457,839) (36,947)
Other, net................................................ 64,368 17,750 (3,622)
------------ ------------ ------------
Net cash used by investing activities................. (2,543,855) (2,953,403) (1,951,353)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits....................... (27,886) 890,779 1,441,762
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 1,095,999 988,959 468,826
Net (decrease) increase in commercial paper outstanding... (16,855) (89,522) 16,774
Net increase (decrease) in other short-term borrowings.... 515,976 (335,169) 155,630
Proceeds from issuance of senior notes.................... 3,460,500 8,347,080 6,710,000
Repayment of senior notes................................. (2,900,500) (7,507,080) (6,960,000)
Proceeds from the sale of the credit card portfolio....... -- 722,748 --
Proceeds from issuance of long-term notes................. 180,000 75,000 --
Repayment of long term notes.............................. (180,000) -- --
Proceeds from issuance of preferred stock of subsidiary... -- 250,000 --
Cash dividends paid on preferred stock.................... (16,594) (16,594) (16,594)
Cash dividends paid on common stock....................... (65,700) (181,500) (42,000)
------------ ------------ ------------
Net cash provided by financing activities............. 2,044,940 3,144,701 1,774,398
------------ ------------ ------------
Net (decrease) increase in cash and demand balances due
from banks.............................................. (6,862) 187,896 66,346
Cash and demand balances due from banks at January 1...... 1,492,270 1,304,374 1,238,028
------------ ------------ ------------
Cash and demand balances due from banks at December 31.... $ 1,485,408 $ 1,492,270 $ 1,304,374
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized).................... $ 790,455 $ 760,234 $ 704,307
Income taxes............................................ $ 73,418 $ 55,161 $ 75,224
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
48
<PAGE> 50
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 of Financial Statements for additional
information on business combinations and Note 22 for additional information on
related party transactions on pages 82-83 of this Report.
The Corporation provides banking, trust and other services domestically and
internationally through 14 bank and 15 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 option 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, futures, forwards, option contracts
and swaps.
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
49
<PAGE> 51
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 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 Consolidated Statements of Condition. 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.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. As issued, the Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." The Statement is effective upon
issuance and it amends SFAS No. 133 to be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000, which for the Corporation would be
the quarter ending March 31, 2001. The Corporation is in the process of
assessing the impact of adopting the Statements on its financial position and
results of operations.
50
<PAGE> 52
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.
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, 1999 and 1998, the Corporation's
Consolidated Statements of Condition included approximately $21 million and $14
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.
51
<PAGE> 53
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 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 American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
Corporation adopted this statement in January 1998 and it did not have a
material effect on the Corporation's financial position or results of
operations. 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.
Bank-Owned Insurance Investments
The Corporation has purchased life insurance coverage for certain officers.
The one-time premiums paid for the policies, which coincide with the initial
cash surrender value, are recorded as other assets on the Consolidated
Statements of Condition. Increases or decreases in cash surrender value (other
than proceeds from death benefits) are recorded as other income or other
expense. Proceeds from death benefits first reduce the cash surrender value
attributable to the individual policy and any additional proceeds are recorded
as other income.
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.
52
<PAGE> 54
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 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 SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 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 No. 131 did not affect the
Corporation's financial position or results of operations. See Note 18 to
Financial Statements on page 76 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.
Reclassifications
Certain reclassifications were made to conform prior years' financial
statements to the current year's presentation.
53
<PAGE> 55
2. SECURITIES
The amortized cost and estimated fair value of securities
available-for-sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------------------- -------------------------------------------------
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.......... $1,737,101 $ 116 $ 63,444 $1,673,773 $1,503,734 $42,116 $ 208 $1,545,642
Federal agency......... 5,800,122 506 176,845 5,623,783 4,929,000 14,188 992 4,942,196
State and municipal.... 339,033 3,383 3,619 338,797 326,811 10,968 107 337,672
Other.................. 175,551 6 18,211 157,346 140,895 6 2,757 138,144
---------- ------ -------- ---------- ---------- ------- ------ ----------
Total securities....... $8,051,807 $4,011 $262,119 $7,793,699 $6,900,440 $67,278 $4,064 $6,963,654
========== ====== ======== ========== ========== ======= ====== ==========
</TABLE>
At December 31, 1999 and 1998, available-for-sale and trading account
securities having a par value of $5.82 billion and $3.13 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 $3.26 billion and $2.46 billion were sold under agreement to
repurchase at December 31, 1999 and 1998, respectively.
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1999, 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, 1999
-----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Within 1 year............................................. $2,337,109 $2,330,797
1 to 5 years.............................................. 2,368,006 2,326,585
5 to 10 years............................................. 1,614,003 1,522,069
Over 10 years............................................. 1,581,886 1,481,410
Other securities without stated maturity.................... 150,803 132,838
---------- ----------
Total securities............................................ $8,051,807 $7,793,699
========== ==========
</TABLE>
In 1999, 1998 and 1997, proceeds from the sale of securities
available-for-sale amounted to $879 million, $2.55 billion and $1.31 billion,
respectively. Gross gains of $14.1 million and no gross losses were realized on
these sales in 1999, while gross gains of $28.5 million and gross losses of $1.5
million were realized on these sales in 1998, and gross gains of $13.5 million
and gross losses of $0.3 million were realized in 1997. Net unrealized holding
gains on trading securities included in earnings at December 31, 1999 was $1.4
million compared to an unrealized gain of $0.8 million at December 31, 1998.
54
<PAGE> 56
3. LOANS
The following table summarizes loan balances by category:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and
dealers................................................ $ 8,578,520 $ 8,194,586
Real estate construction.................................. 119,717 149,242
Real estate mortgages..................................... 3,538,066 3,185,279
Installment............................................... 824,563 602,421
Direct lease financing.................................... 15,876 16,884
Foreign loans:
Governments and official institutions..................... 504 812
Banks and other financial institutions.................... 10,751 52,855
Other, primarily commercial and industrial................ 26,890 28,200
----------- -----------
Total loans............................................ 13,114,887 12,230,279
Less unearned income........................................ 858 1,879
----------- -----------
Loans, net of unearned income.......................... 13,114,029 12,228,400
Less allowance for possible loan losses..................... 147,235 140,608
----------- -----------
Loans, net of allowance for possible loan losses....... $12,966,794 $12,087,792
=========== ===========
</TABLE>
Nonaccrual loans, restructured loans and other nonperforming assets are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans............................................ $23,558 $18,695 $17,790
Restructured loans.......................................... 2,975 1,523 598
------- ------- -------
Total nonperforming loans................................... 26,533 20,218 18,388
Other assets received in satisfaction of debt............... 946 559 1,300
------- ------- -------
Total nonperforming assets................................ $27,479 $20,777 $19,688
======= ======= =======
Gross amount of interest income that would have been
recorded if year-end nonperforming loans had been accruing
interest at their original terms.......................... $ 1,285 $ 1,457 $ 1,061
Interest income actually recognized......................... 86 75 51
------- ------- -------
Interest shortfall........................................ $ 1,199 $ 1,382 $ 1,010
======= ======= =======
</TABLE>
At December 31, 1999 and 1998, the Corporation had no aggregate public and
private sector outstandings to any single country experiencing a liquidity
problem which exceeded one percent of the Corporation's consolidated assets.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights, included in other assets, of $6.4 million were
capitalized during both 1999 and 1998. Amortization expense associated with the
mortgage servicing rights was $2.5 million and $1.2 million in 1999 and 1998,
respectively. There were no direct write-downs in 1999 or 1998. The net
capitalized assets of $13.1 million and $9.2 million at December 31, 1999 and
1998, respectively, are reflective of the fair value of those rights.
55
<PAGE> 57
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................... $140,608 $130,876 $142,211
-------- -------- --------
Charge-offs.......................................... (26,406) (29,117) (82,555)
Recoveries........................................... 7,999 11,892 12,773
-------- -------- --------
Net charge-offs.................................... (18,407) (17,225) (69,782)
Provisions charged to operations..................... 25,034 26,957 58,447
-------- -------- --------
Balance, end of year................................. $147,235 $140,608 $130,876
======== ======== ========
</TABLE>
Details on impaired loans and related allowance are as follows:
<TABLE>
<CAPTION>
IMPAIRED LOANS IMPAIRED LOANS TOTAL
FOR WHICH THERE IS FOR WHICH THERE IS IMPAIRED
A RELATED ALLOWANCE NO RELATED ALLOWANCE LOANS
------------------- -------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31,1999
Balance................................ $ 9,173 $17,360 $26,533
Related allowance...................... 5,022 -- 5,022
------- ------- -------
Balance, net of allowance.............. $ 4,151 $17,360 $21,511
======= ======= =======
December 31,1998
Balance................................ $13,542 $ 6,676 $20,218
Related allowance...................... 2,661 -- 2,661
------- ------- -------
Balance, net of allowance.............. $10,881 $ 6,676 $17,557
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired loans.................................. $32,996 $32,148 $29,308
======= ======= =======
Total interest income on impaired loans recorded on a
cash basis............................................ $ 329 $ 91 $ 115
======= ======= =======
</TABLE>
56
<PAGE> 58
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
-------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 39,419 $ 39,750
Premises.................................................... 334,787 327,054
Equipment................................................... 372,504 320,174
Leasehold improvements...................................... 40,565 32,247
-------- --------
Total.................................................. 787,275 719,225
Accumulated depreciation and amortization................... 394,464 349,423
-------- --------
Premises and equipment................................. $392,811 $369,802
======== ========
</TABLE>
The provision for depreciation and amortization was $52.9 million in 1999,
$44.3 million in 1998, and $40.0 million in 1997.
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, 1999
and December 31, 1998. The securities underlying the agreements are book-entry
securities. Securities are transferred by appropriate entry into the
Corporation's account with Bank of New York at the Federal Reserve Bank of New
York under a written custodial agreement with Bank of New York that explicitly
recognizes the Corporation's interest in these securities.
The Corporation also enters into sales of U.S. Treasury and Federal agency
securities under agreements to repurchase identical securities. The amounts
received under these agreements represent short-term borrowings and are
reflected as liabilities in the Consolidated Statements of Condition. Securities
sold under agreement to repurchase totaled $3.26 billion and $2.46 billion at
December 31, 1999 and 1998, 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>
1999 1998
---- ----
(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................................................... 75,969 159,000
Daily average amount outstanding during the year.......... 6,272 30,954
Daily average annualized rate of interest................. 4.22% 3.59%
Securities Sold Under Agreement to Repurchase
Amount outstanding at end of year......................... $3,259,414 $ 2,458,444
Highest amount outstanding as of any month-end during the
year................................................... 3,259,414 2,458,444
Daily average amount outstanding during the year.......... 2,649,997 1,967,856
Daily average annualized rate of interest................. 4.84% 5.24%
</TABLE>
57
<PAGE> 59
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
-------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Fixed rate 9 3/8% subordinated notes due June 1, 2001
($100,000 par value)...................................... $ 99,673 $ 99,387
Floating rate subordinated note to Bankmont due December 1,
2004...................................................... -- 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
Fixed rate 7 5/8% subordinated note to Bankmont due June 27,
2008...................................................... -- 15,000
Floating rate subordinated note to FinCo due June 29,
2009...................................................... 180,000 --
Fixed rate 6 1/8% subordinated note to Bankmont due August
31, 2010.................................................. 75,000 75,000
-------- --------
Total.................................................. $454,673 $454,387
======== ========
</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 1999, 180 day LIBOR was 6.13
percent.
The Corporation, in connection with the issuance of commercial paper and
for other corporate purposes, had a $150 million revolving credit agreement with
five nonaffiliated banks and BMO that terminated on December 18, 1999. At that
time the Corporation entered into a new $150 million revolving credit agreement
with a group of five nonaffiliated banks and BMO that terminates on December 8,
2000. There were no borrowings under either credit facility during 1999 or 1998.
On June 29, 1999, Bankcorp borrowed (Canadian) $266 million (U.S. $180
million) from BMO (US) Finance, LLC ("FinCo"), a Delaware limited liability
company and an indirect subsidiary of BMO. This new loan is 10 year subordinated
debt, bearing interest at Bankers' Acceptance (BA) + 43 bps, and matures June
29, 2009. Bankcorp entered into a currency and interest rate swap agreement to
exchange the C$266 million for U.S. $180 million and makes quarterly interest
payments on the swap. The interest rate converts to LIBOR + 44.5 bps under the
swap.
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
$1.50 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, 1999, $1.50 billion of senior notes were outstanding with original
maturities ranging from 366 to 385 days (remaining maturities ranging from 18 to
223 days) and stated interest rates ranging from 5.00 percent to 5.85 percent.
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.
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
58
<PAGE> 60
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 investment 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, 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 customers' liability on acceptances and acceptances
outstanding approximate carrying value due to the short-term nature of these
assets and liabilities and the generally negligible credit losses associated
with them.
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.
59
<PAGE> 61
The estimated fair values of the Corporation's financial instruments at
December 31, 1999 and 1998 are presented in the following table. See Note 9 to
Financial Statements on page 61 of this Report for additional information
regarding fair values of off-balance-sheet financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------
1999 1998
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and demand balances due from banks... $ 1,485,408 $ 1,485,408 $ 1,492,270 $ 1,492,270
Money market assets:
Interest-bearing deposits at banks...... 239,980 239,980 98,937 98,937
Federal funds sold and securities
purchased under agreement to
resell............................... 305,890 305,890 155,709 155,709
Securities available-for-sale............. 7,793,699 7,793,699 6,963,654 6,963,654
Trading account assets.................... 68,910 68,910 120,668 120,668
Loans, net of unearned income and
allowance for possible loan losses...... 12,966,794 12,905,732 12,087,792 12,107,090
Customers' liability on acceptances....... 43,599 43,599 30,829 30,829
Accrued interest receivable............... 187,811 187,811 147,316 147,316
Bank-owned insurance investments.......... 772,579 772,579 725,302 725,302
----------- ----------- ----------- -----------
Total on-balance-sheet financial
assets.......................... $23,864,670 $23,803,608 $21,822,477 $21,841,775
=========== =========== =========== ===========
LIABILITIES
Deposits:
Demand deposits......................... $ 9,630,683 $ 9,630,683 $ 9,297,644 $ 9,297,644
Time deposits........................... 5,664,273 5,675,526 6,025,198 6,059,299
Federal funds purchased and securities
sold under agreement to repurchase...... 4,536,831 4,536,831 3,440,832 3,440,832
Commercial paper outstanding.............. 245,050 245,050 261,905 261,905
Other short-term borrowings............... 684,127 684,127 168,151 168,151
Acceptances outstanding................... 43,599 43,599 30,829 30,829
Accrued interest payable.................. 90,493 90,493 56,610 56,610
Senior notes.............................. 1,500,000 1,500,000 940,000 940,000
Minority interest -- preferred stock of
subsidiary.............................. 250,000 250,000 250,000 250,000
Long-term notes........................... 454,673 448,235 454,387 469,393
----------- ----------- ----------- -----------
Total on-balance-sheet financial
liabilities..................... $23,099,729 $23,104,544 $20,925,556 $20,974,663
=========== =========== =========== ===========
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
(POSITIVE POSITIONS/(OBLIGATIONS))
Credit facilities......................... $ (20,853) $ (20,853) $ (13,551) $ (13,551)
Interest rate contracts:
Dealer and trading contracts............ 456 456 (352) (352)
Risk management contracts............... (4) 3,759 (297) (4,701)
Foreign exchange rate contracts:
Dealer and trading contracts............ (315) (315) -- --
Risk management contracts............... (192) 4,925 -- --
----------- ----------- ----------- -----------
Total off-balance-sheet financial
instruments..................... $ (20,908) $ (12,028) $ (14,200) $ (18,604)
=========== =========== =========== ===========
</TABLE>
60
<PAGE> 62
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 $8.42 billion and $8.32 billion at December 31, 1999 and 1998,
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, 1999, totaled $301 million and at
December 31, 1998, totaled $408 million.
Standby letters of credit are unconditional commitments which guarantee the
obligation of a customer to a third party should that customer default. They are
issued to support financial and performance-related obligations including
brokers' margin maintenance, industrial revenue bond repayment, debt repayment,
construction contract performance and trade agreement performance. The
Corporation's maximum risk of accounting loss for these items is represented by
the total commitments outstanding of $1.95 billion at December 31, 1999 and
$2.07 billion at December 31, 1998. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $401 million
at December 31, 1999 and $491 million at December 31, 1998.
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 $92
million at December 31, 1999 and $101 million at December 31, 1998.
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 $20.9 million at December 31, 1999 and $13.6
million at December 31, 1998.
61
<PAGE> 63
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 potential for loss arising from potential adverse
changes in underlying market factors, including interest and foreign exchange
rates. The Corporation manages market risk through the imposition of integrated
value-at-risk limits and an active, independent monitoring process.
Value at risk methodology is used for measuring the market risk of the
Corporation's trading positions. This statistical methodology uses recent market
volatility to estimate the maximum daily trading loss that the Corporation would
expect to incur, on average, 99 percent of the time. The model also measures the
effect of correlation among the various trading instruments to determine how
much risk is eliminated by offsetting positions.
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 on
page 64).
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
62
<PAGE> 64
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
------------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards............................. $ 111,710 $ 272,658 $ 284 $ 123
Forward rate agreements.......................... -- 146,800 -- 558
Options written.................................. -- -- -- --
Options purchased................................ 1,000 -- 3 --
Guarantees written............................... 531,775 735,221 1,935 91
Guarantees purchased............................. 519,022 735,221 1,240 2,647
Swaps............................................ 2,677,750 2,727,942 23,871 33,909
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
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......................... $ 284 $ -- $ 123 $ --
Unrealized losses........................ -- -- -- --
Forward rate agreements
Unrealized gains......................... -- 184 558 192
Unrealized losses........................ -- (184) (558) (192)
Options
Purchased................................ 3 -- -- --
Written.................................. -- -- -- --
Guarantees
Purchased................................ (695) 2,006 2,556 2,087
Written.................................. 763 (2,037) (2,556) (2,087)
Swaps
Unrealized gains......................... 23,871 20,942 33,909 43,790
Unrealized losses........................ (23,770) (21,155) (34,384) (42,672)
-------- -------- -------- --------
Total Interest Rate Contracts....... $ 456 $ (244) $ (352) $ 1,118
======== ======== ======== ========
</TABLE>
Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31, 1999,
1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards...................................... $ 542 $ 788 $ (649)
Forward rate agreements................................... 2 -- --
Options................................................... (36) (16) 54
Guarantees................................................ (57) -- (6)
Swaps..................................................... 439 210 42
Debt Instruments............................................ 8,003 9,388 7,570
------ ------- ------
Total Trading Revenue.................................. $8,893 $10,370 $7,011
====== ======= ======
</TABLE>
63
<PAGE> 65
The following table summarizes the maturities and weighted average interest
rates paid and received on dealer/trading interest rate swaps:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------------------------
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........... $217,634 $472,434 $504,687 $130,218 $ 61,200 $1,386,173
Average pay rate.......... 5.77% 6.11% 6.07% 6.58% 6.16% 6.09%
Average receive rate...... 6.07% 6.13% 6.02% 5.51% 6.13% 6.02%
Receive Fixed Swaps:
Notional amount........... $209,399 $446,915 $478,529 $101,134 $ 55,600 $1,291,577
Average pay rate.......... 6.05% 6.13% 6.19% 5.68% 6.13% 6.10%
Average receive rate...... 5.77% 6.02% 6.09% 6.59% 6.14% 6.06%
Total notional
amount............... $427,033 $919,349 $983,216 $231,352 $116,800 $2,677,750
</TABLE>
The following table summarizes the bank's dealer/trading equities and
commodities contracts and their related contractual or notional amounts and
maximum replacement costs.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
CONTRACTUAL OR MAXIMUM
NOTIONAL AMOUNT REPLACEMENT COST
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equities Contracts:
Options written....................................... $15,451 $3,702 $ -- $ --
Options purchased..................................... 15,451 3,702 2,507 1,032
Commodities Contracts................................... -- 1,596 -- 193
</TABLE>
The following table summarizes average and end of period fair values of
dealer/trading equities contracts and commodities contracts for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equities Contracts:
Options
Purchased.............................. $ 2,507 $ 79 $ 1,032 $ 179
Written................................ (2,507) (79) (1,032) (179)
------- ---- ------- -----
Total Equities Contracts............. $ -- $ -- $ -- $ --
======= ==== ======= =====
Commodities Contracts:
Unrealized Gains.......................... $ -- $ 9 $ 193 $ 8
Unrealized Losses......................... -- (9) (193) (8)
------- ---- ------- -----
Total Commodities Contracts.......... $ -- $ -- $ -- $ --
======= ==== ======= =====
</TABLE>
There were no net gains (losses) from dealer/trading activity in equities
or commodities contracts for the years ended December 31, 1999 and 1998.
Risk Management Activity
In addition to its dealer activities, the Corporation uses interest rate
contracts, primarily swaps, and foreign exchange contracts to reduce the level
of financial risk inherent in mismatches between the interest rate
64
<PAGE> 66
sensitivities and foreign currency exchange rate fluctuations of certain assets
and liabilities. For non-trading risks, market risk is controlled by actively
managing the asset and liability mix, either directly through the balance sheet
or with off-balance sheet derivative instruments. Measures also focus on
interest rate exposure gaps and sensitivity to rate changes. During 1999 and
1998, interest rate swaps were primarily used to alter the character of revenue
earned on certain fixed rate loans. During 1999 foreign exchange contracts were
used to stabilize any currency exchange rate fluctuations for certain senior
notes. The Corporation had $436 million notional amount of swap contracts, used
for risk management purposes, outstanding at December 31, 1999 with a fair value
of $8.7 million. At December 31, 1998, the Corporation had $152 million notional
amount of swap contracts outstanding with a loss in fair value of $4.7 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 $2.8 million and $3.0 million, respectively, at December 31,
1999 and $0.2 and $4.5 million, respectively, at December 31, 1998. Risk
management activity, including the related cash positions, had no material
effect on the Corporation's net income for the year ended December 31, 1999 or
1998. There were no deferred gains or losses on terminated contracts at December
31, 1999 or 1998.
The following table summarizes swap activity for risk management purposes:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------
(IN THOUSANDS)
<S> <C>
Amount, December 31, 1997................................... $ 483,032
Additions................................................... 57,517
Maturities.................................................. (388,915)
Terminations................................................ --
---------
Amount, December 31, 1998................................... $ 151,634
Additions................................................... 322,850
Maturities.................................................. 6,576
Terminations................................................ (44,685)
---------
Amount, December 31, 1999................................... $ 436,375
=========
</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, 1999
-------------------------------------------------------------
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.......................... $75,267 $84,960 $ 20,141 $ -- $180,368
Average pay rate......................... 6.25% 6.01% 6.67% --% 6.18%
Average receive rate..................... 6.18% 6.15% 6.17% --% 6.17%
Receive Fixed Swaps:
Notional amount.......................... $ -- $ -- $256,007 $ -- $256,007
Average pay rate......................... --% --% 6.32% --% 6.32%
Average receive rate..................... --% --% 5.55% --% 5.55%
Total notional amount................. $75,267 $84,960 $276,148 $ -- $436,375
</TABLE>
At December 31, 1999, swap contracts with BMO represent $19.6 million and
$4.5 million of unrealized gains and unrealized losses, respectively. Guarantee
contracts purchased from BMO represent $0.8 million and $0.2 million of
unrealized gains and unrealized losses, respectively. Guarantee contracts
written with BMO represent $1.8 million and $0.4 million of unrealized gains and
unrealized losses, respectively.
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
monitor-
65
<PAGE> 67
ing 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. HTSB
and BMO 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 1999, 1998 or 1997 net income or financial position.
At December 31, 1999, approximately 75 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 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
------------------------ --------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange Contracts:
Spot, futures and forwards................... $1,563,178 $1,734,546 $22,290 $19,991
Options written.............................. 168,590 184,615 -- --
Options purchased............................ 168,590 184,615 4,086 3,885
Cross currency swaps......................... 324,235 123,906 13,416 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, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
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.......................... $ 22,290 $ 22,531 $ 19,991 $ 35,056
Unrealized losses......................... (22,290) (22,531) (19,991) (35,056)
Options
Purchased................................. 4,086 7,984 3,885 3,304
Written................................... (4,086) (7,984) (3,885) (3,304)
Cross currency swaps
Unrealized gains.......................... 13,416 1,111 2,996 2,913
Unrealized losses......................... (13,731) (775) (2,996) (2,913)
-------- -------- -------- --------
Total Foreign Exchange...................... $ (315) $ 336 $ -- $ --
======== ======== ======== ========
</TABLE>
At December 31, 1999, spot, futures and forward contracts with BMO
represent $8.2 million and $10.0 million of unrealized gains and unrealized
losses, respectively. Options contracts with BMO represent $4.1 million and $4.1
million of options purchased and options written, respectively. Cross currency
swaps with BMO represent $7.8 million and $5.8 million of unrealized gains and
unrealized losses, respectively.
66
<PAGE> 68
Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1999, 1998 and 1997 totaled $8.3 million, $6.8 million
and $5.4 million, respectively, of net profit under the aforementioned agreement
with BMO.
Securities Activities
The Corporation's securities activities that have off-balance-sheet risk
include municipal bond underwriting and short selling of securities.
Through its municipal bond underwriting activities, the Corporation commits
to buy and offer for resale newly issued bonds. The Corporation is exposed to
market risk because it may be unable to resell its inventory of bonds profitably
as a result of unfavorable market conditions. In syndicate arrangements, the
Corporation is obligated to fulfill syndicate members' commitments should they
default. The syndicates of which the Corporation was a member had underwriting
commitments totaling $50 million at December 31, 1999 and $83 million at
December 31, 1998.
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, 1999
or 1998.
10. CONCENTRATIONS OF CREDIT RISK IN FINANCIAL INSTRUMENTS
The Corporation had one concentration of credit risk arising from financial
instruments at December 31, 1999 and 1998. 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, mortgage loans, home equity loans
and lines, standby and commercial letters of credit and banker's acceptances.
The financial viability of customers in the Midwest is, in part, dependent on
the region's economy. Corporate customers headquartered in the region and
serving a national or international market are not included in this
concentration because their business is broad-based and not dependent on the
region's economy. The Corporation's maximum risk of accounting loss, should all
customers making up the Midwestern concentration fail to perform according to
contract terms and all collateral prove to be worthless, was approximately $13.5
billion or 41 percent of the Corporation's total credit exposure at December 31,
1999 and $15.1 billion or 49 percent of the Corporation's total credit exposure
at December 31, 1998.
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 61 of this Report for information on
collateral supporting credit facilities.
11. EMPLOYEE BENEFIT PLANS
The Corporation has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1999. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1999. 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
67
<PAGE> 69
the minimum. For 1999, 1998 and 1997, cumulative contributions were greater than
the amounts recorded as pension expense for financial reporting purposes.
The total consolidated pension expense of the Corporation, including the
supplemental plan (excluding settlement losses), for 1999, 1998 and 1997 was
$15.2 million, $10.0 million and $8.7 million, respectively.
In addition to pension benefits, the Corporation provides medical care
benefits for retirees (and their dependents) who have attained age 55 and have
at least 10 years of service. The Corporation also provides medical care
benefits for disabled employees and widows of former employees (and their
dependents). The Corporation provides these medical care benefits through a
self-insured plan. Under the terms of the plan, the Corporation contributes to
the cost of coverage based on employees length of service. Cost sharing with
plan participants is accomplished through deductibles, coinsurance and
out-of-pocket limits. Funding for the plan largely comes from the general assets
of the Corporation, supplemented by contributions to a trust fund created under
Internal Revenue Code Section 401(h).
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
------------------------------ ---------------------------------
1999*** 1998*** 1997*** 1999*** 1998*** 1997***
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION*
Benefit obligation at beginning of
year.............................. $274,535 $229,474 $209,871 $ 41,050 $ 39,757 $ 38,550
Service cost........................ 12,671 11,043 9,862 2,230 1,758 1,552
Interest cost....................... 18,928 17,319 15,108 2,989 2,805 2,645
Benefits paid (net of participant
contributions).................... (26,644) (21,326) (15,942) (2,983) (2,953) (1,704)
Actuarial (gain) or loss............ (24,908) 38,025 10,575 (706) (317) (1,286)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year... $254,582 $274,535 $229,474 $ 42,580 $ 41,050 $ 39,757
======== ======== ======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year................. $243,293 $266,589 $217,175 $ 19,716 $ 18,031 $ 12,133
Actual return on plan assets........ 27,746 (10,749) 58,246 2,255 (1,005) 3,663
Employer contribution............... 9,947 8,778 7,111 2,803 2,690 2,235
Benefits paid....................... (26,644) (21,325) (15,943) -- -- --
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end of
year**............................ $254,342 $243,293 $266,589 $ 24,774 $ 19,716 $ 18,031
======== ======== ======== ======== ======== ========
Funded Status....................... $ (240) $(31,242) $ 37,115 $(17,806) $(21,334) $(21,726)
Contributions made between
measurement date (September 30)
and end of year................... -- 10,017 9,269 -- -- --
Unrecognized actuarial (gain) or
loss.............................. 8,918 40,932 (29,079) (14,977) (13,941) (16,783)
Unrecognized transition (asset) or
obligation........................ (803) (1,159) (1,513) 25,598 27,490 29,497
Unrecognized prior service cost..... (5,446) (6,292) (7,127) 2,206 2,398 2,592
-------- -------- -------- -------- -------- --------
Prepaid (accrued) benefit cost...... $ 2,429 $ 12,256 $ 8,665 $ (4,979) $ (5,387) $ (6,420)
======== ======== ======== ======== ======== ========
</TABLE>
68
<PAGE> 70
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT MEDICAL BENEFITS
------------------------------ ---------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST
Service cost........................ $ 12,671 $ 11,043 $ 9,862 $ 2,230 $ 1,758 $ 1,552
Interest cost....................... 18,928 17,319 15,108 2,990 2,805 2,645
Expected return on plan assets...... (21,564) (20,749) (17,780) (1,660) (1,490) (1,047)
Amortization of prior service
cost.............................. (833) (835) (835) 195 195 195
Amortization of transition (asset)
or obligation..................... (354) (354) (354) 1,964 1,966 1,966
Recognized actuarial (gain) or
loss.............................. 944 -- -- (324) (583) (547)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost........... $ 9,792 $ 6,424 $ 6,001 $ 5,395 $ 4,651 $ 4,764
======== ======== ======== ======== ======== ========
</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.
<TABLE>
<CAPTION>
POSTRETIREMENT MEDICAL
PENSION BENEFITS BENEFITS
------------------ ------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate.......................................... 7.50% 7.00% 7.25% 7.50% 7.00% 7.25%
Expected return on plan assets......................... 9.00% 9.00% 9.00% 8.00% 8.00% 8.00%
Rate of compensation increase.......................... 5.50% 5.50% 5.70% N/A N/A N/A
</TABLE>
- -------------------------
* Discount rates are used to determine service costs for the subsequent year.
For measurement purposes, a 6.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 6.0 percent in 2001 and remain level
thereafter.
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... $1,238 $ (868)
Effect on postretirement benefit obligation............... $6,382 $(5,157)
</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
69
<PAGE> 71
statutory limitations for qualified funded plans. The following table sets forth
the status of this supplemental plan:
<TABLE>
<CAPTION>
SUPPLEMENTAL UNFUNDED RETIREMENT
BENEFITS
---------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 24,667 $ 19,731 $ 15,263
Service cost................................................ 2,694 1,357 793
Interest cost............................................... 1,474 1,178 796
Benefits paid (net of participant contributions)............ (5,094) (1,493) (2,109)
Actuarial (gain) or loss.................................... (7,411) 3,894 4,988
-------- -------- --------
Benefit obligation at end of year........................... $ 16,330 $ 24,667 $ 19,731
-------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $ -- $ -- $ --
Actual return on plan assets................................ -- -- --
Employer contribution....................................... 5,094 1,493 2,109
Benefits paid............................................... (5,094) (1,493) (2,109)
-------- -------- --------
Fair value of plan assets at end of year.................... $ -- $ -- $ --
-------- -------- --------
Funded Status............................................... $(16,330) $(24,667) $(19,731)
Contributions made between measurement date (September 30)
and end of year........................................... 86 45 48
Unrecognized actuarial (gain) or loss....................... 142 9,867 6,083
Unrecognized transition (asset) or obligation............... 283 362 515
Unrecognized prior service cost............................. 2,609 2,800 3,580
-------- -------- --------
Prepaid (accrued) benefit cost.............................. $(13,210) $(11,593) $ (9,505)
-------- -------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................................ $ 2,693 $ 1,357 $ 793
Interest cost............................................... 1,474 1,178 796
Expected return on plan assets.............................. -- -- --
Amortization of prior service cost.......................... 562 528 563
Amortization of transition (asset) or obligation............ 128 121 128
Recognized actuarial (gain) or loss......................... 537 397 411
-------- -------- --------
Net periodic benefit cost................................... $ 5,394 $ 3,581 $ 2,691
======== ======== ========
Additional (gain) or loss recognized due to:
Curtailment............................................... $ -- $ -- $ --
Settlement................................................ $ 1,314 $ -- $ 241
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate............................................... 6.00% 6.00% 6.00%
Rate of compensation increase............................... 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 $11.5 million, $10.6 million
and $10.3 million in 1999, 1998 and 1997, 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.
Harris Bank Stock Option Program
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.
The Corporation granted 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 BMO common
stock equal to the market price on the date of grant. The compensation expense
related to this program totaled $2.7 million, $1.3 million and $0.8 million in
1999, 1998 and 1997 respectively.
The following table summarizes the stock option activity for 1999, 1998 and
1997 and provides details of stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
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..................... 1,961,200 $34.39 1,076,300 $30.63 902,100 $25.48
Granted.................... 797,500 34.72 879,300 39.06 263,750 46.33
Exercised.................. -- -- --
Forfeited, cancelled....... (2,500) 39.06 -- -- (89,550) 25.03
Transferred................ (15,000) 39.06 5,600 22.55
Expired.................... -- -- --
--------- --------- ---------
Outstanding at end of
year..................... 2,741,200 34.45 1,961,200 34.39 1,076,300 30.63
========= ========= =========
Options exercisable at
year-end................. None None None
Weighted-average fair value
of options granted during
the year................. $ 6.69 $ 7.98 $ 9.53
</TABLE>
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$22-30 818,150 6.51 years $25.51
34-42 1,659,300 9.44 36.97
46-50 263,750 7.95 46.33
---------
22-50 2,741,200 8.42 34.45
=========
</TABLE>
The fair value of the stock options granted has been estimated using the
Bloomberg Model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ------
<S> <C> <C> <C>
Risk-free interest rate............................... 6.31% 4.87% 5.81%
Expected life, in years............................... 7.0 7.5 7.5
Expected volatility................................... 21.46% 19.82% 15.96%
Compound annual dividend growth....................... 9.02% 8.82% 8.82%
Estimated fair value per option (US $)................ $ 6.69 $ 7.98 $ 9.53
</TABLE>
71
<PAGE> 73
Harris Bank Stock Appreciation Rights Plan
The Corporation maintains the Harris Bank Stock Appreciation Rights Plan
which was established in January 1995. The rights granted under this plan have
either a three-year or five-year term and are exercisable after the expiration
of the respective term, assuming cumulative performance goals are met.
Compensation expense for the Harris Bank Stock Appreciation Rights Plan totaled
$0.4 million, $0.6 million and $5.9 million in 1999, 1998 and 1997 respectively.
The following table details the rights outstanding at December 31, 1999,
1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------- --------
<S> <C> <C> <C>
Outstanding beginning of the year.............. 378,200 398,000 611,000
Granted........................................ -- -- --
Exercised...................................... (305,200) (24,000) (143,000)
Cancelled...................................... -- -- (70,000)
Transferred.................................... -- 4,200 --
--------- ------- --------
Outstanding end of the year.................... 73,000 378,200 398,000
========= ======= ========
</TABLE>
13. LEASE EXPENSE AND OBLIGATIONS
Rental expense for all operating leases was $19.3 million in 1999, $17.6
million in 1998 and $20.8 million in 1997. These amounts include real estate
taxes, maintenance and other rental-related operating costs of $3.6 million,
$3.1 million and $4.3 million for 1999, 1998 and 1997, respectively, paid under
net lease arrangements. Lease commitments are primarily for office space.
Minimum rental commitments as of December 31, 1999 for all noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
2000........................................................ $12,583
2001........................................................ 10,794
2002........................................................ 8,047
2003........................................................ 6,001
2004........................................................ 5,629
2005 and thereafter......................................... 29,337
-------
Total minimum future rentals........................... $72,391
=======
</TABLE>
Occupancy expenses for 1999, 1998 and 1997 have been reduced by $13.0
million, $14.0 million and $14.3 million, respectively, for rental income from
leased premises.
72
<PAGE> 74
14. INCOME TAXES
The 1999, 1998, and 1997 applicable income tax expense (benefit) was as
follows:
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999:
Current........................................ $70,887 $ (664) $24 $70,247
Deferred....................................... (7,631) 2,522 -- $(5,109)
------- ------ --- -------
Total..................................... $63,256 $1,858 $24 $65,138
======= ====== === =======
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
======= ====== === =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Gross deferred tax assets:
Allowance for possible loan losses........................ $ 58,427 $ 56,547 $51,283
Deferred employee compensation............................ 6,214 10,272 8,224
Deferred expense and prepaid income....................... 10,394 -- 7,256
Pension and medical trust................................. 8,738 5,811 4,028
Other assets.............................................. 8,073 9,902 10,134
-------- -------- -------
Deferred tax assets.................................. 91,846 82,532 80,925
-------- -------- -------
Gross deferred tax liabilities:
Depreciable assets........................................ (5,273) (6,077) (2,686)
Other liabilities......................................... (8,995) (3,988) (2,349)
-------- -------- -------
Deferred tax liabilities............................... (14,268) (10,065) (5,035)
-------- -------- -------
Net deferred tax assets................................... 77,578 72,467 75,890
-------- -------- -------
Tax effect of adjustment related to available-for-sale
securities................................................ 102,591 (25,017) (7,563)
-------- -------- -------
Net deferred tax assets including adjustment related to
available-for-sale securities............................. $180,169 $ 47,450 $68,327
======== ======== =======
</TABLE>
At December 31, 1999 and 1998, the respective net deferred tax assets of
$78 million and $72 million included $68 million and $60 million for Federal
taxes and $10 million and $12 million for state taxes, respectively. Bankcorp
has recognized its Federal and state deferred tax assets as management believes
that it is more likely than not that the net deferred tax assets will be
realized. The deferred taxes reported on the Corporation's Consolidated
Statements of Condition at December 31, 1999 and 1998 also include a $103
million deferred tax asset and a $25 million deferred tax liability,
respectively, for the tax effect of the net unrealized gains or losses
associated with marking to market certain securities designated as
available-for-sale, in accordance with SFAS No. 115.
73
<PAGE> 75
Total income tax expense of $65.1 million for 1999, $69.9 million for 1998,
and $70.1 million for 1997 reflects effective tax rates of 24.3 percent, 27.7
percent, and 30.9 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
--------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ---------- ------ ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed tax expense............ $ 93,867 35.0% $ 88,384 35.0% $79,327 35.0%
Increase (reduction) in income
tax expense due to:
Tax-exempt income from loans
and investments net of
municipal interest expense
disallowance............... (6,462) (2.4) (6,121) (2.4) (6,591) (2.9)
Bank owned insurance
investments................ (14,477) (5.4) (11,319) (4.5) (4,518) (2.0)
Equity ownership in
securitization trust....... (5,601) (2.1) -- -- -- --
Other, net.................... (2,189) (0.8) (1,043) (0.4) 1,858 0.8
-------- ---- -------- ---- ------- ----
Actual tax expense.............. $ 65,138 24.3% $ 69,901 27.7% $70,076 30.9%
======== ==== ======== ==== ======= ====
</TABLE>
The tax expense from net gains on security sales amounted to $5.5 million,
$10.5 million, and $5.1 million in 1999, 1998, and 1997, respectively.
15. REGULATORY CAPITAL
Bankcorp, as a U.S. bank holding company, and HTSB, as a state-member bank,
must each adhere to the capital adequacy guidelines of the Federal Reserve
Board, 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. 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 are
expected to maintain a minimum ratio of 4 percent.
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
74
<PAGE> 76
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, 1999, 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, 1999 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.
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
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to
Risk-Weighted Assets
Corporation................ $2,261,292 11.54% * $1,567,620 * 8.00% * $1,959,525 * 10.00%
HTSB....................... $1,740,498 10.77% * $1,292,849 * 8.00% * $1,616,061 * 10.00%
Tier 1 Capital to
Risk-Weighted Assets
Corporation................ $1,739,753 8.88% * $ 783,673 * 4.00% * $1,175,509 * 6.00%
HTSB....................... $1,401,796 8.68% * $ 645,989 * 4.00% * $ 968,983 * 6.00%
Tier 1 Capital to Average
Assets
Corporation................ $1,739,753 7.07% * $ 984,302 * 4.00% * $1,230,377 * 5.00%
HTSB....................... $1,401,796 7.29% * $ 769,161 * 4.00% * $ 961,451 * 5.00%
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% * $1,102,896 * 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%
</TABLE>
- ------------
* Greater than or equal to.
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16. INVESTMENTS IN SUBSIDIARIES AND STATUTORY RESTRICTIONS
Bankcorp's investment in the combined net assets of its wholly-owned
subsidiaries was $1.68 billion and $1.74 billion at December 31, 1999 and 1998,
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, $412 million of dividends at
December 31, 1999. Actual dividends paid, however, would be subject to prudent
capital maintenance. Cash dividends paid to Bankcorp by its subsidiaries
amounted to $104 million and $134 million in 1999 and 1998, respectively.
The Federal Reserve Act also places restrictions on certain transactions
between Bankcorp and its affiliates, including loans from subsidiary banks. Such
restrictions include collateralization requirements and quantitative
limitations. Essentially, a member bank's aggregate involvement in these
restricted transactions may not exceed 20 percent of its capital and surplus, as
defined by the Federal Reserve Board. In addition, restricted transactions
involving an individual affiliate are limited to 10 percent of its capital and
surplus.
The bank subsidiaries of Bankcorp are required by the Federal Reserve Act
to maintain reserves against certain of their deposits. Reserves are held either
in the form of vault cash or balances maintained with the Federal Reserve Bank.
Required reserves are essentially a function of daily average deposit balances
and statutory reserve ratios prescribed by type of deposit. During 1999 and
1998, daily average reserve balances of $209 million and $225 million,
respectively, were required for those subsidiaries of Bankcorp that must
maintain such balances. At year-end 1999 and 1998, balances on deposit at the
Federal Reserve Bank totaled $226 million and $195 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, Electronic Financial
Services and Private Client Group. 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 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. The Private Client
Group serves the needs of affluent individuals both within Chicagoland and
nationally through the integrated delivery of a comprehensive offering of wealth
management services, including investment management, personal trust, customized
lending and financial planning. Businesses within this group include private
banking, mutual fund management, retirement plan services and Harris Investment
Management (the Corporation's institutional investment manager).
76
<PAGE> 78
The "Other" category is comprised of the Corporation's Treasury unit, which
serves as the Corporation's funding unit, as well as income from bank-owned
insurance investments and 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 resources to them based on FTE basis income before income taxes.
Selected segment information is included in the following table.
77
<PAGE> 79
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
CORPORATE AND
INSTITUTIONAL ELECTRONIC
FINANCIAL CHICAGOLAND FINANCIAL PRIVATE CLIENT CONSOLIDATED
SERVICES BANKING SERVICES GROUP OTHER TOTAL
------------- ----------- ---------- -------------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1999
Net interest income
(FTE basis)................. $198.3 $255.6 $ 67.2 49.0 $ 7.3 $ 577.4
Noninterest income............ 108.5 74.4 104.4 131.2 44.5 463.0
Provision for loan losses..... 18.2 6.6 -- 0.3 (0.1) 25.0
Noninterest expense........... 137.8 281.6 134.2 150.8 10.4 714.8
------ ------ ------ ------ ------- -------
Income before income taxes.... 150.8 41.8 37.4 29.1 41.5 300.6
Income taxes.................. 60.3 17.4 14.9 11.7 (6.8) 97.5
------ ------ ------ ------ ------- -------
Net income.................... $ 90.5 $ 24.4 $ 22.5 $ 17.4 $ 48.3 $ 203.1
====== ====== ====== ====== ======= =======
Average Assets................ $6,875 $8,015 $1,255 $1,240 $ 6,130 $23,515
====== ====== ====== ====== ======= =======
Average Loans................. $6,797 $6,276 $ 36 $1,087 $(1,683) $12,513
====== ====== ====== ====== ======= =======
Average Deposits.............. $ 394 $7,957 $2,421 $1,260 $ 3,106 $15,138
====== ====== ====== ====== ======= =======
1998
Net interest income
(FTE basis)................. $178.0 $240.8 $ 68.1 45.5 $ 4.8 $ 537.2
Noninterest income............ 100.7 69.0 108.4(1) 121.8 51.1 451.0
Provision for loan losses..... 21.1 5.7 0.1 0.3 (0.2) 27.0
Noninterest expense........... 123.1 271.3 132.0 131.3 20.9 678.6
------ ------ ------ ------ ------- -------
Income before income taxes.... 134.5 32.8 44.4 35.7 35.2 282.6
Income taxes.................. 53.5 14.5 17.8 14.5 (0.3) 100.0
------ ------ ------ ------ ------- -------
Net income.................... $ 81.0 $ 18.3 $ 26.6 $ 21.2 $ 35.5 $ 182.6
====== ====== ====== ====== ======= =======
Average Assets................ $6,330 $7,835 $1,230 $1,090 $ 4,742 $21,227
====== ====== ====== ====== ======= =======
Average Loans................. $6,159 $6,157 $ 59(1) $ 954 $(1,669) $11,660
====== ====== ====== ====== ======= =======
Average Deposits.............. $ 407 $7,633 $2,999 $1,216 $ 2,116 $14,371
====== ====== ====== ====== ======= =======
1997
Net interest income
(FTE basis)................. $125.5 $234.2 $135.1 $ 37.7 $ 65.3 $ 597.8
Noninterest income............ 83.9 49.9 113.9 108.1 21.9 377.7
Provision for loan losses..... 15.0 1.8 50.0 0.2 (8.6) 58.4
Noninterest expense........... 117.8 258.7 153.2 124.8 9.2 663.7
------ ------ ------ ------ ------- -------
Income before income taxes.... 76.6 23.6 45.8 20.8 86.6 253.4
Income taxes.................. 30.6 10.3 18.7 7.9 29.3 96.8
------ ------ ------ ------ ------- -------
Net income.................... $ 46.0 $ 13.3 $ 27.1 $ 12.9 $ 57.3 $ 156.6
====== ====== ====== ====== ======= =======
Average Assets................ $5,293 $7,656 $1,836 $ 865 $ 3,570 $19,220
====== ====== ====== ====== ======= =======
Average Loans................. $5,033 $6,295 $ 841 $ 745 $(1,953) $10,961
====== ====== ====== ====== ======= =======
Average Deposits.............. $ 549 $7,007 $2,556 $1,189 $ 1,983 $13,284
====== ====== ====== ====== ======= =======
</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.
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<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>
1999
Total operating income................................... $ 46,974 $ 1,785,358 $ 1,832,332
Total expenses........................................... 14,803 1,549,338 1,564,141
-------- ----------- -----------
Income before taxes...................................... 32,171 236,020 268,191
Applicable income taxes.................................. 12,786 52,352 65,138
-------- ----------- -----------
Net income............................................... $ 19,385 $ 183,668 $ 203,053
======== =========== ===========
Identifiable assets at year-end.......................... $322,297 $24,540,581 $24,862,878
======== =========== ===========
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
======== =========== ===========
</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, 1999, 1998 and 1997,
identifiable foreign assets accounted for 1, 1 and 4 percent, respectively, of
total consolidated assets.
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<PAGE> 81
20. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Presented below are the statements of income, statements of condition and
statements of cash flows for Harris Bankcorp, Inc. (parent company only):
Statements of Income
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on securities purchased from bank subsidiary under
agreement to resell....................................... $ 6,485 $ 7,641 $ 6,332
Interest on advances to affiliates.......................... 763 763 763
Interest on advances to bank subsidiaries................... 15,534 18,573 22,462
Interest on investments in Federal agency securities........ 14,490 13,055 11,825
Interest on deposits at bank subsidiaries................... -- -- 22
Dividends from bank subsidiaries............................ 103,577 134,300 65,662
Other operating income...................................... 44 -- 234
-------- -------- --------
Total operating income................................. 140,893 174,332 107,300
-------- -------- --------
Interest expense on commercial paper........................ 13,876 16,136 16,771
Interest expense on long-term notes......................... 31,186 29,495 26,499
Other operating expense..................................... 4,604 4,907 6,932
-------- -------- --------
Total operating expenses............................... 49,666 50,538 50,202
-------- -------- --------
Income before income taxes and equity in undistributed net
income of subsidiaries.................................... 91,227 123,794 57,098
Applicable income tax benefit............................... (6,780) (5,153) (5,760)
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries.............................................. 98,007 128,947 62,858
Equity in undistributed net income of bank subsidiaries..... 96,274 47,046 88,574
Equity in undistributed net income of nonbank
subsidiaries.............................................. 9,115 6,717 5,142
Equity in undistributed net loss of partially-owned bank
subsidiary................................................ (343) (85) --
-------- -------- --------
Net income............................................. $203,053 $182,625 $156,574
======== ======== ========
</TABLE>
80
<PAGE> 82
Statements of Condition
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Demand balances due from bank subsidiary.................... $ 463 $ 272
Investment in U. S. Treasury and Federal agency
securities................................................ 169,405 143,422
Securities purchased from bank subsidiary under agreement to
resell.................................................... 81,814 128,771
Advances to bank subsidiaries............................... 240,000 240,000
Advances to affiliates...................................... 10,000 10,000
Equity investment in wholly-owned subsidiaries:
Banks..................................................... 1,606,785 1,676,117
Nonbanks.................................................. 70,498 67,966
Equity investments in partially-owned bank subsidiary:...... 1,019 1,362
Other assets................................................ 109,474 107,029
---------- ----------
TOTAL ASSETS......................................... $2,289,458 $2,374,939
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper outstanding................................ $ 245,050 $ 261,905
Other liabilities........................................... 8,978 7,615
Long-term notes............................................. 454,673 454,387
---------- ----------
Total liabilities.................................... 708,701 723,907
Stockholder's equity........................................ 1,580,757 1,651,032
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........... $2,289,458 $2,374,939
========== ==========
</TABLE>
81
<PAGE> 83
Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................ $ 203,053 $ 182,625 $ 156,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiaries........... (105,389) (53,763) (93,716)
Accretion and amortization......................... (411) (10,821) (11,825)
Deferred income tax (benefit) provision............ 60 (129) (33)
Net decrease/(increase) in interest receivable..... (3,365) 1,069 (812)
Other, net......................................... (2,691) (1,667) (6,255)
--------- ---------- -----------
Net cash provided by operating activities........ 91,257 117,314 43,933
--------- ---------- -----------
INVESTING ACTIVITIES:
Net decrease(increase) in interest-bearing deposits
at banks......................................... -- -- 152,799
Net (increase)decrease in securities purchased
under agreement to resell........................ 46,957 (2,477) (126,294)
Proceeds from maturities of portfolio securities... 722,263 1,033,782 1,135,139
Purchases of portfolio securities.................. (748,258) (936,080) (1,151,010)
Additional capital invested in bank subsidiaries... (9,350) (3,310) --
Net decrease(increase) in advances to
subsidiaries..................................... -- 100,000 (15,000)
Other, net......................................... (6,207) (97,675) 3
--------- ---------- -----------
Net cash provided(used) by investing
activities.................................... 5,405 94,240 (4,363)
--------- ---------- -----------
FINANCING ACTIVITIES:
Net (decrease)increase in commercial paper
outstanding...................................... (16,855) (89,522) 16,774
Proceeds from issuance of long-term notes.......... 180,000 75,000 --
Repayment of long-term notes....................... (180,000) -- --
Contribution to capital surplus.................... 2,678 1,307 2,226
Cash dividends paid on Series A preferred stock.... (13,050) (13,050) (13,050)
Cash dividends paid on Series B preferred stock.... (3,544) (3,544) (3,543)
Cash dividends paid on common stock................ (65,700) (181,500) (42,000)
--------- ---------- -----------
Net cash provided (used) by financing
activities.................................... (96,471) (211,309) (39,593)
--------- ---------- -----------
Net increase(decrease) in demand balances due from
banks................................................. 191 245 (23)
Demand balances due from banks at January 1............. 272 27 50
--------- ---------- -----------
Demand balances due from banks at December 31........... $ 463 $ 272 $ 27
========= ========== ===========
</TABLE>
21. BUSINESS COMBINATIONS AND DISPOSITIONS/INTANGIBLES
At December 31, 1999 and 1998, intangible assets, including goodwill
resulting from business combinations, amounted to $250 million and $268 million,
respectively. Amortization of these intangibles amounted to $25.0 million in
1999, $24.1 million in 1998, and $27.8 million in 1997. 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 assets had
a carrying value of $693.0 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.
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<PAGE> 84
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 $11.6
million at December 31, 1999 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 1999, 1998 and 1997, 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, interest rate and foreign exchange rate 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 1999, 1998 and 1997, the
Corporation received from BMO approximately $14.6 million, $17.1 million and
$20.9 million respectively, primarily for trust services, data processing and
other operations support provided by the Corporation.
HTSB and BMO 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. 1999, 1998
and 1997 foreign exchange revenues included $8.3 million, $6.8 million and $5.4
million of net profit, respectively, under this agreement.
On June 29, 1999, Bankcorp borrowed (Canadian) $266 million from FinCo. The
loan is subordinated debt, due to mature July 29, 2009. Bankcorp entered into a
currency and interest rate swap agreement to exchange the C$266 million for
U.S. $180 million and makes quarterly interest payments on the swap. The loan
interest rate is BA + 43 bps and converts to 90 day LIBOR + 44.5 bps under the
swap.
23. SUBSEQUENT EVENT
On February 1, 2000, the Corporation announced the sale of its corporate
trust businesses. In separate and unrelated transactions, the indenture trust
business is being sold to a subsidiary of The Bank of New York Company, Inc.,
and the shareholder services business to Computershare Limited. The combined
sales will result in an estimated pre-tax gain to Bankcorp of approximately $50
million in first quarter 2000, not including revenue contingent upon the outcome
of certain events, expected in second half 2000. The sales are subject to
regulatory approval and are expected to close during first quarter 2000. In
1999, noninterest revenue from the corporate trust businesses amounted to $51.7
million. The Corporation does not believe that the sale of these businesses will
have a material impact on the results of operations for future periods.
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<PAGE> 85
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, 1999.
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP PricewaterhouseCoopers LLP
Chicago, Illinois
January 28, 2000 except for Note 23, as to which the date is March 10, 2000
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.
84
<PAGE> 86
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Bankcorp's Board of Directors consists of fourteen 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.
MARTIN R. CASTRO, age 36, Attorney-at-Law. Elected in 1999.
PASTORA SAN JUAN CAFFERTY, age 59, 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.
HAVEN E. COCKERHAM, age 52, Senior Vice President, Human Resources, R. R.
Donnelley & Sons Company (printing company). Prior to joining R. R. Donnelley &
Sons in 1998, Mr. Cockerham headed Human Resources for Detroit Edison. Elected
in 1999.
F. ANTHONY COMPER, age 54, Chairman and Chief Executive Officer and a
Director of Bank of Montreal. Elected in 1990.
SUSAN T. CONGALTON, age 53, Managing Director, Lupine L.L.C. (consulting
and private investments). Elected in 1988.
WILBUR H. GANTZ, age 62, Chairman of the Board and Chief Executive Officer
of PathoGenesis Corporation (diagnostic health care) and a Director of W.W.
Grainger and Gillette Corporation. Elected in 1984.
JAMES J. GLASSER, age 65, 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 60, 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 64, Chairman, Oil-Dri Corporation of America (a
developer, manufacturer and marketer of sorbent products). Elected in 1995.
EDWARD W. LYMAN, JR., age 57, Vice Chair of the Board of Bankcorp and
Harris Trust and Savings Bank. Elected in 1995.
ALAN G. MCNALLY, age 54, 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 67, Chairman, The Charles H. Shaw Company (real estate
development). Elected in 1990.
RICHARD E. TERRY, age 62, Chairman and Chief Executive Officer, Peoples
Energy Corporation (public utility) and a Director of Amsted Industries. Elected
in 1992.
JAMES O. WEBB, age 68, 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, 1999 -- Jeffrey D. Butterfield, age 53;
Timothy S. Crane, age 38; Dennis L. Dean, age 48; Emilia DiMenco, age 45; Pierre
O. Greffe, age 47; Louis F. Lanwermeyer, age 51; Michael W. Lewis, age 50;
Michael B. Lowe, age 54; Erin E. McInerney, age 44; Peter B. McNitt, age 45;
Richard J. Moreland, age 53; Charles R. Piermarini, age 43; Paul V. Reagan, age
53; Steven R. Rothbloom, age 44; Randall W. Teteak, age 55; William E. Thonn,
age 51; Charles R. Tonge, age 52; Philip A. Washburn, age 53; William W.
Whipple, age 47; Edward J. Williams, age 57; and Sohrab Zargham, age 58. Each
officer, other than
85
<PAGE> 87
Messrs. Piermarini 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 1997, Mr.
Teteak was Senior Vice President at First Union National Bank responsible for
technology and automation planning.
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:
(1) Financial Statements (See page 1 for a listing of all financial
statements included in Item 8)
(2) Financial Statement Schedules
All Schedules normally required by Form 10-K are omitted since they are either
not applicable or the required information is shown in the financial statements
or the notes thereto.
(3) Exhibits:
3. Articles of Incorporation and By-laws
a) Restated Certificate of Incorporation (filed as an Exhibit to
Bankcorp's 1987 Form 10-K and incorporated herein by
reference)
b) By-laws of Bankcorp
4. Indenture dated as of June 1, 1989 relating to Bankcorp's 9 3/8%
Subordinated Notes Due 2001 (filed as an Exhibit to Bankcorp's
May 24, 1989 Registration Statement on Form S-3 and incorporated
herein by reference). In addition, Bankcorp has issued two
Floating Rate Subordinated Notes and one Fixed Rate Subordinated
Note to its parent company, Bankmont. Bankcorp has also issued a
Floating Rate Subordinated Note to FinCo. The principal amount
of these notes totals $280 million for the floating rate notes
and $75 million for the fixed rate note, respectively. The
floating rate notes mature in 2005, 2006 and 2009, respectively.
The fixed rate note matures in 2010. Bankcorp hereby agrees to
file a copy of the agreement relating to any such notes with the
Commission upon request.
10. Material Contracts and Compensatory Plans
a) Managerial Incentive Plan (filed as an Exhibit to Bankcorp's
1997 Form 10-K and incorporated herein by reference)
b) Employees' Savings and Profit Sharing Plan (filed as an
Exhibit to Bankcorp's 1995 Form 10-K and incorporated herein
by reference).
c) 1995 Stock Appreciation Rights Plan (filed as an Exhibit to
Bankcorp's 1995 Form 10-K and incorporated herein by
reference).
d) 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)
e) Harris Bank Stock Option Program, pursuant to which certain
designated executives and certain other employees of the
Corporation participate in the Bank of Montreal
86
<PAGE> 88
Stock Option Plan (filed as an Exhibit to Bank of Montreal's
May 9, 1995 Registration Statement on Form S-8, File No.
33-92112, and incorporated herein by reference)
23. Consents of Experts and Counsel (consents of Independent
Auditors)
24. Power of Attorney
27. Financial Data Schedule
(b) No Current Report on Form 8-K was filed during the quarter ended
December 31, 1999.
- -------------------------
* 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.
87
<PAGE> 89
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 2000.
<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 2000.
<TABLE>
<S> <C> <C>
Pastora San Juan Cafferty James J. Glasser Charles H. Shaw
Martin R. Castro Leo M. Henikoff Richard E. Terry
Haven E. Cockerham Richard M. Jaffee James O. Webb
Susan T. Congalton Edward W. Lyman, Jr.
Wilbur H. Gantz
Alan G. McNally
Attorney-In-Fact
</TABLE>
Supplemental Information
No annual report or proxy statement will be sent to security holders in
2000.
88
<PAGE> 1
EXHIBIT 3(b)
BYLAWS
HARRIS BANKCORP, INC.
[HARRIS BANKCORP LOGO]
<PAGE> 2
BYLAWS
APRIL, 1999
<PAGE> 3
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be established and
maintained as prescribed in the Certificate of Incorporation of the Corporation.
SECTION 2. OTHER OFFICES. The Corporation may have other offices, either within
or outside the State of Delaware, at such place or places as the Board of
Directors of the Corporation may from time to time appoint or the business of
the Corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
SECTION 1. LOCATION. Meetings of stockholders of the Corporation shall be held
at such place or places as shall be designated by the Board of Directors of the
Corporation as set forth in the notice thereof.
SECTION 2. ANNUAL ELECTION OF DIRECTORS. The annual meeting of stockholders for
the election of members of the Board of Directors and the transaction of other
business shall be held in each year on the third Wednesday of April. If the date
of the annual meeting shall fall upon a legal holiday, the meeting shall be held
on the next succeeding business day. At each annual meeting, the stockholders
entitled to vote shall elect a Board of Directors and they may transact such
other corporate business as may properly come before the meeting.
SECTION 3. VOTING. Each stockholder entitled to vote in accordance with the
terms of the Certificate of Incorporation of the Corporation and in accordance
with the provisions of these bylaws shall be entitled to vote, in person or by
proxy, the shares of stock of the Corporation entitled to vote held by such
stockholder, but no proxy shall be voted after one year from its date, unless
such proxy provides for a longer period. Stockholders may cumulate their votes
for election of directors as prescribed in the Certificate of Incorporation of
the Corporation, and taking into account the number of votes cast on a
cumulative basis, the election of directors shall be determined by a plurality
vote. All other questions shall be decided by the vote of the holders of a
majority of the stock present in person or represented by proxy at the meeting
concerned, except as otherwise provided by the Certificate of Incorporation or
by applicable law.
SECTION 4. QUORUM. Except as otherwise required by applicable law, by the
Certificate of Incorporation of the Corporation or by these bylaws, the
presence, in person or by proxy, of stockholders holding a majority of the stock
of the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders. In case a quorum shall not be present at any meeting thereof,
a majority in interest of the stockholders entitled to vote thereat and present
in person or
<PAGE> 4
by proxy shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting (or as otherwise required by law)
until the requisite amount of stock entitled to vote shall be present. At any
such adjourned meeting at which the requisite amount of stock entitled to vote
shall be represented, any business may be transaction which might have been
transacted at the meeting as originally noticed.
SECTION 5. SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the Board of Directors or by
the Chairman of the Board, a Vice Chair of the Board or the President. It shall
be the duty of the Chairman of the Board to call such meetings upon a request in
writing therefor, stating the purpose or purposes thereof and delivered to the
Secretary, signed by a majority of the members of the Board of Directors or by a
majority in interest of the stockholders entitled to vote, or by resolution of
the directors.
SECTION 6. NOTICE OF MEETINGS. Written or printed notice, stating the place and
time of the meeting of the stockholders (and, in the case of a special meeting
thereof, the purpose or purposes for which the meeting is called), shall be
given by the Secretary to each stockholder entitled to vote thereat at his last
known post office address, not less than ten days nor more than sixty days
before each such meeting.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. The Board of Directors shall consist of such number
of members as shall be fixed from time to time by vote of the stockholders or
the Board of Directors pursuant to and subject to the limitations of Article
Seventh of the Certificate of Incorporation of the Corporation. The directors
shall be elected at the annual meeting, or at an adjournment thereof, of the
stockholders of the Corporation and each director shall be elected to serve
until his successor shall be elected and shall qualify. Directors need not be
stockholders.
SECTION 2. VACANCIES. Vacancies on the Board of Directors and newly created
directorships resulting from an increase in the authorized number of directors
may be filled at a special meeting of the stockholders called for that purpose.
Additionally, as provided in Article Seventh of the Certificate of Incorporated
of the Corporation, the Board of Directors, by the affirmative vote of a
majority of the Board of Directors at any regular meeting of the Board or (if
notice of the proposed action is contained in the notice of such special
meeting) at any special meeting of the Board, may during the interval between
annual meetings of stockholders elect not more than a total of three persons as
directors to fill vacancies or newly created directorships.
SECTION 3. RESIGNATIONS. Any director of the Corporation may resign at any time.
Such resignation shall be made by written notice to the Corporation, and shall
take effect at the time specified therein, and if no time be specified, at the
time of its receipt by the Chairman of the
<PAGE> 5
Board or Secretary of the Corporation. The acceptance of a resignation shall not
be necessary to make it effective.
SECTION 4. REMOVAL. Any director or directors may be removed either for or
without cause at any time, by the affirmative vote of the holders of a majority
of all the shares of stock outstanding and entitled to vote, at a special
meeting of the stockholders called for the purpose; provided, however, that no
director may be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire membership of the Board of Directors.
SECTION 5. POWERS. The Board of Directors shall exercise all of the powers of
the Corporation except such as are by law, or by the Certificate of
Incorporation of the Corporation, or by these bylaws, conferred upon or reserved
to the stockholders.
SECTION 6. COMMITTEES. The Board of Directors may, by resolution or resolutions
passed by majority of the whole Board, designate an Executive Committee, and one
or more other committees, each committee to consist of two or more of the
directors of the Corporation, which, to the extent provided in said resolution
or resolutions or in these bylaws, shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation, and may have power to authorize the Seal of the Corporation to be
affixed to all papers which may require it. The committees shall keep regular
minutes of their proceedings and report the same to the Board of Directors when
required. The Chairman of the Board, a Vice Chair of the Board, the President or
the member or members of any Board committee present at any duly called meeting
and not disqualified from voting, whether or not such member or members
constitute a quorum, may designate another member or other members of the Board
of Directors to act at such meeting, and any director or directors so designated
shall have the same powers, duties and compensation as regular members. The
presence at the meeting of any director or directors so designated shall be
considered in determining whether a quorum is present.
SECTION 7. MEETINGS. All meetings of the Board of Directors shall be held at the
same time and place as meetings of the Board of Directors of Harris Trust and
Savings Bank and Harris Bankmont, Inc., or at such other place or time as the
Chairman of the Board or a Vice Chair of the Board may designate.
In the event that the Chairman of the Board or a Vice Chair of the Board shall
designate an alternate meeting place or time for any regular meeting, notice of
the alternate meeting place or time shall be given by mailing the same to each
director not later than five business days preceding the date of the meeting, or
by telegraphing or telefaxing the same to him or her or delivering the same to
him or her personally not later than the day previous to such meeting, but save
for any such required notice of alternate meeting place or time, such regular
meeting shall be held without notice other than this bylaw.
<PAGE> 6
Special meetings of the Board of Directors may be called by the Chairman of the
Board or a Vice Chair of the Board. Except to the extent the time or method of
giving notice is regulated by statute, notice of any such meeting and of any
alternate meeting place or time shall be given in the same manner provided for
notice of regular meetings. Except as otherwise required by statute or these
bylaws, neither the business to be transacted at, nor the purpose of any meeting
need be specified in the notice or any waiver thereof.
SECTION 8. QUORUM. A majority of the directors shall constitute a quorum for the
transaction of business. If at any meeting of the Board there shall be less than
a quorum present, a majority of those present may adjourn the meeting from time
to time until a quorum is obtained, and no further notice thereof need be given
other than by announcement at the meeting which shall be so adjourned.
SECTION 9. ACTION WITHOUT MEETING. Any action required or permitted to be taken
at any meeting of the Board of Directors, or of any committee thereof, may be
taken without a meeting if all members of the Board or of such committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of the proceedings of the Board or committee.
SECTION 10. MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors
or any committee designated by the Board, may participate in the meeting of the
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in such meeting shall constitute presence in
person at such meeting.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be chosen by the
Board of Directors and may include a Chairman of the Board, one or more Vice
Chairs of the Board, and a President, each of whom shall be a member of the
Board, and one whom shall designate the Chief Executive Officer, one or more
Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, a Treasurer,
a Secretary and such other officers as the Chief Executive Officer shall from
time to time designate. Officer-Directors and non-director Executive Vice
Presidents shall be elected by the Board of Directors. All other officers shall
be appointed by the Chief Executive Officer. Officers, whether elected or
appointed, shall hold their respective offices until the next succeeding annual
meeting of stockholders and their successors are elected and qualified, or until
their earlier retirement, resignation, removal or appointment to another office.
Any officer may be removed by the Chief Executive Officer or the Board at any
time with or without cause.
<PAGE> 7
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such
other officers and agents as it may deem advisable, who shall hold their offices
for such terms and shall exercise such powers and perform such duties as shall
be determined may from time to time by the Board of Directors.
SECTION 3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall exercise
general control and supervision of the business and affairs of the Corporation,
shall see to it that all resolutions and orders of the Board of Directors are
effected and shall have such other powers and duties as the directors may
specify. He may appoint persons to hold office as Senior Vice President or
below. During any absence or disability to act of the Chief Executive Officer,
his powers and duties shall be exercised and performed by a Vice Chair of the
Board or by an officer designated by the Board of Directors for that purpose. He
shall be an ex-officio member of all Board committees.
SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all
meetings of the Board of Directors and of the stockholders. He shall have
general responsibility for all Board matters, including without limitation, the
development of corporate governance policies and processes, committee
assignments, and meeting agendas. He shall have such other powers and duties as
the Board of Directors may specify. He shall be an ex-officio member of all
Board committees.
SECTION 5. PRESIDENT. The President shall have such powers and duties as the
Board of Directors or the Chief Executive Officer may specify. During any
absence or disability to act of the President, his powers and duties shall be
performed and exercised by an officer designated in writing by the Chief
Executive Officer, or in the absence of such designation, by an officer
designated by the Board of the Directors for that purpose.
SECTION 6. CHIEF OPERATING OFFICER. The Chief Operating Officer shall manage or
supervise the management of the day-to-day operations of the Corporation and
shall have such powers and duties as the Chief Executive Officer or the Board of
Directors may specify.
SECTION 7. VICE CHAIR OF THE BOARD. A Vice Chair of the Board shall have such
powers and duties as the Board of Directors may specify. During any absence or
disability to act of the Chairman of the Board, a Vice Chair of the Board shall
preside at all meetings of the Board of Directors and of the stockholders and
have and exercise his powers and duties.
SECTION 8. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS, VICE PRESIDENTS.
Each Executive Vice President, Senior Vice President and Vice President shall
have such powers and shall perform such duties as shall be assigned by the Board
of Directors or the Chief Executive Officer.
SECTION 9. TREASURER. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the Corporation. He shall deposit all moneys
and other valuables in the name and to the credit of the
<PAGE> 8
Corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as may be ordered by
the Chairman of the Board, a Vice Chair of the Board or the President or by the
Board of Directors, taking proper vouchers for such disbursements. He shall
render to the Chief Executive Officer and to the Board of Directors at the
regular meetings of the Board of Directors, or whenever either of them may
request it, an account of all his transactions as Treasurer and of the financial
condition of the Corporation. If required by the Board of Directors, he shall
give the Corporation a bond for the faithful discharge of his duties in such
amount and with such surety as the Board of Directors shall prescribe.
SECTION 10. SECRETARY. The Secretary shall give, or cause to be given, notice of
all meetings of stockholders or the Board of Directors, and all other notices
required by law or by these bylaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman of the Board, a Vice Chair of the Board or the President, or by
the Board of Directors or (as the case may be) the stockholders, upon whose
request the meeting is called as provided in these bylaws.
He shall record all the proceedings of the meetings of the stockholders, or the
Board of Directors in appropriate books to be kept for that purpose, and shall
perform such other duties as may be assigned to him by the Chairman of the Board
or by the Board of Directors, or the Executive Committee. He shall have the
custody of the Seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the Chairman of the Board, a Vice
Chair of the Board or the President or by the Board of Directors or the
Executive Committee, and attest the same.
SECTION 11. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant Treasurers
and Assistant Secretaries, if any, shall be elected and shall have such powers
and shall perform such duties as shall be assigned to them, respectively, by the
Board of Directors, the Executive Committee or the Chief Executive Officer.
SECTION 12. SECRETARY OF THE BOARD. The Board of Directors may appoint a
Secretary of the Board other than the Secretary of the Corporation as provided
for in Section 10 of this Article IV, who may or may not be a member of the
Board and who shall give or cause to be given notice of all meetings of
stockholders and the Board of Directors. He shall record all the proceedings of
the meetings of the stockholders and of the Board of Directors in appropriate
books to be kept for that purpose, and perform such other duties as may be
assigned to him by the Chairman of the Board, the Board of Directors or the
Executive Committee.
<PAGE> 9
ARTICLE V
CERTIFICATES OF STOCK
SECTION 1. FORM. Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by, or in the name of the Corporation, by the
Chairman of the Board, or the President, or a Vice President and by the
Treasurer or an Assistant Treasurer or Secretary or an Assistant Secretary of
the Corporation, certifying the number of shares owned by him in the
Corporation. Each such certificate shall be countersigned by a transfer agent
and registered by a registrar approved by the Board of Directors for such
purpose. If any such certificate is manually countersigned on behalf of a
registrar other than the Corporation or its employee, any or all of the other
signatures on such certificate on behalf of the Corporation or on behalf of a
transfer agent may be facsimile. In case any officer or any transfer agent who
has signed or countersigned, or whose facsimile signature or signatures have
been used on any such certificate shall cease to be such officer or transfer
agent, whether because of death, resignation or otherwise, before such
certificate shall have been issued, such certificate may nevertheless be adopted
by the Corporation and be issued and delivered with the same effect as if the
officer or transfer agent concerned had not ceased to be such officer or
transfer agent (as the case may be). The Seal of the Corporation or a facsimile
thereof may, but need not, be affixed to certificates of stock of the
Corporation.
SECTION 2. REPLACEMENT. The Board of Directors may (by a general resolution or
otherwise) authorize or direct a new stock certificate or certificates to be
issued in place of any stock certificate or certificates theretofore issued by
the Corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person or persons claiming the certificate of
stock to be lost or destroyed. When so authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such lost
or destroyed certificate or certificates, or the legal representative or
representatives thereof, to give the Corporation a bond in such sum as the Board
of Directors (by a general resolution or otherwise) may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost or destroyed.
SECTION 3. TRANSFER. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares of capital stock of the Corporation
duly endorsed (or accompanied by proper evidence of succession, assignment or
authority to transfer) and otherwise in compliance with applicable law, the
Certificate of Incorporation of the Corporation and these bylaws with respect to
such transfer, the Corporation shall issue, or cause to be issued, a new stock
certificate or certificates to the person or persons entitled thereto and cause
the old stock certificate or certificates surrendered therefor to be
appropriately canceled.
<PAGE> 10
ARTICLE VI
MISCELLANEOUS
SECTION 1. STOCKHOLDERS' RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of any such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 2. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation of the Corporation and any resolutions adopted by the Board of
Directors pursuant to Part 1 of Article Fourth of the Certificate of
Incorporation of the Corporation with respect to any series of Preferred Stock
of the Corporation, the Board of Directors may, at any regular or special
meeting thereof and out of funds legally available therefor, declare dividends
upon the capital stock of the Corporation as and when the Board of Directors
deems expedient.
SECTION 3. SEAL. The corporate Seal shall be circular in form and shall contain
the name of the Corporation, the year of its creation and the words and figures
"CORPORATE SEAL DELAWARE". Said Seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall be determined
by the Board of Directors.
SECTION 5. CHECKS. All checks, drafts or other orders for the payment of money,
notes or other evidences of indebtedness issued in the name of the Corporation
shall be signed by such officer or officers, agent or agents of the Corporation,
and in such manner as shall be determined from time to time by resolution of the
Board of Directors.
SECTION 6. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by these
bylaws to be given, personal notice is not meant unless expressly so stated, and
any notice so required shall be deemed to be sufficient if given by depositing
the same in a post office box in a sealed post-paid wrapper, addressed to the
person entitled thereto at his last known post office address, and such notice
shall be deemed to have been given on the day of such mailing. Stockholders not
entitled to vote shall not be entitled to receive notice of any meetings except
as otherwise provided by law.
<PAGE> 11
Whenever any notice whatever is required to be given under the provisions of any
law, or under the provisions of the Certificate of Incorporation of the
Corporation or these bylaws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
ARTICLE VII
AMENDMENTS
These bylaws may be amended at any annual meeting of the stockholders or (if
notice of the proposed alteration or repeal, or bylaw or bylaws to be made, be
contained in the notice of such special meeting) at any special meeting thereof,
by the affirmative vote of the holders of a majority of the stock issued and
outstanding and entitled to vote thereat, or these bylaws may be amended by the
affirmative vote of a majority of the Board of Directors, at a regular meeting
of the Board, or (if notice of the proposed amendment or bylaw or bylaws to be
made, be contained in the notice of such special meeting) at any special meeting
of the Board.
* * * * *
I, ________________________ hereby certify that I am the ______________________
Secretary of Harris Bankcorp, Inc., a Delaware corporation, that the foregoing
is a true and correct copy of the bylaws of said Corporation, and that the same
are in full force and effect this ______ day of _____________________,
_________.
--------------------------------
Secretary
<PAGE> 12
<TABLE>
INDEX
<S> <C>
A N
Amendments of Bylaws - Pg. 9 Notice of:
Annual Meeting of Stockholders - Pg. 1 Annual Meeting of Stockholders - Pg. 2
Assistant Secretaries - Pg. 6 Special Meeting of Stockholders - Pg. 2
Assistant Treasurers - Pg. 6 Regular Board Meetings - Pgs. 3, 4
Special Board Meetings - Pgs. 3, 4
General - Pg. 8
Waiver of notice - Pgs. 8, 9
B O
Board of Directors - Pg. 2 Officers - Pg. 4
Board action without meeting - Pg. 4
C P
Chairman of the Board - Pg. 5 Place of Meetings:
Chief Executive Officer - Pg. 5 Board - Pg. 3
Chief Operating Officer - Pg. 5 Stockholders - Pg. 1
Committees appointed by Board - Pg. 3 President - Pg. 5
D Q
Directors: Quorum:
Election of - Pg. 1 Directors' Meetings - Pgs. 3, 4
General powers - Pg. 3 Stockholders' Meetings - Pgs. 4,5
Removal of - Pg. 3
Resignation of - Pgs. 2, 3
Dividends - Pg. 7 R
E Record dates - Pg. 8
Executive Committee - Pg. 3 Registrar of stock - Pg. 7
S
F Seal - Pg. 8
Fiscal year - Pg. 8 Secretary - Pg. 6
Stock certificates - Pg. 7
T
Transfer agent - Pg. 7
Treasurer - Pgs. 5, 6
M
Meetings: V
Annual Stockholders - Pg. 3 Vice Chair of the Board - Pg. 5
Special Stockholders - Pg. 2 Vice Presidents - Pg. 5
Regular Board - Pg. 3
Special Board - Pg. 4 W
Waiver of notice - Pgs. 8, 9
</TABLE>
<PAGE> 13
[HARRIS BANKCORP LOGO]
Harris Bankcorp, Inc.
111 West Monroe Street
Chicago, Illinois 60603
<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 28,
2000 except for Note 23, as to which the date is March 10, 2000, relating to the
consolidated statements of condition of Harris Bankcorp, Inc. and Subsidiaries
as of December 31, 1999 and 1998, 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, 1999, which report
appears on page 84 of the December 31, 1999 Annual Report on Form 10-K of Harris
Bankcorp, Inc.
KPMG LLP PricewaterhouseCoopers LLP
Chicago, Illinois
March 22, 2000
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each person whose signature appears below authorizes Alan G. McNally,
Chairman of the Board and Chief Executive Officer, or Edward W. Lyman, 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 1999 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/ /s/
--------------------------- ----------------------------
Pastora San Juan Cafferty Leo M. Henikoff
Director Director
/s/ /s/
--------------------------- ----------------------------
Martin R. Castro Richard M. Jaffee
Director Director
/s/ /s/
--------------------------- ----------------------------
Haven E. Cockerham Edward W. Lyman, Jr.
Director Vice Chair and Director
/s/ /s/
--------------------------- ----------------------------
F. Anthony Comper Alan G. McNally
Director Chairman of the Board,
Chief Executive Officer,
and Director
/s/ /s/
--------------------------- ----------------------------
Susan T. Congalton Charles H. Shaw
Director Director
/s/ /s/
--------------------------- ----------------------------
Wilbur H. Gantz Richard E. Terry
Director Director
/s/ /s/
--------------------------- ----------------------------
James J. Glasser James O. Webb
Director Director
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,485,408
<INT-BEARING-DEPOSITS> 239,980
<FED-FUNDS-SOLD> 305,890
<TRADING-ASSETS> 68,910
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 7,793,699
<LOANS> 13,114,029
<ALLOWANCE> 147,235
<TOTAL-ASSETS> 24,862,878
<DEPOSITS> 15,294,956
<SHORT-TERM> 6,966,008
<LIABILITIES-OTHER> 272,885
<LONG-TERM> 704,673
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,302,417
<TOTAL-LIABILITIES-AND-EQUITY> 24,862,878
<INTEREST-LOAN> 928,219
<INTEREST-INVEST> 425,208
<INTEREST-OTHER> 15,923
<INTEREST-TOTAL> 1,369,350
<INTEREST-DEPOSIT> 490,608
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<INTEREST-INCOME-NET> 545,012
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<SECURITIES-GAINS> 14,075
<EXPENSE-OTHER> 714,769
<INCOME-PRETAX> 268,191
<INCOME-PRE-EXTRAORDINARY> 203,053
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<NET-INCOME> 203,053
<EPS-BASIC> 27.97
<EPS-DILUTED> 27.97
<YIELD-ACTUAL> 2.82
<LOANS-NON> 23,558
<LOANS-PAST> 35,899
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