<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
HARRIS BANKCORP, INC.
111 West Monroe Street
Chicago, Illinois 60603
(312) 461-2121
Commission File Number 0-18179
Incorporated in the State of Delaware
IRS Employer Identification No. 36-2722782
Harris Bankcorp, Inc. (the "Corporation") 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 and has been subject to such filing requirements for the
past 90 days.
At November 13, 1995 the Corporation had 6,667,490 shares of $8 par value common
stock outstanding.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements.
Consolidated Statement of Condition as of September 30, 1995, December
31, 1994 and September 30, 1994.
Consolidated Statement of Income for the quarters and nine months ended
September 30, 1995 and 1994.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the nine months ended September
30, 1995 and 1994.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The above financial statements and financial review, included in the
Corporation's 1995 Third Quarter Report, are filed as Exhibit A and incorporated
herein by reference.
Part II. Other Information
Items 1, 2, 3, 4, and 5 are being omitted from this report because such items
are not applicable to the reporting period.
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are included in this report because such items are not
applicable to the reporting period.
(b) No Current Report on Form 8-K was filed during the quarter ended
September 30, 1995, for which this report is filed.
SIGNATURES
Pursuant to the requirements 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 13th day of November 1995.
----------------------------------------
Pierre O. Greffe
Chief Financial Officer
----------------------------------------
Paul R. Skubic
Chief Accounting Officer
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<PAGE>
EXHIBIT A--HARRIS BANKCORP, INC.
1995 THIRD QUARTER REPORT
SEPTEMBER 30, 1995
-3-
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights Harris Bankcorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30 Nine Months Ended September 30
----------------------------- ------------------------------
1995 1994 Change 1995 1994 Change
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<S> <C> <C> <C> <C> <C> <C>
Earnings and Dividends (in thousands)
Net interest income.............................. $121,040 $116,702 4% $358,285 $335,904 7%
Net interest income (fully taxable equivalent)... 124,900 122,591 2 372,544 353,627 5
Provision for credit losses...................... 10,974 9,030 22 31,414 34,495 (9)
Noninterest income............................... 79,978 76,255 5 252,020 237,465 6
Noninterest expenses............................. 137,167 136,718 - 418,448 465,075 (10)
Net income....................................... 35,802 33,845 6 108,711 61,768 76
Dividends........................................ 14,400 3,860 + 42,400 30,878 37
- ------------------------------------------------------------------------------------------------------------------
Selected Ratios
Return on average stockholder's equity........... 12.93% 13.50% (57)bp 13.61% 8.24% +
Return on average assets......................... 0.89 0.93 (4) 0.96 0.59 37bp
Tier 1 capital ratio............................. 8.45 8.72 (27)
Total risk-based capital ratio................... 11.73 12.43 (70)
Tier 1 leverage ratio............................ 6.93 6.96 (3)
Allowance for possible credit losses to
total loans (period-end)....................... 1.42 1.58 (16)
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Daily Average Balances (in millions)
Loans, net of unearned income.................... $ 8,928 $ 7,677 16% $ 8,589 $ 7,597 13%
Portfolio securities............................. 3,859 3,373 14 3,533 3,141 12
Money market assets.............................. 768 1,157 (34) 913 1,273 (28)
Total interest-earning assets.................... 13,622 12,244 11 13,094 12,053 9
Total assets..................................... 15,919 14,380 11 15,242 14,065 8
Deposits......................................... 10,079 9,665 4 9,958 9,647 3
Short-term borrowings............................ 3,794 2,809 35 3,325 2,582 29
Stockholder's equity............................. 1,099 995 10 1,071 1,002 7
- ------------------------------------------------------------------------------------------------------------------
Balances at September 30 (in millions)
Loans, net of unearned income.................... $ 9,131 $ 8,019 14%
Allowance for possible credit losses............. 129 127 2
Portfolio securities............................. 4,002 3,411 17
Total assets..................................... 16,245 14,692 11
Deposits......................................... 9,837 9,885 -
Stockholder's equity............................. 1,118 1,005 11
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</TABLE>
1
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Report From Management
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Harris Bankcorp recorded third quarter earnings of $35.8 million, up 6% from
$33.8 million in the third quarter of 1994. Strong loan growth in the corporate
banking, community banking and charge card business; sustained cost control; and
a reduction in FDIC premiums were the primary reasons for this improvement.
Third quarter net interest income on a fully taxable equivalent basis was
$124.9 million, up $2.3 million or 2% from $122.6 million in 1994's third
quarter. Average earning assets rose 11% to $13.6 billion from $12.2 billion in
1994, attributable to an increase of 16% or $1.3 billion in average loans. Net
interest margin declined to 3.65% from 3.98% in the same quarter last year,
reflecting rate compression in certain asset categories, a lower mix of
noninterest-bearing deposits, and the relationship which existed in the markets
between short and longer term rates.
Noninterest income increased 5% to $80.0 million in third quarter 1995 from
the same quarter last year. Trust and investment management revenue rose $1.8
million and charge card fees increased $1.0 million from third quarter 1994.
Other income, including loan syndication and trade finance fees, gains from
sales of mortgage loans, and other miscellaneous items, rose $5.2 million.
Service charges declined by $2.2 million, partly due to customer refunds with
respect to FDIC insurance. Foreign exchange revenue decreased by $1.6 million;
this revenue is now reported net of expenses under a new profit sharing
arrangement with Bank of Montreal.
Third quarter 1995 noninterest expenses increased to $137.2 million from
$136.7 million a year ago. Slight increases were experienced in most expense
categories which were offset by a $4.3 million reduction in FDIC insurance
premiums. Excluding the effect of the FDIC reduction, expenses would have
increased by 3%.
Income tax expenses increased by $3.7 million during the current quarter,
reflecting higher pretax income and slightly lower levels of tax-exempt income.
The third quarter 1995 provision for credit losses was $11.0 million, up from
$9.0 million in the prior year's quarter. Net loan charge-offs for the current
quarter were $9.1 million, down from $11.3 million a year-ago. This decrease
resulted from lower write-offs in the commercial loan portfolio.
Nonperforming assets at September 30, 1995 totaled $60 million or 0.7% of
total loans, down from $103 million or 1.3% of loans last year and $71 million
or 0.8% of loans at June 30, 1995. At September 30, 1995, the allowance for
possible credit losses was $129 million, equal to 1.4% of total loans
outstanding, compared with $127 million or 1.6% of loans at the end of third
quarter 1994. As a result, the ratio of the allowance for possible credit losses
to nonperforming assets increased from 124% at September 30, 1994 to 216% at
September 30, 1995.
At September 30, 1995, equity capital of Harris Bankcorp amounted to $1.12
billion, up from $1.01 billion one year earlier. The regulatory leverage capital
ratio was 6.93% for third quarter 1995 compared to 6.96% in the same quarter of
1994. Harris Bankcorp's capital ratio exceeds the prescribed regulatory minimum
for bank holding companies.
For third quarter 1995, the annualized return on average stockholder's equity
and return on average assets were 12.93% and .89% respectively, compared to
returns of 13.50% and .93% in the comparable quarter a year ago.
For the first nine months of 1995, Harris Bankcorp earned $108.7 million, a
76% increase from the same period a year earlier when net income was $61.8
million. Year-to-date earnings comparisons were significantly affected by a
one-time $33.4 million after-tax charge in 1994 resulting from management's
decision to absorb the impact of higher interest rates on mortgage-backed
securities held in certain customer accounts of Harris Trust and Savings Bank's
Securities Lending unit. Excluding the effect of this charge, earnings for the
nine months ended September 30, 1995 increased by 14%.
Net interest income on a fully taxable equivalent basis of $372.5 million in
the current nine-month period was up 5% from the comparable 1994 period. Net
interest margin fell from 3.92% to 3.80%, while average earning assets rose 9%
from $12.1 billion to $13.1 billion and average loans increased by $1.0 billion
or 13%. Noninterest revenue increased 6% to $252.0 million in 1995. This year,
net gains from sales of debt portfolio securities amounted to $20.6 million
compared to $5.6 million in the prior year. Most of the 1995 gains from sales of
debt portfolio securities were recognized in the second quarter when conditions
in the U.S. bond market led to significant price rallies. These events enabled
Harris Bankcorp to sell certain U.S. government agency securities and reinvest
the proceeds to reposition its portfolio and take advantage of profit
opportunities not typically available.
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2
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Noninterest expenses for the current nine-month period were 1% higher than the
comparable period in 1994, excluding the one-time $51.3 million (pretax) charge
in the Securities Lending unit. The provision for credit losses declined by $3.1
million, while income tax expense rose $39.7 million, primarily because of
substantially higher pretax income and slightly lower levels of tax-exempt
income.
Harris Bankcorp has reached an agreement to perform shareholder services for
Banc One Corporation and for Banc One's stock transfer clients. The shareholder
services agreement is the sixth of its kind for Harris Bankcorp. Harris Trust
and Savings Bank is among the top five shareholder services banking institutions
in the United States and serves more than 400 clients and over 4 million
shareholders nationwide.
Working Mother magazine has named Harris as one of the 100 Best Companies for
Working Mothers. The Bank was recognized as "a role model when it comes to
creating job flexibility" and cited specifically for programs including
flextime, compressed work weeks, work at home, job sharing, nursing mother
rooms, child care discounts, adoption assistance and elder care referral.
Working Mother selects companies according to pay, opportunities for women to
advance, child care support and other family-friendly benefits. We are pleased
Harris is among those named on this distinguished list.
Harris Trust and Savings Bank, together with its 25 community banks (including
banking institutions owned by Harris Bankmont, Inc.), was recently recognized by
the Small Business Administration (SBA) as the largest SBA lender in the Chicago
metropolitan area and one of the two top SBA lenders in the State of Illinois.
During the 12-month period ended September 30, Harris banks made more than 120
SBA loans, totaling $10.2 million. In citing the organization for its strong
performance, the SBA's Illinois director noted that, "With both an urban and a
suburban presence, Harris banks...are recognized for their ability to tailor
their products to meet the needs of the distinct markets they serve."
The Harris organization recently announced plans for new branches in the
Chicago suburbs of Algonquin, Darien, Frankfort and Gurnee and in the City of
Chicago on the Lake Shore Campus of Loyola University, bringing the total number
of Harris locations opened, under construction or announced to 85.
Alan G. McNally October 27, 1995
Chairman of the Board and
Chief Executive Officer
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3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Income Harris Bankcorp, Inc. and Subsidiaries
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Quarter Ended September 30 Nine Months Ended September 30
-------------------------- ------------------------------
(in thousands, except per share data) 1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Interest Income
Loans, including fees...................................................... $196,943 $153,722 $569,902 $424,240
Money market assets:
Deposits at banks......................................................... 9,681 8,329 29,654 21,934
Federal funds sold and securities purchased under agreement to resell..... 3,517 5,170 14,437 15,886
Trading account............................................................ 970 540 2,670 1,660
Securities available for sale:
U.S. Treasury and Federal agency.......................................... 43,024 29,179 110,037 81,224
Other..................................................................... 2,794 2,026 7,691 4,281
Securities held to maturity:
U.S. Treasury and Federal agency.......................................... 9,142 9,176 27,614 17,851
State and municipal....................................................... 5,965 9,047 22,171 27,738
Other..................................................................... 60 563 279 1,971
-------- -------- -------- ---------
Total interest income..................................................... 272,096 217,752 784,455 596,785
-------- -------- -------- ---------
Interest Expense
Deposits................................................................... 91,172 65,069 266,635 174,013
Short-term borrowings...................................................... 45,215 30,937 122,088 72,761
Senior notes............................................................... 8,934 - 20,111 -
Long-term notes............................................................ 5,735 5,044 17,336 14,107
-------- -------- -------- ---------
Total interest expense.................................................... 151,056 101,050 426,170 260,881
-------- -------- -------- ---------
Net Interest Income........................................................ 121,040 116,702 358,285 335,904
Provision for credit losses................................................ 10,974 9,030 31,414 34,495
-------- -------- -------- ---------
Net Interest Income after Provision for
Credit Losses............................................................. 110,066 107,672 326,871 301,409
-------- -------- -------- ---------
Noninterest Income
Trust and investment management fees....................................... 37,950 36,165 113,041 111,435
Trading account............................................................ 399 163 3,011 (1,105)
Foreign exchange........................................................... 2,434 4,019 10,160 15,473
Charge card................................................................ 10,909 9,866 30,621 26,871
Service fees and charges................................................... 16,246 18,475 51,437 55,984
Portfolio securities gains................................................. 1,672 2,404 20,572 5,644
Other...................................................................... 10,368 5,163 23,178 23,163
-------- -------- -------- ---------
Total noninterest income.................................................. 79,978 76,255 252,020 237,465
-------- -------- -------- ---------
Noninterest Expenses
Salaries and other compensation............................................ 65,779 61,183 190,930 184,657
Pension, profit sharing and other employee benefits........................ 13,164 15,991 47,568 53,852
Net occupancy.............................................................. 11,730 10,956 35,095 33,356
Equipment.................................................................. 10,928 10,440 31,142 31,089
Marketing.................................................................. 6,605 5,774 19,052 17,705
Communication and delivery................................................. 5,108 4,706 14,989 13,160
Deposit insurance.......................................................... (281) 3,947 7,352 11,781
Trust customer charge...................................................... - - - 51,335
Other...................................................................... 24,134 23,721 72,320 68,140
-------- -------- -------- ---------
Total noninterest expenses................................................ 137,167 136,718 418,448 465,075
-------- -------- -------- ---------
Income before income taxes................................................. 52,877 47,209 160,443 73,799
Applicable income taxes.................................................... 17,075 13,364 51,732 12,031
-------- -------- -------- ---------
Net Income................................................................ $ 35,802 $ 33,845 $108,711 $ 61,768
======== ======== ======== =========
Earnings per Common Share (based on 6,667,490 average shares outstanding)
Net income................................................................. $ 5.36 $ 5.07 $ 16.30 $ 9.26
======== ======== ======== =========
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</TABLE>
4
<PAGE>
Consolidated Statement of Condition Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
September 30 December 31 September 30
(in thousands, except share data) 1995 1994 1994
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<S> <C> <C> <C>
Assets
Cash and demand balances
due from banks...................... $ 1,350,070 $ 1,399,781 $ 1,204,984
Money market assets:
Interest-bearing deposits at banks.. 457,508 757,227 666,911
Federal funds sold and securities
purchased under agreement to
resell............................. 368,519 404,226 510,500
Trading account assets............... 50,647 36,067 37,354
Portfolio securities:
Held to maturity (market value of
$930,361 in 1995, $1,101,927 and
$1,136,462 in 1994)................ 913,919 1,107,659 1,125,103
Available for sale.................. 3,088,572 2,581,293 2,285,783
Loans, net of unearned income of
$17,493 in 1995, $20,724 and
$23,044 in 1994.......... .......... 9,131,371 8,229,254 8,018,654
Allowance for possible credit losses. (129,345) (124,734) (127,088)
Premises and equipment............... 222,916 221,494 221,505
Customers' liability on acceptances.. 190,871 125,113 98,625
Other assets......................... 600,125 594,159 649,928
----------- ----------- -----------
Total assets....................... $16,245,173 $15,331,539 $14,692,259
=========== =========== ===========
Liabilities
Deposits in domestic offices
-- noninterest-bearing.............. $ 2,770,094 $ 3,222,043 $ 2,849,197
-- interest-bearing................. 4,396,073 4,214,273 4,418,455
Deposits in foreign offices
-- noninterest-bearing.............. 22,727 31,903 141,769
-- interest-bearing................. 2,647,945 2,451,513 2,475,476
----------- ----------- -----------
Total deposits..................... 9,836,839 9,919,732 9,884,897
Federal funds purchased
and securities sold under
agreement to repurchase............. 2,894,321 2,632,167 2,308,706
Commercial paper outstanding......... 250,432 306,737 293,821
Short-term borrowings................ 511,509 670,362 364,474
Senior notes......................... 689,000 - -
Acceptances outstanding.............. 190,871 125,113 98,625
Accrued interest, taxes
and other expenses.................. 161,274 126,723 115,671
Other liabilities.................... 293,853 230,741 321,898
Long-term notes...................... 298,915 298,810 298,776
----------- ----------- -----------
Total liabilities.................. 15,127,014 14,310,385 13,686,868
----------- ----------- -----------
Stockholder's Equity
Preferred stock (no par value);
authorized 1,000,000 shares;
issued none................. - - -
Common stock ($8 par value);
authorized 10,000,000 shares; issued
and outstanding 6,667,490 shares.... 53,340 53,340 53,340
Surplus.............................. 203,897 203,897 203,897
Retained earnings.................... 862,928 796,617 764,899
Unrealized holding losses, net of
deferred taxes of ($1,329) in 1995,
($21,535) and ($11,028) in 1994..... (2,006) (32,700) (16,745)
----------- ----------- -----------
Total stockholder's
equity............................ 1,118,159 1,021,154 1,005,391
----------- ----------- -----------
Total liabilities and
stockholder's equity.............. $16,245,173 $15,331,539 $14,692,259
=========== =========== ===========
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</TABLE>
5
<PAGE>
Consolidated Statement of Changes
in Stockholder's Equity Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
(in thousands) 1995 1994
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<S> <C> <C>
Balance at January 1................................... $1,021,154 $1,017,672
Net income............................................ 108,711 61,768
Dividends............................................. (42,400) (30,878)
Net change in unrealized holding gains and losses..... 30,694 (43,171)
---------- ----------
Balance at September 30................................ $1,118,159 $1,005,391
========== ==========
Consolidated Statement of Cash Flows Harris Bankcorp, Inc. and Subsidiaries
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Nine Months Ended September 30
------------------------------
(in thousands) 1995 1994
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Operating Activities:
Net income...................................... $ 108,711 $ 61,768
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses.................... 31,414 34,495
Depreciation and amortization.................. 34,897 37,262
Deferred tax benefit........................... (3,327) (4,299)
Gain on sales of portfolio securities.......... (20,572) (5,644)
Trading account net cash (purchases) sales..... (14,580) 12,707
Net (increase) in interest receivable.......... (9,966) (26,340)
Net increase in interest payable............... 13,551 5,751
Net (increase) decrease in loans held for
resale........................................ (92,271) 215,189
Other, net..................................... 75,555 (69,549)
----------- -----------
Net cash provided by operating activities...... 123,412 261,340
----------- -----------
Investing Activities:
Net decrease (increase) in interest-bearing
deposits at banks............................. 299,719 (139,431)
Net decrease in federal funds sold and
securities purchased under agreement to
resell........................................ 35,707 7,411
Proceeds from maturities of securities held to
maturity...................................... 575,613 388,842
Purchases of securities held to maturity....... (381,695) (786,357)
Proceeds from sales of securities available
for sale...................................... 1,514,607 140,020
Proceeds from maturities of securities
available for sale............................ 3,878,263 3,373,721
Purchases of securities available for sale..... (5,828,855) (3,422,594)
Net (increase) in loans........................ (836,650) (568,969)
Proceeds from sales of premises and equipment.. 20,171 35,499
Purchases of premises and equipment............ (50,497) (59,528)
Other, net..................................... (10,209) 43,511
----------- -----------
Net cash used by investing activities.......... (783,826) (987,875)
----------- -----------
Financing Activities:
Net (decrease) increase in deposits............ (82,893) 509,026
Net increase in federal funds purchased and
securities sold under agreement to repurchase. 262,154 447,645
Net (decrease) in commercial paper
outstanding................................... (56,305) (94,718)
Net (decrease) in short-term borrowings........ (158,853) (32,447)
Proceeds from issuance of senior notes......... 2,040,100 -
Repayment of senior notes...................... (1,351,100) -
Cash dividends paid............................ (42,400) (30,878)
----------- -----------
Net cash provided by financing activities...... 610,703 798,628
----------- -----------
Net (decrease) increase in cash and demand
balances due from banks...................... (49,711) 72,093
Cash and demand balances due from banks at
January 1.................................... 1,399,781 1,132,891
----------- -----------
Cash and demand balances due from banks at
September 30................................. $ 1,350,070 $ 1,204,984
=========== ===========
</TABLE>
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6
<PAGE>
Notes To Financial Statements Harris Bankcorp, Inc. and Subsidiaries
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1. Basis Of Presentation
Harris Bankcorp, Inc. (the "Corporation") is a wholly owned subsidiary of
Bankmont Financial Corp. (a wholly owned subsidiary of Bank of Montreal). The
consolidated financial statements of the Corporation include the accounts of the
Corporation and its wholly owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated.
The consolidated financial statements have been prepared by management from
the books and records of the Corporation, without audit by independent certified
public accountants. However, these statements reflect all adjustments and
disclosures which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented and should be read
in conjunction with the notes to financial statements included in the
Corporation's Form 10-K for the year ended December 31, 1994.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
Because the results of operations are so closely related to and responsive to
changes in economic conditions, the results for any interim period are not
necessarily indicative of the results that can be expected for the entire year.
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2. Legal Proceedings
Certain subsidiaries of Harris Bankcorp, Inc. 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
consolidated financial position.
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3. Cash Flows
For purposes of the Corporation's Consolidated Statement of Cash Flows, cash and
cash equivalents is defined to include cash and demand balances due from banks.
Cash interest payments (net of amounts capitalized) for the nine months ended
September 30 totaled $429,821,000 and $255,130,000 in 1995 and 1994,
respectively. Cash income tax payments over the same periods totaled $53,207,000
and $31,608,000, respectively.
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4. Accounting Changes
During the first quarter of 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114--Accounting by Creditors for Impairment of a
Loan and SFAS No. 118--Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures. SFAS No. 114 addresses accounting by creditors for
impairment of certain loans. It requires that impaired loans within the scope of
the statement (primarily commercial credits) be measured based on the present
value of expected future cash flows (discounted at the loan's effective interest
rate) or, alternatively, at the loan's observable market price or the fair value
of supporting collateral. The Corporation determines loan impairment when
assessing the adequacy of the allowance for possible credit losses. SFAS No. 118
permits existing income recognition practices to continue. The adoption of these
statements did not have a material impact on the Corporation's net income or
financial position.
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5. Trust Customer Charge
During the second quarter of 1994, Harris Trust and Savings Bank ("HTSB"), the
principal banking subsidiary of the Corporation, decided to absorb the impact of
higher interest rates on mortgage-backed securities in the accounts of customers
in its Securities Lending unit. This charge resulted from investments of cash
collateral managed by HTSB as agent for certain of its institutional trust
customers. The investment consisted of floating rate mortgaged-backed securities
with caps on interest ranging from 8.5% to 10%. HTSB's securities lending unit
has invested in these types of securities on behalf of customers since 1991,
with the total positions growing to $2.3 billion by the second quarter of 1994.
Harris management believed that the securities satisfied customer guidelines at
the time of their acquisition. All securities were AAA-rated and the interest
returns were tied to movements in LIBOR. As of March 31, 1994 and December 31,
1993, there were no imbedded customer losses on these securities. Subsequent to
March 31, 1994, rising short-term rates substantially extended the average
duration of the securities. Given customer expectations and a concern that
further rate increases could have a disproportionate negative impact on market
values, Harris made a decision to eliminate all the mortgage-backed securities
from these customer accounts and absorb the full loss on behalf of
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7
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customers. Of the approximately $2.3 billion outstanding, one-third was sold
into the marketplace while the remaining two-thirds were sold to Bank of
Montreal ("BMO"). Sales prices were determined based on available market
quotations, which resulted in a loss approximating $51.3 million ($33.4 million
after-tax). At June 30, 1994 all mortgage-backed securities that had been
included in this portfolio were disposed of and neither Harris nor its customers
were at risk for subsequent declines in the market value of those securities.
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6. Foreign Exchange
Effective April 3, 1995, the Corporation and BMO agreed to combine their U.S.
foreign exchange activities (FX). Under this arrangement, FX net profit will be
shared by the Corporation and BMO in accordance with a specific formula set
forth in the agreement. This agreement expires in April 2002 but may be extended
at that time. Either party may terminate the arrangement at its option.
Beginning with second quarter 1995, FX revenues are reported net of expenses.
Management of the Corporation does not believe that 1995 net income will be
materially affected by this agreement.
<TABLE>
<CAPTION>
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Consolidated Statistical Summary Harris Bankcorp, Inc. and Subsidiaries
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Daily Average Balances (in millions) Quarter Ended September 30 Nine Months Ended September 30
Average Rates Earned and Paid -------------------------------- --------------------------------
(fully taxable equivalent basis) 1995 1994 1995 1994
--------------- --------------- --------------- ---------------
Balances Rates Balances Rates Balances Rates Balances Rates
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Money market assets:
Interest-bearing deposits at banks.................. $ 528 6.33% $ 703 4.70% $ 589 5.96% $ 695 4.22%
Federal funds sold and securities purchased under
agreement to resell................................ 240 5.82 455 4.51 324 5.95 578 3.68
------- ------- ------- -------
Total money market assets.......................... 768 6.19 1,158 4.36 913 5.96 1,273 3.97
Trading account assets............................... 67 6.62 36 7.23 59 7.17 41 6.83
Portfolio securities:
Held to maturity:
U.S. Treasury and Federal agency.................... 602 6.03 607 6.01 611 6.04 385 6.20
State and municipal................................. 328 10.85 474 11.87 386 11.61 480 11.92
Other............................................... 5 5.81 37 6.03 6 6.09 47 5.49
------- ------- ------- -------
Total held to maturity............................. 935 7.72 1,118 8.50 1,003 8.19 912 9.17
Available for sale:
U.S. Treasury and Federal Agency.................... 2,735 6.35 2,085 5.55 2,369 6.27 2,094 5.19
Other............................................... 189 5.40 170 4.80 161 5.68 136 4.31
------- ------- ------- -------
Total available for sale........................... 2,924 6.28 2,255 5.49 2,530 6.23 2,230 5.13
------- ------- ------- -------
Total portfolio securities......................... 3,859 6.47 3,373 6.49 3,533 6.79 3,142 6.31
Loans, net of unearned income........................ 8,928 8.80 7,677 8.00 8,589 8.89 7,597 7.50
------- ------- ------- -------
Total interest-earning assets...................... 13,622 8.02 12,244 7.26 13,094 8.15 12,053 6.81
Cash and demand balances due from banks.............. 1,187 1,155 1,182 1,159
Other assets......................................... 1,110 981 966 853
------- ------- ------- -------
Total assets....................................... $15,919 $14,380 $15,242 $14,065
======= ======= ======= =======
Liabilities and Stockholder's Equity
Interest checking deposits and money market accounts. $ 1,657 2.81 $ 1,800 2.63 $ 1,650 3.05 $ 1,860 2.47
Savings deposits and certificates.................... 2,503 5.37 2,202 3.82 2,426 5.04 2,174 3.64
Other time deposits.................................. 736 5.84 699 4.70 639 5.97 680 4.11
Foreign office time deposits......................... 2,334 5.91 2,056 4.56 2,414 6.03 2,015 3.96
------- ------- ------- -------
Total interest-bearing deposits.................... 7,230 5.00 6,757 3.82 7,129 5.00 6,729 3.46
Short-term borrowings................................ 3,213 5.59 2,809 4.37 2,889 5.65 2,582 3.76
Senior notes......................................... 581 6.14 -- -- 436 6.15 -- --
Long-term notes...................................... 299 7.68 299 6.75 299 7.73 299 6.30
------- ------- ------- -------
Total interest-bearing liabilities................. 11,323 5.30 9,865 4.07 10,753 5.30 9,610 3.63
Noninterest-bearing deposits......................... 2,849 2,907 2,829 2,919
Other liabilities.................................... 648 613 589 534
Stockholder's equity................................. 1,099 995 1,071 1,002
------- ------- ------- -------
Total liabilities and stockholder's equity......... $15,919 $14,380 $15,242 $14,065
======= ======= ======= =======
Net interest margin (related to average interest-
earning assets)..................................... 3.65% 3.98% 3.80% 3.92%
==== ===== ===== ====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
THIRD QUARTER 1995 COMPARED WITH
THIRD QUARTER 1994
- --------------------------------------------------------------------------------
SUMMARY
The Corporation's third quarter 1995 net income was $35.8 million, an increase
of 6% from third quarter 1994 income of $33.8 million. The earnings growth is
attributed primarily to strong loan growth in the corporate banking, community
banking and charge card businesses; sustained cost control; and a reduction in
FDIC premiums.
Net interest income on a fully taxable equivalent ("FTE") basis was $124.9
million, up 2% from $122.6 million in the year-ago quarter, reflecting an 11%
increase in average earning assets partially offset by a 33 basis point
reduction in net interest margin. Noninterest income increased $3.7 million or
5% from the same quarter last year. Trust and investment management revenue,
charge card fees and other income rose $1.8 million, $1.0 million and $5.2
million, respectively. Service charges declined by $2.2 million partly due to
customer refunds with respect to FDIC insurance. Foreign exchange revenue
decreased by $1.6 million; this revenue is now reported net of expenses under a
new profit sharing arrangement with BMO. Noninterest expenses rose only
slightly. Small increases in most expense categories were largely offset by a
$4.3 million reduction in FDIC insurance premiums. Excluding the effect of the
FDIC reduction, expenses would have increased by 3%. The provision for credit
losses increased by $2.0 million or 22% from $9.0 million to $11.0 million.
Income tax expense increased by $3.7 million from $13.4 million to $17.1
million, primarily because of higher pretax income and slightly lower levels of
tax-exempt income compared to the prior year's quarter.
The Corporation's annualized returns on average assets and equity were 0.89%
and 12.93%, respectively, in the current quarter compared to returns of 0.93%
and 13.50%, respectively, for the same quarter last year.
Additional commentary on the matters included in the above summary is provided
in the following sections of this Report.
- --------------------------------------------------------------------------------
NET INTEREST INCOME
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
-------------------------- ------------------------------
(in thousands) 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income............................. $272,096 $217,752 $784,455 $596,785
Fully taxable equivalent adjustment......... 3,860 5,889 14,259 17,723
-------- -------- -------- --------
Interest income (fully taxable equivalent
basis).................................... 275,956 223,641 798,714 614,508
Interest expense............................ 151,056 101,050 426,170 260,881
-------- -------- -------- --------
Net interest income (fully taxable
equivalent basis)......................... $124,900 $122,591 $372,544 $353,627
======== ======== ======== ========
Increase (decrease) due to change in:
Volume..................................... $ 13,058 $ 8,848 $ 29,941 $ 22,127
Rate....................................... (10,749) (1,781) (11,024) (15,088)
-------- -------- -------- --------
Total increase (decrease) in net interest
income................................... $ 2,309 $ 7,067 $ 18,917 $ 7,039
======== ======== ======== ========
</TABLE>
Third quarter net interest income on a FTE basis was $124.9 million, up 2% from
$122.6 million in the third quarter 1994. Average earning assets rose 11% or
$1.38 billion from $12.24 billion to $13.62 billion in third quarter 1995. Net
interest margin, the other principal determinant of net interest income,
declined to 3.65% from 3.98% in the same quarter last year.
Average loans rose 16% or $1.25 billion over last year's third quarter and
represented over 90% of the overall increase in average earning assets.
Virtually all major domestic loan categories increased, led by expansions of
$698 million, $305 million and $203 million in commercial loans, charge card
balances and real estate loans, respectively. Average portfolio securities rose
14%, or $486 million from the prior year's third quarter, while average money
market assets declined to $768 million, down 34% from the 1994 third quarter.
Incremental funding for this asset growth came mainly from a $473 million
increase in interest-bearing deposits, a $404 million increase in short-term
borrowings and $581 million of new senior notes issued by HTSB.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
Foreign office time deposits grew by $278 million and savings deposits and
certificates of deposit were up $301 million. Noninterest-bearing funds
supporting earning assets decreased 3%, or $80 million compared to the 1994
third quarter.
The Corporation's consolidated net interest margin declined to 3.65% from
3.98% in the prior year's third quarter. Factors causing this decline were rate
compression within certain asset categories, a lower mix of noninterest-bearing
deposits, the relationship which existed in the market between short and longer
term rates, the maturity of certain municipal bond holdings and sales of debt
securities with proceeds reinvested at slightly lower yields.
Average Earning Assets--Net Interest Margin
<TABLE>
<CAPTION>
Daily Average Balances (in millions)
Average Rates Earned and Paid
(fully taxable equivalent basis)
Quarter Ended September 30 Nine Months Ended September 30
---------------------------------------- -----------------------------------------
1995 1994 1995 1994
----------------- ------------------ ------------------ ------------------
Balances Rates Balances Rates Balances Rates Balances Rates
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets.... $13,622 8.02% $12,244 7.26% $13,094 8.15% $12,053 6.81%
======= ======= ======= =======
Interest-bearing
liabilities............... $11,323 5.30 $ 9,865 4.07 $10,753 5.30 $ 9,610 3.63
Noninterest-bearing
sources of funds.......... 2,299 -- 2,379 -- 2,341 -- 2,443 --
------- ------- ------- -------
Total supporting
liabilities.............. $13,622 4.37 $12,244 3.28 $13,094 4.35 $12,053 2.89
======= ======= ======= =======
Net interest margin
(related to average
interest-earning assets).. 3.65% 3.98% 3.80% 3.92%
==== ==== ==== ====
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest Income
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30 Increase (Decrease) Ended September 30 Increase (Decrease)
------------------ ------------------- ------------------ -------------------
(dollars in thousands) 1995 1994 Amount % 1995 1994 Amount %
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees........... $37,950 $36,165 $ 1,785 5 $113,041 $111,435 $ 1,606 1
Trading account............ 399 163 236 + 3,011 (1,105) 4,116 +
Foreign exchange........... 2,434 4,019 (1,585) (39) 10,160 15,473 (5,313) (34)
Charge card................ 10,909 9,866 1,043 11 30,621 26,871 3,750 14
Service fees and charges... 16,246 18,475 (2,229) (12) 51,437 55,984 (4,547) (8)
Securities gains........... 1,672 2,404 (732) (30) 20,572 5,644 14,928 +
Other...................... 10,368 5,163 5,205 + 23,178 23,163 15 --
------- ------- ------- -------- -------- -------
Total noninterest income.. $79,978 $76,255 $ 3,723 5 $252,020 $237,465 $14,555 6
======= ======= ======= === ======== ======== ======= ===
</TABLE>
Noninterest income for the third quarter was $80.0 million, an increase of $3.7
million or 5% from the third quarter of 1994. Trust and investment management
revenue was $38.0 million, an increase of $1.8 million or 5% from the previous
year. During the current quarter, the Corporation began to accrue certain fees
from personal trust customers. As a result, an additional $2.8 million of income
was recognized. Charge card fees totaled $10.9 million, up $1.0 million from
1994. Other income including loan syndication and trade finance fees, gains from
sales of mortgage loans, income from bank-owned life insurance and other
miscellaneous items, doubled from $5.2 million to $10.4 million in 1995.
Service fees and charges were $16.2 million, a decrease of $2.2 million or 12%
from last year partly due to customer refunds with respect to FDIC insurance.
Foreign exchange revenue was $2.4 million, down 39% from the third quarter of
1994. Effective in second quarter 1995, this revenue is reported net of expenses
under a new profit sharing arrangement with BMO. Gains reported from the sale of
debt securities totaled $1.7 million, down $0.7 million or 30% from 1994.
- --------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
NONINTEREST EXPENSES AND INCOME TAXES
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30 Increase (Decrease) Ended September 30 Increase (Decrease)
-------------------- ------------------- ------------------- ------------------
(dollars in thousands) 1995 1994 Amount % 1995 1994 Amount %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation.... $ 65,779 $ 61,183 $ 4,596 8 $190,930 $184,657 $ 6,273 3
Pension, profit sharing and other
employee benefits................. 13,164 15,991 (2,827) (18) 47,568 53,852 (6,284) (12)
Net occupancy...................... 11,730 10,956 774 7 35,095 33,356 1,739 5
Equipment.......................... 10,928 10,440 448 5 31,142 31,089 53 -
Marketing.......................... 6,605 5,774 831 14 19,052 17,705 1,347 8
Communication and delivery......... 5,108 4,706 402 9 14,989 13,160 1,829 14
Deposit insurance.................. (281) 3,947 (4,228) (107) 7,352 11,781 (4,429) (38)
Trust customer charge.............. - - - - - 51,335 (51,335) (-)
Other.............................. 24,134 23,721 413 2 72,320 68,140 4,180 6
-------- -------- ------- -------- -------- --------
Total noninterest expenses........ $137,167 $136,718 $ 449 - $418,448 $465,075 $(46,627) (10)
======== ======== ======= ======== ======== ========
Provision for income taxes......... $ 17,075 $ 13,364 $ 3,711 28 $ 51,732 $ 12,031 $ 39,701 +
======== ======== ======= ==== ======== ======== ======== ====
</TABLE>
Noninterest expenses for the third quarter totaled $137.2 million, essentially
unchanged from the third quarter of 1994. Slight increases in most expense
categories were offset by a reduction in costs due to amendments to certain
benefit plans and a $4.3 million decrease in FDIC insurance premiums. Excluding
the effect of the FDIC insurance premium reduction, expenses would have
increased 3% from the previous year.
Employment-related expenses totaled $78.9 million, an increase of $1.8 million
or 2%. Marketing increased $0.8 million or 14%, while communication and delivery
expenses reflected an increase of $0.4 million. Equipment and net occupancy
costs increased by $0.5 million and $0.8 million, respectively.
The Corporation recorded income tax expense for the current quarter of $17.1
million, an increase of $3.7 million or 28%, reflecting higher pretax income and
slightly lower levels of tax-exempt income.
- --------------------------------------------------------------------------------
CAPITAL POSITION
The Corporation's total equity capital at September 30, 1995 was $1.12 billion,
compared with $1.02 billion and $1.01 billion at December 31, 1994 and September
30, 1994, respectively. During the preceding twelve months, the Corporation
declared dividends of $46 million.
U.S. banking regulators have issued risk-based capital guidelines based on
the international "Basle Committee" agreement that 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. The guidelines specify minimum ratios
for Tier 1 capital to risk-weighted assets of 4% and total capital to risk-
weighted assets of 8%.
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 equal at least 50% of total
capital. Tier 2 capital basically includes subordinated debt (less a discount
factor during the five years prior to maturity), other types of preferred stock
and the allowance for possible credit losses. The portion of the allowance for
possible credit losses includable in Tier 2 capital is limited to 1.25% of risk-
weighted assets. The Corporation's Tier 1 and total risk-based capital ratios
were 8.45% and 11.73%, respectively, at September 30, 1995.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
Another regulatory capital measure, the Tier 1 leverage ratio, is computed by
dividing period-end Tier 1 capital by adjusted quarterly average assets. The
Federal Reserve Board established a minimum ratio of 4% to 5% for most holding
companies. The Corporation's Tier 1 leverage ratio was 6.93% for the quarter
ended September 30, 1995 compared to 6.96% for the year-ago quarter.
The Federal Deposit Insurance Corporation Improvement Act of 1991 contains
provisions that establish five capital categories for all FDIC-insured
institutions ranging from "well capitalized" to "critically undercapitalized."
Based on those regulations that became effective on or before September 30,
1995, all of the Corporation's subsidiary banks were designated as "well
capitalized", the highest capital category.
Capital adequacy guidelines generally restrict the inclusion of intangible
assets in Tier 1 capital; however, purchased 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. 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 September 30, 1995, the Corporation's intangible assets totaled
$40.7 million, including approximately $18.1 million of intangibles excluded
under capital guidelines. The Corporation's tangible Tier 1 leverage ratio
(which excludes all intangibles) was 6.80% for the third quarter of 1995.
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
September 30 December 31 September 30
(dollars in thousands) 1995 1994 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period)............................................ $16,245,173 $15,331,539 $14,692,259
=========== =========== ===========
Average assets (quarter)................................................ $15,919,244 $14,668,264 $14,380,029
=========== =========== ===========
Risk-weighted on-balance sheet assets................................... $10,110,393 $ 9,078,759 $ 8,971,000
Risk-weighted off-balance sheet items................................... 2,946,694 2,580,005 2,510,608
----------- ----------- -----------
Total risk-weighted assets (based on regulatory accounting principles).. $13,057,087 $11,658,764 $11,481,608
=========== =========== ===========
Tier 1 capital.......................................................... $ 1,101,722 $ 1,033,481 $ 1,001,429
Supplementary capital................................................... 427,961 423,254 425,567
----------- ----------- -----------
Total capital........................................................... $ 1,529,683 $ 1,456,735 $ 1,426,996
=========== =========== ===========
Tier 1 leverage ratio................................................... 6.93% 7.03% 6.96%
Risk-based capital ratios
Tier 1................................................................. 8.45% 8.86% 8.72%
Total.................................................................. 11.73% 12.49% 12.43%
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
September 30 June 30 September 30
(dollars in thousands) 1995 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans............................................... $ 55,050 $ 65,478 $ 88,344
Restructured loans............................................. 2,113 2,149 2,908
-------- -------- --------
Total nonperforming loans.................................... 57,163 67,627 91,252
Other assets received in satisfaction of debt.................. 2,729 3,246 11,248
-------- -------- --------
Total nonperforming assets................................... $ 59,892 $ 70,873 $102,500
======== ======== ========
Nonperforming loans to total loans (end of period)............. .63% .75% 1.14%
Nonperforming assets to total loans (end of period)............ .66% .78% 1.28%
======== ========= ========
90-day past due loans still accruing interest.................. $ 22,301 $ 24,644 $ 20,748
======== ======== ========
</TABLE>
Nonperforming assets consist 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 earning assets.
Nonperforming assets at September 30, 1995 totaled $60 million, or .66% of
total loans, down from $71 million or .78% of total loans at June 30, 1995 and
also down from $103 million or 1.28% of loans a year ago.
Interest shortfall for the quarter ended September 30, 1995 was $0.5 million
compared to $1.4 million a year earlier reflecting the lower level of
nonperforming loans and increased interest collections.
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 restructured loans meet this definition. Impaired
loans are measured by the Corporation at the present value of expected future
cash flow or, alternatively, at the fair value of collateral. Known losses of
principal on these loans have been charged off. Interest income on nonaccrual
loans is recognized only at the time cash is received and only if the collection
of the entire principal balance is expected. Interest income on restructured
loans is accrued according to the most recently agreed upon contractual terms.
<TABLE>
<CAPTION>
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total Impaired
(dollars in thousands) September 30, 1995 A Related Allowance No Related Allowance Loans
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance...................................................... $26,788 $30,375 $57,163
Related allowance............................................ 13,638 -- 13,638
------- ------- -------
Balance, net of allowance.................................... $13,150 $30,375 $43,525
======= ======= =======
Quarter Ended Nine Months Ended
------------- -----------------
(dollars in thousands) September 30, 1995 September 30, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Average impaired loans.......................................................... $62,531 $75,296
======= =======
Total interest income on impaired loans......................................... $ 667 $ 1,630
======= =======
Interest income on impaired loans recorded on a cash basis...................... $ 613 $ 1,446
======= =======
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
Allowance For Possible Credit Losses
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
(dollars in thousands) 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period.............. $127,479 $129,336 $124,734 $131,676
-------- -------- -------- --------
Charge-offs............................... (14,335) (16,884) (45,653) (52,393)
Recoveries................................ 5,227 5,606 18,850 13,310
-------- -------- -------- --------
Net charge-offs.......................... (9,108) (11,278) (26,803) (39,083)
Provision charged to operations........... 10,974 9,030 31,414 34,495
-------- -------- -------- --------
Balance, September 30..................... $129,345 $127,088 $129,345 $127,088
======== ======== ======== ========
Net charge-offs as a percentage of
provision charged to operations.......... 83% 125% 85% 113%
======== ========
Allowance for possible credit losses
to nonperforming loans (period-end)...... 226% 139%
Allowance for possible credit losses
to total loans outstanding (period-end).. 1.42% 1.58%
======== ========
</TABLE>
The Corporation's provision for credit losses for the current quarter was $11.0
million, up 22.2% from $9.0 million in last year's third quarter. Net charge-
offs declined from $11.3 million to $9.1 million for the current quarter, making
net charge-offs on a year-to-date basis $26.8 million compared to $39.1 million
in 1994. The decrease in net charge-offs was primarily attributable to lower
commercial loan charge-offs in third quarter 1995 compared to the prior year,
somewhat offset by an increase in net charge-offs in the charge card portfolio.
For the third quarter of 1995, net charge-offs related to charge card and
commercial loans were $7.1 million and $1.7 million, respectively, compared to
$5.9 million and $5.1 million, respectively, for the third quarter of 1994.
At September 30, 1995, the allowance for possible credit losses was $129
million, equal to 1.42% of total loans outstanding compared to $127 or 1.58% of
total loans one year ago; however, the allowance as a percentage of
nonperforming loans increased from 139% to 226% at September 30, 1995.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Liquidity And Sources Of Funds
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 needs. 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 demand based upon knowledge of major
customers and overall economic conditions. Appropriate responses to changes in
these conditions preserve customer confidence in the ability of the Corporation
to continually serve their credit and deposit withdrawal requirements. Some
level of liquidity is provided by maintaining assets which mature within a short
timeframe or that could be sold quickly without significant loss. The
Corporation's liquid assets include cash and demand balances due from banks,
money market assets, portfolio securities available for sale and trading account
assets. Liquid assets represented approximately 33% of the Corporation's total
assets and amounted to $5.32 billion at September 30, 1995. However, the most
important source of liquidity is the ability to raise funds, as required, in a
variety of money markets using multiple instruments.
The Corporation, in connection with the issuance of commercial paper and for
other corporate purposes, has a $130 million revolving credit agreement with
five nonaffiliated banks that terminates on September 20, 1996. This agreement
allows for extensions of its termination date, if requested by the Corporation
and approved by the nonaffiliated banks. The Corporation requested and received
one such extension in the nine months ended September 30, 1995. There were no
borrowings under this credit facility in 1995 or 1994.
Total deposits averaged $10.08 billion in the third quarter of 1995, an
increase of $414 million compared to the same quarter last year. The
Corporation's average volume of core deposits, consisting of demand deposits,
interest checking deposits, savings deposits and certificates, and money market
accounts rose 2%. This growth in core deposits reflected increases in savings
deposits and certificates, offset by decreases in all other categories. Core
deposits represented approximately 51% and 56% of average supporting liabilities
in the 1995 and 1994 third quarters, respectively.
Average money market assets in the third quarter of 1995 decreased $390
million or 34% from the same quarter last year. These assets represented 6% of
average earning assets in 1995 compared to 9% one year ago. Average money market
liabilities increased 14% to $3.21 billion this quarter from $2.81 billion in
the same quarter last year, primarily the result of increases in federal funds
borrowed and securities sold under repurchase agreements.
HTSB offers to institutional investors from time to time, unsecured short-term
and medium-term bank notes in an aggregate principal amount of up to $1.5
billion outstanding at any time. The term of each note could range from fourteen
days to fifteen years. The notes are subordinated to deposits and rank pari
passu with all other senior unsecured indebtedness of HTSB. As of September 30,
1995, $689 million of short-term notes were outstanding.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 1995 Compared With 1994
Net income for the nine months ended September 30, 1995 was $108.7 million, a
76% increase from $61.8 million earned for the same period a year earlier.
Included in the 1994 figure was the one-time $33.4 million after-tax securities
lending charge. Excluding the effect of this item, earnings would have improved
by 14%. Annualized returns on average assets and equity for the 1995 period were
0.96% and 13.61%, respectively, compared to 1994 returns of 0.91% and 12.75%,
respectively, adjusted for the securities lending charge. Actual 1994 returns
for the nine-month period were 0.59% return on assets and 8.24% return on
equity.
Net interest income on a fully taxable equivalent basis increased to $372.5
million this year, up 5% from $353.6 million in 1994. Average earning assets
grew 9% to $13.09 billion from $12.05 billion a year ago, while the net interest
margin declined 12 basis points to 3.80%.
Average loans rose 13%, or $992 million period-to-period. Most domestic loan
categories increased from the year-ago levels, led by commercial loans, credit
card loans, mortgage loans and installment loans, which advanced $547 million,
$233 million, $143 million, and $110 million, respectively. Portfolio securities
registered 12% growth, rising $391 million to $3.53 billion. Average money
market assets declined $360 million or 28%, compared to the similar 1994 period.
Increases in interest-bearing liabilities funded the Corporation's growth.
Interest-bearing deposits, primarily foreign office time deposits, rose by $400
million or 6% from the prior year, while average short-term borrowings increased
$307 million or 12% and senior notes increased $436 million from last year.
These notes are described in further detail in the "Liquidity And Sources Of
Funds" section of this Report. Noninterest-bearing sources of funds, primarily
demand deposits and equity capital, were virtually unchanged and represented
17.9% of supporting liabilities, down from 20.3% in 1994.
The Corporation's consolidated net interest margin decreased 12 basis points
from 3.92% to 3.80% this year. The decline was due to rate compression in
certain asset categories, lower yields from the reinvestment of debt portfolio
security sales and maturity proceeds and the relative decline in noninterest-
bearing supporting liabilities.
Noninterest income totaled $252.0 million, an increase of $14.6 million or 6%
from the 1994 nine-month period. In the current period, net gains from sales of
debt portfolio securities amounted to $20.6 million compared to $5.6 million in
the prior year. Most of the 1995 gains from sales of debt portfolio securities
were recognized in the second quarter when conditions in the U.S. bond market
led to significant price rallies. These events enabled the Corporation to sell
certain U.S. government agency securities and reinvest the proceeds to
reposition its portfolio and take advantage of profit opportunities not
typically available. Foreign exchange revenue declined $5.3 million as a result
of netting revenue and expenses under a new profit sharing arrangement with Bank
of Montreal. Service fees declined $4.5 million in part due to customer refunds
for the decrease in FDIC insurance premiums. These reductions were offset by
increased trading revenues of $4.1 million and higher charge card revenues of
$3.8 million due to volume growth in the charge card loan portfolio.
Noninterest expense totaled $418.4 million, a decrease of $46.6 million from
the same period in 1994. The 1995 amount includes the impact of a $4.3 million
reduction in FDIC insurance premiums. Increased levels of noninterest expense
for the first nine months of 1994 resulted from the aforementioned charge
relating to activity in the Securities Lending unit. Excluding the effect of
these special items, noninterest expense would have increased by 2% from 1994.
Income tax expense increased $39.7 million primarily because of higher pretax
income and slightly lower levels of tax-exempt income. In addition, in 1994 the
Corporation reduced its tax expense through a favorable adjustment of prior year
tax reserves and the recognition of state tax benefits from prior years. The
provision for credit losses for the first nine months of 1995 was $31.4 million,
down $3.1 million or 9% from 1994. Net loan charge-offs totaled $26.8 million in
1995 compared to $39.1 million for 1994.
- --------------------------------------------------------------------------------
16
<PAGE>
Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Harris Bankcorp, Inc.
111 West Monroe Street
Chicago, Illinois 60603
- ---------------------------
Harris Bankcorp, Inc.
Executive Officers
Alan G. McNally
Chairman of the Board and Chief Executive Officer
Edward W. Lyman, Jr.
Vice Chair of the Board
Maribeth S. Rahe
Vice Chair of the Board
- ---------------------------
Harris Bankcorp, Inc.
Board of Directors
Alan G. McNally
Chairman of the Board and Chief Executive Officer
Edward W. Lyman, Jr.
Vice Chair of the Board
Maribeth S. Rahe
Vice Chair of the Board
Matthew W. Barrett
Chairman of the Board and Chief Executive Officer
Bank of Montreal
F. Anthony Comper
President and Chief Operating Officer
Bank of Montreal
Susan T. Congalton
Managing Director
Lupine Partners
Roxanne J. Decyk
Vice President, Corporate Planning Amoco Corporation
Wilbur H. Gantz
President and Chief Executive Officer
PathoGenesis Corporation
James J. Glasser
Chairman, President and Chief Executive Officer
GATX Corporation
Daryl F. Grisham
President and Chief Executive Officer
Parker House Sausage Company
Dr. Leo M. Henikoff
President and Chief Executive Officer
Rush-Presbyterian-St. Luke's Medical Center
Dr. Stanley O. Ikenberry
President Emeritus
University of Illinois
Richard M. Jaffee
Chairman and Chief Executive Officer
Oil-Dri Corporation of America
Charles H. Shaw
Chairman
The Shaw Company
Richard E. Terry
Chairman and Chief Executive Officer
Peoples Energy Corporation
James O. Webb
President
James O. Webb & Associates, Inc.
William J. Weisz
Chairman of the Board
Motorola, Inc.
- ---------------------------
Harris Trust and Savings Bank
Member Federal Reserve System
Member Federal Deposit Insurance Corporation
Main Banking Premises
P.O. Box 755
111 West Monroe Street
Chicago, Illinois 60603
Branches
Board of Trade Building
141 West Jackson Boulevard
Chicago, Illinois 60604
West Garfield Park
3900 West Madison Avenue
Chicago, Illinois 60624
Automatic Banking Centers
311 West Monroe Street
Chicago, Illinois 60606
Presidential Towers
555 West Madison Street
Chicago, Illinois 60606
Ameritech Corporate Offices
212 West Washington Street
Chicago, Illinois 60606
Loyola University
Lake Shore Campus
6525 North Sheridan Road
Chicago, Illinois 60626
Harris Bank Card Center
700 East Lake Cook Road
Buffalo Grove, Illinois 60089
Banking Department
Representative Office
New York, New York
Investment Department Representative Office
New York, New York
International Banking Facility
Chicago, Illinois
International Branch
London, England
Subsidiaries
Harris Bank International Corporation
New York, New York
Harriscorp Leasing, Inc.
Chicago, Illinois
Harris Trading Advisory Corporation
Chicago, Illinois
Harris Building Services Corporation
Chicago, Illinois
Midwestern Holdings, Inc.
Chicago, Illinois
Michigan Holdings, Inc.
Chicago, Illinois
Bank of Montreal Global, Inc.
Chicago, Illinois
Bank of Montreal Trust Company (C.I.), Ltd.
St. Helier, Jersey Channel Islands
- ---------------------------
Harris Bankcorp, Inc.
Bank Subsidiaries
Harris Trust and Savings Bank
Chicago, Illinois
(two branches)
Harris Bank Argo
Summit, Illinois
(four branches)
Harris Bank Barrington, N.A.
Barrington, Illinois
(five branches)
Harris Bank Batavia, N.A.
Batavia, Illinois
(one branch)
Harris Bank Frankfort
Frankfort, Illinois
(one branch)
Harris Bank Glencoe-Northbrook, N.A.
Glencoe, Illinois
(one branch)
Harris Bank Hinsdale, N.A.
Hinsdale, Illinois
(one branch)
Harris Bank Libertyville
Libertyville, Illinois
(three branches)
Harris Bank Naperville
Naperville, Illinois
(four branches)
Harris Bank Roselle
Roselle, Illinois
(four branches)
Harris Bank St. Charles
St. Charles, Illinois
(four branches)
Harris Bank Wilmette, N.A.
Wilmette, Illinois
Harris Bank Winnetka, N.A.
Winnetka, Illinois
(one branch)
Harris Trust Bank of Arizona
Scottsdale, Arizona
(one branch)
- ---------------------------
Harris Bankcorp, Inc.
Non-Bank Subsidiaries
Harris Investors Direct, Inc.
Chicago, Illinois
Harris Trust Company of Florida
West Palm Beach, Florida
(two branches)
Harris Trust Company of New York
New York, New York
Bank of Montreal Trust Company
New York, New York
Harris Trust Company of California
Los Angeles, California
Harriscorp Capital Corporation
Chicago, Illinois
Harriscorp Finance, Inc.
Chicago, Illinois
Harris Investment Management, Inc.
Chicago, Illinois
Harris Life Insurance Company
Scottsdale, Arizona
- --------------------------------------------------------------------------------
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