<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 June 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 August 11, 1995 the Corporation had 6,667,490 shares of $8 par value common
stock outstanding.
<PAGE>
Part 1. Financial Information
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Item 1. Financial Statements.
Consolidated Statement of Condition as of June 30, 1995, December 31,
1994 and June 30, 1994.
Consolidated Statement of Income for the quarters and six months ended
June 30, 1995 and 1994.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the six months ended June 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 Second 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
June 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 11th day of August 1995.
________________________
Pierre O. Greffe
Chief Financial Officer
________________________
Paul R. Skubic
Chief Accounting Officer
<PAGE>
EXHIBIT A--HARRIS BANKCORP, INC.
1995 SECOND QUARTER REPORT
June 30, 1995
<PAGE>
Financial Highlights
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Harris Bankcorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 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.................................. $119,831 $113,626 5% $237,245 $219,202 8%
Net interest income (fully taxable equivalent)....... 124,791 119,631 4 247,644 231,036 7
Provision for credit losses.......................... 11,778 12,035 (2) 20,440 25,465 (20)
Noninterest income................................... 91,441 80,670 13 172,042 161,210 7
Noninterest expenses................................. 143,039 189,739 (25) 281,281 328,357 (14)
Net income........................................... 38,191 502 + 72,909 27,923 +
Cash dividends....................................... 14,000 13,509 4 28,000 27,018 4
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Selected Ratios
Return on average stockholder's equity............... 14.24% .20% + 13.92% 5.60% +
Return on average assets............................. 1.02 .01 + .99 .40 +
Tier 1 capital ratio................................. 8.45 8.30 15bp
Total risk-based capital ratio....................... 11.80 11.97 (17)
Tier 1 leverage ratio................................ 6.96 6.84 12
Allowance for possible credit losses to
total loans (period-end)............................ 1.41 1.64 (23)
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Daily Average Balances (in millions)
Loans, net of unearned income........................ $ 8,634 $ 7,640 13% $ 8,416 $ 7,557 11%
Portfolio securities................................. 3,233 3,099 4 3,366 3,023 11
Money market assets.................................. 924 1,401 (34) 987 1,332 (26)
Total interest-earning assets........................ 12,849 12,188 5 12,825 11,956 7
Total assets......................................... 14,973 14,201 5 14,898 13,906 7
Deposits............................................. 9,881 9,746 1 9,897 9,639 3
Short-term borrowings................................ 3,076 2,581 3 2,725 2,468 10
Stockholder's equity................................. 1,076 999 8 1,056 1,006 5
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Balances at June 30 (in millions)
Loans, net of unearned income........................ $ 9,071 $ 7,906 15%
Allowance for possible credit losses................. 127 129 (2)
Portfolio securities................................. 3,484 3,388 3
Total assets......................................... 15,519 14,741 5
Deposits............................................. 9,754 10,119 (4)
Stockholder's equity................................. 1,096 984 11
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</TABLE>
Report From Management
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Harris Bankcorp recorded second quarter earnings of $38.2 million, a substantial
improvement from 1994 second quarter net income of $.5 million. During the prior
year's second quarter, Harris Bankcorp recorded a one-time $33.4 million after-
tax charge 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, second quarter 1995 net income increased 13% from second quarter
1994, attributable to strong loan growth, gains from portfolio securities
transactions, sustained cost control, and strong asset quality.
Net interest income on a fully taxable equivalent basis was $124.8 million, up
$5.2 million or 4% from second quarter last year. Average earning assets rose 5%
to $12.8 billion from $12.2 billion in second quarter 1994, attributable to an
increase of $994 million or 13% in average loans. Commercial loans and charge
card outstandings were the strongest contributors to this growth. With the
relationship which existed in the markets between short and longer term rates,
net interest margin decreased to 3.89% from 3.93% in the same quarter last year.
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1
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Noninterest income of $91.4 million rose $10.8 million or 13% from the same
quarter last year. In second quarter 1995, Harris Bankcorp realized a net gain
of $16.8 million from portfolio securities transactions, compared to nominal
gains in the second quarter one year earlier. During both May and June 1995,
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.
In the current quarter, revenue from money market and bond trading activities
improved by $0.7 million while charge card fees rose by $1.5 million compared to
second quarter 1994. Other noninterest income declined by $3.9 million from the
year-ago quarter when Harris Bankcorp realized a $5.5 million gain from the sale
of an equity interest acquired in a troubled debt restructuring. Foreign
exchange revenue declined by $2.1 million. However with second quarter 1995,
under a new profit sharing arrangement with its parent, Bank of Montreal,
foreign exchange revenues are now reported net of expenses.
Comparative noninterest expenses were impacted by the 1994 securities lending
charge. Excluding this item, second quarter 1995 noninterest expenses would have
increased by 3%; after including all charges, current quarter expenses declined
by 25% compared to a year ago. Income taxes rose $26.2 million during the
current quarter. In addition to higher pretax income in the current quarter,
1994 tax expenses were lower due to state tax benefits from prior years.
The second quarter 1995 provision for credit losses of $11.8 million was down
2.1% from $12.0 million in the second quarter of 1994. Net loan charge-offs
during the current quarter were $11.7 million compared to $21.5 million in the
same period last year.
Nonperforming assets at June 30, 1995 totaled $71 million, or 0.8% of total
loans, compared to $89 million or 1.2% at March 31, 1995, and $106 million or
1.3% a year ago. At June 30, 1995, the allowance for possible credit losses was
$127 million, equal to 1.4% of total loans outstanding, compared to $129 million
or 1.6% at the end of second quarter 1994. As a result, the ratio of the
allowance for possible credit losses to nonperforming assets increased from 122%
at June 30, 1994 to 180% at June 30, 1995.
At June 30, 1995, equity capital of Harris Bankcorp amounted to $1.1 billion,
up from $984 million at June 30, 1994. The leverage capital ratio was 6.96% for
the second quarter of 1995 compared to 6.84% in the same quarter one year
earlier. Harris Bankcorp's capital ratio substantially exceeds the prescribed
regulatory minimum for bank holding companies. The Corporation's Tier 1 and
total risk-based capital ratios were at 8.45% and 11.80%, respectively, compared
to respective ratios of 8.30% and 11.97% at June 30, 1994. Regulatory minimums
for these capital measures are 4% and 8%.
Annualized returns on stockholder's equity and average assets were 14.24% and
1.02%, respectively, in the second quarter of 1995. Returns in the prior year
were nominal because of the effect of the charge in the Securities Lending unit.
Excluding that charge, second quarter 1994 return on equity was 13.59% and
return on assets was .96%.
For the first six months of 1995, net income was $72.9 million, a 161%
increase from the same period a year earlier when net income was $27.9 million.
Similar to the second quarter, year-to-date earnings comparisons were
significantly affected by the one-time securities lending charge. Excluding the
effect of this charge, earnings for the first half of 1995 improved by 19%.
Net interest income of $237.2 million in the current six-month period was up
8% from the comparable 1994 period. Although the net interest margin fell
slightly, average earning assets rose 7% from $12.0 billion to $12.8 billion,
and average loans increased by $859 million or 11%. Noninterest income increased
7% to $172.0 million in 1995. In the current period, net gains from portfolio
securities transactions amounted to $18.9 million compared to $3.2 million in
the prior year, while in 1994, Harris Bankcorp recognized a $5.5 million gain
from the sale of an equity interest acquired in a troubled debt restructuring.
Excluding the one-time charge in 1994, noninterest expenses in the first six
months of 1995 were 2% higher than the comparable 1994 period. In 1995, the
provision for credit losses declined by $5.0 million, while income tax expense
rose by $36.0 million.
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2
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In June, Donald S. Hunt retired as President and Chief Operating Officer of the
Harris after a 31-year career of great distinction. During that time, Mr. Hunt
earned positions of leadership throughout the Bank, in areas ranging from
international banking to information systems.
The Board of Directors named Edward W. Lyman, Jr. and Maribeth S. Rahe Vice
Chairs of the Board, effective July 1, 1995. Together with Alan G. McNally,
Chairman of the Board and Chief Executive Officer, Lyman and Rahe comprise the
Office of the Chairman, responsible for the strategic and tactical direction of
the Bank.
Harris Bank has announced that it is extending its successful Small Business
Lending Rate (SBLR) initiative through at least January 1997. Introduced as a
two-year program in early 1994, the SBLR is, in effect, a "prime" rate for small
business which tracks one-half percent below the Wall Street Journal prime. The
decision to extend the SBLR is an indication of our strategic commitment to the
small business market.
Harris has launched an innovative partnership to foster maximum minority and
female participation in the Bank's aggressive branch expansion program. Minority
and women-owned construction firms selected for the Capacity Building Program
are teaming with one of the three design/build contractors leading the Bank's
construction efforts. Through these partnership arrangements, it is expected
that eventually each minority/women-owned firm will be able to take lead
responsibility for the construction of at least one additional bank branch.
We recently announced plans for new branches in the Chicago suburbs of Orland
Park and LaGrange, bringing the total number of Harris locations opened or under
construction to 79.
Alan G. McNally
Chairman of the Board and
Chief Executive Officer
July 28, 1995
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3
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<TABLE>
<CAPTION>
Consolidated Statement of Income Harris Bankcorp, Inc. and Subsidiaries
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Quarter Ended June 30 Six Months Ended June 30
---------------------- ------------------------
(in thousands except share data) 1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Interest Income
Loans, including fees................................ $192,458 $142,826 $372,959 $270,518
Money market assets:
Deposits at banks................................... 10,003 7,982 19,973 13,605
Federal funds sold and securities purchased under
agreement to resell................................ 5,407 5,753 10,920 10,716
Trading account...................................... 851 640 1,700 1,120
Securities available for sale:
U.S. Treasury and Federal agency.................... 31,885 27,216 67,013 52,045
Other............................................... 2,833 1,648 4,897 2,255
Securities held to maturity:
U.S. Treasury and Federal agency.................... 8,829 5,242 18,472 8,675
State and municipal................................. 7,720 9,361 16,206 18,691
Other............................................... 77 681 219 1,408
-------- -------- -------- --------
Total interest income............................... 260,063 201,349 512,359 379,033
-------- -------- -------- --------
Interest Expense
Deposits............................................. 89,627 58,988 175,463 108,944
Short-term borrowings................................ 38,173 24,067 76,874 41,824
Senior notes......................................... 6,604 - 11,177 -
Long-term notes...................................... 5,828 4,668 11,600 9,063
-------- -------- -------- --------
Total interest expense.............................. 140,232 87,723 275,114 159,831
-------- -------- -------- --------
Net Interest Income.................................. 119,831 113,626 237,245 219,202
Provision for credit losses.......................... 11,778 12,035 20,440 25,465
-------- -------- -------- --------
Net Interest Income after Provision for Credit Losses 108,053 101,591 216,805 193,737
-------- -------- -------- --------
Noninterest Income
Trust and investment management fees................. 36,346 37,645 75,091 75,270
Trading account...................................... 679 (60) 2,612 (1,268)
Foreign exchange..................................... 3,169 5,236 7,726 11,454
Charge card.......................................... 10,467 8,944 19,712 17,005
Service fees and charges............................. 17,538 18,513 35,191 37,509
Portfolio securities gains........................... 16,838 92 18,900 3,240
Other................................................ 6,404 10,300 12,810 18,000
-------- -------- -------- --------
Total noninterest income............................ 91,441 80,670 172,042 161,210
-------- -------- -------- --------
Noninterest Expenses
Salaries and other compensation...................... 62,611 62,660 125,151 123,474
Pension, profit sharing and other employee benefits.. 16,703 16,949 34,404 37,861
Net occupancy........................................ 12,011 11,334 23,365 22,400
Equipment............................................ 10,388 9,953 20,214 20,649
Marketing............................................ 6,652 6,437 12,447 11,930
Communication and delivery........................... 5,152 4,302 9,881 8,454
Deposit insurance.................................... 3,816 3,916 7,634 7,834
Trust customer charge................................ - 51,335 - 51,335
Other................................................ 25,706 22,853 48,185 44,420
-------- -------- -------- --------
Total noninterest expenses.......................... 143,039 189,739 281,281 328,357
-------- -------- -------- --------
Income (loss) before income taxes.................... 56,455 (7,478) 107,566 26,590
Applicable income taxes (benefit).................... 18,264 (7,980) 34,657 (1,333)
-------- -------- -------- --------
Net Income.......................................... $ 38,191 $ 502 $ 72,909 $ 27,923
======== ======== ======== ========
Earnings per Common Share (based on 6,667,490
average shares outstanding)
Net income........................................... $ 5.72 $ .08 $ 10.93 $ 4.19
======== ======== ======== ========
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</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Condition Harris Bankcorp, Inc. and Subsidiaries
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June 30 December 31 June 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............................................... $ 1,160,894 $ 1,399,781 $ 1,080,537
Money market assets:
Interest-bearing deposits at banks................................................... 619,569 757,227 686,861
Federal funds sold and securities purchased under agreement to resell................ 283,143 404,226 559,329
Trading account assets................................................................ 71,115 36,067 40,533
Portfolio securities:
Held to maturity (market value of $1,022,138 in 1995, $1,101,927
and $1,147,594 in 1994)............................................................. 1,006,002 1,107,659 1,126,611
Available for sale................................................................... 2,477,793 2,581,293 2,261,279
Loans, net of unearned income of $17,902 in 1995, $20,724 and $21,757 in 1994......... 9,070,573 8,229,254 7,905,980
Allowance for possible credit losses.................................................. (127,479) (124,734) (129,336)
Premises and equipment................................................................ 224,199 221,494 221,955
Customers' liability on acceptances................................................... 120,891 125,113 71,652
Other assets.......................................................................... 612,171 594,159 915,962
----------- ----------- -----------
Total assets........................................................................ $15,518,871 $15,331,539 $14,741,363
=========== =========== ===========
Liabilities
Deposits in domestic offices -- noninterest-bearing................................... 2,922,896 $ 3,222,043 $ 3,115,209
-- interest-bearing...................................... 4,299,288 4,214,273 4,532,570
Deposits in foreign offices -- noninterest-bearing.................................... 33,115 31,903 36,676
-- interest-bearing....................................... 2,499,040 2,451,513 2,434,136
----------- ----------- -----------
Total deposits...................................................................... 9,754,339 9,919,732 10,118,591
Federal funds purchased and securities sold under agreement to repurchase............. 2,607,212 2,632,167 1,863,901
Commercial paper outstanding.......................................................... 284,099 306,737 292,541
Short-term borrowings................................................................. 430,370 670,362 434,252
Senior notes.......................................................................... 456,100 - -
Acceptances outstanding............................................................... 120,891 125,113 71,652
Accrued interest, taxes and other expenses............................................ 136,799 126,723 91,794
Other liabilities..................................................................... 333,856 230,741 586,226
Long-term notes....................................................................... 298,879 298,810 298,744
----------- ----------- -----------
Total liabilities................................................................... 14,422,545 14,310,385 13,757,701
----------- ----------- -----------
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..................................................................... 841,526 796,617 734,914
Unrealized holding losses, net of deferred taxes of ($1,607) in 1995, ($21,535)
and ($5,580) in 1994................................................................. (2,437) (32,700) (8,489)
----------- ----------- -----------
Total stockholder's equity.......................................................... 1,096,326 1,021,154 983,662
----------- ----------- -----------
Total liabilities and stockholder's equity.......................................... $15,518,871 $15,331,539 $14,741,363
=========== =========== ===========
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</TABLE>
5
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<TABLE>
<CAPTION>
Consolidated Statement of Changes in Stockholder's Equity Harris Bankcorp, Inc. and Subsidiaries
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(in thousands) 1995 1994
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<S> <C> <C>
Balance at January 1.................................................................. $ 1,021,154 $ 1,017,672
Net income........................................................................... 72,909 27,923
Cash dividends....................................................................... (28,000) (27,018)
Net change in unrealized holding gains/losses on available for sale securities, net
of tax.............................................................................. 30,263 (34,915)
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Balance at June 30.................................................................... $ 1,096,326 $ 983,662
=========== ===========
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Consolidated Statement of Cash Flows Harris Bankcorp, Inc. and Subsidiaries
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Six Months Ended June 30
--------------------------
(in thousands) 1995 1994
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Operating Activities:
Net income............................................................................ $ 72,909 $ 27,923
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses.......................................................... 20,440 25,465
Depreciation and amortization........................................................ 23,867 24,954
Deferred tax benefit................................................................. (839) (2,255)
Gain on sales of portfolio securities................................................ (18,900) (3,240)
Trading account net cash (purchases) sales........................................... (35,048) 9,527
Net decrease (increase) in interest receivable....................................... 3,917 (12,011)
Net increase in interest payable..................................................... 6,630 1,863
Net (increase) decrease in loans held for resale..................................... (84,782) 225,106
Other, net........................................................................... 5,454 (20,934)
----------- -----------
Net cash (used) provided by operating activities.................................... (6,352) 276,398
----------- -----------
Investing Activities:
Net decrease (increase) in interest-bearing deposits at banks........................ 137,658 (159,381)
Net decrease (increase) in Federal funds sold and securities purchased under
agreement to resell................................................................. 121,083 (41,419)
Proceeds from maturities of securities held to maturity.............................. 397,334 335,184
Purchases of securities held to maturity............................................. (293,433) (734,423)
Proceeds from sales of securities available for sale................................. 1,427,291 44,467
Proceeds from maturities of securities available for sale............................ 2,448,553 2,339,867
Purchases of securities available for sale........................................... (3,705,232) (2,257,166)
Net increase in loans................................................................ (774,233) (454,934)
Proceeds from sales of premises and equipment........................................ 17,488 37,622
Purchases of premises and equipment.................................................. (39,222) (52,332)
Other, net........................................................................... 55,056 (46,111)
----------- -----------
Net cash used by investing activities............................................... (207,657) (988,626)
----------- -----------
Financing Activities:
Net (decrease) increase in deposits.................................................. (165,393) 742,720
Net (decrease) increase in Federal funds purchased and securities sold under
agreement to repurchase............................................................. (24,955) 2,839
Net decrease in commercial paper outstanding......................................... (22,638) (24,940)
Net decrease in short-term borrowings................................................ (239,992) (33,727)
Proceeds from issuance of senior notes............................................... 996,100 -
Repayment of senior notes............................................................ (540,000) -
Cash dividends paid.................................................................. (28,000) (27,018)
----------- -----------
Net cash (used) provided by financing activities.................................... (24,878) 659,874
----------- -----------
Net decrease in cash and demand balances due from banks............................. (238,887) (52,354)
Cash and demand balances due from banks at January 1................................ 1,399,781 1,132,891
----------- -----------
Cash and demand balances due from banks at June 30.................................. $ 1,160,894 $ 1,080,537
=========== ===========
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</TABLE>
6
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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. Certain reclassifications were made to
conform prior years' financial statements to the current year's presentation.
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 the Corporation 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 six months ended
June 30, totaled $268,484,000 and $157,968,000 in 1995 and 1994, respectively.
Cash income tax payments over the same periods totaled $35,468,000 and
$30,682,000, respectively.
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4. 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 mortgage-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 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. 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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5. 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
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7
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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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6. Foreign Exchange
Effective April 3, 1995, the Corporation and Bank of Montreal (BMO) agreed to
combine their U.S. foreign exchange activities (FX). Under this arrangement, FX
net profits 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.
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<TABLE>
<CAPTION>
Consolidated Statistical Summary Harris Bankcorp, Inc. and Subsidiaries
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Daily Average Balances (in millions) Quarter Ended June 30 Six Months Ended June 30
Average Rates Earned and Paid ----------------------------------------- -------------------------------------------
(fully taxable equivalent basis) 1995 1994 1995 1994
------------------ -------------------- --------------------- -------------------
Balances Rates Balances Rates Balances Rates Balances Rates
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Money market assets:
Interest-bearing deposits at
banks........................... $ 565 7.10% $ 775 4.13% $ 620 6.50% $ 691 3.97%
Federal funds sold and
securities purchased under
agreement to resell............. 359 6.04 626 3.69 367 6.00 641 3.37
------- ------- -------- -------
Total money market assets....... 924 6.07 1,401 3.94 987 6.31 1,332 3.68
Trading account assets............ 58 7.18 48 7.10 56 7.51 44 6.66
Portfolio securities:
Held to maturity:
U.S. Treasury and Federal agency. 607 5.83 330 6.40 616 6.05 272 6.44
State and municipal.............. 399 11.74 486 11.87 415 11.90 483 11.94
Other............................ 5 6.50 48 5.61 6 6.20 53 5.27
------- ------- -------- -------
Total held to maturity.......... 1,011 8.16 864 9.43 1,037 8.39 808 9.65
Available for sale:
U.S. Treasury and Federal agency. 2,035 6.29 2,077 5.27 2,163 6.25 2,098 5.00
Other............................ 187 6.50 158 4.30 166 6.36 117 3.93
------- ------- -------- -------
Total available for sale........ 2,222 6.30 2,235 5.19 2,329 6.25 2,215 4.95
Total portfolio securities.... 3,233 6.89 3,099 6.38 3,366 6.91 3,023 6.20
Loans, net of unearned income..... 8,634 8.96 7,640 7.53 8,416 8.95 7,557 7.24
------- ------- -------- -------
Total interest-earning assets... 12,849 8.27 12,188 6.82 12,825 8.20 11,956 6.58
------- ------- -------- -------
Cash and demand balances due from
banks............................ 1,163 1,124 1,180 1,161
Other assets...................... 961 889 893 789
------- ------- -------- -------
Total assets.................... $14,973 $14,201 $14,898 $13,906
======= ======= ======== =======
Liabilities and Stockholder's
Equity
Interest checking deposits and
money market accounts............ $ 1,632 3.20 $ 1,863 2.47 $ 1,647 3.18 $ 1,890 2.38
Savings deposits and certificates. 2,440 5.03 2,157 3.58 2,387 4.87 2,159 3.54
Other time deposits............... 658 6.08 810 3.99 589 6.05 670 3.80
Foreign office time deposits...... 2,352 6.14 2,055 3.95 2,455 6.09 1,995 3.64
------- ------- -------- -------
Total interest-bearing deposits. 7,082 5.08 6,885 3.44 7,078 5.00 6,714 3.27
Other short-term borrowings....... 2,648 5.78 2,581 3.74 2,725 5.68 2,468 3.41
Short-term senior notes........... 428 6.16 -- -- 361 6.18 -- --
Long-term notes................... 299 7.80 299 6.25 299 7.76 299 6.07
------- ------- -------- -------
Total interest-bearing
liabilities.................... 10,457 5.38 9,765 3.60 10,463 5.30 9,481 3.40
Noninterest-bearing deposits...... 2,799 2,861 2,819 2,925
Other liabilities................. 641 576 560 494
Stockholder's equity.............. 1,076 999 1,056 1,006
------- ------- -------- -------
Total liabilities and
stockholder's equity........... $14,973 $14,201 $14,898 $13,906
======= ======= ======== =======
Net interest margin (related to
average interest-earning assets). 3.89% 3.93% 3.86% 3.88%
==== ==== ==== ====
</TABLE>
- -------------------------------------------------------------------------------
8
<PAGE>
Financial Review Harris Bankcorp, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Second Quarter 1995
Compared With
Second Quarter 1994
- -------------------------------------------------------------------------------
Summary
The Corporation's second quarter 1995 net income was $38.2 million, up
substantially from $.5 million in the second quarter of 1994. Second quarter
1994 results were significantly reduced due to the Corporation'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. As a result, the Corporation recorded a pre-tax charge of $51.3 million as
a noninterest expense. Excluding this item, second quarter 1995 net income would
have risen 13% from the prior year's second quarter.
Net interest income on a fully taxable equivalent ("FTE") basis was $124.8
million, up 4% from $119.6 million in the year-ago quarter, reflecting a 4%
increase in average earning assets. Net interest margin decreased slightly to
3.89% from 3.93% in the second quarter of 1994. Noninterest income rose $10.8
million, or 13%. In 1995, the Corporation realized a net gain of $16.8 million
from transactions in portfolio securities compared to nominal gains in the
second quarter one year earlier. Second quarter 1994 noninterest income included
$5.9 million of gains from the sales of equity securities. In the current
quarter, revenue from money market and bond trading activities improved by $.7
million while charge card fees rose by $1.5 million compared to second quarter
1994. Foreign exchange revenue declined by $2.1 million. Noninterest expenses
fell 25% to $143.0 million from the second quarter of 1994 because of the
aforementioned securities lending charge. Excluding this item, second quarter
1995 noninterest expenses increased by 3%. Income taxes rose $26.2 million
during the current quarter,primarily because of higher pretax income.
The Corporation's annualized returns on average assets and equity were 1.02%
and 14.24%, respectively, for second quarter 1995. Disregarding the effect of
the charge in the Securities Lending unit, 1994 returns on average assets and
equity would have been approximately .96% and 13.59%, respectively.
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 June 30 Six Months Ended June 30
---------------------- -------------------------
(in thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income....................................... $260,063 $201,349 $512,359 $ 379,033
Fully taxable equivalent adjustment................... 4,960 6,005 10,399 11,834
-------- -------- -------- ---------
Interest income (fully taxable equivalent basis)..... 265,023 207,354 522,758 390,867
Interest expense...................................... 140,232 87,723 275,114 159,831
-------- -------- -------- ---------
Net interest income (fully taxable equivalent basis). $124,791 $119,631 $247,644 $ 231,036
======== ======== ======== =========
Increase (decrease) due to change in:
Volume............................................... $ 6,391 $ 6,892 $ 17,723 $ 13,708
Rate................................................. (1,231) (2,602) (1,115) (13,736)
-------- -------- -------- ---------
Total increase (decrease) in net interest income.... $ 5,160 $ 4,290 $ 16,608 $ (28)
======== ======== ======== =========
</TABLE>
Second quarter net interest income on an FTE basis was $124.8 million, up 4%
from $119.6 million in the second quarter 1994. Average earning assets increased
5% or $661 million and net interest margin, the other principal determinant of
net interest income, decreased from 3.93% to 3.89% in the current quarter.
Average loans rose $994 million, or 13%, partially offset by a decrease in
total money market assets of $477 million or 34%. Loan categories with the most
significant growth over the prior year were commercial, charge card, and real
estate which increased by $628 million, $224 million, and $146 million,
respectively. Average portfolio securities were up 4%, or $134 million,
reflecting increased holdings of Federal agency securities and modest declines
in other major portfolio categories.
- -------------------------------------------------------------------------------
9
<PAGE>
- -------------------------------------------------------------------------------
Funding for this asset growth came primarily from short-term senior notes
issued by Harris Trust and Savings Bank and wholesale foreign time deposits
which increased by an average of $428 million and $297 million respectively.
The Corporation's consolidated net interest margin declined to 3.89% from
3.93% in the same quarter last year. Contributing to the decrease in net
interest margin were the narrowed relationships between short and longer term
interest rates, relatively lower levels of noninterest-bearing supporting funds
and sales of portfolio securities where proceeds were reinvested at slightly
lower yields. This was somewhat offset by an improved mix of earning assets
resulting from the aforementioned loan growth.
<TABLE>
<CAPTION>
Average Earning Assets--Net Interest Margin
Daily Average Balances (in millions) Quarter Ended June 30 Six Months Ended June 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>
Interest-earning assets................. $12,849 8.27% $12,188 6.82% $12,825 8.20% $11,956 6.58%
======= ======= ======= =======
Interest-bearing liabilities............ $10,457 5.38 $ 9,765 3.60 $10,463 5.30 $ 9,481 3.40
Noninterest-bearing sources of funds.... 2,392 -- 2,423 -- 2,362 -- 2,475 --
------- ------- ------- -------
Total supporting liabilities.......... $12,849 4.38 $12,188 2.89 $12,825 4.34 $11,956 2.70
======= ======= ======= =======
Net interest margin (related to average
interest-earning assets).............. 3.89% 3.93% 3.86% 3.88%
==== ==== ==== ====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest Income
<TABLE>
<CAPTION> Quarter Six Months
Ended June 30 Increase (Decrease) Ended June 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.......... $36,346 $37,645 $(1,299) (3) $ 75,091 $ 75,270 $ (179) -
Trading account............ 679 (60) 739 + 2,612 (1,268) 3,880 +
Foreign exchange........... 3,169 5,236 (2,067) (39) 7,726 11,454 (3,728) (33)
Charge card................ 10,467 8,944 1,523 17 19,712 17,005 2,707 16
Service fees and charges... 17,538 18,513 (975) (5) 35,191 37,509 (2,318) (6)
Securities gains........... 16,838 92 16,746 + 18,900 3,240 15,660 +
Other...................... 6,404 10,300 (3,896) (38) 12,810 18,000 (5,190) (29)
------- ------- ------- -------- -------- -------
Total noninterest income. $91,441 $80,670 $10,771 13 $172,042 $161,210 $10,832 7
======= ======= ======= === ======== ======== ======= ===
</TABLE>
Noninterest income for the second quarter was $91.4 million, an increase of
$10.8 million or 13% from the second quarter of 1994. In the current quarter,
the Corporation realized a net gain of $16.8 million from transactions in
portfolio securities, compared to nominal gains in the second quarter one year
earlier. During both May and June 1995, 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. Other noninterest income decreased $3.9 million from the
year-ago quarter, when the Corporation realized $5.9 million of gains from sales
of equity securities.
Foreign exchange revenue was $3.2 million, down $2.1 million or 39% from the
second quarter of 1994. However, beginning in the second quarter of 1995, under
a new profit sharing arrangement with Bank of Montreal, the Corporation's
foreign exchange revenues are now reported net of expenses. In the current
quarter, revenue from trading activities improved by $.7 million compared to the
second quarter a year ago. Service fees and charges were down 5% from the second
quarter of 1994. Charge card income was $10.5 million, an increase of $1.5
million or 17% from the previous year, while trust and investment management
fees declined by 3%.
- -------------------------------------------------------------------------------
10
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses And Income Taxes
Quarter Six Months
Ended June 30 Increase (Decrease) Ended June 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....... $ 62,611 $ 62,660 $ (49) - $125,151 $123,474 $ 1,677 1
Pension, profit sharing and other
employee benefits.................... 16,703 16,949 (246) (1) 34,404 37,861 (3,457) (9)
Net occupancy......................... 12,011 11,334 677 6 23,365 22,400 965 4
Equipment............................. 10,388 9,953 435 4 20,214 20,649 (435) (2)
Marketing............................. 6,652 6,437 215 3 12,447 11,930 517 4
Communication and delivery............ 5,152 4,302 850 20 9,881 8,454 1,427 17
Deposit insurance..................... 3,816 3,916 (100) (3) 7,634 7,834 (200) (3)
Trust customer charge................. - 51,335 (51,335) + - 51,335 (51,335) +
Other................................. 25,706 22,853 2,853 12 48,185 44,420 3,765 8
-------- -------- -------- -------- -------- --------
Total noninterest expenses........... $143,039 $189,739 $(46,700) (25) $281,281 $328,357 $(47,076) (14)
======== ======== ======== ======== ======== ========
Provision (benefit) for income taxes.. $ 18,264 $ (7,980) $ 26,244 + $ 34,657 $ (1,333) $ 35,990 +
======== ======== ======== === ======== ======== ======== ===
</TABLE>
Noninterest expenses for the second quarter totaled $143.0 million, a decrease
of $46.7 million or 25% from the second quarter of 1994. In the second quarter
of 1994, the Corporation recorded a $51.3 million charge 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 item, noninterest expenses would have increased approximately
3% from the previous year.
Employment expenses totaled $79.3 million, virtually unchanged from the second
quarter of 1994. Other noninterest expenses increased by $2.9 million or 12%
while communication and delivery expenses reflected an increase of $.9
million. Equipment and net occupancy costs increased by $.4 million and $.7
million, respectively. Marketing expenses were up $.2 million from the second
quarter of 1994 while costs of deposit insurance decreased slightly.
The Corporation recorded an income tax expense for the current quarter of
$18.3 million, an increase of $26.2 million from the $8.0 million income tax
benefit recorded in second quarter 1994. In addition to higher pretax income in
the current quarter, 1994 tax expenses were lower due to state tax benefits
recognized from prior years.
- --------------------------------------------------------------------------------
Capital Position
The Corporation's total equity capital at June 30, 1995 was $1.10 billion,
compared with $1.02 billion and $984 million at December 31, 1994 and June 30,
1994, respectively. During the preceding twelve months, the Corporation declared
dividends of $36 million.
U.S. banking regulators 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. The guidelines specify minimum ratios
for Tier 1 capital to risk-weighted assets of 4% and total regulatory 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 11.80%, respectively, at June 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 7.21% for the quarter
ended June 30, 1995 compared to 6.84% 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 June 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 June 30, 1995, the Corporation's intangible assets totaled
$43.0 million, including approximately $18.8 million of intangibles excluded
under capital guidelines. The Corporation's tangible Tier 1 leverage ratio
(which excludes all intangibles) was 7.06% for the second quarter of 1995.
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
June 30 December 31 June 30
(dollars in thousands) 1995 1994 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period)......................................... $15,518,871 $15,331,539 $14,741,363
=========== =========== ===========
Average assets (quarter)............................................. $14,972,871 $14,668,264 $14,200,523
=========== =========== ===========
Risk-based on-balance sheet assets................................... $ 9,974,004 $ 9,078,759 $ 9,113,236
Risk-based off-balance sheet assets.................................. 2,778,447 2,580,005 2,573,280
----------- ----------- -----------
Total risk-based assets (based on regulatory accounting principles).. $12,752,451 $11,658,764 $11,686,516
=========== =========== ===========
Tier 1 capital....................................................... $ 1,078,202 $ 1,033,481 $ 970,504
Supplementary capital................................................ 426,050 423,254 427,788
----------- ----------- -----------
Total capital........................................................ $ 1,504,252 $ 1,456,735 $ 1,398,292
=========== =========== ===========
Tier 1 leverage ratio................................................ 7.21% 7.03% 6.84%
Risk-based capital ratios
Tier 1.............................................................. 8.45% 8.86% 8.30%
Total............................................................... 11.80% 12.49% 11.97%
- -------------------------------------------------------------------------------------------------------------------
Nonperforming Assets
June 30 March 31 June 30
(dollars in thousands) 1995 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Nonaccrual loans..................................................... $65,478 $79,377 $ 90,104
Restructured loans................................................... 2,149 2,828 2,307
------- ------- --------
Total nonperforming loans........................................... 67,627 82,205 92,411
Other assets received in satisfaction of debt........................ 3,246 7,108 13,468
------- ------- --------
Total nonperforming assets.......................................... $70,873 $89,313 $105,879
======= ======= ========
Nonperforming loans to total loans (end of period)................... .75% .98% 1.17%
Nonperforming assets to total loans (end of period).................. .78% 1.15% 1.34%
90-day past due loans still accruing interest........................ $24,644 $40,146 $ 28,639
</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.
- --------------------------------------------------------------------------------
12
<PAGE>
- -------------------------------------------------------------------------------
Nonperforming assets at June 30, 1995 totaled $71 million, or .78% of total
loans, down from $89 million or 1.15% of total loans at March 31, 1995 and also
down from $106 million or 1.34% of loans a year ago.
Interest shortfall for the quarter ended June 30, 1995 was $0.5 million
compared to $1.3 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 flows 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) June 30, 1995 related allowance no related allowance Loans
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance.................................................... $45,507 $22,120 $67,627
Related allowance.......................................... 12,058 -- 12,058
------- ------- -------
Balance, net of allowance.................................. $33,449 $22,120 $55,569
======= ======= =======
Quarter Ended Six Months Ended
(dollars in thousands) June 30, 1995 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------
Average impaired loans........................................ $79,681 $81,784
Total interest income on impaired loans....................... $ 694 $ 967
Interest income on impaired loans recorded on a cash basis.... $ 640 $ 833
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Allowance For Possible Credit Losses
Quarter Ended June 30 Six Months Ended June 30
---------------------- ----------------------------
(dollars in thousands) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period.............. $127,432 $138,779 $124,734 $131,676
-------- -------- -------- --------
Charge-offs............................... (18,352) (25,512) (31,318) (35,509)
Recoveries................................ 6,621 4,034 13,623 7,704
-------- -------- -------- --------
Net charge-offs.......................... (11,731) (21,478) (17,695) (27,805)
Provision charged to operations........... 11,778 12,035 20,440 25,465
-------- -------- -------- --------
Balance at June 30........................ $127,479 $129,336 $127,479 $129,336
======== ======== ======== ========
Net charge-offs as a percentage of
provision charged to operations.......... 99% 178% 87% 109%
Allowance for possible credit losses
to nonperforming loans (period-end)...... 189% 140%
Allowance for possible credit losses
to total loans outstanding (period-end).. 1.41% 1.64%
- --------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
- -------------------------------------------------------------------------------
The Corporation's provision for credit losses for the current quarter was $11.8
million, down 2.1% from $12.0 million in last year's second quarter. Net charge-
offs also declined from $21.5 million to $11.7 for the current quarter, making
net charge-offs on a year-to-date basis $17.7 million compared to $27.8 million
in the same 1994 period. The decrease in second quarter net charge-offs was
primarily attributable to large commercial loan charge-offs in the second
quarter of 1994 compared to the current quarter. For the second quarter of 1995,
net charge-offs related to charge card and commercial loans were $6.6 million
and $4.7 million, respectively, compared to $5.3 million and $13.7 million,
respectively, for the second quarter of 1994.
At June 30, 1995, the allowance for possible credit losses was $127 million,
equal to 1.41% of total loans outstanding, down from $129 million or 1.64% of
total loans one year ago; however, the allowance as a percentage of
nonperforming loans increased from 140% to 189% at June 30, 1995.
- -------------------------------------------------------------------------------
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 credit demand based upon knowledge of
major customers and overall economic conditions. Appropriate responses to
changes in these conditions preserve customer confidence in the ability of the
Corporation to continually serve their credit and deposit withdrawal
requirements. Some level of liquidity is provided by maintaining assets which
mature within a short timeframe or could be sold quickly without significant
loss. The Corporation's liquid assets include cash and demand balances due from
banks, money market assets, portfolio securities available for sale and trading
account assets. Liquid assets represented approximately 30% of the Corporation's
total assets and amounted to $4.61 billion at June 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 which terminates on December 20, 1995. This agreement
allows for extensions of its termination date, if requested by the Corporation
and approved by the nonaffiliated banks. The Corporation did not request an
extension of this agreement during the first six months of 1995. There were no
borrowings under this credit facility in 1995 or 1994.
Total deposits averaged $9.88 billion in the second quarter of 1995, an
increase of $135 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 remained essentially unchanged from the prior year. Core deposits
represented approximately 53% of average supporting liabilities in the second
quarter of 1995, down from 56% one year ago.
Average money market assets in the second quarter of 1995 decreased $477
million from the same quarter last year. These assets represented 7% of average
earning assets in 1995, compared to 11% for the prior year. Average money market
liabilities increased 3% to $2.65 billion this quarter from $2.58 billion in the
same quarter last year, primarily the result of increases in securities sold
under repurchase agreements partially offset by a decrease in commercial paper
outstanding.
In December 1994, Harris Trust and Savings Bank ("HTSB"), a wholly owned
subsidiary of the Corporation, distributed an offering circular which described
its capability to offer, 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
as selected by the initial purchaser and agreed to by HTSB. The notes are being
offered and sold only to institutional investors and are subordinated to
deposits and rank pari passu with all other senior unsecured indebtedness of
HTSB. As of June 30, 1995, $456.1 million of short-term notes were outstanding.
- -------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1995 Compared With 1994
Net income for the six months ended June 30, 1995 was $72.9 million, a $45
million or 161% increase from 1994 earnings of $27.9 million. 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 19%.
Annualized returns on average assets and equity for the 1995 period were 1.02%
and 14.24%, respectively, compared to comparable 1994 returns of .96% and
13.59%, respectively, adjusted for the securities lending charge. Actual 1994
returns for the six-month period were .40% return on assets and 5.60% return on
equity.
Net interest income on a fully taxable equivalent basis was $247.6 million in
the current period, an increase of $16.6 million or 7% from the comparable 1994
period. Average earning assets increased 7% to $12.82 billion from $11.96
billion a year ago led by increases in domestic loans. Net interest margin
declined slightly to 3.86% from 3.88% in 1994.
Average loans for the period increased by 11% to $8.42 billion from $7.56
billion in 1994. Most domestic loan categories rose from the year-ago levels.
Commercial loans, charge card outstandings, installment loans and real estate
mortgages grew $470 million, $197 million, $122 million and $114 million,
respectively. Portfolio securities increased $343 million to $3.37 billion while
securities held in trading accounts increased $12 million from a year ago. Money
market assets declined $345 million, or 26% compared to the similar 1994 period.
Increases in interest-bearing liabilities funded the Corporation's asset growth.
Interest-bearing deposits, primarily foreign office time deposits, rose by $364
million or 5% from the prior year, while average short-term borrowings increased
$618 million or 25% primarily as a result of the issuance of unsecured short-
term senior notes of Harris Trust and Savings Bank. 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, decreased $90 million and represented 18.2% of supporting liabilities,
down from 20.7% in 1994.
Noninterest income totaled $172.0 million, an increase of $10.8 million or 7%
from the 1994 six-month period. In the current period, net gains from sales of
debt portfolio securities amounted to $18.9 million compared to $3.2 million in
the prior year. Other noninterest income declined by $5.2 million from the six-
month period ended June 30, 1994, when the Corporation recognized $5.9 million
of gains from the sales of equity securities.
Noninterest expense totaled $281.3 million, a decrease of $47.1 million from
the same period in 1994. Increased levels of noninterest expense for the first
half of 1994 resulted from the aforementioned charge relating to activity in the
Securities Lending unit. Excluding the effect of this special item, noninterest
expense would have increased by 2% from 1994.
Income tax expense increased $36.0 million primarily because of higher pretax
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 six
months of 1995 was $20.4 million, down $5.0 million or 20% from 1994. Net loan
charge-offs totaled $17.7 million in 1995 compared to $27.8 million for 1994.
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
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, 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
University of Illinois
Richard M. Jaffe
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
(three branches)
Harris Bank Barrington, N.A.
Barrington, Illinois
(six 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
(five branches)
Harris Bank Wilmette, N.A.
Wilmette, Illinois
Harris Bank Winnetka, N.A.
Winnetka, Illinois
(one branch)
Harris Trust Bank of Arizona
Scottsdale, Arizona
(two branches)
- ------------------------------
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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