<PAGE> 1
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 March 31, 1996
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 May 14, 1996 the Corporation had 6,667,490 shares of $8 par value common
stock outstanding.
<PAGE> 2
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------------------
1996 1995 Change
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income............................................................ $123,143 $117,414 5%
Net interest income (fully taxable equivalent)................................. 128,699 122,853 5
Provision for credit losses.................................................... 13,523 8,662 56
Noninterest income............................................................. 80,485 80,601 --
Noninterest expenses........................................................... 131,761 138,242 (5)
Net income..................................................................... 39,219 34,718 13
Cash dividends................................................................. 19,408 14,000 39
SELECTED RATIOS
Return on average common stockholder's equity.................................. 15.03% 13.59% 144bp
Return on average assets....................................................... 0.98 0.95 3
Tier 1 risk-based capital ratio................................................ 8.19 8.80 (61)
Total risk-based capital ratio................................................. 11.82 12.36 (54)
Tier 1 leverage ratio.......................................................... 6.96 7.12 (16)
Allowance for possible credit losses to total loans (period-end)............... 1.37 1.52 (15)
DAILY AVERAGE BALANCES (IN MILLIONS)
Loans, net of unearned income.................................................. $ 9,479 $ 8,195 16%
Portfolio securities........................................................... 3,904 3,465 12
Money market assets............................................................ 588 1,051 (44)
Total interest-earning assets.................................................. 14,014 12,764 10
Total assets................................................................... 16,095 14,822 9
Deposits....................................................................... 10,643 9,913 7
Short-term borrowings.......................................................... 3,132 2,803 12
Common stockholder's equity.................................................... 958 1,036 (8)
BALANCES AT QUARTER-END (IN MILLIONS)
Loans, net of unearned income.................................................. $ 9,783 $ 8,370 17%
Allowance for possible credit losses........................................... 134 127 6
Portfolio securities........................................................... 4,352 3,283 33
Total assets................................................................... 16,919 15,062 12
Deposits....................................................................... 11,116 9,710 14
Common stockholder's equity.................................................... 942 1,063 (11)
Total stockholder's equity..................................................... 1,122 1,063 6
</TABLE>
1
<PAGE> 3
REPORT FROM MANAGEMENT
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Harris Bankcorp's earnings for the quarter ended March 31, 1996 were
$39.2 million, an increase of 13% from the same quarter a year
earlier when net income was $34.7 million. The earnings improvement
was attributed to strong loan growth, continued cost control, and an
after-tax gain of $2.4 million from the sale of the Corporation's
securities custody and related trustee services business for large
institutions.
Annualized return on average common stockholder's equity was
15.03% in the current quarter compared to 13.59% a year ago, while
the annualized first quarter 1995 return on average assets was 0.98%
compared to 0.95% in first quarter 1995. Excluding the effect of the
December 1995 capital restructuring previously reported, return on
common equity would have been 13.66%.
Net interest income on a fully taxable equivalent basis was
$128.7 million, up $5.8 million or 5% from first quarter last year.
Average earning assets rose 10% to $14.0 billion from $12.8 billion
in first quarter 1995, primarily attributable to an increase of $1.3
billion or 16% in average loans. Commercial lending was the strongest
contributor to this growth. Net interest margin declined to 3.69%
from 3.90% in the same quarter last year, reflecting relatively lower
levels of noninterest-bearing deposits, a reduction in
higher-yielding tax advantaged municipal securities, and the
relationship in the markets between short and longer term rates.
First quarter noninterest income of $80.5 million was virtually
unchanged from the same quarter last year. In 1996, the Corporation
recorded a $4.0 million gain from the sale of its securities custody
and related trustee services business for large institutions.
Primarily as a result of this sale, trust fees declined $8.9 million
from first quarter 1995. Charge card fees rose 8%, while foreign
exchange income and revenue from money market and bond trading
activity declined. In addition, the Corporation realized a net gain
of $3.4 million from sales of debt securities in 1996, compared to a
$2.0 million net gain in the first quarter one year earlier.
First quarter noninterest expenses of $131.8 million were down
$6.5 million or 5% from first quarter last year, primarily due to
reduced FDIC insurance premiums and lower ongoing costs resulting
from the sale of the Corporation's securities custody and related
trustee services business for large institutions.
Income tax expense rose by $2.7 million reflecting higher pretax
income.
The first quarter 1996 provision for credit losses of $13.5
million was up from $8.7 million in the first quarter of 1995. Net
loan charge-offs during the current quarter were $9.1 million
compared to $6.0 million in the same period last year, with the
difference primarily attributable to higher recoveries on real estate
loans in first quarter 1995.
Nonperforming assets at March 31, 1996 totaled $54.2 million or
0.6% of total loans, compared to $55.0 million or 0.6% at December
31, 1995, and $89 million or 1.1% a year ago. At March 31, 1996, the
allowance for possible credit losses was $134 million, equal to 1.4%
of loans outstanding, compared to $127 million or 1.5% at the end of
first quarter 1995. As a result, the ratio of the allowance for
possible credit losses to non-performing assets increased from 143%
at March 31, 1995, to 246% at March 31, 1996.
At March 31, 1996 equity capital of Harris Bankcorp amounted to
$1.12 billion, up from $1.06 billion one year earlier. The regulatory
leverage capital ratio was 6.96% for the first quarter of 1996
compared to 7.12% in the same quarter of 1995. 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 8.19% and 11.82%, respectively,
compared to respective ratios of 8.80% and 12.36% at March 31, 1995.
Regulatory minimums for these capital measures are 4% and 8%. At
March 31, 1996, the Corporation's equity capital included $180
million of preferred stock.
On April 18, 1996, Daryl F. Grisham, President and Chief
Executive Officer of Parker House Sausage Company, retired from
Harris Bankcorp's Board of Directors after a decade and a half of
outstanding service. Respected and admired for his energetic
leadership within the Corporation and throughout our community, Daryl
has been a true ambassador for the Harris. On the same date, Matthew
W. Barrett, Chairman and Chief Executive Officer of Bank of Montreal,
also concluded his distinguished tenure on the Board. A Harris
director
2
<PAGE> 4
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since 1988, Matt's penetrating vision of the first bank with a truly
North American base has inspired his fellow directors and many
friends at the Harris.
Harris Trust and Savings Bank ("HTSB"), the Corporation's lead
bank subsidiary, has signed a definitive agreement to purchase 54
branches of Household Bank, f.s.b., a wholly-owned subsidiary of
Household International, Inc. HTSB is acquiring 54 Household Bank
branches throughout Chicagoland, with $2.9 billion of deposits and
$300 million of consumer loans. The purchase price is $277 million.
Household Bank has a superb team of employees and an outstanding
network of high-quality facilities and locations, many in strong and
fast growing markets--and with minimal overlap with Harris. The
acquisition is subject to regulatory approvals and is expected to
close this summer.
The branches, which will operate under the Harris name, include 9
City of Chicago locations and 45 suburban locations. The acquisition
expands the number of Harris-affiliated locations (including
facilities of banking institutions owned by Harris Bankmont, Inc.) to
140 from 86 currently opened or under construction.
This acquisition gives us a comprehensive Chicagoland banking
network and allows us to reach our goal of tripling the number of
Harris locations well ahead of time. It brings us into many new
communities and gives us the opportunity to serve thousands of new
customers. All of us at Harris welcome Household Bank customers and
employees to our growing Harris family.
/s/ Alan G. McNally
Alan G. McNally
Chairman of the Board and
Chief Executive Officer April 29, 1996
3
<PAGE> 5
CONSOLIDATED STATEMENT OF INCOME Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands except per share data) 1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees.................................................................... $198,679 $180,501
Money market assets:
Deposits at banks...................................................................... 5,121 9,970
Federal funds sold and securities purchased under agreement to resell.................. 3,357 5,513
Trading account.......................................................................... 945 849
Securities available for sale:
U.S. Treasury and Federal agency....................................................... 52,670 35,128
Other.................................................................................. 5,727 2,064
Securities held to maturity:
U.S. Treasury and Federal agency....................................................... -- 9,643
State and municipal.................................................................... -- 8,486
Other.................................................................................. -- 142
-------- --------
Total interest income.................................................................. 266,499 252,296
-------- --------
INTEREST EXPENSE
Deposits................................................................................. 91,713 85,836
Short-term borrowings.................................................................... 39,413 38,700
Senior notes............................................................................. 5,642 4,574
Long-term notes.......................................................................... 6,588 5,772
-------- --------
Total interest expense................................................................. 143,356 134,882
-------- --------
NET INTEREST INCOME...................................................................... 123,143 117,414
Provision for credit losses.............................................................. 13,523 8,662
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.................................... 109,620 108,752
-------- --------
NONINTEREST INCOME
Trust and investment management fees..................................................... 29,789 38,745
Trading account.......................................................................... 1,000 1,933
Foreign exchange......................................................................... 3,535 4,557
Charge card.............................................................................. 9,966 9,245
Service fees and charges................................................................. 17,125 17,653
Securities gains......................................................................... 3,410 2,062
Other.................................................................................... 15,660 6,406
-------- --------
Total noninterest income............................................................... 80,485 80,601
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation.......................................................... 62,169 62,540
Pension, profit sharing and other employee benefits...................................... 16,188 17,701
Net occupancy............................................................................ 10,726 11,354
Equipment................................................................................ 9,800 9,826
Marketing................................................................................ 5,650 5,795
Communication and delivery............................................................... 5,331 4,729
Deposit insurance........................................................................ 16 3,818
Other.................................................................................... 21,881 22,479
-------- --------
Total noninterest expenses............................................................. 131,761 138,242
-------- --------
Income before income taxes............................................................... 58,344 51,111
Applicable income taxes.................................................................. 19,125 16,393
-------- --------
NET INCOME............................................................................. 39,219 34,718
Dividends on Preferred Stock............................................................. 3,408 --
-------- --------
Net Income Applicable to Common Stock.................................................... $ 35,811 $ 34,718
======== ========
EARNINGS PER COMMON SHARE (BASED ON 6,667,490 AVERAGE SHARES OUTSTANDING)
Net Income Applicable to Common Stock.................................................... $ 5.37 $ 5.21
======== ========
</TABLE>
4
<PAGE> 6
CONSOLIDATED STATEMENT OF CONDITION Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31 March 31
(in thousands except share data) 1996 1995 1995
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and demand balances due from banks................................. $ 1,071,854 $ 1,522,418 $ 1,115,794
Money market assets:
Interest-bearing deposits at banks.................................... 457,302 457,702 645,626
Federal funds sold and securities purchased under agreement to
resell.............................................................. 323,157 179,692 585,906
Portfolio securities:
Held to maturity (market value of $1,003,949 in 1995)................. -- -- 994,789
Available for sale.................................................... 4,352,333 3,389,967 2,287,788
Trading account assets.................................................. 39,577 98,638 23,908
Loans, net of unearned income of $14,272 in 1996, $16,091 and $19,036 in
1995.................................................................. 9,782,744 9,517,797 8,369,583
Allowance for possible credit losses.................................... (133,672) (129,259) (127,432)
Premises and equipment.................................................. 228,307 225,540 222,501
Customers' liability on acceptances..................................... 71,355 95,326 108,888
Other assets............................................................ 725,998 318,380 834,696
----------- ----------- -----------
TOTAL ASSETS...................................................... $ 16,918,955 $ 15,676,201 $ 15,062,047
=========== =========== ===========
LIABILITIES
Deposits in domestic offices - noninterest-bearing...................... $ 2,934,082 $ 3,003,088 $ 2,844,734
- interest-bearing........................... 5,173,895 4,859,939 4,200,131
Deposits in foreign offices - noninterest-bearing....................... 91,862 41,004 64,487
- interest-bearing............................. 2,915,794 2,324,751 2,600,218
----------- ----------- -----------
Total deposits.................................................... 11,115,633 10,228,782 9,709,570
Federal funds purchased and securities sold under agreement to
repurchase............................................................ 2,814,151 1,896,817 2,113,831
Commercial paper outstanding............................................ 244,085 292,022 260,557
Short-term borrowings................................................... 457,152 843,049 412,625
Senior notes............................................................ 443,000 478,000 500,000
Acceptances outstanding................................................. 71,355 95,326 108,888
Accrued interest, taxes and other expenses.............................. 160,916 143,580 138,437
Other liabilities....................................................... 126,407 188,897 455,937
Long-term notes......................................................... 363,989 363,952 298,844
----------- ----------- -----------
TOTAL LIABILITIES................................................. 15,796,688 14,530,425 13,998,689
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Series A Non-voting Preferred stock (no par value); authorized 1,000,000
shares; issued and outstanding 180 shares ($1,000,000 stated value)... 180,000 180,000 --
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....................................................... 701,279 681,468 817,335
Unrealized holding (losses) gains, net of deferred taxes of ($10,752) in
1996, $17,787 and ($7,381) in 1995.................................... (16,249) 27,071 (11,214)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY........................................ 1,122,267 1,145,776 1,063,358
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................ $16,918,955 $ 15,676,201 $ 15,062,047
=========== =========== ===========
</TABLE>
5
<PAGE> 7
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY Harris Bankcorp,
Inc. and Subsidiaries
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<TABLE>
<CAPTION>
(in thousands) 1996 1995
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<S> <C> <C>
BALANCE AT JANUARY 1.................................................................... $1,145,776 $1,021,154
Net income............................................................................ 39,219 34,718
Cash dividends-preferred stock........................................................ (3,408) --
Cash dividends-common stock........................................................... (16,000) (14,000)
Net change in unrealized holding gains/losses on available for sale securities, net of
tax................................................................................. (43,320) 21,486
---------- ----------
BALANCE AT MARCH 31..................................................................... $1,122,267 $1,063,358
========== ==========
</TABLE>
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CONSOLIDATED STATEMENT OF CASH FLOWS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended March 31
---------------------------
(in thousands) 1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................................ $ 39,219 $ 34,718
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for credit losses......................................................... 13,523 8,662
Depreciation and amortization, including intangibles................................ 11,440 11,834
Deferred tax benefit................................................................ (917) (1,342)
Gain on sales of portfolio securities............................................... (3,410) (2,062)
Trading account net sales........................................................... 59,061 12,159
Net decrease in interest receivable................................................. 5,356 3,968
Net increase in interest payable.................................................... 4,240 11,924
Net increase in loans held for resale............................................... (193,081) (87,051)
Other, net.......................................................................... (60,203) 15,377
----------- -----------
Net cash (used) provided by operating activities.................................. (124,772) 8,187
----------- -----------
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits at banks.................................. 400 111,601
Net increase in Federal funds sold and securities purchased under agreement to
resell............................................................................ (143,465) (181,680)
Proceeds from maturities of securities held to maturity............................. -- 222,778
Purchases of securities held to maturity............................................ -- (107,994)
Proceeds from sales of securities available for sale................................ 373,410 447,381
Proceeds from maturities of securities available for sale........................... 900,984 922,526
Purchases of securities available for sale.......................................... (2,305,222) (1,038,048)
Net increase in loans............................................................... (80,975) (66,245)
Proceeds from sales of premises and equipment....................................... 2,789 8,344
Purchases of premises and equipment................................................. (14,814) (18,741)
Other, net.......................................................................... (39,730) (45,681)
----------- -----------
Net cash (used) provided by investing activities.................................. (1,306,623) 254,241
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits................................................. 886,851 (210,162)
Net increase (decrease) in Federal funds purchased and securities sold under
agreement to repurchase........................................................... 917,334 (518,336)
Net decrease in commercial paper outstanding........................................ (47,937) (46,180)
Net decrease in short-term borrowings............................................... (385,897) (257,737)
Proceeds from issuance of senior notes.............................................. 602,286 500,000
Repayment of senior notes........................................................... (637,286) --
Cash dividends paid-preferred stock................................................. (3,408) --
Cash dividends paid-common stock.................................................... (16,000) (14,000)
Other, net.......................................................................... (335,112) --
----------- -----------
Net cash provided (used) by financing activities.................................. 980,831 (546,415)
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM BANKS........................... (450,564) (283,987)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1.............................. 1,522,418 1,399,781
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT MARCH 31............................... $ 1,071,854 $ 1,115,794
=========== ===========
</TABLE>
6
<PAGE> 8
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, 1995.
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 three months ended March 31, totaled
$139,116,000 and $122,958,000 in 1996 and 1995, respectively. Cash
income tax payments over the same periods totaled $5,981,000 and
$4,694,000, respectively.
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4. ACCOUNTING
CHANGES During the first quarter of 1996, the Corporation adopted Statement
of Financial Accounting Standards ("SFAS") No. 122, Accounting for
Mortgage Servicing Rights. The Statement applies to transactions in
which a mortgage banking enterprise acquires mortgage servicing
rights through the purchase or origination of mortgage loans and then
sells or securitizes those loans with servicing rights retained by
the seller. As required by the Statement, the rights to service
mortgage loans for others are recognized as separate assets by
allocating the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values. The capitalized mortgage
servicing rights are periodically evaluated for impairment based on
the fair value of those rights. During the first quarter of 1996, the
Corporation capitalized mortgage servicing rights. The risk
characteristics of the underlying loans used to stratify capitalized
mortgage servicing rights for purposes of measuring impairment are
loan type and repricing interval. The adoption of the Statement did
not have a material effect on the Corporation's financial position or
results of operations.
In January 1996, the Corporation adopted the Harris Bank Stock
Option Program under the Bank of Montreal Stock Option Plan. The plan
was established for certain designated executives and other employees
of the Corporation and affiliated companies in order to provide
incentive to attain long-term strategic goals and to attract and
retain services of employees. On February 26, 1996, the Corporation
granted 510,200 stock options with a ten-year term which are
exercisable only during the second five years of their term, assuming
cumulative performance goals are met. The stock options are
exercisable for Bank of Montreal common stock at a price of Canadian
$31.00 per share, equal to the market price on the date of grant
(equivalent to U.S. $22.55). The estimated grant-date fair value of
the options granted on February 26, 1996 was Canadian $5.79,
equivalent to U.S. $4.26. The Corporation has adopted SFAS No. 123,
Accounting for Stock-based Compensation. The adoption of the
Statement did not have a material effect on the Corporation's
financial position or results of operations.
7
<PAGE> 9
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5. FOREIGN
EXCHANGE
ACTIVITIES 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 are 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. This
agreement did not have a material impact on the Corporation's first
quarter 1996 or fiscal 1995 net income or financial position at March
31, 1996 or December 31, 1995.
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CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------------------------
Daily Average Balances (in millions) 1996 1995
Average Rates Earned and Paid ------------------ ------------------
(fully taxable equivalent basis) Balances Rates Balances Rates
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Money market assets:
Interest-bearing deposits at banks........................................ $ 341 6.03% $ 675 5.99%
Federal funds sold and securities purchased under agreement to resell..... 247 5.47 376 5.95
-------- --------
Total money market assets............................................... 588 5.80 1,051 5.98
Trading account assets...................................................... 71 6.57 53 7.87
Portfolio securities:
Held to maturity:
U.S. Treasury and Federal agency.......................................... -- -- 624 6.27
State and municipal....................................................... -- -- 431 12.05
Other..................................................................... -- -- 8 5.59
-------- --------
Total held to maturity.................................................. -- -- 1,063 8.61
Available for sale:
U.S. Treasury and Federal agency.......................................... 3,515 6.31 2,257 6.40
Other..................................................................... 361 9.00 145 6.13
-------- --------
Total available for sale................................................ 3,876 6.56 2,402 6.39
-------- --------
Total portfolio securities............................................ 3,876 6.56 3,465 7.08
Loans, net of unearned income............................................... 9,479 8.44 8,195 8.93
-------- --------
TOTAL INTEREST-EARNING ASSETS........................................... 14,014 7.80 12,764 8.18
Cash and demand balances due from banks..................................... 1,156 1,196
Other assets................................................................ 925 862
-------- --------
Total assets............................................................ $ 16,095 $ 14,822
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts........................ $ 1,777 3.25 $ 1,662 3.17
Savings deposits and certificates........................................... 2,538 4.98 2,332 4.69
Other time deposits......................................................... 828 5.47 520 6.00
Foreign office time deposits................................................ 2,548 5.47 2,559 6.05
-------- --------
Total interest-bearing deposits......................................... 7,691 4.80 7,073 4.92
Short-term borrowings....................................................... 3,132 5.06 2,803 5.59
Senior notes................................................................ 403 5.59 293 6.23
Long-term notes............................................................. 364 7.24 299 7.73
-------- --------
TOTAL INTEREST-BEARING LIABILITIES...................................... 11,590 4.97 10,468 5.22
Noninterest-bearing deposits................................................ 2,952 2,840
Other liabilities........................................................... 415 478
Stockholder's equity........................................................ 1,138 1,036
-------- --------
Total liabilities and stockholder's equity.............................. $ 16,095 $ 14,822
======= =======
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING ASSETS)............ 3.69% 3.90%
==== =====
</TABLE>
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt interest income has been restated to a comparable taxable level.
Beginning in 1996, the restatement includes a state tax component.
2. AVERAGE RATE ON PORTFOLIO SECURITIES
Yields on securities classified as available for sale are based on amortized
cost.
8
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FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST QUARTER 1996
COMPARED WITH
FIRST QUARTER 1995
- --------------------------------------------------------------------------------
SUMMARY The Corporation's first quarter 1996 net income was $39.2 million, an
increase of 13% from first quarter 1995 earnings of $34.7 million.
This improvement is attributable to strong loan growth, continued
cost control, and an after-tax gain of $2.4 million from the sale of
the Corporation's securities custody and related trustee services
business for large institutions.
Net interest income on a fully taxable equivalent ("FTE") basis
was $128.7 million, up $5.8 million or 5% from first quarter last
year, reflecting a 10% increase in average interest-earning assets
offset in part by a 21 basis point decline in net interest margin.
The provision for credit losses increased $4.9 million from $8.7
million in first quarter 1995 to $13.5 million currently. Noninterest
income was virtually unchanged from first quarter last year, while
noninterest expenses decreased from $138.2 million a year ago to
$131.8 million in the current quarter, primarily because of the
reduction of FDIC insurance premiums on deposits and lower ongoing
costs resulting from the aforementioned securities custody sale.
The Corporation's annualized returns on average assets and equity
were 0.98% and 15.03%, respectively, for first quarter 1996 compared
to returns of 0.95% and 13.59%, respectively, for the same quarter
last year. Excluding the effect of the December, 1995 capital
restructuring, return on equity would have been 13.66% for first
quarter 1996.
Additional commentary on the matters included in the above
summary are provided in the following sections of this quarterly
report.
- --------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended March
31
--------------------
(in thousands) 1996 1995
<S> <C> <C>
----------------------------------------------------------------------------------------------------
Interest income.............................................................. $266,499 $252,296
Fully taxable equivalent adjustment.......................................... 5,555 5,439
-------- --------
Interest income (fully taxable equivalent basis)........................... 272,054 257,735
Interest expense............................................................. 143,355 134,882
-------- --------
Net interest income (fully taxable equivalent basis)....................... $128,699 $122,853
======== ========
Increase (decrease) due to change in:
Volume..................................................................... $ 13,421 $ 9,984
Rate....................................................................... (7,575) 1,464
-------- --------
Total increase (decrease) in net interest income........................... $ 5,846 $ 11,448
======== ========
</TABLE>
First quarter net interest income on an FTE basis was $128.7 million,
up 5% from $122.9 million in first quarter 1995. Average earning
assets increased 10%, or $1.25 billion, and net interest margin, the
other principal determinant of net interest income declined to 3.69%
from 3.90% in the first quarter of the prior year.
Average loans rose $1.28 billion or 16% and represented the
majority of the increase in average earning assets. Loan categories
showing the most significant growth over prior year were commercial,
charge card and real estate which increased by $1.05 billion, $163
million, and $168 million, respectively. Average portfolio securities
were up 12%, or $411 million, reflecting greater holdings of Federal
agencies and declines in other major portfolio categories. Average
trading account securities increased $18 million, or 33%. Average
money market assets declined by $463 million or 44%
quarter-to-quarter.
Funding for this asset growth came primarily from short-term
borrowings, other time deposits, saving deposits and certificates,
senior notes and long-term notes which increased by an average of
$329 million,
9
<PAGE> 11
- --------------------------------------------------------------------------------
$308 million, $206 million, $110 million and $65 million,
respectively. Noninterest-bearing funds supporting earning assets
increased $128 million, but declined from 18% to 17%
quarter-to-quarter as a percentage of average supporting liabilities.
The Corporation's consolidated net interest margin declined to
3.69% from 3.90% in the same quarter last year. This decrease
reflects rate compression within certain asset categories, the
maturity of certain higher-yielding municipal bond holdings, the
relative decline in noninterest-bearing funds, sales and maturities
of portfolio securities where proceeds were reinvested at slightly
lower yields, and the narrowed relationship which existed in the
market between short and longer term rates (i.e. flattened yield
curve). This was somewhat offset by an improved mix of earning assets
resulting from the aforementioned loan growth.
AVERAGE EARNINGS ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter ended March 31
------------------------------------------------------
Daily Average Balances (in millions) 1996 1995
Average Rates Earned and Paid --------------------- ---------------------
(fully taxable equivalent basis) Balances Rates Balances Rates
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average interest-earning assets..................... $ 14,014 7.80% $ 12,764 8.18%
======= =======
Interest-bearing liabilities........................ 11,590 4.97 $ 10,468 5.22
Noninterest-bearing sources of funds................ 2,424 -- 2,296 --
------- -------
Total supporting liabilities...................... $ 14,014 4.11 $ 12,764 4.28
======= =======
Net interest margin (related to average
interest-earning assets).......................... 3.69% 3.90%
==== ====
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
Ended March 31 Increase (Decrease)
NONINTEREST ------------------- -------------------
INCOME (dollars in thousands) 1996 1995 Amount %
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust and investment management fees................. $29,789 $38,745 $(8,956) (23)
Trading account...................................... 1,000 1,933 (933) (48)
Foreign exchange..................................... 3,535 4,557 (1,022) (22)
Charge card.......................................... 9,966 9,245 721 8
Service fees and charges............................. 17,125 17,653 (528) (3)
Securities gains..................................... 3,410 2,062 1,348 65
Other................................................ 15,660 6,406 9,254 144
------- ------- -------
Total noninterest income............................. $80,485 $80,601 $ (116) --
======= ======= ======= ===
</TABLE>
Noninterest income for the first quarter was $80.5 million, virtually
unchanged from the first quarter of 1995. In the current quarter, the
Corporation recognized a $4.0 million gain on the sale of its
securities custody and related trustee services business for large
institutions. The gain was recorded net of certain anticipated costs
to exit this activity, including employee termination benefits,
amounting to approximately $13 million. Computation of the gain also
includes the Corporation's estimated obligation to service affected
customers on an interim basis. The Corporation has not recognized
contingent revenue to which it would be entitled in the event certain
levels of customer retention are achieved by the purchaser of the
business.
Charge card income totaled $10.0 million, an increase of $.7
million or 8% from the previous year. Other income, including loan
syndication and trade finance fees, gain from sale of mortgage loans,
income from bank-owned life insurance and the aforementioned gain on
sale of certain trust businesses, increased from $6.4 million to
$15.7 million in 1996.
10
<PAGE> 12
- --------------------------------------------------------------------------------
Trust and investment management revenue was $30.0 million, a
decrease of $9.0 million or 23% from the previous year, due primarily
to the aforementioned sale of a portion of the trust business.
Foreign exchange revenue was $3.5 million, a decline of $1.0 million
or 22% from the previous year. Trading account gains totaled $1.0
million, down $.9 million from the previous year when a gain of $1.9
million was reported. Service fees and charges totaled $17.1 million,
a decline of $.5 million or 3% primarily because of lower customer
charges resulting from the reduction of assessed FDIC insurance
premiums on deposits. The Corporation realized net gains of $3.4
million from sales of portfolio securities, compared to $2.1 million
during the first quarter of 1995.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended Increase
NONINTEREST March 31 (Decrease)
EXPENSES AND --------------------- ----------------
INCOME TAXES (dollars in thousands) 1996 1995 Amount %
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and other compensation......................... $ 62,169 $ 62,540 $ (371) (1)
Pension, profit sharing and other employee benefits..... 16,188 17,701 (1,513) (9)
Net occupancy........................................... 10,726 11,354 (628) (6)
Equipment............................................... 9,800 9,826 (26) --
Marketing............................................... 5,650 5,795 (145) (3)
Communication and delivery.............................. 5,331 4,729 602 13
Deposit insurance....................................... 16 3,818 (3,802) (100)
Other................................................... 21,881 22,479 (598) (3)
-------- -------- -------
Total noninterest expenses......................... $131,761 $138,242 $(6,481) (5)
======== ======== ======
Provision for income taxes.............................. $ 19,125 $ 16,393 $ 2,732 17
======== ======== ====== ====
</TABLE>
Noninterest expenses for the first quarter totaled $131.8 million, a
decrease of $6.5 million from the first quarter of 1995. Noninterest
expenses in the first quarter of 1996 have been reduced by
approximately $8.2 million, reflecting cost savings as a result of
the 1996 sale of securities custody and related trustee services
business for large institutions. Total expenses also declined because
of the $3.8 million decrease in FDIC insurance premiums.
Employment-related expenses totaled $78.4 million, a decrease of
$1.9 million or 2%, primarily reflecting savings as a result of the
aforementioned trust business sale and reductions in expense due to
revisions in employee benefit plan formulas in 1995. Net occupancy
expenses totaled $10.7 million, down $.6 million from the prior
year's first quarter, while equipment expenses were virtually
unchanged. Communication and delivery expenses totaled $5.3 million,
an increase of $.6 million or 13% from the prior year's first
quarter.
Income tax expense totaled $19.1 million, an increase of $2.7
million, primarily reflecting higher pretax income.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at March 31, 1996 was $1.12
billion, compared with $1.15 billion and $1.06 billion at December
31, 1995 and March 31, 1995, respectively. During the preceding
twelve months, the Corporation declared common and preferred
dividends of $264.7 million and $3.4 million, respectively. To
support continued business growth and expansion, Bankcorp increased
its capital base by $40 million, effective December 27, 1995. At the
same time, Bankcorp adjusted its capital structure to mirror the
capital mix of BMO and more closely resemble the Corporation's peer
group comprising other major U.S. and Chicago bank holding companies.
Bankcorp issued $180 million of preferred stock and an additional $65
million of long-term subordinated debt, purchased by Bankmont.
Concurrently, common equity was reduced by $205 million through the
declaration of a special dividend.
U.S. banking regulators have issued risk-based capital
guidelines, based on the international "Basle Committee" agreement,
which are applicable to all U.S. banks and bank holding companies.
- --------------------------------------------------------------------------------
11
<PAGE> 13
- --------------------------------------------------------------------------------
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 comprise at least 50 percent of total capital. Tier 2
capital basically includes subordinated debt (less a discount factor
during the five years prior to maturity), other types of preferred
stock and the allowance for possible 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 8.19% and 11.82%,
respectively, at March 31, 1996.
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 6.96% for the quarter ended March 31, 1996
compared to 7.12% for the year-ago quarter.
The Federal Deposit Insurance Corporation Improvement Act of 1991
contains several provisions that established five capital categories
for all FDIC-insured institutions ranging from "well capitalized" to
"critically undercapitalized." Based on those regulations effective
at March 31, 1996, 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, 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 to be deducted from
Tier 1 capital for purposes of risk-based and leverage capital ratio
calculations. At March 31, 1996, the Corporation's intangible assets
totaled $37 million, including approximately $16.9 million of
intangibles excluded under capital guidelines. The Corporation's
tangible Tier 1 leverage ratio (which excludes all intangibles) was
6.85% for the first quarter of 1996.
12
<PAGE> 14
- --------------------------------------------------------------------------------
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
March 31 December 31 March 31
(dollars in thousands) 1996 1995 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $16,918,955 $15,676,201 $15,062,047
=========== =========== ===========
Average assets (quarter).................................. $16,095,408 $16,325,680 $14,821,516
=========== =========== ===========
Risk-based on-balance sheet assets........................ $10,611,715 $10,336,569 $ 9,478,094
Risk-based off-balance sheet assets....................... 3,100,712 3,203,701 2,503,528
----------- ----------- -----------
Total risk-based assets (based on regulatory accounting
principles)............................................. $13,712,427 $13,540,270 $11,981,622
=========== =========== ===========
Tier 1 capital............................................ $ 1,121,318 $ 1,100,899 $ 1,054,765
Supplementary capital..................................... 497,339 492,911 425,968
----------- ----------- -----------
Total capital............................................. $ 1,618,657 $ 1,593,810 $ 1,480,733
=========== =========== ===========
Tier 1 leverage ratio..................................... 6.96% 6.77% 7.12%
Risk-based capital ratios:
Tier 1.................................................. 8.19% 8.14% 8.80%
Total................................................... 11.82% 11.79% 12.36%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING March 31 December 31 March 31
ASSETS (dollars in thousands) 1996 1995 1995
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans.............................................. $51,400 $50,503 $79,377
Restructured loans............................................ 1,987 2,059 2,828
------- ------- -------
Total nonperforming loans................................... 53,387 52,562 82,205
Other assets received in satisfaction of debt................. 846 2,470 7,108
------- ------- -------
Total nonperforming assets.................................. $54,233 $55,032 $89,313
======= ======= =======
Nonperforming loans to total loans (end of period)............ .55% .55% .98%
Nonperforming assets to total loans (end of period)........... .55 .58 1.07
======= ======= =======
90-day past due loans still accruing interest................. $30,126 $28,302 $40,146
======= ======= =======
</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 March 31, 1996 totaled $54.2 million, or
.55% of total loans, down slightly from $55.0 million or .58% of
loans at December 31, 1995 and also down from $89.3 million or 1.07%
of loans a year ago.
Interest shortfall for the quarter ended March 31, 1996 was $1.8
million, compared to $1.4 million one year earlier.
Impaired loans are defined as those where it is probable that
amounts due according to contractual terms, including principal and
interest, will not be collected. Both nonaccrual and certain
restructured loans meet this definition. 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
13
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,071,854
<INT-BEARING-DEPOSITS> 457,302
<FED-FUNDS-SOLD> 323,157
<TRADING-ASSETS> 39,577
<INVESTMENTS-HELD-FOR-SALE> 4,352,333
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 9,782,744
<ALLOWANCE> 133,672
<TOTAL-ASSETS> 16,918,955
<DEPOSITS> 11,115,633
<SHORT-TERM> 3,958,388
<LIABILITIES-OTHER> 287,323
<LONG-TERM> 363,989
0
180,000
<COMMON> 53,340
<OTHER-SE> 888,927
<TOTAL-LIABILITIES-AND-EQUITY> 16,918,955
<INTEREST-LOAN> 198,679
<INTEREST-INVEST> 58,397
<INTEREST-OTHER> 8,478
<INTEREST-TOTAL> 266,499
<INTEREST-DEPOSIT> 91,713
<INTEREST-EXPENSE> 143,356
<INTEREST-INCOME-NET> 123,143
<LOAN-LOSSES> 13,523
<SECURITIES-GAINS> 3,410
<EXPENSE-OTHER> 131,761
<INCOME-PRETAX> 58,344
<INCOME-PRE-EXTRAORDINARY> 39,219
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,219
<EPS-PRIMARY> 5.37
<EPS-DILUTED> 5.37
<YIELD-ACTUAL> 3.69
<LOANS-NON> 51,400
<LOANS-PAST> 30,126
<LOANS-TROUBLED> 1,987
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 129,259
<CHARGE-OFFS> 12,639
<RECOVERIES> 3,529
<ALLOWANCE-CLOSE> 133,672
<ALLOWANCE-DOMESTIC> 133,672
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
