<PAGE> 1
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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, 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 Indentification 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 14, 1996 the Corporation had 6,667,490 shares of $8 par value common
stock outstanding.
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<PAGE> 2
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
---------------------------- ----------------------------
1996 1995 Change 1996 1995 Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income...................................... $128,631 $119,831 7% $251,774 $237,245 6%
Net interest income (fully taxable equivalent)........... 134,545 124,791 8 263,244 247,644 6
Provision for credit losses.............................. 13,689 11,778 16 27,212 20,440 33
Noninterest income....................................... 80,117 91,441 (12) 160,602 172,042 (7)
Noninterest expenses..................................... 138,280 143,039 (3) 270,041 281,281 (4)
Net income............................................... 38,791 38,191 2 78,010 72,909 7
Cash dividends........................................... 15,763 14,000 13 35,170 28,000 26
- ------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity............ 15.04% 14.24% 80bp 15.04% 13.92% 112bp
Return on average assets................................. 0.92 1.02 (10) 0.95 0.99 (4)
Tier 1 risk-based capital ratio.......................... 8.20 8.45 (25)
Total risk-based capital ratio........................... 11.64 11.80 (16)
Tier 1 leverage ratio.................................... 7.12 6.96 16
Allowance for possible credit losses to total loans
(period-end)........................................... 1.36 1.41 (5)
- ------------------------------------------------------------------------------------------------------------------------
DAILY AVERAGE BALANCES (IN MILLIONS)
Loans, net of unearned income............................ $ 9,692 $ 8,634 12% $ 9,585 $ 8,416 14%
Portfolio securities..................................... 4,418 3,233 37 4,149 3,366 23
Money market assets...................................... 722 924 (22) 680 987 (31)
Total interest-earning assets............................ 14,914 12,849 16 14,490 12,825 13
Total assets............................................. 16,880 14,973 13 16,488 14,898 11
Deposits................................................. 10,864 9,881 10 10,754 9,897 9
Short-term borrowings.................................... 4,167 3,076 35 3,852 3,086 25
Common stockholder's equity.............................. 950 1,076 (12) 954 1,056 (10)
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BALANCES AT JUNE 30 (IN MILLIONS)
Loans, net of unearned income............................ $ 10,235 $ 9,071 13%
Allowance for possible credit losses..................... 139 127 9
Portfolio securities..................................... 4,386 3,484 26
Total assets............................................. 17,868 15,519 15
Deposits................................................. 12,666 9,754 30
Common stockholder's equity.............................. 1,222 1,096 11
Total stockholder's equity............................... 1,447 1,096 32
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</TABLE>
1
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REPORT FROM MANAGEMENT
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Harris Bankcorp, Inc.'s earnings for the second quarter of 1996 were
$38.8 million. This represented a 2% increase from the strong second
quarter of a year ago, which included a $16.8 million net gain from
portfolio securities transactions compared to a nominal gain in the
current quarter. The enhanced performance was primarily attributable
to sustained business growth and continued cost control.
Annualized return on average common stockholder's equity was
15.04% in the current quarter compared to 14.24% a year earlier,
while the annualized second quarter 1996 return on average assets was
0.92% compared to 1.02% in second quarter 1995. Excluding the effect
of the December 1995 capital restructuring previously reported,
return on common equity would have been 13.76% for the current
quarter.
Net interest income on a fully taxable equivalent basis was
$134.5 million, up $9.8 million or 8% from second quarter last year.
Average earning assets rose 16% to $14.9 billion from $12.8 billion
in second quarter 1995, attributable to an increase of $1.1 billion
or 12% in average loans. Commercial lending was the strongest
contributor to this growth. Net interest margin decreased to 3.62%
from 3.89% in the same quarter last year. This decline reflects the
maturity of higher-yielding municipal bond holdings, the relative
decrease in noninterest-bearing funds, and spread compression within
certain categories of assets and related funding.
Noninterest income of $80.1 million in the current quarter
declined $11.3 million or 12% from the same quarter last year. In
second quarter 1995, Harris Bankcorp, Inc. ("the Corporation" or
"Harris Bankcorp") realized a net gain of $16.8 million from
portfolio securities transactions, compared to nominal gains in the
current quarter. 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.
During first quarter 1996, the Corporation sold its securities
custody and related trustee services business for large institutions.
Primarily as a result of this sale, trust fees declined by $6.9
million in the second quarter compared to second quarter 1995.
In the current quarter, revenue from money market and bond
trading activities improved by $2.0 million while service charge fees
rose by $1.8 million compared to second quarter 1995. Other
noninterest income, which includes syndication fees, gains on
mortgage loan sales and fees on letters of credit, increased by $7.6
million from the year-ago quarter.
Second quarter noninterest expenses of $138.3 million were down
$4.7 million or 3% from second quarter last year, primarily because
of 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.
The second quarter 1996 provision for credit losses of $13.7
million was up $1.9 million from $11.8 million in the second quarter
of 1995. Net loan charge-offs during the current quarter were $12.9
million compared to $11.7 million in the same period last year.
Nonperforming assets at June 30, 1996 totaled $42 million, or
0.4% of total loans, compared to $54 million or 0.6% at March 31,
1996, and $71 million or 0.8% a year ago. At June 30, 1996, the
allowance for possible credit losses was $139 million compared to
$127 million at the end of second quarter 1995, both equal to 1.4% of
loans outstanding at those dates. As a result, the ratio of the
allowance for possible credit losses to nonperforming assets
increased from 180% at June 30, 1995 to 332% at June 30, 1996.
At June 30, 1996, equity capital of Harris Bankcorp amounted to
$1.45 billion, up from $1.10 billion at June 30, 1995. The regulatory
leverage capital ratio was 7.12% for second quarter 1996 compared to
7.21% in the same quarter one year earlier. Harris Bankcorp's capital
ratio exceeds the prescribed regulatory minimum for bank holding
companies. Harris Bankcorp's June 30, 1996 Tier 1 and total
risk-based capital ratios were 8.20% and 11.64%, respectively,
compared to respective ratios of 8.45% and 11.80% at June 30, 1995.
Regulatory minimums for these capital measures are 4% and 8%. In
conjunction with the acquisition of Household Bank, f.s.b.
("Household") branches, described in further detail elsewhere in this
report, Harris Bankcorp increased its capital base by $340 million,
in part through the issuance of $45 million of Series "B"
2
<PAGE> 4
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non-voting, callable perpetual preferred stock and an additional $15
million of long-term subordinated debt. Both issues were purchased by
Harris Bankcorp's immediate parent, Bankmont Financial Corp. ("BFC").
The balance of the capital, $280 million, was provided via an
infusion of common equity by BFC. At June 30, 1996, Harris Bankcorp's
equity capital included $225 million of preferred stock.
For the first six months of 1996, net income was $78.0 million, a
7% increase from the same period a year earlier when net income was
$72.9 million. The favorable results primarily reflect strong
business growth, effective cost control and a $2.4 million after-tax
gain from the sale of securities custody and related trustee services
business for large institutions. In 1995, the Corporation realized
$18.9 million in net gains from portfolio securities transactions
compared to a $3.6 million net gain for the first six months of 1996.
Net interest income of $251.8 million in the current six-month
period was up 6% from the comparable 1995 period. Although the net
interest margin fell from 3.86% to 3.65% in the period ending June
30, 1996, average earning assets rose 13% from $12.8 billion to $14.5
billion, and average loans increased by $1.2 billion or 14%.
Noninterest income decreased 7% to $160.6 million in 1996, primarily
because of the reduction in net gains from portfolio securities
transactions and a $15.8 million or 21% decline in trust fees. While
personal and corporate trust fees increased substantially for the
six-month period ended June 30, 1996, total trust fees and related
noninterest expenses decreased as a result of the Corporation's sale
of its securities custody and related trustee services business for
large institutions at the beginning of 1996. Total noninterest
expenses declined by $11.2 million or 4% in the current six-month
period, also reflecting reduced FDIC deposit insurance premiums.
On June 28, 1996, Harris Trust and Savings Bank ("HTSB"), the
Corporation's lead bank subsidiary, completed its acquisition of 54
branches previously owned by Household, a wholly-owned subsidiary of
Household International, Inc. At the closing, HTSB assumed deposits
totaling $2.9 billion. In addition, HTSB acquired loans amounting to
$340 million along with real property and certain other miscellaneous
assets. The 54 branches are located throughout the metropolitan
Chicago area, creating a comprehensive Chicagoland banking network
that brings Harris into many new and growing communities. Along with
the recently announced plans for new branches in north suburban
Northbrook; Morgan Park, on the far south side of Chicago; and west
suburban Cicero, the 54 former Household branches bring the total
number of Harris Bank locations opened or under construction to 143.
Harris Bank, which includes the Corporation and Harris Bankmont,
Inc., has recently announced the return of Hubert the Harris Lion,
as part of a major new business and advertising effort. Hubert was
the focal point of some of the Corporation's most successful retail
banking campaigns in prior years and we look forward to similar
successes for Hubert's newest promotion.
Alan G. McNally
Alan G. McNally
Chairman of the Board and
Chief Executive
Officer July 29, 1996
3
<PAGE> 5
CONSOLIDATED STATEMENT OF INCOME Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------- --------------------------
(in thousands except per share data) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees......................................... $201,775 $192,458 $400,454 $372,959
Money market assets:
Deposits at banks........................................... 6,205 10,003 11,326 19,973
Federal funds sold and securities purchased under agreement
to resell................................................. 3,508 5,407 6,865 10,920
Trading account............................................... 1,161 851 2,106 1,700
Securities available for sale:
U.S. Treasury and Federal agency............................ 60,343 31,885 113,012 67,013
Other....................................................... 5,000 2,833 10,728 4,897
Securities held to maturity:
U.S. Treasury and Federal agency............................ -- 8,829 -- 18,472
State and municipal......................................... -- 7,720 -- 16,206
Other....................................................... -- 77 -- 219
-------- -------- -------- --------
Total interest income....................................... 277,992 260,063 544,491 512,359
-------- -------- -------- --------
INTEREST EXPENSE
Deposits...................................................... 93,049 89,627 184,762 175,463
Short-term borrowings......................................... 45,140 38,173 84,553 76,874
Senior notes.................................................. 4,645 6,604 10,286 11,177
Long-term notes............................................... 6,527 5,828 13,116 11,600
-------- -------- -------- --------
Total interest expense...................................... 149,361 140,232 292,717 275,114
-------- -------- -------- --------
NET INTEREST INCOME........................................... 128,631 119,831 251,774 237,245
Provision for credit losses................................... 13,689 11,778 27,212 20,440
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES......... 114,942 108,053 224,562 216,805
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees.......................... 29,470 36,346 59,259 75,091
Trading account............................................... 2,652 679 3,652 2,612
Foreign exchange.............................................. 3,465 3,169 7,000 7,726
Charge card................................................... 11,110 10,467 21,076 19,712
Service fees and charges...................................... 19,310 17,538 36,435 35,191
Portfolio securities gains.................................... 140 16,838 3,550 18,900
Other......................................................... 13,970 6,404 29,630 12,810
-------- -------- -------- --------
Total noninterest income.................................... 80,117 91,441 160,602 172,042
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and other compensation............................... 67,653 62,611 129,822 125,151
Pension, profit sharing and other employee benefits........... 13,590 16,703 29,778 34,404
Net occupancy................................................. 10,852 12,011 21,578 23,365
Equipment..................................................... 10,257 10,388 20,057 20,214
Marketing..................................................... 7,073 6,652 12,723 12,447
Communication and delivery.................................... 5,167 5,152 10,499 9,881
Deposit insurance............................................. 63 3,816 79 7,634
Other......................................................... 23,625 25,706 45,505 48,185
-------- -------- -------- --------
Total noninterest expenses.................................. 138,280 143,039 270,041 281,281
-------- -------- -------- --------
Income before income taxes.................................... 56,779 56,455 115,123 107,566
Applicable income taxes....................................... 17,988 18,264 37,113 34,657
-------- -------- -------- --------
NET INCOME.................................................. 38,791 38,191 78,010 72,909
Dividends on preferred stock.................................. 3,262 -- 6,670 --
-------- -------- -------- --------
Net Income Applicable to Common Stock......................... $ 35,529 $ 38,191 $ 71,340 $ 72,909
======== ======== ======== ========
EARNINGS PER COMMON SHARE (BASED ON 6,667,490 AVERAGE SHARES
OUTSTANDING)
Net Income Applicable to Common Stock......................... $ 5.33 $ 5.72 $ 10.70 $ 10.93
======== ======== ======== ========
</TABLE>
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CONSOLIDATED STATEMENT OF CONDITION Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
June 30 December 31 June 30
(in thousands except share data) 1996 1995 1995
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<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks................................. $ 1,283,832 $ 1,522,418 $ 1,160,894
Money market assets:
Interest-bearing deposits at banks.................................... 475,555 457,702 619,569
Federal funds sold and securities purchased under agreement to
resell.............................................................. 332,958 179,692 283,143
Trading account assets.................................................. 54,916 98,638 71,115
Portfolio securities:
Held to maturity (market value of $1,022,138 in 1995)................. -- -- 1,006,002
Available for sale.................................................... 4,386,440 3,389,967 2,477,793
Loans, net of unearned income of $12,790 in 1996, $16,091 and $17,902 in
1995.................................................................. 10,234,573 9,517,797 9,070,573
Allowance for possible credit losses.................................... (139,220) (129,259) (127,479)
Premises and equipment.................................................. 260,117 225,540 224,199
Customers' liability on acceptances..................................... 69,944 95,326 120,891
Other assets............................................................ 908,546 318,380 612,171
------------ ------------ ------------
TOTAL ASSETS...................................................... $ 17,867,661 $ 15,676,201 $ 15,518,871
============ ============ ============
LIABILITIES
Deposits in domestic offices - noninterest-bearing...................... $ 3,246,521 $ 3,003,088 $ 2,922,896
- interest-bearing......................... 7,865,792 4,859,939 4,299,288
Deposits in foreign offices - noninterest-bearing....................... 41,124 41,004 33,115
- interest-bearing.......................... 1,512,104 2,324,751 2,499,040
------------ ------------ ------------
Total deposits.................................................... 12,665,541 10,228,782 9,754,339
Federal funds purchased and securities sold under agreement to
repurchase............................................................ 2,368,080 1,896,817 2,607,212
Commercial paper outstanding............................................ 233,371 292,022 284,099
Short-term borrowings................................................... 128,395 843,049 430,370
Senior notes............................................................ 350,000 478,000 456,100
Acceptances outstanding................................................. 69,944 95,326 120,891
Accrued interest, taxes and other expenses.............................. 158,170 143,580 136,799
Other liabilities....................................................... 67,869 188,897 333,856
Long-term notes......................................................... 379,028 363,952 298,879
------------ ------------ ------------
TOTAL LIABILITIES................................................. 16,420,398 14,530,425 14,422,545
------------ ------------ ------------
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);
7.25% dividends rate.................................................. 180,000 180,000 --
Series B non-voting preferred stock (no par value); authorized 45
shares; issued and outstanding 45 shares ($1,000,000 stated value);
7.875% dividend rate.................................................. 45,000 -- --
Common stock ($8 par value); authorized 10,000,000 shares; issued and
outstanding 6,667,490 shares.......................................... 53,340 53,340 53,340
Surplus................................................................. 484,088 203,897 203,897
Retained earnings....................................................... 724,308 681,468 841,526
Unrealized holding (losses) gains, net of deferred taxes of ($26,042) in
1996, $17,787 and ($1,607) in 1995.................................... (39,473) 27,071 (2,437)
------------ ------------ ------------
TOTAL STOCKHOLDER'S EQUITY........................................ 1,447,263 1,145,776 1,096,326
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................ $ 17,867,661 $ 15,676,201 $ 15,518,871
============ ============ ============
</TABLE>
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CONSOLIDATED STATEMENT 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........................................................................................ 78,010 72,909
Issuance of preferred stock....................................................................... 45,000 --
Contributions to capital.......................................................................... 280,191 --
Cash dividends -- Series A preferred stock........................................................ (6,670) --
Cash dividends -- common stock.................................................................... (28,500) (28,000)
Net change in unrealized holding gains/losses on available for sale securities, net of tax........ (66,544) 30,263
---------- ----------
BALANCE AT JUNE 30.................................................................................. $1,447,263 $1,096,326
========== ==========
</TABLE>
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CONSOLIDATED STATEMENT OF CASH FLOWS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Six Months Ended June 30
----------------------------
(in thousands) 1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................................ $ 78,010 $ 72,909
Adjustments to reconcile net income to net cash used by operating activities:
Provision for credit losses..................................................................... 27,212 20,440
Depreciation and amortization, including intangibles............................................ 23,336 23,867
Deferred tax benefit............................................................................ (1,829) (839)
Gain on sales of portfolio securities........................................................... (3,550) (18,900)
Trading account net sales (purchases)........................................................... 43,722 (35,048)
Net (increase) decrease in interest receivable.................................................. (13,447) 3,917
Net (decrease) increase in interest payable..................................................... (4,921) 6,630
Net increase in loans held for resale........................................................... (125,240) (84,782)
Other, net...................................................................................... (67,573) 5,454
----------- -----------
Net cash used by operating activities......................................................... (44,280) (6,352)
----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at banks................................... (17,853) 137,658
Net (increase) decrease in Federal funds sold and securities purchased under agreement to
resell........................................................................................ (153,266) 121,083
Proceeds from maturities of securities held to maturity......................................... -- 397,334
Purchases of securities held to maturity........................................................ -- (293,433)
Proceeds from sales of securities available for sale............................................ 473,099 1,427,291
Proceeds from maturities of securities available for sale....................................... 2,674,828 2,448,553
Purchases of securities available for sale...................................................... (4,251,237) (3,705,232)
Net increase in loans........................................................................... (272,672) (774,233)
Net cash received upon assumption of certain assets and liabilities of Household Bank f.s.b..... 2,244,009 --
Proceeds from sales of premises and equipment................................................... 8,532 17,488
Purchases of premises and equipment............................................................. (35,875) (39,222)
Other, net...................................................................................... 50,898 55,056
----------- -----------
Net cash provided (used) by investing activities.............................................. 720,463 (207,657)
----------- -----------
FINANCING ACTIVITIES:
Net decrease in deposits........................................................................ (454,445) (165,393)
Net increase (decrease) in Federal funds purchased and securities sold under agreement to
repurchase.................................................................................... 471,263 (24,955)
Net decrease in commercial paper outstanding.................................................... (58,651) (22,638)
Net decrease in short-term borrowings........................................................... (714,654) (239,992)
Proceeds from issuance of senior notes.......................................................... 960,286 996,100
Repayment of senior notes....................................................................... (1,088,286) (540,000)
Proceeds from issuance of long-term notes....................................................... 15,000 --
Proceeds from issuance of Series B preferred stock.............................................. 45,000 --
Contribution to capital surplus................................................................. 280,000 --
Cash dividends paid on Series A preferred stock................................................. (6,670) --
Cash dividends paid on common stock............................................................. (28,500) (28,000)
Other, net...................................................................................... (335,112) --
----------- -----------
Net cash used by financing activities......................................................... (914,769) (24,878)
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM BANKS....................................... (238,586) (238,887)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1.......................................... 1,522,418 1,399,781
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT JUNE 30............................................ $ 1,283,832 $ 1,160,894
=========== ===========
</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, 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
$286,940,000 and $268,484,000 in 1996 and 1995, respectively. Cash
income tax payments over the same periods totaled $43,722,000 and
$35,468,000, respectively.
- --------------------------------------------------------------------------------
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 began to capitalize 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 key employees. On February 26, 1996, the
Corporation granted 510,200 stock options with a ten-year term which
are exercisable only during the second five years of their term,
assuming cumulative performance goals are met. The stock options are
exercisable for Bank of Montreal common stock at a price of Canadian
$31.00 per share, equal to the market price on the date of grant
(equivalent to U.S. $22.55). The estimated grant-date fair value of
the options granted on February 26, 1996 was Canadian $5.79,
7
<PAGE> 9
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.
- --------------------------------------------------------------------------------
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 and second quarter 1996 or fiscal 1995 net income
or financial position at June 30, 1996, December 31, 1995 or June 30,
1995.
- --------------------------------------------------------------------------------
6. ACQUISITION
OF HOUSEHOLD
BRANCHES On June 28, 1996, Harris Trust and Savings Bank ("HTSB"), the
Corporation's lead bank subsidiary, completed the acquisition of 54
branches previously owned by Household Bank, f.s.b. ("Household"), a
wholly-owned subsidiary of Household International, Inc. The 54
branches are located throughout the metropolitan Chicago area. In
addition to acquiring real and personal property, HTSB has assumed
certain deposit liabilities and purchased other assets, primarily
consumer loans. In anticipation of this transaction, on June 27, 1996
the Corporation increased its capital base by $340 million, in part
through the issuance of $45 million of Series B nonvoting, callable
perpetual preferred stock and an additional $15 million of long term
subordinated debt. Both issues were purchased by Bankmont Financial
Corp. ("BFC"). The balance of the capital, $280 million, was provided
through a direct infusion of common equity by BFC.
At the closing, HTSB assumed deposits totaling $2.9 billion. In
addition, HTSB acquired loans amounting to $340 million along with
real property and certain other miscellaneous assets. After paying a
purchase price of $277 million, HTSB received approximately $2.24
billion in cash from Household as consideration for the deposit
liabilities assumed, net of assets purchased. The contract between
HTSB and Household provided for a final settlement to occur within 10
business day of the closing, to reflect actual loan and deposit
balances as of the closing date. These final settlement adjustments
were not material to the Corporation's second quarter 1996 net income
or financial position at June 30, 1996.
The purchase price of $277 million was recorded as an intangible
asset, along with certain fair value adjustments and deferred
acquisition costs, resulting in total intangibles recognized of $284
million, including $140 million of goodwill.
The impact of the acquisition on 1996 net income is not expected
to be material. Following is a condensed statement of condition of
the Corporation, reflecting the impact of the transaction on the
Corporation's financial position.
8
<PAGE> 10
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1996 Household June 30, 1996
(in millions) Without Household Impact As Reported
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks $ 1,179 $ 105 a,f $ 1,284
Money market and trading account assets 863 863
Portfolio securities 4,386 4,386
Loans, net of unearned income 9,895 340 b 10,235
Allowance for possible credit losses (134) (5)b (139)
Premises and equipment 230 30 c 260
Other assets 685 294 b,c,d,g 979
------- ------- -------
TOTAL ASSETS $17,104 $ 764 $17,868
======= ======= =======
LIABILITIES
Total deposits 11,023 1,643 e,f 12,666
Short-term borrowings 4,324 (1,244)f 3,080
Other liabilities 271 25 g 296
Long-term notes 364 15 a 379
------- ------- -------
TOTAL LIABILITIES 15,982 439 16,421
------- ------- -------
STOCKHOLDER'S EQUITY
Preferred stock 180 45 a 225
Common equity 942 280 a 1,222
------- ------- -------
TOTAL STOCKHOLDER'S EQUITY 1,122 325 1,447
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $17,104 $ 764 $17,868
======= ======= =======
</TABLE>
a. The Corporation received a contribution to capital surplus from BFC of $280
million and issued to BFC $45 million of preferred stock and $15 million of
subordinated debt.
b. The Corporation acquired loans amounting to $340 million and established a
related allowance for possible credit losses of $4.8 million in order to
record the loans at fair value.
c. The Corporation acquired fixed assets totaling $30 million including a $3.9
million adjustment to reflect land acquired at fair market value.
d. The Corporation recorded the $277 million purchase price as an intangible
asset.
e. The Corporation assumed deposit liabilities totaling $2.9 billion.
f. The Corporation reduced short-term borrowings (wholesale time deposits,
Federal funds purchased, etc.) with the net cash available from Household and
the related capital infusion from BFC. In addition, cash and due from bank
balances increased as a result of statutory reserve requirements on deposits.
g. The Corporation recorded $17 million of accrued interest payable on the
assumed deposit liabilities and capitalized as part of the purchase price
approximately $6.8 million for investment banker fees, severance costs and
other charges.
9
<PAGE> 11
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
Daily Average Balances (in millions) ----------------------------------- -----------------------------------
Average Rates Earned and Paid (fully taxable 1996 1995 1996 1996
equivalent basis) Balances Rates Balances Rates Balances Rates Balances Rates
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Money market assets:
Interest-bearing deposits at banks.......... $ 471 5.30% $ 565 7.10% $ 431 5.29% $ 620 6.50%
Federal funds sold and securities purchased
under agreement to resell................. 251 5.61 359 6.04 249 5.54 367 6.00
------- ------- ------- -------
Total money market assets............ 722 5.41 924 6.07 680 5.38 987 6.31
Trading account assets........................ 82 7.22 58 7.18 76 6.96 56 7.51
Portfolio securities:
Held to maturity:
U.S. Treasury and Federal agency............ -- -- 607 5.83 -- -- 616 6.05
State and municipal......................... -- -- 399 11.74 -- -- 415 11.90
Other....................................... -- -- 5 6.50 -- -- 6 6.20
------- ------- ------- -------
Total held to maturity............... -- -- 1,011 8.16 -- -- 1,037 8.39
Available for sale:
U.S. Treasury and Federal agency............ 4,015 6.55 2,035 6.29 3,765 6.57 2,163 6.25
Other....................................... 403 5.02 187 6.50 384 5.62 166 6.36
------- ------- ------- -------
Total available for sale............. 4,418 6.41 2,222 6.30 4,149 6.48 2,329 6.25
-------- -------- ------- ------
Total portfolio securities........... 4,418 6.41 3,233 6.89 4,149 6.48 3,366 6.91
Loans, net of unearned income................. 9,692 8.38 8,634 8.96 9,585 8.42 8,416 8.95
------- ------- ------- -------
TOTAL INTEREST-EARNING ASSETS........ 14,914 7.65 12,849 8.27 14,490 7.71 12,825 8.20
Cash and demand balances due from banks....... 1,086 1,163 1,121 1,180
Other assets.................................. 880 961 877 893
------- ------- ------- -------
Total assets......................... $16,880 $14,973 $16,488 $14,898
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market
accounts.................................... $ 1,843 3.10 $ 1,632 3.20 $ 1,809 3.17 $ 1,647 3.18
Savings deposits and certificates............. 2,590 4.77 2,440 5.03 2,564 4.87 2,387 4.87
Other time deposits........................... 924 5.45 658 6.08 877 5.46 589 6.05
Foreign office time deposits.................. 2,673 5.36 2,352 6.14 2,610 5.41 2,455 6.09
------- ------- ------- -------
Total interest-bearing deposits...... 8,030 4.66 7,082 5.08 7,860 4.73 7,078 5.00
Other short-term borrowings................... 3,831 4.73 2,648 5.78 3,482 4.88 2,725 5.68
Short-term senior notes....................... 336 5.52 428 6.16 370 5.56 361 6.18
Long-term notes............................... 365 7.16 299 7.80 364 7.20 299 7.76
------- ------- ------- -------
TOTAL INTEREST-BEARING LIABILITIES... 12,562 4.78 10,457 5.38 12,076 4.87 10,463 5.30
Noninterest-bearing deposits.................. 2,834 2,799 2,894 2,819
Other liabilities............................. 352 641 383 560
Stockholder's equity.......................... 1,132 1,076 1,135 1,056
------- ------- ------- -------
Total liabilities and stockholder's
equity............................. $16,880 $14,973 $16,488 $14,898
======= ======= ======= =======
NET INTEREST MARGIN (RELATED TO AVERAGE
INTEREST-EARNING ASSETS).................... 3.62% 3.89% 3.65% 3.86%
==== ==== ==== ====
</TABLE>
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt interest income has been restated to a comparable taxable level.
Beginning in 1996, the adjustment includes a state tax component.
2. AVERAGE RATE ON PORTFOLIO SECURITIES
Yields on securities classified as available for sale are based on amortized
cost.
10
<PAGE> 12
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SECOND QUARTER 1996
COMPARED WITH
SECOND QUARTER 1995
- --------------------------------------------------------------------------------
SUMMARY The Corporation's earnings for the second quarter of 1996 were $38.8
million. This represented a 2% increase from the same quarter of a
year ago, which included a $16.8 million net gain from portfolio
securities transactions compared to a nominal gain in the current
quarter. This increase is attributable to sustained business growth
and continued cost control.
Net interest income on a fully taxable equivalent ("FTE") basis
was $134.1 million, up 7% from $124.8 million in the year-ago
quarter, reflecting a 16% increase in average earning assets. Net
interest margin decreased to 3.62% from 3.89% in the second quarter
of 1995. The second quarter 1996 provision for credit losses of $13.7
million was up $1.9 million from $11.8 million in the second quarter
of 1995.
Noninterest income declined $11.3 million, or 12%. In second
quarter 1995, the Corporation realized a net gain of $16.8 million
from sales of portfolio securities compared to nominal gains in the
current quarter. During first quarter 1996, the Corporation sold its
securities custody and related trustee services business for large
institutions. Primarily as a result of this sale, trust fees declined
by $6.9 million. In the current quarter, revenue from money market
and bond trading activities improved by $2.0 million while service
charge fees rose by $1.8 million compared to second quarter 1995.
Other noninterest income, which includes syndication fees, gains on
mortgage loan sales and fees on letters of credit, increased by $7.6
million from the year-ago quarter. Second quarter noninterest
expenses of $138.3 million were down $4.7 million or 3% from second
quarter last year, primarily because of 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.
The Corporation's annualized returns on average assets and equity
were 0.92% and 15.04%, respectively, for second quarter 1996 compared
to returns of 1.02% and 14.24%, respectively for the same quarter
last year. Excluding the effect of the December 1995 capital
restructuring, return on equity would have been 13.76% for the second
quarter of 1996.
On June 28, 1996, Harris Trust and Savings Bank ("HTSB"), the
Corporation's lead bank subsidiary, completed the acquisition of 54
branches previously owned by Household Bank, f.s.b. ("Household"), a
wholly-owned subsidiary of Household International, Inc. The 54
branches are located throughout the metropolitan Chicago area. At the
closing, HTSB assumed deposits totaling $2.9 billion. In addition,
HTSB acquired loans amounting to $340 million along with real
property and certain other miscellaneous assets. After paying a
purchase price of $277 million, HTSB received approximately $2.24
billion in cash from Household as consideration for the deposit
liabilities assumed, net of assets purchased (see Note 6, Notes to
Financial Statements).
Additional commentary on the matters included in the above
summary is provided in the following sections of this Report.
11
<PAGE> 13
- --------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
-------------------- --------------------
(in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------
Interest income $277,992 $260,063 $544,491 $512,359
Fully taxable equivalent adjustment 5,914 4,960 11,470 10,399
-------- -------- -------- --------
Interest income (fully taxable equivalent basis) 283,906 265,023 555,961 522,758
Interest expense 149,361 140,232 292,717 275,114
-------- -------- -------- --------
Net interest income (fully taxable equivalent
basis) $134,545 $124,791 $263,244 $247,644
======== ======== ======== ========
Increase (decrease) due to change in:
Volume $ 18,860 $ 6,391 $ 29,869 $ 17,723
Rate (9,106) (1,231) (14,269) (1,115)
-------- -------- -------- --------
Total increase in net interest income $ 9,754 $ 5,160 $ 15,600 $ 16,608
======== ======== ======== ========
</TABLE>
Second quarter net interest income on an FTE basis was $134.5
million, up 8% from $124.8 million in second quarter 1995. Average
earning assets increased 16% or $2.07 billion and net interest
margin, the other principal determinant of net interest income,
decreased from 3.89% to 3.62% in the current quarter.
Average loans rose $1.06 billion, or 12%, partially offset by a
decrease in total money market assets of $202 million or 22%. Loan
categories with the most significant growth over the prior year were
commercial and charge card which increased by $787 million and $170
million, respectively. Average portfolio securities were up 37%, or
$1.19 billion, primarily reflecting increased holdings of Federal
agency securities.
Funding for this asset growth came primarily from short-term
borrowings, foreign time deposits, other time deposits, money market
accounts and saving deposits and certificates, which increased by an
average of $1.18 billion, $320 million, $266 million, $163 million
and $150 million, respectively.
The Corporation's consolidated net interest margin declined to
3.62% from 3.89% in the same quarter last year. This decrease
reflects the maturity of higher-yielding municipal bond holdings, the
relative decrease in noninterest-bearing funds, and spread
compression within certain categories of assets and related funding.
Additionally, beginning in January 1996, the restatement of certain
tax-exempt income to a fully taxable equivalent status includes a
state tax adjustment. The effect of this adjustment was to increase
net interest margin in 1996 by approximately 7 basis points.
The net interest margins for the quarter and the year-to-date
were not materially impacted by the acquisition of assets and
assumption of $2.9 billion in deposit liabilities in connection with
the June 1996 purchase of branches owned by Household. The
Corporation expects the net interest margin to be favorably affected
in the future because the current interest cost associated with
deposits assumed from Household is generally lower than the existing
cost of wholesale funding displaced. The actual impact is dependent
upon not only the stability of the deposit base but also market rate
movements for each of the funding sources and in the future
relationship between short and longer term rates.
- --------------------------------------------------------------------------------
AVERAGE EARNINGS ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
-------------------------------- --------------------------------
Daily Average Balances (in millions) 1996 1995 1996 1995
Average Rates Earned and Paid -------------- -------------- -------------- --------------
(fully taxable equivalent basis) Balances Rates Balances Rates Balances Rates Balances Rates
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets $14,914 7.65% $12,849 8.27% $14,490 7.71% $12,825 8.20%
======= ======= ======= =======
Interest-bearing liabilities $12,562 4.78 $10,457 5.38 $12,076 4.87 $10,463 5.30
Noninterest-bearing sources of funds 2,352 2,392 2,414 2,362
------- ------- ------ -------
Total supporting liabilities $14,914 4.03 $12,849 4.38 $14,490 4.06 $12,825 4.34
======= ======= ======= =======
Net interest margin (related to
average interest-earning assets) 3.62% 3.89% 3.65% 3.86%
==== ==== ===== =====
</TABLE>
12
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Six Months Increase
Ended June 30 (Decrease) Ended June 30 (Decrease)
NONINTEREST ----------------- -------------- ------------------- --------------
INCOME (dollars in thousands) 1996 1995 Amount % 1996 1995 Amount %
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees............. $29,470 $36,346 $ (6,876) (19) $ 59,259 $ 75,091 $(15,832) (21)
Trading account............. 2,652 679 1,973 291 3,652 2,612 1,040 40
Foreign exchange............ 3,465 3,169 296 9 7,000 7,726 (726) (9)
Charge card................. 11,110 10,467 643 6 21,076 19,712 1,364 7
Service fees and charges.... 19,310 17,538 1,772 10 36,435 35,191 1,244 4
Securities gains............ 140 16,838 (16,698) (99) 3,550 18,900 (15,350) (81)
Other....................... 13,970 6,404 7,566 118 29,630 12,810 16,820 131
------- ------- -------- -------- -------- --------
Total noninterest income.... $80,117 $91,441 $(11,324) (12) $160,602 $172,042 $(11,440) (7)
======= ======= ======== === ======== ======== ======== ===
</TABLE>
Noninterest income for the second quarter was $80.1 million, a
decrease of $11.3 million or 12% from the second quarter of 1995. In
the current quarter, the Corporation realized a net gain of $0.1
million from transactions in portfolio securities, compared to net
gains of $16.8 million in second quarter 1995. 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.
Trust and investment management revenue was $29.5 million, a
decrease of $6.9 million or 19% from the previous year, due primarily
to the sale of the securities custody and related trustee services
business for large institutions.
Trading account gains totaled $2.6 million, an increase of $2.0
million from the previous year due primarily to strong municipal bond
trading activities. Service fees and charges were up 10% from $17.5
million in the year ago quarter to $19.3 million currently. Other
noninterest income, including bank-owned life insurance, gains from
debt restructurings, loan syndication fees, foreign fees and gains on
sales of mortgage loans, increased from $6.4 million to $14.0 million
in 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Six Months Increase
NONINTEREST Ended June 30 (Decrease) Ended June 30 (Decrease)
EXPENSES AND ------------------- ------------- ------------------- --------------
INCOME TAXES (dollars in thousands) 1996 1995 Amount % 1996 1995 Amount %
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation................ $ 67,653 $ 62,611 $ 5,042 8 $129,822 $125,151 $ 4,671 4
Pension, profit sharing and
other employee benefits..... 13,590 16,703 (3,113) (19) 29,778 34,404 (4,626) (13)
Net occupancy............... 10,852 12,011 (1,159) (10) 21,578 23,365 (1,787) (8)
Equipment................... 10,257 10,388 (131) (1) 20,057 20,214 (157) (1)
Marketing................... 7,073 6,652 421 6 12,723 12,447 276 2
Communication and delivery.. 5,167 5,152 15 -- 10,499 9,881 618 6
Deposit insurance........... 63 3,816 (3,753) (98) 79 7,634 (7,555) (99)
Other....................... 23,625 25,706 (2,081) (8) 45,505 48,185 (2,680) (6)
-------- -------- ------- -------- -------- --------
Total noninterest
expenses.................... $138,280 $143,039 $(4,759) (3) $270,041 $281,281 $(11,240) (4)
======== ======== ======= ======== ======== ========
Provision for income
taxes....................... $ 17,988 $ 18,264 $ (276) (2) $ 37,113 $ 34,657 $ 2,456 7
======== ======== ======= === ======== ======== ======== ===
</TABLE>
Noninterest expenses for the second quarter totaled $138.3 million, a
decrease of $4.8 million or 3% from the second quarter of 1995.
Noninterest expenses in second quarter 1996 reflect cost savings of
approximately $6.7 million, as a result of the January 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.
13
<PAGE> 15
- --------------------------------------------------------------------------------
Employment-related expenses totaled $81.2 million, an increase of
$1.9 million or 2%. Net occupancy expenses totaled $10.9 million,
down $1.2 million from the prior year's second quarter, while
equipment expenses were virtually unchanged. Other noninterest
expenses decreased by $2.1 million or 8% while marketing expenses
reflected an increase of $0.4 million.
Income tax expense totaled $18.0 million, a decrease of $0.3
million or 2% from the $18.3 million recorded in second quarter 1995.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at June 30, 1996 was
$1.45 billion, compared with $1.15 billion and $1.10 billion at
December 31, 1995 and June 30, 1995, respectively. During the
preceding twelve months, the Corporation declared common and
preferred dividends of $263.2 million and $6.7 million, respectively.
To support continued business growth and expansion, the Corporation
increased its capital base by $40 million, effective December 27,
1995. At the same time, the Corporation 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. The Corporation issued $180 million of
preferred stock and an additional $65 million of long-term
subordinated debt, purchased by BFC. Concurrently, common equity was
reduced by $205 million through the declaration of a special
dividend.
In anticipation of the acquisition of branches previously owned by
Household as discussed earlier in this report, on June 27, 1996 the
Corporation increased its capital base by $340 million, in part
through the issuance of $45 million of Series "B" non-voting,
callable perpetual preferred stock and an additional $15 million of
long-term subordinated debt. Both issues were purchased by BFC. The
balance of the capital, $280 million, was provided through a direct
infusion of common equity by BFC.
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
Corporation's Tier 1 and total risk-based capital ratios were 8.20%
and 11.64%, respectively, at June 30, 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 7.12% for the quarter ended June 30, 1996
compared to 7.21% 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, 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, 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, 1996, the Corporation's
intangible assets totaled $321.9 million, including approximately
14
<PAGE> 16
- --------------------------------------------------------------------------------
$302.3 million of intangibles excluded under capital guidelines. The
Corporation's tangible Tier 1 leverage ratio (which excludes all
intangibles) was 7.01% for the second quarter of 1996.
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
June 30 December 31 June 30
(dollars in thousands) 1996 1995 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $17,867,661 $15,676,201 $15,518,871
=========== =========== ===========
Average assets (quarter).................................. $16,879,594 $16,325,680 $14,972,871
=========== =========== ===========
Risk-based on-balance sheet assets........................ $11,380,903 $10,336,559 $ 9,974,004
Risk-based off-balance sheet assets....................... 3,371,604 3,203,701 2,778,447
----------- ----------- -----------
Total risk-based assets (based on regulatory accounting
principles)............................................. $14,752,507 $13,540,260 $12,752,451
=========== =========== ===========
Tier 1 capital............................................ $ 1,184,154 $ 1,100,899 $ 1,078,202
Supplementary capital..................................... 498,133 492,911 426,050
----------- ----------- -----------
Total capital............................................. $ 1,682,287 $ 1,593,810 $ 1,504,252
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.12% 6.77% 7.21%
Risk-based capital ratios
Tier 1.................................................. 8.20% 8.14% 8.45%
Total................................................... 11.64% 11.79% 11.80%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING June 30 March 31 June 30
ASSETS (dollars in thousands) 1996 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans................................................... $38,490 $51,400 $65,478
Restructured loans................................................. 1,933 1,987 2,149
------- ------- -------
Total nonperforming loans.......................................... 40,423 53,387 67,627
Other assets received in satisfaction of debt...................... 1,473 846 3,246
------- ------- -------
Total nonperforming assets......................................... $41,896 $54,233 $70,873
======= ======= =======
Nonperforming loans to total loans (end of period)................. .39% .55% .75%
Nonperforming assets to total loans (end of period)................ .41% .55% .78%
======= ======= =======
90-day past due loans still accruing interest $58,695 $30,126 $24,644
======= ======= =======
</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 June 30, 1996 totaled $42 million, or
.41% of total loans, down from $54.2 million or .55% of total loans
at March 31, 1996 and also down from $71 million or .78% of loans a
year ago.
Interest shortfall for the quarter ended June 30, 1996 was $1.7
million compared to $0.5 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
15
<PAGE> 17
- --------------------------------------------------------------------------------
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) Related Allowance No Related Allowance Loans
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1996
Balance............................................. $ 8,378 $ 30,112 $ 38,490
Related allowance................................... 5,673 -- 5,673
------------- -------------- -----------
Balance, net of allowance........................... $ 2,705 $ 30,112 $ 32,817
============= ============== ===========
December 31, 1995
Balance............................................. $ 19,820 $ 30,683 $ 50,503
Related allowance................................... 12,967 -- 12,967
------------- -------------- -----------
Balance, net of allowance........................... $ 6,853 $ 30,683 $ 37,536
============= ============== ===========
June 30, 1995
Balance............................................. $ 45,507 $ 22,120 $ 67,627
Related allowance................................... 12,058 -- 12,058
------------- -------------- -----------
Balance, net of allowance........................... $ 33,449 $ 22,120 $ 55,569
============= ============== ===========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
----------------- --------------------
(dollars in thousands) 1996 1995 1996 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average impaired loans................................. $49,131 $79,681 $50,799 $81,784
======= ======= ======= =======
Total interest income on impaired loans................ $ 89 $ 694 $ 105 $ 967
======= ======= ======= =======
Interest income on impaired loans recorded on a cash
basis................................................ $ 89 $ 640 $ 105 $ 833
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
ALLOWANCE June 30 June 30
FOR POSSIBLE -------------------- --------------------
CREDIT LOSSES (dollars in thousands) 1996 1995 1996 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period....................... $133,672 $127,432 $129,259 $124,734
-------- -------- -------- --------
Charge-offs........................................ (16,583) (18,352) (29,222) (31,318)
Recoveries......................................... 3,642 6,621 7,171 13,623
-------- -------- -------- --------
Net charge-offs.................................... (12,941) (11,731) (22,051) (17,695)
Provision charged to operations.................... 13.689 11,778 27,212 20,440
Allowance related to acquired loans................ 4,800 -- 4,800 --
-------- -------- -------- --------
Balance at June 30................................. $139,220 $127,479 $139,220 $127,479
======== ======== ======== ========
Net charge-offs as a percentage of provision
charged to operations............................ 95% 99% 81% 87%
Allowance for possible credit losses to
nonperforming loans (period-end)................. 344% 189%
Allowance for possible credit losses to
nonperforming assets (period-end)................ 332% 180%
Allowance for possible credit losses to total loans
outstanding (period-end)......................... 1.36% 1.41%
</TABLE>
16
<PAGE> 18
- --------------------------------------------------------------------------------
The Corporation's provision for credit losses for the current quarter
was $13.7 million, up 16% from $11.8 million in last year's second
quarter. Net charge-offs also increased from $11.7 million to $12.9
million for the current quarter, making net charge-offs on a
year-to-date basis $22.1 million compared to $17.7 million in the
same 1995 period. The increase in second quarter net charge-offs was
primarily attributable to higher charge card charge-offs in the
second quarter of 1996 compared to the same quarter last year, offset
somewhat by a decrease in net commercial loan charge-offs from second
quarter 1995 to second quarter 1996. For the second quarter of 1996,
net charge-offs related to charge card and commercial loans were
$11.2 million and $1.5 million, respectively, compared to $6.6
million and $4.7 million, respectively, for the second quarter of
1995.
At June 30, 1996, the allowance for possible credit losses was
$139 million, equal to 1.36% of total loans outstanding, up from $127
million or 1.41% of total loans one year ago; however, the allowance
as a percentage of nonperforming loans increased from 189% at June
30, 1995, to 344% at June 30, 1996.
- --------------------------------------------------------------------------------
LIQUIDITY AND
SOURCES OF
FUNDS Effective liquidity management allows a banking institution to
accommodate the changing net funds flow requirements of customers who
may deposit or withdraw funds, or modify their credit needs. The
Corporation manages its liquidity position through continuous
monitoring of profitability trends, asset quality, interest rate
sensitivity, maturity schedules of earning assets and supporting
liabilities, the composition of managed and other (primarily demand)
liabilities, and prospective customer demand based upon knowledge of
major customers and overall economic conditions. Appropriate
responses to changes in these conditions preserve customer confidence
in the ability of the Corporation to continually serve their credit
and deposit withdrawal requirements. Some level of liquidity is
provided by maintaining assets which mature within a short timeframe
or 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 37% of the
Corporation's total assets and amounted to $6.53 billion at June 30,
1996. However, the most important source of liquidity is the ability
to raise funds, as required, in a variety of markets using multiple
instruments.
The Corporation, in connection with the issuance of commercial
paper and for other corporate purposes, has a $150 million revolving
credit agreement with five nonaffiliated banks and BMO that
terminates on December 18, 1999. There were no borrowings under this
credit facility in year-to-date 1996 or 1995.
In connection with the acquisition of branches previously owned
by Household as discussed earlier in this report, HTSB assumed
deposits totaling approximately $2.9 billion. In addition, HTSB
acquired loans amounting to $340 million along with real property and
certain other miscellaneous assets. HTSB received cash from Household
at closing of $2.24 billion. Capital of $325 million was contributed
to HTSB and HTSB issued $15 million in additional subordinated debt.
The incremental cash available from all of these sources of
approximately $2.6 billion was used by HTSB to liquidate more
expensive sources of wholesale funding by June 30, 1996.
As a result of the Household acquisition, there were significant
changes in the composition of liabilities from December 31, 1995 to
June 30, 1996. Total core deposits increased from $7.2 billion at
December 31, 1995 to $10.5 billion at June 30, 1996. Total wholesale
deposits and short-term borrowings decreased from $6.4 billion at
December 31, 1995 to $5.2 billion at June 30, 1996.
Total deposits averaged $10.86 billion in the second quarter of
1996, an increase of $982 million compared to the same quarter last
year. The Corporation's average volume of core deposits, consisting
of demand deposits, interest checking deposits, savings deposits and
certificates, and money market accounts rose 6%, reflecting increases
in virtually all core deposit categories. Core deposits represented
approximately 48% and 53% of average supporting liabilities in the
second quarters of 1996 and 1995, respectively. Although
17
<PAGE> 19
- --------------------------------------------------------------------------------
average deposits for the quarter were not materially impacted by the
Household transaction, core deposits as a percentage of average
supporting liabilities are expected to increase in future periods.
Average money market assets in the second quarter of 1996
decreased $202 million or 22% from the same quarter last year. These
assets represented 5% of average earning assets in 1996, compared to
7% one year ago. Average money market liabilities increased 45% to
$3.83 billion this quarter from $2.65 billion in the same quarter
last year. The Corporation repositioned its wholesale funding sources
to more liquid liabilities such as federal funds borrowed and
securities sold under repurchase agreements in anticipation of a
reduction in wholesale funding sources as a result of the assumption
of retail deposit liabilities in connection with the Household
transaction.
HTSB offers to institutional investors, from time to time,
unsecured short-term and medium term bank notes in an aggregate
principal amount of up to $1.5 billion outstanding at any time. The
term of each note could range from fourteen days to fifteen years.
The notes are subordinated to deposits and rank pari passu with all
other senior unsecured indebtedness of HTSB. As of June 30, 1996,
$350 million of short-term notes were outstanding compared to $456
million at June 30, 1995.
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, 1996
COMPARED
WITH 1995 Net income for the six months ended June 30, 1996 was $78.0 million,
a $5.1 million or 7% increase from 1995 earnings of $72.9 million.
The increase primarily reflects strong business growth, effective
cost control and a $2.4 million after-tax gain from the sale of
securities custody and related trustee services business for large
institutions. In 1995, the Corporation realized $18.9 million in net
gains from portfolio securities transactions compared to a $3.6
million gain for the first six months of 1996. Annualized returns on
average assets and equity for the 1996 period were 0.95% and 15.04%,
respectively, compared to six-month 1995 returns of 0.99% and 13.92%,
respectively. Excluding the effect of the December 1995 capital
restructuring, return on equity would have been 13.64% for the first
six months of 1996.
Net interest income on a fully taxable equivalent basis was
$263.2 million in the current period, an increase of $15.6 million or
6% from the comparable 1995 period. Average earning assets increased
13% to $14.5 billion from $12.8 billion a year ago and average loans
increased by $1.2 billion or 14%. Net interest margin declined to
3.65% from 3.86% in 1995.
The increase in average loans for the period reflected increases
in most domestic loan categories from the year-ago levels. Commercial
loans, real estate mortgages, charge card outstandings and
installment loans grew $943 million, $169 million, $91 million and
$66 million, respectively. Portfolio securities increased $783
million to $4.15 billion while securities held in trading accounts
increased $21 million from a year ago. Money market assets declined
$307 million, or 31% compared to the similar 1995 period. Increases
in interest-bearing liabilities funded the Corporation's asset
growth. Interest-bearing deposits, primarily foreign office time
deposits, rose by $783 million or 11% from the prior year, while
average short-term borrowings increased $766 million or 25%.
Noninterest-bearing sources of funds, primarily demand deposits and
equity capital, increased $74 million and represented 16.7% of
supporting liabilities, down from 18.2% in 1995.
Noninterest income totaled $160.6 million, a decrease of $11.4
million or 7% from the 1995 six-month period, primarily because of
the reduction in net gains from portfolio securities transactions and
a $15.8 million or 21% decline in trust fees. This was partially
offset by a $16.8 million improvement in other sources of noninterest
income including foreign fees, gains on sales of real estate
mortgages, returns on bank-owned life insurance, syndication fees and
a $4.0 million gain recognized in 1996 on the Corporation's sale of
its securities custody and related trustee services business for
large institutions. While personal and corporate trust fees increased
substantially for the six-month period ended June 30, 1996, total
trust fees and related noninterest expenses decreased as a result of
the aforementioned sale. Noninterest expense totaled
18
<PAGE> 20
- --------------------------------------------------------------------------------
$270.0 million, a decrease of $11.2 million or 4% from the same
period in 1995, also reflecting lower FDIC deposit insurance
premiums.
Income tax expense increased $2.5 million primarily because of
higher pretax income. The provision for credit losses for the first
six months of 1996 was $27.2 million, up $6.8 million or 33% from
1995. Net loan charge-offs totaled $22.1 million in 1996 compared to
$17.7 million for 1995.
19
<PAGE> 21
Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
HARRIS BANKCORP, INC.
111 West Monroe Street
Chicago, Illinois 60603
- ------------------------------
HARRIS BANKCORP, INC.
EXECUTIVE OFFICERS
Alan G. McNally
Chairman of the Board and
Chief Executive Officer
Edward W. Lyman, Jr.
Vice Chair of the Board
Maribeth S. Rahe
Vice Chair of the Board
- ------------------------------
HARRIS BANKCORP, INC.
BOARD OF DIRECTORS
Alan G. McNally
Chairman of the Board and
Chief Executive Officer
Edward W. Lyman, Jr.
Vice Chair of the Board
Maribeth S. Rahe
Vice Chair of the Board
F. Anthony Comper
President and
Chief Operating Officer
Bank of Montreal
Susan T. Congalton
Managing Director
Lupine Partners
Roxanne J. Decyk
Vice President, Corporate Planning
Amoco Corporation
Wilbur H. Gantz
President and
Chief Executive Officer
PathoGenesis Corporation
James J. Glasser
Chairman, President and
Chief Executive Officer
GATX Corporation
Dr. Leo M. Henikoff
President and
Chief Executive Officer
Rush-Presbyterian-St. Luke's Medical Center
Dr. Stanley O. Ikenberry
President Emeritus
University of Illinois
Richard M. Jaffee
Chairman and
Chief Executive Officer
Oil-Dri Corporation
of America
Charles H. Shaw
Chairman
The Shaw Company
Richard E. Terry
Chairman and
Chief Executive Officer
Peoples Energy Corporation
James O. Webb
President
James O. Webb & Associates, Inc.
William J. Weisz
Chairman of the Board
Motorola, Inc.
- ------------------------------
HARRIS BANKCORP, INC.
BANK SUBSIDIARIES
HARRIS TRUST AND SAVINGS BANK
Chicago, Illinois
HARRIS BANK ARGO
Summit, Illinois
HARRIS BANK BARRINGTON, N.A.
Barrington, Illinois
HARRIS BANK BATAVIA, N.A.
Batavia, Illinois
HARRIS BANK FRANKFORT
Frankfort, Illinois
HARRIS BANK GLENCOE-NORTHBROOK, N.A.
Glencoe, Illinois
HARRIS BANK HINSDALE, N.A.
Hinsdale, Illinois
HARRIS BANK LIBERTYVILLE
Libertyville, Illinois
HARRIS BANK NAPERVILLE
Naperville, Illinois
HARRIS BANK ROSELLE
Roselle, Illinois
HARRIS BANK ST. CHARLES
St. Charles, Illinois
HARRIS BANK WILMETTE, N.A.
Wilmette, Illinois
HARRIS BANK WINNETKA, N.A.
Winnetka, Illinois
HARRIS TRUST BANK OF ARIZONA
Scottsdale, Arizona
- ------------------------------
HARRIS BANKCORP, INC.
NON-BANK SUBSIDIARIES
HARRIS TRUST COMPANY OF FLORIDA
West Palm Beach, Florida
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
HARRIS LIFE INSURANCE COMPANY
Scottsdale, Arizona
HARRIS INVESTMENT
MANAGEMENT, INC.
Chicago, Illinois
HARRIS INVESTORS DIRECT, INC.
Chicago, Illinois
HARRISCORP CAPITAL CORPORATION
Chicago, Illinois
HARRISCORP FINANCE, INC.
Chicago, Illinois
HARRIS BANK INTERNATIONAL
CORPORATION
New York, New York
HARRIS TRADING ADVISORY
CORPORATION
Chicago, Illinois
BANK OF MONTREAL TRUST
COMPANY (C.I.), LTD.
St. Helier, Jersey
Channel Islands
HARRISCORP LEASING, INC.
Chicago, Illinois
BANK OF MONTREAL GLOBAL, INC.
Chicago, Illinois
MICHIGAN HOLDINGS, INC.
Chicago, Illinois
MIDWESTERN HOLDINGS, INC.
Chicago, Illinois
HARRIS BUILDING SERVICES
CORPORATION
Chicago, Illinois
<PAGE> 22
Part 1. Financial Information
Item 1. Financial Statements.
Consolidated Statement of Condition as of June 30, 1996, December 31,
1995 and June 30, 1995.
Consolidated Statement of Income for the quarters and six months ended
June 30, 1996 and 1995.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the six months ended June 30,
1996 and 1995.
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 1996 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) Documents filed with Report:
27. Financial Data Schedule
(b) A Current Report on Form 8-K, dated April 19, 1996, was filed on
behalf of Harris Bankcorp, Inc., reporting on Item 5 - Other
Events.
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 14th day of August 1996.
_______________________ _______________________
Pierre O. Greffe Paul R. Skubic
Chief Financial Officer Chief Accounting Officer
- 2 -
<PAGE> 23
EXHIBIT A -- HARRIS BANKCORP, INC.
1996 SECOND QUARTER REPORT
JUNE 30, 1996
<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> JUN-30-1996
<CASH> 1,283,832
<INT-BEARING-DEPOSITS> 475,555
<FED-FUNDS-SOLD> 332,958
<TRADING-ASSETS> 54,916
<INVESTMENTS-HELD-FOR-SALE> 4,386,440
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,234,573
<ALLOWANCE> 139,220
<TOTAL-ASSETS> 17,867,661
<DEPOSITS> 12,665,541
<SHORT-TERM> 3,079,846
<LIABILITIES-OTHER> 226,039
<LONG-TERM> 379,028
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,168,923
<TOTAL-LIABILITIES-AND-EQUITY> 17,867,661
<INTEREST-LOAN> 201,775
<INTEREST-INVEST> 65,343
<INTEREST-OTHER> 9,713
<INTEREST-TOTAL> 277,992
<INTEREST-DEPOSIT> 93,049
<INTEREST-EXPENSE> 149,361
<INTEREST-INCOME-NET> 128,631
<LOAN-LOSSES> 13,689
<SECURITIES-GAINS> 140
<EXPENSE-OTHER> 138,280
<INCOME-PRETAX> 56,779
<INCOME-PRE-EXTRAORDINARY> 38,791
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,791
<EPS-PRIMARY> 5.33
<EPS-DILUTED> 5.33
<YIELD-ACTUAL> 3.62
<LOANS-NON> 38,490
<LOANS-PAST> 58,695
<LOANS-TROUBLED> 1,933
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 133,672
<CHARGE-OFFS> 16,583
<RECOVERIES> 3,642
<ALLOWANCE-CLOSE> 139,220
<ALLOWANCE-DOMESTIC> 139,220
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
