<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
<TABLE>
<S> <C>
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18179
</TABLE>
HARRIS BANKCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-2722782
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 WEST MONROE STREET, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (312) 461-2121
-------------------------
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 13, 1997 the Corporation had 6,667,490 shares of $8 par value
common stock outstanding.
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statement of Condition as of June 30, 1997, December 31,
1996 and June 30, 1996.
Consolidated Statement of Income for the quarters and six months ended
June 30, 1997 and 1996.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the six months ended June 30,
1997 and 1996.
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 1997 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) No Current Report on Form 8-K was filed during the quarter ended
June 30, 1997, for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Harris
Bankcorp, Inc., has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 13th day of August 1997.
/s/
- ------------------------------------------------
Pierre O. Greffe
Chief Financial Officer
/s/
- ------------------------------------------------
Paul R. Skubic
Chief Accounting Officer
<PAGE> 3
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
1997 1996 Change 1997 1996 Change
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS ($ IN THOUSANDS)
Net interest income................................ $146,350 $128,631 14% $287,582 $251,774 14%
Net interest income (fully taxable equivalent)..... 153,168 134,545 14 300,522 263,244 14
Provision for loan losses.......................... 16,410 13,689 20 30,292 27,212 11
Noninterest income................................. 90,550 80,117 13 178,402 160,602 11
Noninterest expenses............................... 165,308 138,280 20 322,283 270,041 19
Net income......................................... 37,441 38,791 (3) 76,774 78,010 (2)
Dividends -- common stock.......................... 12,400 12,500 (1) 23,000 28,500 (19)
Dividends -- preferred stock....................... 4,148 3,262 27 8,297 6,670 24
Cash earnings (1).................................. 41,960 40,529 4 85,850 81,461 5
- ----------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity...... 10.32% 15.04% (472)bp 10.72% 15.04% (432)bp
Return on average assets........................... 0.79 0.92 (13) 0.82 0.95 (13)
Cash basis return on average common stockholder's
equity (2)....................................... 13.73 16.40 (267) 14.26 16.34 (208)
Cash basis return on average assets (3)............ 0.89 0.97 (8) 0.94 1.00 (6)
Tier 1 risk-based capital ratio.................... 7.95 8.20 (25)
Total risk-based capital ratio..................... 10.93 11.64 (71)
Tier 1 leverage ratio.............................. 6.79 7.12 (33)
Allowance for possible loan losses to total loans
(period-end)..................................... 1.27 1.36 (9)
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DAILY AVERAGE BALANCES ($ IN MILLIONS)
Loans, net of unearned income...................... $ 10,912 $ 9,692 13% $ 10,788 $ 9,585 13%
Portfolio securities............................... 4,875 4,418 10 4,694 4,149 13
Money market assets................................ 854 722 18 835 680 23
Total interest-earning assets...................... 16,753 14,914 12 16,427 14,490 13
Total assets....................................... 19,119 16,880 13 18,814 16,488 14
Deposits........................................... 12,982 10,864 19 12,839 10,754 19
Short-term borrowings.............................. 3,935 4,167 (6) 3,764 3,852 (2)
Common stockholder's equity........................ 1,295 950 36 1,288 954 35
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BALANCES AT QUARTER-END ($ IN MILLIONS)
Loans, net of unearned income...................... $ 11,195 $ 10,235 9%
Allowance for possible loan losses................. 142 139 2
Portfolio securities............................... 4,943 4,386 13
Total assets....................................... 20,163 17,868 13
Deposits........................................... 14,571 12,666 15
Common stockholder's equity........................ 1,330 1,222 9
Total stockholder's equity......................... 1,555 1,447 7
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</TABLE>
(1) Cash earnings are defined as earnings before amortization of goodwill and
other valuation intangibles.
(2) Cash basis return on average common stockholder's equity is calculated as
net income applicable to common stock plus after-tax amortization expenses
of goodwill and other valuation intangibles, divided by average common
stockholder's equity less tax affected average intangible assets.
(3) Cash basis return on average assets is calculated as net income plus
after-tax amortization expenses of goodwill and other valuation intangibles,
divided by average assets less average intangible assets.
1
<PAGE> 4
REPORT FROM MANAGEMENT
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Harris Bankcorp's earnings for the second quarter of 1997 were $37.4
million, resulting in year-to-date net income of $76.8 million. This
represented a 3% decrease from the same quarter of a year ago and a
2% decrease from the first six months of 1996. Earnings before
amortization of goodwill and other valuation intangibles ("cash
earnings") were $42.0 million in the second quarter of 1997, a 4%
increase compared to the corresponding quarter in 1996; and resulting
in cash earnings for the first six months of 1997 of $85.9 million, a
5% increase compared to $81.5 million in the first half a year ago.
With Harris Trust and Savings Bank's ("HTSB") June 1996
acquisition of Household Bank, f.s.b.'s ("Household" or "Household
Bank") Chicagoland network, earnings on a cash basis is the most
relevant measure of performance and comparison with prior periods.
The improvement in cash earnings is attributable to continued growth
in corporate banking, corporate trust, community and private banking,
and cash management services, somewhat offset by the cost associated
with systems conversions related to the Household transaction and
credit card results. In the six months ended June 30, 1997, on a cash
basis, return on equity ("cash ROE") was 14.26% compared to cash ROE
of 16.34% in the same period last year.
Earnings comparability was affected by both the June 1996
purchase of Household Bank's Chicagoland retail banking business and
the 1996 first quarter sale of HTSB's securities custody and related
trustee services business for large institutions. Excluding the $4.0
million gain from the latter transaction and the impact of the
Household acquisition, pretax "core earnings" (excluding acquisitions
and divestitures) rose 2% quarter-to-quarter and also increased 6%
for the first six months of 1997 versus the comparable period of
1996.
Net interest income on a fully taxable equivalent basis was
$153.2 million for the current quarter, up $18.6 million or 14% from
second quarter last year. Average earning assets rose 12% to $16.75
billion from $14.91 billion in second quarter 1996, primarily
attributable to an increase of $1.22 billion or 13% in average loans.
Commercial, installment and residential real estate lending were all
strong contributors to this growth. Net interest margin rose from
3.62% in the second quarter last year to 3.67% currently, reflecting
a more favorable funding mix associated with deposits acquired from
Household Bank. Excluding the contribution of the Household
transaction, net interest income would have increased $4.7 million or
4% quarter-to-quarter and 4% for the first half of 1997 compared to
the first half of 1996. Net interest income for the six months ended
June 30, 1997 was $300.5 million, a 14% increase from the comparable
1996 period.
Second quarter noninterest income of $90.6 million increased 13%
from the same quarter last year. Trust fees increased $3.7 million
compared to second quarter 1996 and service charge fees rose by $4.4
million. Foreign exchange income declined by $2.2 million while
trading account revenue declined $1.0 million. Net gains from debt
portfolio securities sales were nominal in second quarter 1996
compared to $2.6 million during the current quarter. Excluding the
Household contribution in 1997 and the gain from sale of the
securities custody and related trustee services business for large
institutions in 1996, core noninterest income rose 9%
quarter-to-quarter and 10% on a comparative basis for the six-month
period ended June 30, 1997.
Second quarter 1997 noninterest expenses of $165.3 million rose
$27.0 million or 20% from second quarter a year ago. The prior year's
second quarter did not include operating expenses associated with
Household or the related amortization of goodwill and other
intangible assets. Excluding Household-related charges, total
expenses increased $7.6 million or 6% in second quarter 1997 compared
to the year-earlier quarter. For the first six months of 1997,
noninterest expenses excluding Household-related charges rose 6%
compared to the six months ending June 30, 1996. A significant
portion of both increases is attributable to the one-time cost of
systems conversions.
Harris Bankcorp's second quarter 1997 provision for loan losses
of $16.4 million was up from $13.7 million in the second quarter of
1996. Net loan charge-offs during the current quarter were $16.7
million compared to $12.9 million in the same period last year, with
the difference primarily attributable to higher writeoffs in the
charge card portfolio.
Nonperforming assets at June 30, 1997 totaled $33 million or 0.3%
of total loans, compared to $34 million or 0.3% at March 31, 1997,
and $42 million or 0.4% a year ago. At June 30, 1997, the allowance
for
2
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possible loan losses was $142 million, equal to 1.3% of loans
outstanding, compared to $139 million or 1.4% at the end of second
quarter 1996. As a result, the ratio of the allowance for possible
loan losses to nonperforming assets increased from 332% at June 30,
1996 to 434% at June 30, 1997.
At June 30, 1997, equity capital of Harris Bankcorp amounted to
$1.56 billion, up from $1.45 billion one year earlier. The regulatory
leverage capital ratio was 6.79% for the second quarter of 1997
compared to 7.12% in the same quarter of 1996. The capital ratio
exceeds the prescribed regulatory minimum for bank holding companies.
At June 30, 1997, Harris Bankcorp's equity capital included $225
million of preferred stock.
For the first six months of 1997, Harris Bankcorp's annualized
return on average common stockholder's equity was 10.72% compared to
15.04% in the first half of 1996.
In June, Maribeth S. Rahe, Vice Chair of the Board, Personal and
Commercial Financial Services, resigned from Harris Trust and Savings
Bank and from the Harris Bankcorp Board of Directors. Ms. Rahe led
the Bank through a period of unprecedented growth and expansion,
highlighted by the acquisition of Suburban Bank in 1994 and Household
Bank's Chicagoland business in 1996.
ALAN G. MCNALLY
Alan G. McNally
Chairman of the Board and
Chief Executive Officer July 29, 1997
3
<PAGE> 6
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) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $232,736 $201,775 $454,172 $400,454
Money market assets:
Deposits at banks......................................... 8,790 6,205 16,920 11,326
Federal funds sold and securities purchased under
agreement to resell..................................... 2,985 3,508 5,754 6,865
Trading account............................................. 609 1,161 1,600 2,106
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 70,813 60,343 133,266 113,012
State and municipal....................................... 4,421 4,400 8,764 8,927
Other..................................................... 362 600 735 1,801
-------- -------- -------- --------
Total interest income..................................... 320,716 277,992 621,211 544,491
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 114,834 93,049 221,589 184,762
Short-term borrowings....................................... 39,246 45,140 76,345 84,553
Senior notes................................................ 14,214 4,645 23,160 10,286
Long-term notes............................................. 6,072 6,527 12,535 13,116
-------- -------- -------- --------
Total interest expense.................................... 174,366 149,361 333,629 292,717
-------- -------- -------- --------
NET INTEREST INCOME......................................... 146,350 128,631 287,582 251,774
Provision for loan losses................................... 16,410 13,689 30,292 27,212
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 129,940 114,942 257,290 224,562
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 33,159 29,470 64,753 59,259
Trading account............................................. 1,631 2,652 2,559 3,652
Foreign exchange............................................ 1,232 3,465 2,120 7,000
Charge card................................................. 12,830 11,110 24,432 21,076
Service fees and charges.................................... 23,703 19,310 47,099 36,435
Portfolio securities gains.................................. 2,630 140 3,968 3,550
Other....................................................... 15,365 13,970 33,471 29,630
-------- -------- -------- --------
Total noninterest income.................................. 90,550 80,117 178,402 160,602
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 77,340 67,653 151,704 129,822
Pension, profit sharing and other employee benefits......... 15,485 13,590 31,222 29,778
Net occupancy............................................... 13,583 10,852 28,078 21,578
Equipment................................................... 12,263 10,257 22,816 20,057
Marketing................................................... 7,046 7,073 13,036 12,723
Communication and delivery.................................. 5,963 5,167 11,336 10,499
Deposit insurance........................................... 770 63 1,421 79
Other....................................................... 25,947 21,389 48,798 41,087
-------- -------- -------- --------
158,397 136,044 308,411 265,623
Goodwill and other valuation intangibles.................... 6,911 2,236 13,872 4,418
-------- -------- -------- --------
Total noninterest expenses................................ 165,308 138,280 322,283 270,041
-------- -------- -------- --------
Income before income taxes.................................. 55,182 56,779 113,409 115,123
Applicable income taxes..................................... 17,741 17,988 36,635 37,113
-------- -------- -------- --------
NET INCOME................................................ 37,441 38,791 76,774 78,010
Dividends on preferred stock................................ 4,148 3,262 8,297 6,670
-------- -------- -------- --------
Net Income Applicable to Common Stock....................... $ 33,293 $ 35,529 $ 68,477 $ 71,340
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 6,667,490 average shares
outstanding)
Net Income Applicable to Common Stock....................... $ 4.99 $ 5.33 $ 10.27 $ 10.70
======== ======== ======== ========
</TABLE>
4
<PAGE> 7
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) 1997 1996 1996
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<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,776,743 $ 1,238,028 $ 1,283,832
Money market assets:
Interest-bearing deposits at banks........................ 628,982 658,257 475,555
Federal funds sold and securities purchased under
agreement to resell..................................... 239,389 294,792 332,958
Trading account assets...................................... 101,569 110,355 54,916
Portfolio securities available-for-sale..................... 4,943,132 3,985,183 4,386,440
Loans, net of unearned income of $5,228 in 1997, $7,624 and
$12,790 in 1996........................................... 11,195,267 10,744,653 10,234,573
Allowance for possible loan losses (141,963) (142,211) (139,220)
Net loans................................................. 11,053,304 10,602,442 10,095,353
Premises and equipment...................................... 291,459 275,091 260,117
Customers' liability on acceptances......................... 46,107 78,983 69,944
Goodwill and other valuation intangibles.................... 302,259 310,663 321,934
Other assets 779,977 674,946 586,612
----------- ----------- -----------
TOTAL ASSETS.......................................... $20,162,921 $18,228,740 $17,867,661
=========== =========== ===========
LIABILITIES
Deposits in domestic offices - noninterest-bearing.......... $ 3,889,181 $ 3,642,578 $ 3,246,521
- interest-bearing............... 8,858,599 7,668,893 7,865,792
Deposits in foreign offices - noninterest-bearing........... 127,332 35,116 41,124
- interest-bearing................. 1,696,094 1,643,714 1,512,104
----------- ----------- -----------
Total deposits........................................ 14,571,206 12,990,301 12,665,541
Federal funds purchased and securities sold under agreement
to repurchase............................................. 2,887,073 1,983,047 2,368,080
Commercial paper outstanding................................ 274,370 334,653 233,371
Other short-term borrowings................................. 7,090 347,690 128,395
Senior notes................................................ 240,000 350,000 350,000
Acceptances outstanding..................................... 46,107 78,983 69,944
Accrued interest, taxes and other expenses.................. 140,527 159,250 158,170
Other liabilities........................................... 61,886 90,543 67,869
Long-term notes............................................. 379,191 379,107 379,028
----------- ----------- -----------
TOTAL LIABILITIES..................................... 18,607,450 16,713,574 16,420,398
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Series A Non-voting, Callable, Perpetual Preferred stock (no
par value); authorized 1,000,000 shares; issued and
outstanding 180 shares
($1,000,000 stated value); 7.25% dividend rate............ 180,000 180,000 180,000
Series B Non-voting, Callable, Perpetual Preferred stock (no
par value); authorized 45 shares; issued and outstanding
45 shares ($1,000,000 stated value); 7.875% dividend
rate...................................................... 45,000 45,000 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..................................................... 484,483 484,319 484,088
Retained earnings........................................... 806,103 760,626 724,308
Unrealized holding losses, net of deferred tax benefits of
$11,560 in 1997, $5,364 and $26,042 in 1996............... (13,455) (8,119) (39,473)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,555,471 1,515,166 1,447,263
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $20,162,921 $18,228,740 $17,867,661
=========== =========== ===========
</TABLE>
5
<PAGE> 8
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY Harris Bankcorp, Inc.
and Subsidiaries
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<TABLE>
<CAPTION>
(in thousands) 1997 1996
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<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,515,166 $1,145,776
Net income................................................ 76,774 78,010
Issuance of Series B preferred stock...................... -- 45,000
Contributions to capital.................................. 164 280,191
Cash dividends -- Series A preferred stock................ (6,525) (6,670)
Cash dividends -- Series B preferred stock................ (1,772) --
Cash dividends -- common stock............................ (23,000) (28,500)
Net change in unrealized holding losses on
available-for-sale securities, net of tax............... (5,336) (66,544)
---------- ----------
BALANCE AT JUNE 30.......................................... $1,555,471 $1,447,263
========== ==========
</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) 1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 76,774 $ 78,010
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses................................. 30,292 27,212
Depreciation and amortization, including intangibles...... 34,232 23,336
Deferred tax benefit...................................... (1,445) (1,829)
Gain on sales of portfolio securities..................... (3,968) (3,550)
Trading account net sales................................. 8,786 43,722
Net increase in interest receivable....................... (18,504) (13,447)
Net decrease in interest payable.......................... (10,742) (4,921)
Net increase in loans held for resale..................... (6,892) (125,240)
Other, net................................................ (19,329) (67,573)
----------- -----------
Net cash provided (used) by operating activities........ 89,204 (44,280)
----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks................................................... 29,275 (17,853)
Net decrease (increase) in Federal funds sold and
securities purchased under agreement to resell.......... 55,403 (153,266)
Proceeds from sales of securities available-for-sale...... 360,343 473,099
Proceeds from maturities of securities
available-for-sale...................................... 5,638,063 2,674,828
Purchases of securities available-for-sale................ (6,963,919) (4,251,237)
Net increase in loans..................................... (474,262) (272,672)
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............. 13,388 8,532
Purchases of premises and equipment....................... (50,116) (35,875)
Other, net................................................ (101,415) 50,898
----------- -----------
Net cash (used) provided by investing activities........ (1,493,240) 720,463
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 1,580,905 (454,445)
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 904,026 471,263
Net decrease in commercial paper outstanding.............. (60,283) (58,651)
Net decrease in short-term borrowings..................... (340,600) (714,654)
Proceeds from issuance of senior notes.................... 3,265,000 960,286
Repayment of senior notes................................. (3,375,000) (1,088,286)
Proceeds from issuance of long-term notes................. -- 15,000
Proceeds from issuance of preferred stock................. -- 45,000
Contribution to capital surplus........................... -- 280,000
Cash dividends paid on preferred stock.................... (8,297) (6,670)
Cash dividends paid on common stock....................... (23,000) (28,500)
Other, net................................................ -- (335,112)
----------- -----------
Net cash provided (used) by financing activities........ 1,942,751 (914,769)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND DEMAND BALANCES DUE
FROM BANKS............................................. 538,715 (238,586)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1.... 1,238,028 1,522,418
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT JUNE 30...... $ 1,776,743 $ 1,283,832
=========== ===========
</TABLE>
6
<PAGE> 9
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, 1996.
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
PROCEEDINGSCertain subsidiaries of the Corporation are defendants in various
legal proceedings arising in the normal course of business. In the
opinion of management, based on the advice of legal counsel, the
ultimate resolution of these matters will not have a material adverse
effect on the Corporation's consolidated financial position.
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3. CASH FLOWS
For purposes of the Corporation's Consolidated Statement of Cash
Flows, cash and cash equivalents is defined to include cash and
demand balances due from banks. Cash interest payments (net of
amounts capitalized) for the six months ended June 30, totaled $377.4
million and $286.9 million in 1997 and 1996, respectively. Cash
income tax payments over the same periods totaled $39.6 million and
$43.7 million, respectively.
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4. ACCOUNTING
CHANGES During the first quarter of 1997, the Corporation adopted Statement
of Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The Statement provides standards based on the
application of a financial components approach to transfers and
servicing of financial assets and extinguishments of liabilities. The
approach is focused on control of assets and liabilities existing
after transfers of financial assets whereby an entity recognizes the
assets it controls and the liabilities it has incurred and
derecognizes the assets it no longer controls and the liabilities it
has extinguished. The Statement provides standards to determine
whether transfers of financial assets are to be accounted for as
sales or secured borrowings. The adoption of the portions of SFAS No.
125 which were not deferred by SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125, did
not have a material effect on the Corporation's financial position or
results of operations.
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5. DERIVATIVES
The Corporation uses various interest rate and foreign exchange
derivative contracts in the management of its risk strategy or as
part of its dealer and trading activities. Interest rate contracts
include futures, forward rate agreements, option contracts,
guarantees (caps, floors and collars) and swaps. Foreign exchange
contracts include spot, future, forward and option contracts.
Derivative financial instruments which are used as part of the
Corporation's dealer and trading activities are marked to market and
the resulting unrealized gains and losses are recognized in
noninterest income in the period of change. These instruments include
interest rate futures, forward rate agreements, option contracts,
guarantees (caps, floors and collars), swaps and foreign exchange
spot, future, forward and option contracts. Realized and unrealized
gains and losses on interest rate contracts and foreign exchange
contracts are recorded in trading account income and foreign exchange
income, respectively.
7
<PAGE> 10
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Derivative financial instruments which are used in the management
of the Corporation's risk strategy may qualify for hedge accounting.
A derivative financial instrument may be a hedge of an existing
asset, liability, firm commitment or anticipated transaction. Hedge
accounting is used when the following criteria are met: the hedged
item exposes the Corporation to price, currency or interest rate risk
and the hedging instrument reduces the exposure to risk and the
hedging instrument is designated as a hedge. At the inception of the
hedge and throughout the hedge period, a high correlation of changes
in both the market value of the hedging instrument and the fair value
of the hedged item should be probable. Additional criteria for using
hedge accounting for anticipated transactions are: the significant
characteristics and expected terms of the anticipated transaction are
identified and it is probable that the anticipated transaction will
occur.
If hedge criteria are met, then unrealized gains and losses on
derivative financial instruments other than interest rate swaps are
generally recognized in the same period and in the same manner in
which gains and losses from the hedged item are recognized.
Unrealized gains and losses on a hedging instrument are deferred when
the hedged item is accounted for on an historical cost basis. The
hedging instrument is marked to market when the hedged item is
accounted for on a mark to market basis.
Derivative financial instruments which are used in the management
of the Corporation's risk strategy include interest rate futures,
forwards, swaps and option contracts.
Deferred gains and losses on interest rate futures contracts used
to hedge existing assets and liabilities are included in the basis of
the item being hedged. For hedges of anticipated transactions, the
Corporation recognizes deferred gains or losses on futures
transactions as adjustments to the cash position eventually taken.
Gains or losses on termination of an interest rate futures contract
designated as a hedge are deferred and recognized when the offsetting
gain or loss is recognized on the hedged item. When the hedged item
is sold, existing unrealized gains or losses on the interest rate
futures contract are recognized as part of net income at the time of
the sale. Thereafter, unrealized gains and losses on the hedge
contract are recognized in income immediately.
The Corporation engages in interest rate swaps in order to manage
its interest rate risk exposure. Contractual payments under interest
rate swaps designated as hedges are accrued in the Statement of
Income as a component of interest income or expense. There is no
recognition of unrealized gains and losses on the balance sheet.
Gains or losses on termination of an interest rate swap contract
designated as a hedge are deferred and amortized as an adjustment of
the yield on the underlying balance sheet position over the remainder
of the original contractual life of the terminated swap. When the
hedged item is sold, existing unrealized gains or losses on the swap
contract are recognized in income at the time of the sale.
Thereafter, unrealized gains and losses on the hedge contract are
recognized as part of net income when they occur.
Interest rate options are used to manage the Corporation's
interest rate risk exposure from rate lock commitments and fixed rate
mortgage loans intended to be sold in the secondary market. Changes
in the market value of options designated as hedges are deferred from
income recognition and effectively recognized as other noninterest
income when the loans are sold and the hedge position is closed.
Loans intended to be sold in the secondary market are carried at
lower of allocated cost or current market value. When a hedge
contract with an embedded gain is terminated early, the deferred gain
is recorded as an adjustment to the carrying value of the loans. When
a hedge contract with an embedded loss is terminated early, the
deferred loss is charged to other noninterest income. When the hedged
item is sold before the hedge contract is terminated and the hedge
contract has an embedded gain or loss, the deferred gain or loss is
recorded as other noninterest income in the same period as part of
the gain or loss on the sale of the loans. Thereafter, unrealized
gains and losses on the hedge contract are recognized as part of net
income when they occur.
8
<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) 1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
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>
ASSETS
Money market assets:
Interest-bearing deposits at banks....... $ 643 5.49% $ 471 5.30% $ 627 5.45% $ 431 5.29%
Federal funds sold and securities
purchased under agreement to resell.... 211 5.66 251 5.61 208 5.57 249 5.54
-------- -------- -------- --------
Total money market assets......... 854 5.53 722 5.41 835 5.48 680 5.38
Trading account assets..................... 55 5.77 82 7.22 62 6.39 76 6.96
Portfolio securities available-for-sale:
(1) (2)
U.S. Treasury and Federal agency......... 4,593 6.54 4,015 6.55 4,407 6.45 3,765 6.57
State and municipal...................... 306 8.66 355 5.01 303 8.65 317 5.66
Other.................................... 33 5.09 48 5.05 32 5.13 67 5.39
-------- -------- -------- --------
Total portfolio securities
available-for-sale.............. 4,932 6.66 4,418 6.41 4,742 6.58 4,149 6.48
Loans, net of unearned income.............. 10,912 8.56 9,692 8.38 10,788 8.49 9,585 8.42
-------- -------- -------- --------
TOTAL INTEREST-EARNING ASSETS..... 16,753 7.84 14,914 7.65 16,427 7.77 14,490 7.71
-------- -------- -------- --------
Cash and demand balances due from banks.... 1,190 1,086 1,206 1,121
Other assets............................... 1,176 880 1,181 877
-------- -------- -------- --------
Total assets...................... $ 19,119 $ 16,880 $ 18,814 $ 16,488
======== ======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market
accounts................................. $ 2,741 3.23 $ 1,843 3.10 $ 2,778 3.21 $ 1,809 3.17
Savings deposits and certificates.......... 4,717 4.92 2,590 4.77 4,708 4.90 2,564 4.87
Other time deposits........................ 972 5.59 924 5.45 695 5.52 877 5.46
Foreign office time deposits............... 1,554 5.52 2,673 5.36 1,641 5.40 2,610 5.41
-------- -------- -------- --------
TOTAL INTEREST-BEARING DEPOSITS... 9,984 4.61 8,030 4.66 9,822 4.55 7,860 4.73
Short-term borrowings...................... 3,935 5.37 4,167 4.84 3,764 5.27 3,852 4.99
Long-term notes............................ 379 7.26 365 7.16 379 7.22 364 7.20
-------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES..................... 14,298 4.89 12,562 4.78 13,965 4.81 12,076 4.87
Noninterest-bearing deposits............... 2,998 2,834 3,017 2,894
Other liabilities.......................... 303 352 319 383
Stockholder's equity....................... 1,520 1,132 1,513 1,135
-------- -------- -------- --------
Total liabilities and
stockholder's
equity.......................... $ 19,119 $ 16,880 $ 18,814 $ 16,488
======== ======== ======== ========
NET INTEREST MARGIN (RELATED TO AVERAGE
INTEREST-EARNING ASSETS)................. 3.67% 3.62% 3.68% 3.65%
===== ===== ===== =====
</TABLE>
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt interest income has been restated to a comparable taxable level.
2. AVERAGE RATE ON PORTFOLIO SECURITIES AVAILABLE-FOR-SALE
Yields on securities classified as available-for-sale are based on amortized
cost.
9
<PAGE> 12
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SECOND QUARTER 1997
COMPARED WITH
SECOND QUARTER 1996
- --------------------------------------------------------------------------------
SUMMARY The Corporation's net income for the second quarter of 1997 was $37.4
million. This represented a 3% decrease from the same quarter of a
year ago. In management's opinion, "cash earnings," defined as
earnings before amortization of goodwill and other valuation
intangibles (primarily from the Household transaction), represent a
more valid basis for comparison with prior periods. Cash earnings
were $42.0 million in the second quarter of 1997, a 4% increase
compared to the corresponding quarter in 1996. Cash ROE was 13.73%
compared to cash ROE of 16.40% in the same quarter a year ago.
Second quarter net interest income on a fully taxable equivalent
basis was $153.2 million, up $18.6 million or 14% from $134.5 million
in 1996's second quarter. Average earning assets rose 12% to $16.75
billion from $14.91 billion in 1996, primarily attributable to an
increase of 13% or $1.22 billion in average loans. Commercial,
installment and residential real estate lending were all strong
contributors to this growth. Household represented $389 million of
the increase in total average loans. Net interest margin improved to
3.67% from 3.62% in the same quarter last year. Several factors
affected net interest margin but the most significant was a more
favorable funding mix resulting from lower interest costs associated
with deposits assumed from Household Bank, compared to interest costs
on wholesale funds displaced. Excluding the contribution of the
Household transaction, net interest income would have increased $4.7
million or 4% quarter-to-quarter.
The second quarter 1997 provision for loan losses of $16.4
million was up $2.7 million from $13.7 million in the second quarter
of 1996. Net charge-offs increased from $12.9 million to $16.7
million in the current quarter, primarily reflecting higher charge
card portfolio writeoffs.
Noninterest income increased $10.4 million, or 13%. In the
current quarter trust fees increased by $3.7 million, service charge
fees rose by $4.4 million and charge card income increased $1.7
million. Securities gains improved $2.5 million compared to second
quarter 1996. Foreign exchange income declined $2.2 million.
Excluding the contribution from the Household transaction, the
Corporation's noninterest income would have increased $7.5 million or
9% from the prior year's quarter.
Second quarter noninterest expenses of $165.3 million rose $27.0
million from second quarter last year. Second quarter 1996 did not
include operating expenses associated with Household or the related
amortization of goodwill and other intangible assets. Excluding all
Household-related charges, total expenses increased $7.6 million or
6% in the second quarter 1997 compared to the year-earlier quarter,
primarily attributable to one-time costs of systems conversions.
Additional commentary on the matters included in the above
summary is provided in the following sections of this report.
10
<PAGE> 13
- --------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------- -------------------------
(dollars in thousands) 1997 1996 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income................................... $320,716 $277,992 $621,211 $544,491
Fully taxable equivalent adjustment............... 6,818 5,914 12,940 11,470
-------- -------- -------- --------
Interest income (fully taxable equivalent
basis)...................................... 327,534 283,906 634,151 555,961
Interest expense.................................. 174,366 149,361 333,629 292,717
-------- -------- -------- --------
Net interest income (fully taxable
equivalent basis)........................... $153,168 $134,545 $300,522 $263,244
======== ======== ======== ========
Increase (decrease) due to change in:
Volume........................................ $ 16,747 $ 18,860 $ 35,118 $ 29,869
Rate.......................................... 1,876 (9,106) 2,160 (14,269)
-------- -------- -------- --------
Total increase in net interest income.... $ 18,623 $ 9,754 $ 37,278 $ 15,600
======== ======== ======== ========
</TABLE>
Second quarter net interest income on an FTE basis was $153.2
million, up 14% from $134.5 million in second quarter 1996. Average
earning assets increased 12% or $1.84 billion and net interest
margin, the other principal determinant of net interest income,
increased from 3.62% to 3.67% in the current quarter. Excluding the
Household transaction, net interest income would have increased $4.7
million.
Average loans rose $1.22 billion, or 13%. Commercial, installment
and residential real estate loans increased $496 million, $425
million and $497 million, respectively, with Household loans
representing approximately $389 million of the increase in total
loans. Average portfolio securities were up 12%, or $514 million,
primarily reflecting increased holdings of Federal agency securities.
Total money market assets rose $132 million or 18% over second
quarter 1996 levels.
Funding for this asset growth came primarily from the assumption
of deposit liabilities in connection with the June 1996 purchase of
branches owned by Household. Savings deposits and certificates
increased by $2.13 billion. Money market and interest checking
accounts increased $637 million and $261 million, respectively. With
the increase in retail deposits, dependence on wholesale funding
declined, including reductions in foreign time deposits of $1.12
billion and short-term borrowings of $232 million.
The Corporation's consolidated net interest margin rose to 3.67%
from 3.62% in the same quarter last year. This reflects a more
favorable funding mix resulting from lower interest costs associated
with deposits assumed from Household, compared to interest costs on
wholesale funds displaced. This benefit has been offset somewhat by
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.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended June 30
-----------------------------------------
Daily Average Balances (in millions) 1997 1996
Average Rates Earned and Paid ------------------- -------------------
(fully taxable equivalent basis) Balances Rates Balances Rates
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets................... $ 16,753 7.84% $ 14,914 7.65%
======== ========
Interest-bearing liabilities.............. $ 14,298 4.89 $ 12,562 4.78
Noninterest-bearing sources of funds...... 2,455 2,352
-------- --------
Total supporting liabilities.......... $ 16,753 4.17 $ 14,914 4.03
======== ========
Net interest margin (related to average
interest-earning assets)................ 3.67% 3.62%
=== ===
<CAPTION>
Six Months Ended June 30
-----------------------------------------
Daily Average Balances (in millions) 1997 1996
Average Rates Earned and Paid ------------------- -------------------
(fully taxable equivalent basis) Balances Rates Balances Rates
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets................... $ 16,427 7.77% $ 14,490 7.71%
======== ========
Interest-bearing liabilities.............. $ 13,965 4.81 $ 12,076 4.87
Noninterest-bearing sources of funds...... 2,462 2,414
-------- --------
Total supporting liabilities.......... $ 16,427 4.09 $ 14,490 4.06
======== ========
Net interest margin (related to average
interest-earning assets)................ 3.68% 3.65%
=== ===
</TABLE>
11
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Six Months Increase
Ended June 30 (Decrease) Ended June 30 (Decrease)
NONINTEREST ------------------- ------------- ------------------- -------------
INCOME (dollars in thousands) 1997 1996 Amount % 1997 1996 Amount %
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees........... $ 33,159 $ 29,470 $ 3,689 13 $ 64,753 $ 59,259 $ 5,494 9
Trading account............. 1,631 2,652 (1,021) (38) 2,559 3,652 (1,093) (30)
Foreign exchange............ 1,232 3,465 (2,233) (64) 2,120 7,000 (4,880) (70)
Charge card................. 12,830 11,110 1,720 15 24,432 21,076 3,356 16
Service fees and charges.... 23,703 19,310 4,393 23 47,099 36,435 10,664 29
Portfolio securities
gains..................... 2,630 140 2,490 + 3,968 3,550 418 12
Other....................... 15,365 13,970 1,395 10 33,471 29,630 3,841 13
-------- -------- ------- -------- -------- -------
Total noninterest income.... $ 90,550 $ 80,117 $10,433 13 $178,402 $160,602 $17,800 11
======== ======== ======= === ======== ======== ======= ===
</TABLE>
Noninterest income for the 1997 second quarter was $90.6 million, an
increase of $10.4 million or 13% from the second quarter of 1996.
Service fees and charges totaled $23.7 million, an increase of $4.4
million or 23% from the prior year. Excluding the effect of
Household, service fees and charges would have increased $1.7 million
or 9%. Trust and investment management revenue was $33.2 million, an
increase of $3.7 million or 13% from the previous year. Charge card
fees totaled $12.8 million, up $1.7 million from 1996. Net gains
reported from the sale of debt portfolio securities totaled $2.6
million, up $2.5 million over 1996.
Foreign exchange revenue was $1.2 million, down 64% from the
second quarter of 1996 primarily because of reductions in customer
transactions related to the sale of the securities custody and
related trustee service business for large institutions in first
quarter 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONINTEREST Quarter Increase Six Months Increase
EXPENSES Ended June 30 (Decrease) Ended June 30 (Decrease)
AND INCOME ------------------- ------------- ------------------- -------------
TAXES (dollars in thousands) 1997 1996 Amount % 1997 1996 Amount %
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation.............. $ 77,340 $ 67,653 $ 9,687 14 $151,704 $129,822 $21,882 17
Pension, profit sharing and
other employee benefits... 15,485 13,590 1,895 14 31,222 29,778 1,444 5
Net occupancy............... 13,583 10,852 2,731 25 28,078 21,578 6,500 30
Equipment................... 12,263 10,257 2,006 20 22,816 20,057 2,759 14
Marketing................... 7,046 7,073 (27) -- 13,036 12,723 313 2
Communication and
delivery.................. 5,963 5,167 796 15 11,336 10,499 837 8
Deposit insurance........... 770 63 707 + 1,421 79 1,342 +
Other....................... 25,947 21,389 4,558 21 48,798 41,087 7,711 19
-------- -------- ------- -------- -------- -------
158,397 136,044 22,353 16 308,411 265,623 42,788 16
Goodwill and other valuation
intangibles............... 6,911 2,236 4,675 209 13,872 4,418 9,454 214
-------- -------- ------- -------- -------- -------
Total noninterest expense... $165,308 $138,280 $27,028 20 $322,283 $270,041 $52,242 19
======== ======== ======= ======== ======== =======
Provision for income taxes $ 17,741 $ 17,988 $ (247) (1) $ 36,635 $ 37,113 $ (478) (1)
======== ======== ======= === ======== ======== ======= ===
</TABLE>
Noninterest expenses for 1997 second quarter totaled $165.3 million,
an increase of $27.0 million or 20% from the second quarter of 1996.
Second quarter 1996 did not include operating expenses associated
with Household or the related amortization of goodwill and other
intangible assets. Excluding all Household-related charges, total
expenses increased $7.6 million or 6% in second quarter 1997 compared
to the year-earlier quarter.
12
<PAGE> 15
- --------------------------------------------------------------------------------
Employment-related expenses totaled $92.8 million, an increase of
$11.6 million or 14%. Excluding the effect of Household,
employment-related expenses would have increased $5.5 million or 7%.
Net occupancy expenses totaled $13.6 million, up $2.7 million from
the prior year's second quarter. Net occupancy expenses would have
increased $0.8 million or 7%, excluding the effect of Household.
Other noninterest expenses rose $4.6 million or 21%; the increase was
primarily related to incremental expense from the Household
transaction. Amortization of Household-related goodwill and other
valuation intangibles resulted in a $4.7 million increase from the
prior year's quarter.
Income tax expense totaled $17.7 million, a decrease of 1% from
$18.0 million recorded in second quarter 1996, reflecting a small
decline in pretax income.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at June 30, 1997 was $1.56
billion, compared with $1.52 billion and $1.45 billion at December
31, 1996 and June 30, 1996, respectively. During the preceding twelve
months, the Corporation declared common and preferred dividends of
$42.7 million and $16.6 million, respectively.
In anticipation of the acquisition of branches previously owned
by Household, 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 the Corporation's parent company, Bankmont
Financial Corp. ("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 loan losses. The Corporation's Tier 1 and
total risk-based capital ratios were 7.95% and 10.93%, respectively,
at June 30, 1997. HTSB's Tier 1 and total risk-based capital ratios
were 7.26% and 10.56%, respectively, at June 30, 1997.
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 and HTSB's
Tier 1 leverage ratios were 6.79% and 6.49%, respectively, for the
second quarter of 1997.
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, 1997, 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. Identifiable
intangibles acquired before February 19, 1992 continue to be included
with Tier 1 capital. All other intangibles (including core deposit
premiums and goodwill), along with amounts in excess of the above
limits, are deducted from Tier 1 capital for purposes of risk-based
and leverage capital ratio calculations. At June 30, 1997, the
Corporation's intangible assets totaled $302 million, including
approximately $286 million of
13
<PAGE> 16
- --------------------------------------------------------------------------------
intangibles excluded under capital guidelines. The Corporation's and HTSB's
tangible Tier 1 leverage ratios (which exclude all intangibles) were 6.71% and
6.39%, respectively, for the second quarter of 1997.
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
June 30 December 31 June 30
(dollars in thousands) 1997 1996 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $20,162,921 $18,228,740 $17,867,661
=========== =========== ===========
Average assets (quarter).................................. $19,118,919 $18,159,800 $16,879,594
=========== =========== ===========
Risk-based on-balance sheet assets........................ $12,650,915 $11,975,359 $11,380,903
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 3,749,855 $ 3,508,486 $ 3,371,604
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $16,112,172 $15,191,093 $14,752,507
=========== =========== ===========
Tier 1 capital............................................ $ 1,280,354 $ 1,230,628 $ 1,184,154
=========== =========== ===========
Supplementary capital..................................... $ 481,478 $ 501,497 $ 498,133
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 1,761,237 $ 1,731,448 $ 1,682,287
=========== =========== ===========
Tier 1 leverage ratio..................................... 6.79% 6.88% 7.12%
=========== =========== ===========
Risk-based capital ratios
Tier 1.................................................. 7.95% 8.10% 8.20%
Total................................................... 10.93% 11.40% 11.64%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING June 30 March 31 June 30
ASSETS (dollars in thousands) 1997 1996 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans............................................ $ 29,198 $31,370 $ 38,490
Restructured loans.......................................... 1,950 1,508 1,933
---------- ------- --------
Total nonperforming loans................................... 31,148 32,878 40,423
Other assets received in satisfaction of debt............... 1,526 1,598 1,473
---------- ------- --------
Total nonperforming assets..................................$ 32,674 $34,476 $ 41,896
========== ======= ========
Nonperforming loans to total loans (end of period).......... 0.28% 0.30% 0.39%
Nonperforming assets to total loans (end of period)......... 0.29% 0.31% 0.41%
========== ======= ========
90-day past due loans still accruing interest............... $ 57,097 $35,424 $ 58,695
========== ======= ========
</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, 1997 totaled $33 million, or
.29% of total loans, down from $34 million or .31% of total loans at
March 31, 1997 and also down from $42 million or .41% of loans a year
earlier.
Interest shortfall for the quarter ended June 30, 1997 was $1.8
million compared to $1.7 million one year ago.
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.
14
<PAGE> 17
- --------------------------------------------------------------------------------
Interest income on nonaccrual loans is recognized only at the time cash is
received and only if the collection of the entire principal balance is expected.
Interest income on restructured loans is accrued according to the most recently
agreed upon contractual terms.
<TABLE>
<CAPTION>
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total Impaired
(dollars in thousands) Related Allowance No Related Allowance Loans
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1997
Balance............................................ $11,725 $17,473 $29,198
Related allowance.................................. 4,940 -- 4,940
------- ------- -------
Balance, net of allowance.......................... $ 6,785 $17,473 $24,258
======= ======= =======
December 31, 1996
Balance............................................ $ 4,827 $23,326 $28,153
Related allowance.................................. 3,244 -- 3,244
------- ------- -------
Balance, net of allowance.......................... $ 1,583 $23,326 $24,909
======= ======= =======
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended June 30 Six Months Ended June 30
---------------------- ------------------------
(dollars in thousands) 1997 1996 1997 1996
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average impaired loans.................................... $29,210 $49,131 $30,599 $50,799
======= ======= ======= =======
Total interest income on impaired loans................... $ 14 $ 89 $ 62 $ 105
======= ======= ======= =======
Interest income on impaired loans recorded on a cash
basis................................................... $ 14 $ 89 $ 62 $ 105
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR POSSIBLE
Quarter Ended June 30 Six Months Ended June 30
--------------------- -------------------------
LOAN LOSSES (dollars in thousands) 1997 1996 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period.......................... $142,263 $133,672 $142,211 $129,259
-------- -------- -------- --------
Charge-offs........................................... (19,375) (16,583) (36,991) (29,222)
Recoveries............................................ 2,665 3,642 6,451 7,171
-------- -------- -------- --------
Net charge-offs....................................... (16,710) (12,941) (30,540) (22,051)
Provision charged to operations....................... 16,410 13,689 30,292 27,212
Allowance related to acquired loans................... -- 4,800 -- 4,800
-------- -------- -------- --------
Balance at June 30.................................... $141,963 $139,220 $141,963 $139,220
======== ======== ======== ========
Net charge-offs as a percentage of provision charged
to operations....................................... 102% 95% 101% 81%
Allowance for possible loan losses to nonperforming
loans (period-end).................................. 456% 344%
Allowance for possible loan losses to nonperforming
assets (period-end)................................. 434% 332%
Allowance for possible loan losses to total loans
outstanding (period-end)............................ 1.27% 1.36%
</TABLE>
15
<PAGE> 18
- --------------------------------------------------------------------------------
The Corporation's provision for loan losses for the current quarter
was $16.4 million, up 19.9% from $13.7 million in last year's second
quarter. Net charge-offs also increased from $12.9 million to $16.7
million for the current quarter, bringing net charge-offs on a
year-to-date basis to $30.5 million compared to $22.1 million in the
same 1996 period. The increase in second quarter net charge-offs was
primarily attributable to higher writeoffs of charge card balances in
the second quarter of 1997 compared to the same quarter last year,
offset somewhat by a decrease in net commercial loan charge-offs from
second quarter 1996 to second quarter 1997. For the second quarter of
1997, net charge-offs related to charge card and commercial loans
were $14.6 million and $0.8 million, respectively, compared to $11.2
million and $1.5 million, respectively, for the second quarter of
1996.
At June 30, 1997, the allowance for possible loan losses was $142
million, equal to 1.27% of total loans outstanding, up from $139
million or 1.36% of total loans one year ago; however, the allowance
as a percentage of nonperforming loans increased from 344% at June
30, 1996, to 456% at June 30, 1997.
- --------------------------------------------------------------------------------
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 38% of the
Corporation's total assets and amounted to $7.69 billion at June 30,
1997. 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 Bank of Montreal
that terminates on December 18, 1999. There were no borrowings under
this credit facility in year-to-date 1997 or 1996.
In connection with the June 1996 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.
As a result of the Household acquisition, there were significant
changes in the composition of average liabilities from second quarter
1996 to the quarter ending June 30, 1997. The Corporation's average
volume of core deposits, consisting of demand deposits, interest
checking deposits, savings deposits and certificates, and money
market accounts increased from $7.19 billion or 48% of total
non-equity funding for the quarter ending June 30, 1996 to $10.46
billion or 62% of non-equity funding during second quarter 1997.
Total deposits averaged $12.98 billion in the current quarter, an
increase of $2.12 billion compared to the same quarter last year.
Total average wholesale deposits and short-term borrowings decreased
from $7.72 billion or 52% of total non-equity funding at June 30,
1996 to $6.46 billion or 38% of total non-equity funding at June 30,
1997.
16
<PAGE> 19
- --------------------------------------------------------------------------------
Average money market assets in the second quarter of 1997
increased $132 million or 18% from the same quarter last year.
These assets represented 5% of average earning assets in 1997
remaining unchanged from one year ago. Average money market
liabilities decreased 22% to $2.97 billion this quarter from
$3.83 billion in the same quarter last year. The Corporation
reduced its wholesale funding sources primarily 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 $1.50 billion outstanding at any time.
The term of each note could range from fourteen days to fifteen
years. The notes are subordinated to deposits and rank pari passu
with all other senior unsecured indebtedness of HTSB. As of June
30, 1997, $240 million of short-term notes were outstanding
compared to $350 million at June 30, 1996.
- --------------------------------------------------------------------------------
SIX MONTHS The Corporation's earnings for the six months ended June 30,
ENDED 1997 were $76.8 million. This represented a $1.2 million or 2%
JUNE 30, 1997 decrease from 1996 earnings of $78.0 million. Earnings
COMPARED comparability between years was affected by the June 1996
WITH 1996 purchase of Household Bank's Chicagoland retail banking business.
In addition to the impact of the Household transaction, during
the first quarter a year ago the Corporation realized a $2.4
million after-tax gain from the sale of its securities custody
and related trustee service business for large institutions.
Excluding the impact of the Household transaction and the gain
from the sale of the custody business for large institutions,
core earnings increased 6% from a year ago.
Net interest income on a fully taxable equivalent basis was
$300.5 million in the current period, an increase of $37.3
million or 14% from $263.2 million in the first six months of
1996. Average earning assets increased to $16.4 billion from
$14.5 billion a year ago primarily attributable to an increase of
13% or $1.20 billion in average loans. Commercial, installment
and residential real estate lending were all contributors to this
growth. Household represented $382 million of the increase in
total average loans. Net interest margin improved to 3.68% from
3.65% in 1996. Several factors affected the margin but the most
significant was a more favorable funding mix resulting from lower
interest costs associated with deposits assumed from Household
Bank, compared to interest costs on wholesale funds displaced.
Excluding the contribution of the Household transaction, net
interest income would have increased $11.2 million or 4% from a
year ago.
The 1997 provision for loan losses of $30.3 million was up
$3.1 million from $27.2 million a year ago. Net charge-offs
increased $8.5 million to $30.5 million, primarily reflecting
higher charge card portfolio writeoffs.
Noninterest income increased $17.8 million to $178.4 million
in 1997 compared to a year. During the first quarter of 1996,
HTSB sold its securities custody and related trustee services
business for large institutions, recording a $4.0 million pretax
gain. In the current year, trust income increased $5.5 million,
charge card income increased $3.4 million and service charge
income increased $10.7 million. Foreign exchange income declined
$4.9 million. Other sources of noninterest income which include
syndication fees, gains on mortgage loan sales and fees on
letters of credit increased $3.8 million. Without the
contribution from the Household transaction and the sale of the
custody business for large institutions, the Corporation's
noninterest income would have increased $15.9 million or 10% from
the prior year.
Noninterest expenses of $322.3 million rose $52.2 million
from a year ago. Excluding all Household-related charges, total
expenses increased $15.4 million or 6% in 1997 compared to a year
earlier, primarily attributable to the cost of a property lease
cancellation and a one-time cost of systems conversions in
addition to normal expense increases associated with business
expansion.
17
<PAGE> 20
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
- ------------------------------
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
Pastora San Juan Cafferty
Professor
University of Chicago
School of Social Service Administration
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
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.
- ------------------------------
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
HARRIS TRADE SERVICES LIMITED
Hong Kong
<PAGE> 21
EXHIBIT A -- HARRIS BANKCORP, INC.
1997 SECOND QUARTER REPORT
JUNE 30, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,776,743
<INT-BEARING-DEPOSITS> 628,982
<FED-FUNDS-SOLD> 239,389
<TRADING-ASSETS> 101,569
<INVESTMENTS-HELD-FOR-SALE> 4,943,132
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 11,195,267
<ALLOWANCE> (141,963)
<TOTAL-ASSETS> 20,162,921
<DEPOSITS> 14,571,206
<SHORT-TERM> 3,408,533
<LIABILITIES-OTHER> 202,413
<LONG-TERM> 379,191
53,340
0
<COMMON> 225,000
<OTHER-SE> 1,277,131
<TOTAL-LIABILITIES-AND-EQUITY> 20,162,921
<INTEREST-LOAN> 232,736
<INTEREST-INVEST> 75,596
<INTEREST-OTHER> 12,384
<INTEREST-TOTAL> 320,716
<INTEREST-DEPOSIT> 114,834
<INTEREST-EXPENSE> 174,366
<INTEREST-INCOME-NET> 146,350
<LOAN-LOSSES> 16,410
<SECURITIES-GAINS> 2,630
<EXPENSE-OTHER> 165,308
<INCOME-PRETAX> 55,182
<INCOME-PRE-EXTRAORDINARY> 37,441
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,441
<EPS-PRIMARY> 4.99
<EPS-DILUTED> 4.99
<YIELD-ACTUAL> 3.67
<LOANS-NON> 29,198
<LOANS-PAST> 57,097
<LOANS-TROUBLED> 1,950
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 142,263
<CHARGE-OFFS> 19,375
<RECOVERIES> 2,665
<ALLOWANCE-CLOSE> 141,963
<ALLOWANCE-DOMESTIC> 141,963
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
