<PAGE> 1
================================================================================
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 MARCH 31, 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 May 13, 1997 the Corporation had 6,667,490 shares of $8 par value common
stock outstanding.
================================================================================
<PAGE> 2
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------------
1997 1996 Change
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income......................................... $141,232 $123,143 15%
Net interest income (fully taxable equivalent).............. 147,354 128,699 14
Provision for loan losses................................... 13,882 13,523 3
Noninterest income.......................................... 87,853 80,485 9
Noninterest expenses........................................ 156,976 131,761 19
Net income.................................................. 39,333 39,219 --
Dividends -- common stock................................... 10,600 16,000 (34)
Dividends -- preferred stock................................ 4,148 3,408 22
- -------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity............... 11.13% 15.03% (390)bp
Return on average assets.................................... 0.86 0.98 (12)
Cash basis return on average common stockholder's equity
(1)....................................................... 14.81 16.27 (146)
Cash basis return on average assets (2)..................... 0.98 1.03 (5)
Tier 1 risk-based capital ratio............................. 7.92 8.19 (27)
Total risk-based capital ratio.............................. 11.07 11.82 (75)
Tier 1 leverage ratio....................................... 6.87 6.96 (9)
Allowance for possible loan losses to total loans
(period-end).............................................. 1.28 1.37 (9)
- -------------------------------------------------------------------------------------------
DAILY AVERAGE BALANCES (IN MILLIONS)
Loans, net of unearned income............................... $ 10,662 $ 9,479 12%
Portfolio securities........................................ 4,511 3,904 16
Money market assets......................................... 816 588 39
Total interest-earning assets............................... 16,098 14,014 15
Total assets................................................ 18,506 16,095 15
Deposits.................................................... 12,694 10,643 19
Short-term borrowings....................................... 3,591 3,535 2
Common stockholder's equity................................. 1,282 958 34
- -------------------------------------------------------------------------------------------
BALANCES AT QUARTER-END (IN MILLIONS)
Loans, net of unearned income............................... $ 11,136 $ 9,783 14%
Allowance for possible loan losses.......................... 142 134 6
Portfolio securities........................................ 4,849 4,352 11
Total assets................................................ 19,884 16,919 18
Deposits.................................................... 13,618 11,116 23
Common stockholder's equity................................. 1,274 942 35
Total stockholder's equity.................................. 1,499 1,122 34
- -------------------------------------------------------------------------------------------
</TABLE>
(1) 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 after-tax average intangible assets.
(2) 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> 3
REPORT FROM MANAGEMENT
- --------------------------------------------------------------------------------
Harris Bankcorp's earnings for the quarter ended March 31, 1997 were
$39.3 million compared to $39.2 million for the same quarter a year
earlier. For the current quarter, annualized return on average common
stockholder's equity was 11.13% compared to 15.03% in first quarter
1996, while the annualized return on average assets was 0.86%
currently and 0.98% in first quarter a year ago.
Earnings comparability between the quarters was affected by the
June 1996 purchase of Household Bank, f.s.b.'s ("Household" or
"Household Bank") Chicagoland retail banking business. In addition to
the impact of the Household transaction, during 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 services business
for large institutions. Excluding the impact of the Household
transaction and the gain from sale of the custody business for large
institutions, core earnings increased 11% from first quarter 1996.
Earnings before amortization of goodwill and other valuation
intangibles ("cash earnings") were $43.9 million in first quarter
1997 compared to $40.9 million in the same quarter a year ago. The
cash earnings improvement was attributable to strong business growth
across corporate, private and retail banking. With Harris Bankcorp's
June 1996 acquisition of Household Bank's Chicagoland network,
earnings on a cash basis is the most relevant measure of comparative
performance.
In the current quarter, on a cash basis, return on equity ("cash
ROE") and return on assets ("cash ROA") were 14.81% and 0.98%,
respectively -- compared to cash ROE of 16.27% and cash ROA of 1.03%
in first quarter last year.
Net interest income on a fully taxable equivalent basis was
$147.4 million, up $18.7 million or 14% from first quarter last year.
Average earning assets rose 15% to $16.10 billion from $14.01 billion
in first quarter 1996, primarily attributable to an increase of $1.18
billion or 12% in average loans. Commercial, installment and
residential real estate lending were all strong contributors to this
growth. Net interest margin rose slightly from 3.69% in the first
quarter last year to 3.70% currently. Excluding the contribution of
the Household transaction, net interest income would have increased
$6.5 million or 5% quarter-to-quarter.
First quarter noninterest income of $87.9 million increased 9%
from the same quarter last year. Service charge fees rose by $6.3
million, including $2.3 million of fees from accounts associated with
the Household acquisition. Other income, which includes syndication
fees, mortgage loan sales, equity securities gains and foreign fees
increased $2.4 million during the current quarter while trust and
investment management fees rose $1.8 million. Foreign exchange income
declined by $2.6 million and net gains from debt portfolio securities
sales decreased from $2.1 million in first quarter 1996 to $1.3
million during the current quarter.
First quarter 1997 noninterest expenses of $157.0 million rose
$25.2 million or 19% from first quarter a year ago. The prior year's
first quarter 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 $7.8 million or 6% in first quarter 1997 compared
to the year-earlier quarter. This increase is attributable to the
cost of property lease cancellation and systems conversions in
addition to normal expense increases associated with core business
expansion.
Income tax expense decreased by 1%, reflecting slightly lower
pretax income.
The first quarter 1997 provision for loan losses of $13.9 million
was up from $13.5 million in the first quarter of 1996. Net loan
charge-offs during the current quarter were $13.8 million compared to
$9.1 million in the same period last year, with the difference
primarily attributable to higher writeoffs in the charge card
portfolio.
Nonperforming assets at March 31, 1997 totaled $34 million or
0.3% of total loans, compared to $31 million or 0.3% at December 31,
1996, and $54 million or 0.6% a year ago. At March 31, 1997, the
allowance for possible loan losses was $142 million, equal to 1.3% of
loans outstanding, compared to $134 million or 1.4% at the end of
first quarter 1996. As a result, the ratio of the allowance for
possible loan losses to nonperforming assets increased from 246% at
March 31, 1996 to 413% at March 31, 1997.
2
<PAGE> 4
- --------------------------------------------------------------------------------
At March 31, 1997, equity capital of Harris Bankcorp amounted to
$1.50 billion, up from $1.12 billion one year earlier. The regulatory
leverage capital ratio was 6.87% for the first quarter of 1997
compared to 6.96% in the same quarter of 1996. Harris Bankcorp's
capital ratio exceeds the prescribed regulatory minimum for bank
holding companies. Harris Bankcorp's March 31, 1997 Tier 1 and total
risk-based capital ratios were 7.92% and 11.07%, respectively,
compared to respective ratios of 8.19% and 11.82% at March 31, 1996.
In conjunction with the acquisition of Household Bank's Chicagoland
retail banking business, Harris Bankcorp increased its capital base
by $340 million, in part through the issuance of $45 million of
preferred stock and an additional $15 million of long-term
subordinated debt to the Corporation's parent company, Bankmont
Financial Corp. ("BFC"). The balance of the capital, $280 million,
was provided via an infusion of equity by BFC. At March 31, 1997,
Harris Bankcorp's equity capital included $225 million of preferred
stock.
The Corporation has recently opened three new locations, one in
north suburban Lake Forest and two on the City of Chicago's south
side, in Brighton Park and Morgan Park. This brings to 144 the number
of Harris-affiliated locations (including facilities of banking
institutions owned by Harris Bankmont, Inc.) opened or planned
throughout Chicagoland.
Harris Bank has announced that it is extending its successful
Small Business Lending Rate ("SBLR") initiative through at least
January 1998. The Harris Small Business Lending Rate, in effect a
unique "prime" rate for small businesses that tracks one-half percent
below The Wall Street Journal Prime, was first introduced as a
two-year program in early 1994. Now in its fourth successful year,
close to 4,000 Chicagoland small businesses are currently lowering
their cost of borrowing by banking at Harris. The decision to again
extend SBLR is a demonstration of our intense commitment to
Chicagoland's small businesses, which are so important to the growth
and vitality of their communities.
Harris Trust and Savings Bank, together with its 26 community
bank affiliates (including banking institutions owned by Harris
Bankmont, Inc.), was recently recognized for the second consecutive
year by the Small Business Administration ("SBA") as Chicagoland's
top SBA bank lender and the second largest in Illinois.
In April, two very talented and dedicated directors completed
their tenure on Harris Bankcorp's Board of Directors after many years
of wonderful service to the entire Harris community.
We are extremely grateful to Dr. Stanley O. Ikenberry, retired
President of the University of Illinois and now President of the
American Council on Education, for his wise counsel and inspiring
vision. Stan's thoughtful style and reflective approach have enriched
the Board's deliberations since 1985.
To William J. Weisz, retired Chairman and Chief Executive Officer
of Motorola, Inc., we express our deepest appreciation for his wisdom
and superb leadership during these past nine years. Bill's insights
and perspectives have been invaluable in shaping our strategy and
direction.
The contribution of these two outstanding individuals will be
greatly missed.
Pastora San Juan Cafferty, Professor at the University of
Chicago's School of Social Service Administration, was elected as a
new Board member.
ALAN G. MCNALLY
Alan G. McNally
Chairman of the Board and
Chief Executive Officer April 29, 1997
3
<PAGE> 5
CONSOLIDATED STATEMENT OF INCOME Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands except per share data) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $221,436 $198,679
Money market assets:
Deposits at banks......................................... 8,130 5,121
Federal funds sold and securities purchased under
agreement to resell..................................... 2,769 3,357
Trading account............................................. 992 945
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 62,453 52,670
State and municipal....................................... 4,343 4,527
Other..................................................... 371 1,200
-------- --------
Total interest income..................................... 300,494 266,499
-------- --------
INTEREST EXPENSE
Deposits.................................................... 106,754 91,713
Short-term borrowings....................................... 37,099 39,413
Senior notes................................................ 8,946 5,642
Long-term notes............................................. 6,463 6,588
-------- --------
Total interest expense.................................... 159,262 143,356
-------- --------
NET INTEREST INCOME......................................... 141,232 123,143
Provision for loan losses................................... 13,882 13,523
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 127,350 109,620
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 31,594 29,789
Trading account............................................. 928 1,000
Foreign exchange............................................ 888 3,535
Charge card................................................. 11,603 9,966
Service fees and charges.................................... 23,396 17,125
Portfolio securities gains.................................. 1,338 3,410
Other....................................................... 18,106 15,660
-------- --------
Total noninterest income.................................. 87,853 80,485
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 74,365 62,169
Pension, profit sharing and other employee benefits......... 15,737 16,188
Net occupancy............................................... 14,495 10,726
Equipment................................................... 10,554 9,800
Marketing................................................... 5,989 5,650
Communication and delivery.................................. 5,374 5,331
Deposit insurance........................................... 652 16
Other....................................................... 22,848 19,699
-------- --------
150,014 129,579
Goodwill and other valuation intangibles.................... 6,962 2,182
-------- --------
Total noninterest expenses................................ 156,976 131,761
-------- --------
Income before income taxes.................................. 58,227 58,344
Applicable income taxes..................................... 18,894 19,125
-------- --------
NET INCOME................................................ 39,333 39,219
Dividends on preferred stock................................ 4,148 3,408
-------- --------
Net Income Applicable to Common Stock....................... $ 35,185 $ 35,811
======== ========
EARNINGS PER COMMON SHARE (based on 6,667,490 average shares
outstanding)
Net Income Applicable to Common Stock....................... $ 5.28 $ 5.37
======== ========
</TABLE>
4
<PAGE> 6
CONSOLIDATED STATEMENT OF CONDITION Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31 March 31
(in thousands except share data) 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,657,846 $ 1,238,028 $ 1,071,854
Money market assets:
Interest-bearing deposits at banks........................ 620,917 658,257 457,302
Federal funds sold and securities purchased under
agreement to resell..................................... 443,649 294,792 323,157
Trading account assets...................................... 44,234 110,355 39,577
Portfolio securities available-for-sale..................... 4,848,503 3,985,183 4,352,333
Loans, net of unearned income of $6,271 in 1997, $7,624
and $14,272 in 1996....................................... 11,135,883 10,744,653 9,782,744
Allowance for possible loan losses.......................... (142,263) (142,211) (133,672)
Net loans................................................. 10,993,620 10,602,442 9,649,072
Premises and equipment...................................... 283,137 275,091 228,307
Customers' liability on acceptances......................... 66,859 78,983 71,355
Goodwill and other valuation intangibles.................... 308,405 310,663 36,960
Other assets................................................ 617,166 674,946 689,038
----------- ----------- -----------
TOTAL ASSETS.......................................... $19,884,336 $18,228,740 $16,918,955
=========== =========== ===========
LIABILITIES
Deposits in domestic offices - noninterest-bearing.......... $ 3,862,473 $ 3,642,578 $ 2,934,082
- interest-bearing............... 7,774,870 7,668,893 5,173,895
Deposits in foreign offices - noninterest-bearing........... 54,391 35,116 91,862
- interest-bearing................. 1,926,264 1,643,714 2,915,794
----------- ----------- -----------
Total deposits........................................ 13,617,998 12,990,301 11,115,633
Federal funds purchased and securities sold under agreement
to repurchase............................................. 2,815,140 1,983,047 2,814,151
Commercial paper outstanding................................ 264,391 334,653 244,085
Other short-term borrowings................................. 44,065 347,690 457,152
Senior notes................................................ 950,000 350,000 443,000
Acceptances outstanding..................................... 66,859 78,983 71,355
Accrued interest, taxes and other expenses.................. 165,846 159,250 160,916
Other liabilities........................................... 81,590 90,543 126,407
Long-term notes............................................. 379,149 379,107 363,989
----------- ----------- -----------
TOTAL LIABILITIES..................................... 18,385,038 16,713,574 15,796,688
----------- ----------- -----------
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 --
Common stock ($8 par value); authorized 10,000,000 shares;
issued and outstanding 6,667,490 shares................... 53,340 53,340 53,340
Surplus..................................................... 484,513 484,319 203,897
Retained earnings........................................... 785,211 760,626 701,279
Unrealized holding gains/(losses), net of deferred taxes of
($32,110) in 1997, ($5,364) and ($10,752) in 1996......... (48,766) (8,119) (16,249)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,499,298 1,515,166 1,122,267
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $19,884,336 $18,228,740 $16,918,955
=========== =========== ===========
</TABLE>
5
<PAGE> 7
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY Harris Bankcorp, Inc.
and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,515,166 $1,145,776
Net income................................................ 39,333 39,219
Contributions to capital.................................. 194 --
Dividends -- Series A preferred stock..................... (3,262) (3,408)
Dividends -- Series B preferred stock..................... (886) --
Dividends -- common stock................................. (10,600) (16,000)
Net change in unrealized holding gains/(losses) on
available-for-sale securities, net of tax............... (40,647) (43,320)
---------- ----------
BALANCE AT MARCH 31......................................... $1,499,298 $1,122,267
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
----------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 39,333 $ 39,219
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses................................. 13,882 13,523
Depreciation and amortization, including intangibles...... 17,013 11,440
Deferred tax benefit...................................... (193) (917)
Gain on sales of portfolio securities..................... (1,338) (3,410)
Trading account net sales................................. 66,121 59,061
Net (increase) decrease in interest receivable............ (551) 5,356
Net increase in interest payable.......................... 2,284 4,240
Net decrease (increase) in loans held for resale.......... 19,924 (193,081)
Other, net................................................ (4,538) (60,203)
----------- -----------
Net cash provided (used) by operating activities........ 151,937 (124,772)
----------- -----------
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits at banks........ 37,340 400
Net increase in Federal funds sold and securities
purchased under agreement to resell..................... (148,857) (143,465)
Proceeds from sales of securities available-for-sale...... 155,352 373,410
Proceeds from maturities of securities
available-for-sale...................................... 2,551,257 900,984
Purchases of securities available-for-sale................ (3,635,984) (2,305,222)
Net increase in loans..................................... (424,984) (80,975)
Proceeds from sales of premises and equipment............. 3,815 2,789
Purchases of premises and equipment....................... (21,912) (14,814)
Other, net................................................ 80,699 (39,730)
----------- -----------
Net cash used by investing activities................... (1,403,274) (1,306,623)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits.................................. 627,697 886,851
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 832,093 917,334
Net decrease in commercial paper outstanding.............. (70,262) (47,937)
Net decrease in short-term borrowings..................... (303,625) (385,897)
Proceeds from issuance of senior notes.................... 1,230,000 602,286
Repayment of senior notes................................. (630,000) (637,286)
Cash dividends paid on preferred stock.................... (4,148) (3,408)
Cash dividends paid on common stock....................... (10,600) (16,000)
Other, net................................................ -- (335,112)
----------- -----------
Net cash provided by financing activities............... 1,671,155 980,831
----------- -----------
NET INCREASE (DECREASE) IN CASH AND DEMAND BALANCES DUE
FROM BANKS............................................. 419,818 (450,564)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1.... 1,238,028 1,522,418
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT MARCH 31..... $ 1,657,846 $ 1,071,854
=========== ===========
</TABLE>
6
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
3. CASH FLOWS
For purposes of the Corporation's Consolidated Statement of Cash
Flows, cash and cash equivalents are defined to include cash and
demand balances due from banks. Cash interest payments (net of any
amounts capitalized) for the quarter ended March 31, totaled
$156,979,000 and $139,116,000 in 1997 and 1996, respectively. Cash
income tax payments over the same periods totaled $2,690,000 and
$5,981,000, respectively.
- --------------------------------------------------------------------------------
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.
7
<PAGE> 9
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
---------------------------------------
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>
ASSETS
Money market assets:
Interest-bearing deposits at banks........................ $ 610 5.40% $ 341 6.03%
Federal funds sold and securities purchased under
agreement to resell..................................... 206 5.47 247 5.47
-------- --------
Total money market assets.......................... 816 5.42 588 5.80
Trading account assets...................................... 70 6.86 71 6.57
Portfolio securities available-for-sale:
U.S. Treasury and Federal agency.......................... 4,223 6.33 3,515 6.31
State and municipal....................................... 296 8.74 275 10.05
Other..................................................... 31 5.23 86 5.60
-------- --------
Total portfolio securities available-for-sale...... 4,550 6.49 3,876 6.56
Loans, net of unearned income............................... 10,662 8.41 9,479 8.44
-------- --------
TOTAL INTEREST-EARNING ASSETS...................... 16,098 7.71 14,014 7.80
-------- --------
Cash and demand balances due from banks..................... 1,221 1,156
Other assets................................................ 1,187 925
-------- --------
Total assets....................................... $ 18,506 $ 16,095
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts........ $ 2,816 3.20 $ 1,777 3.25
Savings deposits and certificates........................... 4,699 4.88 2,538 4.98
Other time deposits......................................... 414 5.35 828 5.47
Foreign office time deposits................................ 1,729 5.30 2,548 5.47
-------- --------
TOTAL INTEREST-BEARING DEPOSITS.................... 9,658 4.48 7,691 4.80
Short-term borrowings....................................... 3,591 5.16 3,535 5.17
Long-term notes............................................. 379 7.18 364 7.24
-------- --------
TOTAL INTEREST-BEARING LIABILITIES................. 13,628 4.73 11,590 4.97
Noninterest-bearing deposits................................ 3,036 2,952
Other liabilities........................................... 335 415
Stockholder's equity........................................ 1,507 1,138
-------- --------
Total liabilities and stockholder's equity......... $ 18,506 $ 16,095
======== ========
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING
ASSETS)................................................... 3.70% 3.69%
===== =====
</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.
8
<PAGE> 10
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST QUARTER 1997
COMPARED WITH
FIRST QUARTER 1996
- --------------------------------------------------------------------------------
SUMMARY The Corporation's first quarter 1997 net income was $39.3 million, an
increase of $0.1 million from first quarter 1996. Earnings
comparability between quarters was affected by the June 1996 purchase
of Household Bank's Chicagoland retail banking business. In addition
to the impact of the Household transaction, during 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 11% from
first quarter 1996.
First quarter net interest income on a fully taxable equivalent
basis was $147.4 million, up $18.7 million or 14% from $128.7 million
in 1996's first quarter. Average earning assets rose 15% to $16.10
billion from $14.01 billion in 1996, primarily attributable to an
increase of 12% or $1.18 billion in average loans. Commercial,
installment and residential real estate lending were all strong
contributors to this growth. Included in this increase were $374
million of loans acquired from Household. Net interest margin
improved to 3.70% from 3.69% in the same quarter last year. Several
factors affected 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 $6.5
million or 5% quarter-to-quarter.
The first quarter provision for loan losses of $13.9 million was
up $0.4 million from $13.5 million in the first quarter of 1996. Net
charge-offs increased from $9.1 million to $13.8 million, primarily
reflecting higher charge card portfolio writeoffs.
Noninterest income increased $7.4 million to $87.9 million for
first quarter 1997 from the same quarter last year. During first
quarter 1996, HTSB sold its securities custody and related trustee
services business for large institutions, recording a $4.0 million
pretax gain. In the current quarter, service charge fees rose by $6.3
million and trust and investment management fees improved by $1.8
million compared to first quarter 1996. 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 by $8.3 million or 11% from the prior year's quarter.
First quarter 1997 noninterest expenses of $157.0 million rose
$25.2 million from first quarter last year. First 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
$7.8 million or 6% in first quarter 1997 compared to the year-earlier
quarter, primarily attributable to the cost of property lease
cancellation and systems conversions in addition to normal expense
increases associated with core business expansion.
Additional commentary on the matters included in the above
summary is provided in the following sections of this Report.
9
<PAGE> 11
- --------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands) 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Interest income............................................. $300,494 $266,499
Fully taxable equivalent adjustment......................... 6,122 5,555
-------- --------
Interest income (fully taxable equivalent basis)........ 306,616 272,054
Interest expense............................................ 159,262 143,355
-------- --------
Net interest income (fully taxable equivalent basis).... $147,354 $128,699
======== ========
Increase (decrease) due to change in:
Volume.................................................. $ 18,321 $ 13,421
Rate.................................................... 334 (7,575)
-------- --------
Total increase in net interest income................... $ 18,655 $ 5,846
======== ========
</TABLE>
First quarter net interest income on a fully taxable equivalent basis
was $147.4 million, up 14% from $128.7 million in first quarter 1996.
Average earning assets increased 15% or $2.08 billion and net
interest margin, the other principal determinant of net interest
income, increased from 3.69% to 3.70% in the current quarter.
Excluding the contribution of the Household transaction, net interest
income would have increased $6.5 million or 5% quarter-to-quarter and
the net interest margin would have decreased to 3.50% from 3.69%.
Average loans rose $1.18 billion, or 12%. Commercial, installment
and residential real estate loans increased $433 million, $409
million and $479 million, respectively, with Household loans
representing approximately $374 million of the increase in total
loans. Average portfolio securities were up 17%, or $674 million,
primarily reflecting increased holdings of Federal agency securities.
Total money market assets rose $228 million or 39% over first quarter
1996 levels.
Funding for asset growth came primarily from the assumption of
$2.9 billion in deposit liabilities in connection with the June 1996
purchase of branches owned by Household. Savings deposits and
certificates increased by $2.16 billion. Money market and interest
checking accounts increased $769 million and $270 million,
respectively. With this increase in retail deposits, dependence on
wholesale funding declined through reductions in foreign time
deposits of $819 million and other time deposits of $414 million.
Short-term borrowings increased by $56 million. The effective rate on
interest-bearing liabilities dropped from 4.97% in first quarter 1996
to 4.73% in the current quarter.
The Corporation's consolidated net interest margin increased to
3.70% from 3.69% 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 March 31
------------------------------------
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..................................... $16,097 7.71% $14,014 7.80%
======= =======
Interest-bearing liabilities................................ $13,628 4.73 $11,590 4.97
Noninterest-bearing sources of funds........................ 2,469 -- 2,424 --
------- -------
Total supporting liabilities............................ $16,097 4.01 $14,014 4.11
======= =======
Net interest margin (related to average interest-earning assets)...... 3.70% 3.69%
==== ====
</TABLE>
10
<PAGE> 12
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
Ended March 31 Increase (Decrease)
Noninterest -------------------- --------------------
Income (dollars in thousands) 1997 1996 Amount %
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust and investment management fees........................ $ 31,594 $ 29,789 $ 1,805 6
Trading account............................................. 928 1,000 (72) (7)
Foreign exchange............................................ 888 3,535 (2,647) (75)
Charge card................................................. 11,603 9,966 1,637 16
Service fees and charges.................................... 23,396 17,125 6,271 37
Securities gains............................................ 1,338 3,410 (2,072) (61)
Other....................................................... 18,106 15,660 2,446 16
-------- -------- -------
Total noninterest income................................. $ 87,853 $ 80,485 $ 7,368 9
======== ======== ======= ===
</TABLE>
Noninterest income for the first quarter was $87.9 million, an
increase of $7.4 million or 9% from the first quarter of 1996.
Service fees and charges were $23.4 million, an increase of $6.3
million or 37% from the previous year. Excluding the effect of
Household, service fees and charges would have increased $4.0 million
or 23%. Trust and investment management revenue was $31.6 million, an
increase of $1.8 million or 6% from the previous year. Charge card
fees totaled $11.6 million, up $1.6 million from 1996. Other income
including foreign fees, income from bank-owned life insurance and
other miscellaneous items, increased $2.4 million to $18.1 million in
1997. First quarter 1996 included a $4.0 million pretax gain that the
Corporation realized on the sale of its securities custody and
related trustee services business for large institutions.
Foreign exchange revenue was $0.9 million, down 75% from the
first quarter of 1996 primarily because of reductions related to the
aforementioned sale of the securities custody and related businesses.
Net gains reported from the sale of debt securities totaled $1.3
million, down $2.1 million or 61% from 1996. Excluding the 1997
contribution from the Household transaction and the 1996 gain from
the sale of the trust business, noninterest income rose 11%
quarter-to-quarter.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Noninterest Quarter
Expenses Ended March 31 Increase (Decrease)
and Income -------------------- --------------------
Taxes (dollars in thousands) 1997 1996 Amount %
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and other compensation............................. $ 74,365 $ 62,169 $12,196 20
Pension, profit sharing and other employee benefits......... 15,737 16,188 (451) (3)
Net occupancy............................................... 14,495 10,726 3,769 35
Equipment................................................... 10,554 9,800 754 8
Marketing................................................... 5,989 5,650 339 6
Communication and delivery.................................. 5,374 5,331 43 1
Deposit insurance........................................... 652 16 636 +
Other....................................................... 22,848 19,699 3,149 16
-------- -------- -------
150,014 129,579 20,435 16
Goodwill and other valuation intangibles.................... 6,962 2,182 4,780 219
-------- -------- -------
Total noninterest expenses............................... $156,976 $131,761 $25,215 19
======== ======== =======
Provision for income taxes.................................. $ 18,894 $ 19,125 $ (231) (1)
======== ======== ======= ===
</TABLE>
Noninterest expenses for the first quarter totaled $157.0 million, an
increase of $25.2 million or 19% from the first quarter of 1996.
First 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 $7.8 million or 6% in first quarter 1997 compared
to the year-earlier quarter. This increase is attributable to the
cost of a property lease cancellation and non-Household systems
conversion charges in addition to other normal expense increases
associated with core business expansion.
11
<PAGE> 13
- --------------------------------------------------------------------------------
Employment-related expenses totaled $90.1 million, an increase of
$11.7 million or 15%. Excluding the effect of Household,
employment-related expenses would have increased $6.6 million or 8%.
Net occupancy expenses totaled $14.5 million, up $3.8 million from
the prior year's first quarter. Net occupancy expenses would have
increased $2.0 million or 18%, excluding the effect of Household.
This primarily reflects the cost of cancelling a lease for space no
longer needed. Other noninterest expenses increased by $3.1 million
or 16%. Excluding the impact of Household expenses, other noninterest
expenses would have decreased $0.4 million or 2%. Amortization of
goodwill and other valuation intangibles increased $4.8 million, with
virtually the entire increase resulting from the Household
transaction.
Income tax expense totaled $18.9 million, a decrease of $0.2
million or 1% from the $19.1 million recorded in first quarter 1996
reflecting a slight decline in pretax income.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at March 31, 1997 was $1.50
billion, compared with $1.52 billion and $1.12 billion at December
31, 1996 and March 31, 1996, respectively. During the preceding
twelve months, the Corporation declared common and preferred
dividends of $42.8 million and $15.7 million, respectively.
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 loan losses. The Corporation's Tier 1 and
total risk-based capital ratios were 7.92% and 11.07%, respectively,
at March 31, 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 Tier 1
leverage ratio was 6.87% at March 31, 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 March 31, 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 March 31, 1997, the
Corporation's intangible assets totaled $308 million, including
approximately $291 million of intangibles excluded under capital
guidelines. The Corporation's tangible Tier 1 leverage ratio (which
excludes all intangibles) was 6.78% for the first quarter of 1997.
12
<PAGE> 14
- --------------------------------------------------------------------------------
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
March 31 December 31 March 31
(dollars in thousands) 1997 1996 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $19,884,336 $18,228,740 $16,918,955
=========== =========== ===========
Average assets (quarter).................................. $18,505,557 $18,159,800 $16,095,408
=========== =========== ===========
Risk-based on-balance sheet assets........................ $12,492,076 $11,975,359 $10,611,715
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 3,675,803 $ 3,508,486 $ 3,100,712
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $15,876,608 $15,191,093 $13,712,427
=========== =========== ===========
Tier 1 capital............................................ $ 1,256,812 $ 1,230,628 $ 1,121,318
=========== =========== ===========
Supplementary capital..................................... $ 501,582 $ 501,497 $ 497,339
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 1,757,774 $ 1,731,448 $ 1,618,657
=========== =========== ===========
Tier 1 leverage ratio..................................... 6.87% 6.88% 6.96%
Risk-based capital ratios
Tier 1.................................................. 7.92% 8.10% 8.19%
Total................................................... 11.07% 11.40% 11.82%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nonperforming March 31 December 31 March 31
Assets (dollars in thousands) 1997 1996 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans............................................ $ 31,370 $28,153 $ 51,400
Restructured loans.......................................... 1,508 1,512 1,987
-------- ----------- --------
Total nonperforming loans................................ 32,878 29,665 53,387
Other assets received in satisfaction of debt............... 1,598 1,562 846
-------- ----------- --------
Total nonperforming assets............................... $ 34,476 $31,227 $ 54,233
======== =========== ========
Nonperforming loans to total loans (end of period).......... .30% .28% .55%
Nonperforming assets to total loans (end of period)......... .31% .29% .55%
======== =========== ========
90-day past due loans still accruing interest............... $ 35,424 $46,369 $ 30,126
======== =========== ========
</TABLE>
Nonperforming assets consist of loans placed on nonaccrual status
when collection of interest is doubtful, restructured loans on which
interest is being accrued but which have terms that have been
renegotiated to provide for a reduction of interest or principal, and
real estate or other assets which have been acquired in full or
partial settlement of defaulted loans. These assets, as a group, are
not earning at rates comparable to earning assets.
Nonperforming assets at March 31, 1997 totaled $34 million, or
0.31% of total loans, up from $31 million or 0.29% of total loans at
December 31, 1996 and down from $54 million or 0.55% of loans a year
ago.
Interest shortfall for the quarter ended March 31, 1997 was $1.0
million compared to $1.8 million one year earlier.
Impaired loans are defined as those where it is probable that
amounts due according to contractual terms, including principal and
interest, will not be collected. Both nonaccrual and certain
restructured loans meet this definition. Impaired loans are measured
by the Corporation at the present value of expected future cash flows
or, alternatively, at the fair value of collateral. Known losses of
principal on these loans have been charged off. Interest income on
nonaccrual loans is recognized only at the time cash is received and
only if the collection of
13
<PAGE> 15
- --------------------------------------------------------------------------------
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>
March 31, 1997
Balance............................................ $13,176 $18,194 $31,370
Related allowance.................................. 4,887 -- 4,887
------- ------- -------
Balance, net of allowance.......................... $ 8,289 $18,194 $26,483
======= ======= =======
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
======= ======= =======
March 31, 1996
Balance............................................ $14,510 $36,890 $51,400
Related allowance.................................. 8,848 -- 8,848
------- ------- -------
Balance, net of allowance.......................... $ 5,662 $36,890 $42,552
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31
----------------------
(dollars in thousands) 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Average impaired loans...................................... $32,003 $52,466
======= =======
Total interest income on impaired loans..................... $ 48 $ 16
======= =======
Interest income on impaired loans recorded on a cash
basis..................................................... $ 48 $ 16
======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Allowance
for Possible
Quarter Ended March 31
-----------------------
Loan Losses (dollars in thousands) 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period................................ $142,211 $129,259
-------- --------
Charge-offs................................................. (17,616) (12,639)
Recoveries.................................................. 3,786 3,529
-------- --------
Net charge-offs............................................. (13,830) (9,110)
Provision charged to operations............................. 13,882 13,523
-------- --------
Balance at March 31......................................... $142,263 $133,672
======== ========
Net charge-offs as a percentage of provision charged to
operations................................................ 100% 67%
Allowance for possible loan losses to nonperforming loans
(period-end).............................................. 433 250
Allowance for possible loan losses to nonperforming assets
(period-end).............................................. 413 246
Allowance for possible loan losses to total loans
outstanding (period-end).................................. 1.28 1.37
</TABLE>
The Corporation's provision for loan losses for the current quarter
was $13.9 million, up 2.7% from $13.5 million in last year's first
quarter. Net charge-offs also increased from $9.1 million to $13.8
million for the current quarter. The increase in 1997 first quarter
net charge-offs was primarily attributable to higher charge card
charge-offs compared to the same quarter last year, offset somewhat
by a decrease in commercial loan net charge-offs. For the first
quarter of 1997, net charge-offs related to charge card and
commercial loans
14
<PAGE> 16
- --------------------------------------------------------------------------------
were $12.5 million and $0.6 million, respectively, compared to $6.6 million and
$2.2 million, respectively, for the first quarter of 1996.
At March 31, 1997, the allowance for possible loan losses was
$142 million, equal to 1.28% of total loans outstanding, compared to
$134 million or 1.37% of total loans one year ago. The allowance as a
percentage of nonperforming loans increased from 250% at March 31,
1996, to 433% at March 31, 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 $7.62 billion at March 31,
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,
Harris Trust and Savings Bank ("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 liabilities from March 31, 1996 to
March 31, 1997. Total core deposits increased from $7.37 billion or
49% of total non-equity funding at March 31, 1996 to $11.45 billion
or 65% of total non-equity funding at March 31, 1997. The
Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and
certificates, and money market accounts rose 45% quarter-to-quarter,
reflecting increases in virtually all core deposit categories. Total
wholesale deposits and short-term borrowings decreased from $7.70
billion or 51% of total non-equity funding at March 31, 1996 to $6.24
billion or 35% of total non-equity funding at March 31, 1997. Total
deposits averaged $12.69 billion in the first quarter of 1997, an
increase of $2.05 billion compared to the same quarter last year.
Average money market assets in the first quarter of 1997
increased $228 million or 39% from the same quarter last year. These
assets represented 5% of average earning assets in 1997 compared to
4% a year ago. Average money market liabilities decreased 6% to $2.95
billion this quarter from $3.13 billion in the same quarter last
year. The Corporation reduced this wholesale funding source primarily
as a result of the assumption of retail deposit liabilities in
connection with the Household transaction.
15
<PAGE> 17
- --------------------------------------------------------------------------------
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 March 31, 1997,
$950 million of short-term notes were outstanding compared to $443
million at March 31, 1996.
16
<PAGE> 18
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
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> 19
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statement of Condition as of March 31, 1997, December 31,
1996 and March 31, 1996.
Consolidated Statement of Income for the quarters ended March 31, 1997
and 1996.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the quarters ended March 31,
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 First 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
March 31, 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 May 1997.
/s/
- ------------------------------------------------
Pierre O. Greffe
Chief Financial Officer
/s/
- ------------------------------------------------
Paul R. Skubic
Chief Accounting Officer
<PAGE> 20
EXHIBIT A -- HARRIS BANKCORP, INC.
1997 FIRST QUARTER REPORT
MARCH 31, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,657,846
<INT-BEARING-DEPOSITS> 620,917
<FED-FUNDS-SOLD> 443,649
<TRADING-ASSETS> 44,234
<INVESTMENTS-HELD-FOR-SALE> 4,848,503
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 11,135,883
<ALLOWANCE> 142,263
<TOTAL-ASSETS> 19,884,336
<DEPOSITS> 13,617,998
<SHORT-TERM> 4,073,596
<LIABILITIES-OTHER> 247,436
<LONG-TERM> 379,149
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,220,958
<TOTAL-LIABILITIES-AND-EQUITY> 19,884,336
<INTEREST-LOAN> 221,436
<INTEREST-INVEST> 67,167
<INTEREST-OTHER> 11,891
<INTEREST-TOTAL> 300,494
<INTEREST-DEPOSIT> 106,754
<INTEREST-EXPENSE> 159,262
<INTEREST-INCOME-NET> 141,232
<LOAN-LOSSES> 13,882
<SECURITIES-GAINS> 1,338
<EXPENSE-OTHER> 156,976
<INCOME-PRETAX> 58,227
<INCOME-PRE-EXTRAORDINARY> 39,333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,333
<EPS-PRIMARY> 5.28
<EPS-DILUTED> 5.28
<YIELD-ACTUAL> 3.70
<LOANS-NON> 31,370
<LOANS-PAST> 35,424
<LOANS-TROUBLED> 1,508
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 142,211
<CHARGE-OFFS> 17,616
<RECOVERIES> 3,786
<ALLOWANCE-CLOSE> 142,263
<ALLOWANCE-DOMESTIC> 142,263
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
