<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 SEPTEMBER 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 November 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 September 30, 1997, December
31, 1996 and September 30, 1996.
Consolidated Statement of Income for the quarters and nine months ended
September 30, 1997 and 1996.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the nine months ended September
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 Third 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
September 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 November 1997.
/s/ /s/
- ----------------------------- -----------------------------
Pierre O. Greffe Paul R. Skubic
Chief Financial Officer Chief Accounting Officer
<PAGE> 3
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
----------------------------- --------------------------------
1997 1996 Change 1997 1996 Change
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS ($ IN THOUSANDS)
Net interest income................................ $140,893 $139,253 1% $427,774 $391,027 9%
Net interest income (fully taxable equivalent)..... 147,534 146,833 0 447,354 410,077 9
Provision for loan losses.......................... 15,035 15,011 0 45,327 42,223 7
Noninterest income................................. 100,478 80,504 25 279,740 241,106 16
Noninterest expenses............................... 168,275 167,350 1 490,722 437,391 12
Net income......................................... 40,092 26,530 51 116,861 104,540 12
Cash and noncash dividends -- common stock......... 14,455 11,700 24 37,455 40,200 (7)
Cash dividends -- preferred stock.................. 4,148 4,188 (1) 12,446 10,857 15
Cash earnings (1).................................. 44,681 31,047 44 130,526 112,509 16
- -------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity...... 10.59% 7.24% 335bp 10.67% 11.96% (129)bp
Return on average assets........................... 0.83 0.60 23 0.82 0.83 (1)
Cash basis return on average common stockholder's
equity (2)....................................... 13.85 10.37 348 14.12 14.18 (6)
Cash basis return on average assets (3)............ 0.93 0.72 21 0.94 0.90 4
Tier 1 risk-based capital ratio.................... 8.03 8.09 (6)
Total risk-based capital ratio..................... 10.98 11.48 (50)
Tier 1 leverage ratio.............................. 6.88 6.93 (5)
Allowance for possible loan losses to total loans
(period-end)..................................... 1.24 1.39 (15)
- -------------------------------------------------------------------------------------------------------------------------
DAILY AVERAGE BALANCES ($ IN MILLIONS)
Loans, net of unearned income...................... $ 11,008 $ 10,132 9% $ 10,862 $ 9,769 11%
Portfolio securities available-for-sale............ 5,001 4,377 14 4,830 4,225 14
Money market assets................................ 771 863 (11) 813 741 10
Total interest-earning assets...................... 16,831 15,432 9 16,563 14,806 12
Total assets....................................... 19,259 17,562 10 18,964 16,849 13
Deposits........................................... 13,474 12,052 12 13,052 11,190 17
Short-term borrowings.............................. 3,556 3,342 6 3,694 3,680 0
Common stockholder's equity........................ 1,347 1,228 10 1,308 1,046 25
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BALANCES AT QUARTER-END ($ IN MILLIONS)
Loans, net of unearned income...................... $ 11,198 $ 10,343 8%
Allowance for possible loan losses................. 139 143 (3)
Portfolio securities available-for-sale............ 4,897 4,337 13
Total assets....................................... 19,519 19,019 3
Deposits........................................... 13,930 13,329 5
Common stockholder's equity........................ 1,368 1,246 10
Total stockholder's equity......................... 1,593 1,471 8
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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, Inc. had record earnings of $40.1 million for third
quarter 1997 and $116.9 million for the first nine months of 1997.
This compares to $26.5 million and $104.5 million for the prior
year's third quarter and nine months net income, respectively. 1996
results included a one-time $10.0 million after-tax charge resulting
from legislation to re-capitalize the Savings Association Insurance
Fund ("SAIF"). Excluding the SAIF charge, earnings rose 10%
quarter-to-quarter. The Corporation continues to experience strong
business and revenue growth.
Excluding the SAIF charge, earnings before amortization of
goodwill and other valuation intangibles ("cash earnings") were $44.7
million in the third quarter of 1997, a 9% increase compared to the
corresponding quarter in 1996. With Harris Trust and Savings Bank's
("HTSB") June 1996 acquisition of Household Bank f.s.b.'s
("Household") Chicagoland network, earnings on a cash basis is the
most relevant measure of performance. In the quarter ended September
30, 1997, on a cash basis, return on equity ("cash ROE") was 13.85%
compared to cash ROE of 14.23% in the same period last year,
excluding the one-time SAIF charge.
Earnings comparability for the nine month period ended September
30, 1997 was affected by both the June 1996 purchase of Household's
Chicagoland retail banking business and the first quarter 1996 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" increased 6% for the first nine months of 1997
versus the comparable period of 1996.
Third quarter net interest income on a fully taxable equivalent
basis of $147.5 million remained essentially unchanged from the 1996
third quarter. Average earning assets rose $1.40 billion or 9% to
$16.83 billion in 1997. Average loans increased by 9% or $876
million. Commercial, installment and retail mortgage lending were the
strongest contributors to this growth.
Net interest margin declined to 3.48% from 3.79% in the same
quarter last year, principally reflecting a higher average cost of
funds. For the first nine months of 1997, net interest income on a
fully taxable equivalent basis was $447.4 million, an increase of 9%
from the comparable period in the prior year. Earning assets
increased 12% and net interest margin was 3.61% currently compared to
3.70% in the prior year. Excluding the contribution of the Household
transaction, net interest income would have increased $11.2 million
or 3%.
Noninterest income of $100.5 million was up $20.0 million or 25%
in third quarter 1997 from the same quarter last year. Trust and
investment management fees rose 18% from the prior year's third
quarter. Net portfolio securities gains were $5.9 million currently
compared to $0.7 million in third quarter 1996. Other income, which
includes syndication fees, bank-owned life insurance, foreign fees,
and gains on mortgage sales, increased $8.5 million from 1996. For
the first nine months of 1997, excluding the effect of the Household
contribution in 1997 and the gain from the sale of the securities
custody and related trustee services business for large institutions
in 1996, core noninterest income rose 15% on a comparative period
basis.
Third quarter 1997 noninterest expenses of $168.3 million
increased 1% from third quarter last year. Excluding the one-time
$16.7 million SAIF assessment, expenses increased 12%, reflecting
continued growth and development of certain lines of business. Total
noninterest expenses were $490.7 million in the current nine-month
period. The first six months of the prior year did not include
operating expenses associated with the Household transaction or the
related amortization of goodwill and other intangible assets.
Excluding Household-related operating charges and the one-time SAIF
assessment, total expenses increased $33.2 million or 8% for the nine
months ended September 30, 1997 compared to the year-earlier period.
The third quarter 1997 provision for loan losses of $15.0 million
was essentially unchanged from the third quarter of 1996. Net loan
charge-offs during the current quarter were $18.1 million compared to
$11.0 million in the same period last year. The majority of the
increase resulted from higher writeoffs in the charge card portfolio.
2
<PAGE> 5
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Nonperforming assets at September 30, 1997 totaled $34 million,
or 0.3% of total loans, compared to $33 million or 0.3% at June 30,
1997, and $36 million or 0.4% a year ago. At September 30, 1997, the
allowance for possible loan losses was $139 million, equal to 1.2% of
loans outstanding compared to $143 million at the end of third
quarter 1996, equal to 1.4% of loans outstanding. The ratio of the
allowance for possible loan losses to nonperforming assets was 401%
at September 30, 1996 and 410% at September 30, 1997.
At September 30, 1997, equity capital of Harris Bankcorp amounted
to $1.59 billion, up from $1.47 billion at September 30, 1996. The
regulatory leverage capital ratio was 6.88% for third quarter 1997
compared to 6.93% in the same quarter one year earlier. Harris
Bankcorp's capital ratio exceeds the prescribed regulatory minimum
for bank holding companies. Harris Bankcorp's September 30, 1997 Tier
1 and total risk-based capital ratios were 8.03% and 10.98%,
respectively, compared to respective ratios of 8.09% and 11.48% at
September 30, 1996. At September 30, 1997, equity capital included
$225 million of preferred stock.
During the quarter, the Corporation and its parent company, Bank
of Montreal, announced the formation of a new national credit card
enterprise. The new company will combine most of the consumer credit
card portfolios of HTSB and BankBoston Corporation -- totaling more
than one million customers with receivables of nearly $2
billion -- along with the expertise of First Annapolis Consulting,
Inc., the premier credit card consulting company in the U.S. The
company will use First Data Resources for data processing and related
functions; most Harris credit card-issuing employees will become
employees of First Data Resources.
ALAN G. MCNALLY
Alan G. McNally
Chairman of the Board and
Chief Executive Officer
3
<PAGE> 6
CONSOLIDATED STATEMENT OF INCOME Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
--------------------------- -------------------------------
(in thousands except per share data) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees.................................... $234,386 $215,691 $687,804 $616,145
Money market assets:
Deposits at banks...................................... 7,134 9,118 24,054 20,444
Federal funds sold and securities purchased under
agreement to resell.................................. 3,088 2,451 8,842 9,316
Trading account.......................................... 841 881 2,442 2,987
Securities available-for-sale:
U.S. Treasury and Federal agency....................... 69,391 60,257 202,658 173,269
State and municipal.................................... 4,464 4,609 13,228 13,536
Other.................................................. 409 437 1,143 2,238
-------- -------- -------- --------
Total interest income.................................. 319,713 293,444 940,171 837,935
-------- -------- -------- --------
INTEREST EXPENSE
Deposits................................................. 124,175 104,408 345,763 289,170
Short-term borrowings.................................... 39,217 36,985 115,510 121,538
Senior notes............................................. 8,433 5,988 31,594 16,257
Long-term notes.......................................... 6,995 6,810 19,530 19,943
-------- -------- -------- --------
Total interest expense................................. 178,820 154,191 512,397 446,908
-------- -------- -------- --------
NET INTEREST INCOME...................................... 140,893 139,253 427,774 391,027
Provision for loan losses................................ 15,035 15,011 45,327 42,223
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 125,858 124,242 382,447 348,804
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees..................... 34,320 29,071 99,073 88,330
Trading account.......................................... 793 686 3,352 4,338
Foreign exchange......................................... 1,348 1,697 3,462 8,697
Charge card.............................................. 12,940 13,115 37,372 34,191
Service fees and charges................................. 25,079 23,582 71,641 60,017
Portfolio securities gains............................... 5,927 738 9,896 4,288
Other.................................................... 20,071 11,615 54,944 41,245
-------- -------- -------- --------
Total noninterest income............................... 100,478 80,504 279,740 241,106
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation.......................... 79,131 71,756 230,816 201,590
Pension, profit sharing and other employee benefits...... 14,942 13,175 46,212 42,941
Net occupancy............................................ 14,917 12,894 43,004 34,472
Equipment................................................ 12,282 10,338 35,099 30,395
Marketing................................................ 6,026 7,662 18,978 20,381
Communication and delivery............................... 6,126 4,743 17,463 15,242
Deposit insurance........................................ 736 18,348 2,157 18,427
Other.................................................... 27,079 21,553 76,085 62,644
-------- -------- -------- --------
161,239 160,469 469,814 426,092
Goodwill and other valuation intangibles................. 7,036 6,881 20,908 11,299
-------- -------- -------- --------
Total noninterest expenses............................. 168,275 167,350 490,722 437,391
-------- -------- -------- --------
Income before income taxes............................... 58,061 37,396 171,465 152,519
Applicable income taxes.................................. 17,969 10,866 54,604 47,979
-------- -------- -------- --------
NET INCOME............................................. 40,092 26,530 116,861 104,540
Dividends on preferred stock............................. 4,148 4,188 12,445 10,857
-------- -------- -------- --------
Net Income Applicable to Common Stock.................... $ 35,944 $ 22,342 $104,416 $ 93,683
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 6,667,490 average
shares outstanding)
Net Income Applicable to Common Stock.................... $ 5.39 $ 3.35 $ 15.66 $ 14.05
======== ======== ======== ========
</TABLE>
4
<PAGE> 7
CONSOLIDATED STATEMENT OF CONDITION Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
September 30 December 31 September 30
(in thousands except share data) 1997 1996 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,252,362 $ 1,238,028 $ 1,822,522
Money market assets:
Interest-bearing deposits at banks........................ 550,234 658,257 839,933
Federal funds sold and securities purchased under
agreement to resell..................................... 402,379 294,792 493,057
Portfolio securities available-for-sale..................... 4,896,536 3,985,183 4,337,406
Trading account assets...................................... 35,467 110,355 28,225
Loans, net of unearned income of $5,152 in 1997, $7,624 and
$11,391 in 1996........................................... 11,198,157 10,744,653 10,343,418
Allowance for possible loan losses.......................... (138,867) (142,211) (143,216)
----------- ----------- -----------
Net loans................................................. 11,059,290 10,602,442 10,200,202
Premises and equipment...................................... 305,786 275,091 264,261
Customers' liability on acceptances......................... 41,205 78,983 100,950
Goodwill and other valuation intangibles.................... 297,724 310,663 316,573
Other assets................................................ 678,364 674,946 615,620
----------- ----------- -----------
TOTAL ASSETS.......................................... $19,519,347 $18,228,740 $19,018,749
=========== =========== ===========
LIABILITIES
Deposits in domestic offices - noninterest-bearing.......... $ 3,177,985 $ 3,642,578 $ 3,662,264
- interest-bearing............... 8,772,543 7,668,893 7,617,386
Deposits in foreign offices - noninterest-bearing........... 23,421 35,116 32,775
- interest-bearing................ 1,955,914 1,643,714 2,017,003
----------- ----------- -----------
Total deposits........................................ 13,929,863 12,990,301 13,329,428
Federal funds purchased and securities sold under agreement
to repurchase............................................. 2,369,070 1,983,047 2,656,235
Commercial paper outstanding................................ 354,372 334,653 225,301
Other short-term borrowings................................. 28,235 347,690 170,331
Senior notes................................................ 605,000 350,000 439,000
Acceptances outstanding..................................... 41,205 78,983 100,950
Accrued interest, taxes and other expenses.................. 156,857 159,250 179,721
Other liabilities........................................... 62,294 90,543 68,191
Long-term notes............................................. 379,234 379,107 379,067
----------- ----------- -----------
TOTAL LIABILITIES..................................... 17,926,130 16,713,574 17,548,224
----------- ----------- -----------
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..................................................... 484,877 484,319 484,191
Retained earnings........................................... 827,586 760,626 734,951
Unrealized holding gains (losses), net of deferred taxes of
($1,577) in 1997, $5,364 and $17,778 in 1996.............. 2,414 (8,119) (26,957)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,593,217 1,515,166 1,470,525
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $19,519,347 $18,228,740 $19,018,749
=========== =========== ===========
</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................................................ 116,861 104,540
Issuance of Series B preferred stock...................... -- 45,000
Contributions to capital.................................. 558 280,294
Noncash dividend.......................................... (2,455) --
Cash dividends -- Series A preferred stock................ (9,788) (9,932)
Cash dividends -- Series B preferred stock................ (2,658) (925)
Cash dividends -- common stock............................ (35,000) (40,200)
Net change in unrealized holding gains (losses) on
available-for-sale securities, net of tax............... 10,533 (54,028)
---------- ----------
BALANCE AT SEPTEMBER 30..................................... $1,593,217 $1,470,525
========== ==========
</TABLE>
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CONSOLIDATED STATEMENT OF CASH FLOWS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 116,861 $ 104,540
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 45,327 42,223
Depreciation and amortization, including intangibles...... 51,574 39,902
Deferred tax (benefit) expense............................ (2,241) 982
Gain on sales of portfolio securities..................... (9,896) (4,288)
Trading account net sales................................. 74,888 70,413
Net increase in interest receivable....................... (22,192) (8,376)
Net decrease in interest payable.......................... (2,123) (1,497)
Net increase in loans held for resale..................... (52,002) (47,515)
Other, net................................................ (22,573) (80,502)
------------ -----------
Net cash provided by operating activities............... 177,623 115,882
------------ -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks................................................... 108,023 (382,231)
Net increase in Federal funds sold and securities
purchased under agreement to resell..................... (107,587) (313,365)
Proceeds from sales of securities available-for-sale...... 1,043,072 911,590
Proceeds from maturities of securities
available-for-sale...................................... 8,131,227 4,643,530
Purchases of securities available-for-sale................ (10,058,282) (6,587,879)
Net increase in loans..................................... (450,174) (470,256)
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............. 19,230 12,719
Purchases of premises and equipment....................... (80,591) (53,891)
Other, net................................................ (1,610) 34,819
------------ -----------
Net cash (used) provided by investing activities........ (1,396,692) 39,045
------------ -----------
FINANCING ACTIVITIES:
Net increase in deposits.................................. 939,562 209,442
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 386,023 759,418
Net increase (decrease) in commercial paper outstanding... 19,719 (66,721)
Net decrease in short-term borrowings..................... (319,455) (672,718)
Proceeds from issuance of senior notes.................... 5,310,000 1,199,436
Repayment of senior notes................................. (5,055,000) (1,238,436)
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.................... (12,446) (9,932)
Cash dividends paid on common stock....................... (35,000) (40,200)
Other, net................................................ -- (335,112)
------------ -----------
Net cash provided by financing activities............... 1,233,403 145,177
------------ -----------
NET INCREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS.................................................. 14,334 300,104
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1.... 1,238,028 1,522,418
------------ -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT SEPTEMBER
30..................................................... $ 1,252,362 $ 1,822,522
============ ===========
</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.
- --------------------------------------------------------------------------------
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 is defined to include cash and
demand balances due from banks. Cash interest payments (net of
amounts capitalized) for the nine months ended September 30, totaled
$514.6 million and $522.7 million in 1997 and 1996, respectively.
Cash income tax payments over the same periods totaled $60.0 million
and $58.9 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
may include futures, forward rate agreements, option contracts,
guarantees (caps, floors and collars) and swaps. Foreign exchange
contracts may 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. 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.
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; the hedging instrument reduces the exposure to risk and the
hedging instrument is designated as a hedge. At the inception of the
hedge and
7
<PAGE> 10
- --------------------------------------------------------------------------------
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.
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 amortized 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.
- --------------------------------------------------------------------------------
6. SALE OF
CREDIT CARD
PORTFOLIO On September 4, 1997, Harris Trust and Savings Bank, a wholly-owned
subsidiary of the Corporation, announced that it had entered into a
contract to transfer its credit card portfolio to a company to be
owned by BankBoston Corporation, First Annapolis Consulting, Inc. and
Bankmont Financial Corp., the parent corporation of the Corporation.
The transaction is expected to close during fourth quarter 1997.
At the time of the announcement, the Harris Trust and Savings
Bank charge card portfolio balance amounted to approximately $750
million, representing less than 5% of the Corporation's total
consolidated assets. Upon completion of the transfer, Harris Trust
and Savings Bank will receive cash and an equity interest in the
newly formed company, which it intends to immediately sell for cash
to Bankmont Financial Corp. After the sale, Harris Trust and Savings
Bank will no longer have a financial interest in the results of that
business. The projected after-tax gain from the transaction is
anticipated to be less than 10% of 1997 net income for the
Corporation. The impact of this transaction on the Corporation's
financial position and future results of operations is not expected
to be material.
8
<PAGE> 11
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
--------------------------------------- ---------------------------------------
Daily Average Balances (in millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
----------------- ----------------- ----------------- -----------------
<CAPTION>
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....... $ 557 5.08% $ 687 5.28% $ 603 5.33% $ 516 5.29%
Federal funds sold and securities
purchased under agreement to resell.... 214 5.73 176 5.53 210 5.62 225 5.54
-------- -------- -------- --------
Total money market assets......... 771 5.26 863 5.34 813 5.41 741 5.36
Trading account assets..................... 51 8.10 60 7.44 58 6.89 71 7.07
Portfolio securities available-for-sale:
(1)(2)
U.S. Treasury and Federal agency......... 4,657 6.25 4,034 6.39 4,492 6.37 3,871 6.32
State and municipal...................... 311 8.61 307 9.22 305 8.74 297 9.25
Other.................................... 33 4.74 36 5.05 33 4.94 57 5.30
-------- -------- -------- --------
Total portfolio securities
available-for-sale.............. 5,001 6.38 4,377 6.57 4,830 6.51 4,225 6.51
Loans, net of unearned income.............. 11,008 8.47 10,132 8.50 10,862 8.47 9,769 8.44
-------- -------- -------- --------
TOTAL INTEREST-EARNING ASSETS..... 16,831 7.70 15,432 7.77 16,563 7.74 14,806 7.73
-------- -------- -------- --------
Cash and demand balances due from banks.... 1,221 1,144 1,211 1,129
Other assets............................... 1,207 986 1,190 914
-------- -------- -------- --------
Total assets...................... $ 19,259 $ 17,562 $ 18,964 $ 16,849
======== ======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market
accounts................................. $ 2,765 3.35 $ 2,675 3.23 $ 2,774 3.26 $ 2,100 3.20
Savings deposits and certificates.......... 4,742 5.00 4,629 4.91 4,723 4.93 3,271 4.87
Other time deposits........................ 1,058 5.60 493 4.87 814 5.56 734 5.42
Foreign office time deposits............... 1,871 5.54 1,471 5.28 1,718 5.45 2,228 5.38
-------- -------- -------- --------
TOTAL INTEREST-BEARING DEPOSITS... 10,436 4.72 9,268 4.48 10,029 4.61 8,333 4.64
Short-term borrowings...................... 3,556 5.32 3,342 5.27 3,694 5.28 3,680 5.08
Long-term notes............................ 379 7.38 379 7.19 379 7.27 369 7.04
-------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES..................... 14,371 4.94 12,989 4.73 14,102 4.86 12,382 4.82
Noninterest-bearing deposits............... 3,038 2,784 3,023 2,857
Other liabilities.......................... 278 336 306 368
Stockholder's equity....................... 1,572 1,453 1,533 1,242
-------- -------- -------- --------
Total liabilities and
stockholder's
equity.......................... $ 19,259 $ 17,562 $ 18,964 $ 16,849
======== ======== ======== ========
NET INTEREST MARGIN (RELATED TO AVERAGE
INTEREST-EARNING ASSETS)................. 3.48% 3.79% 3.61% 3.70%
===== ===== ===== =====
</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
- --------------------------------------------------------------------------------
THIRD QUARTER 1997
COMPARED WITH
THIRD QUARTER 1996
- --------------------------------------------------------------------------------
SUMMARY The Corporation's net income for the third quarter of 1997 was $40.1
million compared to $26.5 million in the year ago quarter. 1996
results included a one-time $10.0 million after-tax charge resulting
from legislation to re-capitalize the Savings Association Insurance
Fund ("SAIF"). Excluding the SAIF charge, earnings increased 10% from
the same quarter of a year ago. "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. Excluding the SAIF charge,
cash earnings were $44.7 million in the third quarter of 1997, a 9%
increase compared to the corresponding quarter in 1996. Cash ROE was
13.85% compared to cash ROE of 14.23% in the same quarter a year ago,
excluding the one-time SAIF charge.
Third quarter net interest income on a fully taxable equivalent
basis of $147.5 million was essentially unchanged from the third
quarter a year ago. Average earning assets rose 9% to $16.83 billion
from $15.43 billion in 1996, primarily attributable to an increase of
$624 million or 14% in portfolio securities available-for-sale and an
increase of 9% or $876 million in average loans. Commercial,
installment and residential real estate lending were all strong
contributors to this growth. Net interest margin declined to 3.48%
from 3.79% in the same quarter last year, principally reflecting a
higher average cost of funds.
The third quarter 1997 provision for loan losses of $15.0 million
was essentially unchanged from the third quarter of 1996. Net
charge-offs increased from $11.0 million to $18.1 million in the
current quarter, primarily reflecting higher charge card portfolio
writeoffs.
Noninterest income increased $20.0 million, or 25%, from third
quarter 1996. In the current quarter trust fees rose by $5.2 million
and service charge fees increased $1.5 million. Securities gains
improved $5.2 million compared to third quarter 1996. Foreign
exchange income declined $0.3 million and charge card income declined
$0.2 million. Other income, which includes syndication fees, foreign
fees, bank-owned life insurance and gains on mortgage sales,
increased $8.5 million from 1996.
Third quarter noninterest expenses of $168.3 million rose $0.9
million from third quarter last year. Excluding the one-time $16.7
million SAIF assessment, expenses increased 12%, reflecting continued
growth and development of certain lines of business.
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>
Nine Months Ended
Quarter Ended September 30 September 30
--------------------------- -----------------------
(dollars in thousands) 1997 1996 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income................................... $319,713 $293,444 $940,171 $837,935
Fully taxable equivalent adjustment............... 6,641 7,580 19,580 19,050
-------- -------- -------- --------
Interest income (fully taxable equivalent
basis)...................................... 326,354 301,024 959,751 856,985
Interest expense.................................. 178,820 154,191 512,397 446,908
-------- -------- -------- --------
Net interest income (fully taxable
equivalent basis)........................... $147,534 $146,833 $447,354 $410,077
======== ======== ======== ========
Increase (decrease) due to change in:
Volume........................................ $ 13,009 $ 17,020 $ 47,431 $ 47,566
Rate.......................................... (12,308) 4,913 (10,154) (10,033)
-------- -------- -------- --------
Total increase in net interest income.... $ 701 $ 21,933 $ 37,277 $ 37,533
======== ======== ======== ========
</TABLE>
Third quarter net interest income on an FTE basis of $147.5 million,
remained essentially unchanged from third quarter 1996. Average
earning assets increased 9% or $1.40 billion and net interest margin,
the other principal determinant of net interest income, declined from
3.79% to 3.48% in the current quarter.
Average loans rose $876 million, or 9%. Commercial, installment
and residential real estate loans increased $458 million, $148
million and $526 million, respectively. Average portfolio securities
were up 14%, or $624 million, primarily reflecting increased holdings
of U.S. Federal agency securities. Total money market assets declined
$92 million or 11% over third quarter 1996 levels.
Funding for this asset growth came primarily from other time
deposits and foreign time deposits, which increased by an average of
$565 million and $400 million, respectively. The remainder was spread
between money market accounts, savings deposits and certificates, and
short-term borrowings.
The Corporation's declining net interest margin principally
reflects rapid earning asset growth and slower core deposit growth.
As a result, much of the incremental supporting liabilities are
wholesale funds with higher effective rates. In addition, loan yields
are subject to continued competitive pressure.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended September 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................... $ 16,831 7.70% $ 15,432 7.77%
======== ========
Interest-bearing liabilities.............. $ 14,371 4.94 $ 12,989 4.73
Noninterest-bearing sources of funds...... 2,460 2,443
-------- --------
Total supporting liabilities.......... $ 16,831 4.22 $ 15,432 3.98
======== ========
Net interest margin (related to average
interest-earning assets)................ 3.48% 3.79%
=== ===
<CAPTION>
Nine Months Ended September 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................... $ 16,563 7.74% $ 14,806 7.73%
======== ========
Interest-bearing liabilities.............. $ 14,102 4.86 $ 12,382 4.82
Noninterest-bearing sources of funds...... 2,461 2,424
-------- --------
Total supporting liabilities.......... $ 16,563 4.13 $ 14,806 4.03
======== ========
Net interest margin (related to average
interest-earning assets)................ 3.61% 3.70%
=== ===
</TABLE>
11
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Nine Months Increase
Ended September 30 (Decrease) Ended September 30 (Decrease)
Noninterest ------------------ ------------- ------------------- -------------
Income (dollars in thousands) 1997 1996 Amount % 1997 1996 Amount %
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees............ $ 34,320 $29,071 $ 5,249 18 $ 99,073 $ 88,330 $10,743 12
Trading account.............. 793 686 107 16 3,352 4,338 (986) (23)
Foreign exchange............. 1,348 1,697 (349) (21) 3,462 8,697 (5,235) (60)
Charge card.................. 12,940 13,115 (175) (1) 37,372 34,191 3,181 9
Service fees and charges..... 25,079 23,582 1,497 6 71,641 60,017 11,624 19
Portfolio securities gains... 5,927 738 5,189 + 9,896 4,288 5,608 131
Other........................ 20,071 11,615 8,456 73 54,944 41,245 13,699 33
-------- ------- ------- -------- -------- -------
Total noninterest income..... $100,478 $80,504 $19,974 25 $279,740 $241,106 $38,634 16
======== ======= ======= === ======== ======== ======= ===
</TABLE>
Noninterest income for the 1997 third quarter was $100.5 million, an
increase of $20.0 million or 25% from the third quarter of 1996.
Trust and investment management revenue was $34.3 million, an
increase of $5.2 million or 18% from the previous year. This growth
came primarily in personal trust revenue. Service fees and charges
totaled $25.1 million, an increase of $1.5 million or 6% from the
prior year. Other income, which includes syndication fees, foreign
fees, bank-owned life insurance and gains on mortgage sales,
increased $8.5 million over 1996. Net gains reported from the sale of
debt portfolio securities totaled $5.9 million, up $5.2 million from
1996.
Charge card fees totaled $12.9 million, down slightly from the
$13.1 million reported in the year-earlier quarter. Foreign exchange
revenue was $1.3 million, down 21% from the third 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 Nine Months Increase
Expenses Ended September 30 (Decrease) Ended September 30 (Decrease)
and Income ------------------- ------------- ------------------- -------------
Taxes (dollars in thousands) 1997 1996 Amount % 1997 1996 Amount %
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation.............. $ 79,131 $ 71,756 $ 7,375 10 $230,816 $201,590 $29,226 14
Pension, profit sharing and
other employee benefits... 14,942 13,175 1,767 13 46,212 42,941 3,271 8
Net occupancy............... 14,917 12,894 2,023 16 43,004 34,472 8,532 25
Equipment................... 12,282 10,338 1,944 19 35,099 30,395 4,704 15
Marketing................... 6,026 7,662 (1,636) (21) 18,978 20,381 (1,403) (7)
Communication and
delivery.................. 6,126 4,743 1,383 29 17,463 15,242 2,221 15
Deposit insurance........... 736 18,348 (17,612) (96) 2,157 18,427 (16,270) (88)
Other....................... 27,079 21,553 5,526 26 76,085 62,644 13,441 21
-------- -------- ------- -------- -------- -------
161,239 160,469 770 0 469,814 426,092 43,722 10
Goodwill and other valuation
intangibles............... 7,036 6,881 155 2 20,908 11,299 9,609 85
-------- -------- ------- -------- -------- -------
Total noninterest expense... $168,275 $167,350 $ 925 1 $490,722 $437,391 $53,331 12
======== ======== ======= ======== ======== =======
Provision for income
taxes..................... $ 17,969 $ 10,866 $ 7,103 65 $ 54,604 $ 47,979 $ 6,625 14
======== ======== ======= === ======== ======== ======= ===
</TABLE>
Noninterest expenses for 1997 third quarter totaled $168.3 million,
an increase of $0.9 million or 1% from the third quarter of 1996.
Third quarter 1996 included the one-time SAIF assessment levied on
deposits
12
<PAGE> 15
- --------------------------------------------------------------------------------
assumed from Household amounting to $16.7 million. Excluding the
effect of the SAIF assessment, total noninterest expenses increased
$17.6 million or 12% in third quarter 1997 compared to the
year-earlier quarter. Generally, the higher expenses in various
categories are attributable to the manpower and related costs
required for systems conversions as well as growth and development of
various lines of business targeted for expansion.
Employment-related expenses totaled $94.1 million, an increase of
$9.1 million or 11%. Net occupancy expenses totaled $14.9 million, up
$2.0 million from the prior year's third quarter. Equipment expenses
increased $1.9 million or 19% over third quarter 1996. Marketing
expenses declined $1.6 million, while communication and delivery
expenses rose $1.4 million over the year-earlier quarter. Other
noninterest expenses rose $5.5 million or 26%, primarily due to
systems conversions as well as business growth and development.
Income tax expense totaled $18.0 million, an increase of 65% from
$10.9 million recorded in third quarter 1996, reflecting higher
pretax income.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at September 30, 1997 was
$1.59 billion, compared with $1.52 billion and $1.47 billion at
December 31, 1996 and September 30, 1996, respectively. During the
preceding twelve months, the Corporation declared common and
preferred dividends of $43 million and $16.6 million, respectively.
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 8.03% and 10.98%, respectively,
at September 30, 1997. HTSB's Tier 1 and total risk-based capital
ratios were 7.38% and 10.63%, respectively, at September 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 6.88% and 6.61%, respectively, for the
third 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 September 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 September 30, 1997, the
Corporation's intangible assets totaled $298 million, including
approximately $282 million of intangibles excluded under capital
guidelines. The Corporation's and HTSB's tangible Tier 1 leverage
ratios (which exclude all intangibles) were 6.80% and 6.51%,
respectively, for the third quarter of 1997.
13
<PAGE> 16
- --------------------------------------------------------------------------------
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
September 30 December 31 September 30
(dollars in thousands) 1997 1996 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $19,519,347 $18,228,740 $19,018,749
=========== =========== ===========
Average assets (quarter).................................. $19,259,009 $18,159,800 $17,562,535
=========== =========== ===========
Risk-based on-balance sheet assets........................ $12,575,085 $11,975,359 $11,752,669
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 3,946,740 $ 3,508,486 $ 3,364,916
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $16,235,367 $15,191,093 $14,819,254
=========== =========== ===========
Tier 1 capital............................................ $ 1,304,436 $ 1,230,628 $ 1,199,246
=========== =========== ===========
Supplementary capital..................................... $ 478,407 $ 501,497 $ 502,464
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 1,782,209 $ 1,731,448 $ 1,701,051
=========== =========== ===========
Tier 1 leverage ratio..................................... 6.88% 6.88% 6.93%
Risk-based capital ratios
Tier 1.................................................. 8.03% 8.10% 8.09%
Total................................................... 10.98% 11.40% 11.48%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nonperforming September 30 December 31 September 30
Assets (dollars in thousands) 1997 1996 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans............................................ $ 31,565 $28,153 $ 33,002
Restructured loans.......................................... 946 1,512 1,958
------------ ----------- ------------
Total nonperforming loans................................... 32,511 29,665 34,960
Other assets received in satisfaction of debt............... 1,374 1,562 728
------------ ----------- ------------
Total nonperforming assets.................................. $ 33,885 $31,227 $ 35,688
============ =========== ============
Nonperforming loans to total loans (end of period).......... .29% .28% .34%
Nonperforming assets to total loans (end of period)......... .30% .29% .35%
============ =========== ============
90-day past due loans still accruing interest............... $ 60,539 $46,369 $ 41,253
============ =========== ============
</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 yielding at rates comparable to earning assets.
Nonperforming assets at September 30, 1997 totaled $34 million,
or .30% of total loans, up from $31 million or .29% of total loans at
December 31, 1996 and down from $36 million or .35% of loans a year
earlier.
Interest shortfall for the quarter ended September 30, 1997 was
$1.0 million compared to $2.1 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. Interest income on
nonaccrual loans is recognized only at the time cash is received and
only if the collection of
14
<PAGE> 17
- --------------------------------------------------------------------------------
the entire principal balance is expected. Interest income on
restructured loans is accrued according to the most recently agreed
upon contractual terms.
<TABLE>
<CAPTION>
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total Impaired
(dollars in thousands) Related Allowance No Related Allowance Loans
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1997
Balance............................................ $20,624 $10,941 $31,565
Related allowance.................................. 4,972 -- 4,972
------- ------- -------
Balance, net of allowance.......................... $15,652 $10,941 $26,593
======= ======= =======
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
======= ======= =======
September 30, 1996
Balance............................................ $ 6,402 $26,600 $33,002
Related allowance.................................. 4,867 -- 4,867
------- ------- -------
Balance, net of allowance.......................... $ 1,535 $26,600 $28,135
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
--------------------------- -------------------------------
(dollars in thousands) 1997 1996 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average impaired loans.................... $33,698 $34,378 $31,643 $45,325
======= ======= ======= =======
Total interest income on impaired loans... $ 17 $ 22 $ 79 $ 127
======= ======= ======= =======
Interest income on impaired loans recorded
on a cash basis......................... $ 17 $ 22 $ 79 $ 127
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Allowance
for Possible
Quarter Ended September 30 Nine Months Ended September 30
--------------------------- -------------------------------
Loan Losses (dollars in thousands) 1997 1996 1997 1996
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period............ $141,963 $139,220 $142,211 $129,259
-------- -------- -------- --------
Charge-offs............................. (21,797) (15,520) (58,786) (44,742)
Recoveries.............................. 3,665 4,505 10,115 11,675
-------- -------- -------- --------
Net charge-offs......................... (18,132) (11,015) (48,671) (33,067)
Provision charged to operations......... 15,036 15,011 45,327 42,224
Allowance related to acquired loans..... -- -- -- 4,800
-------- -------- -------- --------
Balance at September 30................. $138,867 $143,216 $138,867 $143,216
======== ======== ======== ========
Net charge-offs as a percentage of
provision charged to operations....... 121% 73% 107% 78%
Allowance for possible loan losses to
nonperforming loans (period-end)...... 427% 410%
Allowance for possible loan losses to
nonperforming assets (period-end)..... 410% 401%
Allowance for possible loan losses to
total loans outstanding
(period-end).......................... 1.24% 1.39%
</TABLE>
15
<PAGE> 18
- --------------------------------------------------------------------------------
The Corporation's provision for loan losses for the current quarter
of $15.0 million remained essentially unchanged from last year's
third quarter. Net charge-offs increased from $11.0 million to $18.1
million for the current quarter, bringing net charge-offs on a
year-to-date basis to $48.7 million compared to $33.1 million in the
same 1996 period. The increase in third quarter net charge-offs was
primarily attributable to higher writeoffs of charge card, commercial
and installment balances in the third quarter of 1997 compared to the
same quarter last year. For the third quarter of 1997, net
charge-offs related to charge card, commercial and installment loans
were $13.3 million, $3.2 million and $1.7 million, respectively,
compared to $9.6 million, $1.5 million and $0.3 million,
respectively, for the third quarter of 1996.
At September 30, 1997, the allowance for possible loan losses was
$139 million, equal to 1.24% of total loans outstanding, down from
$143 million or 1.39% of total loans one year ago; however, the
allowance as a percentage of nonperforming loans increased from 410%
at September 30, 1996, to 427% at September 30, 1997.
The credit card portfolio is scheduled to be sold during fourth
quarter 1997 (see Note 6 on page 8 of this report). The sale of these
assets will be without recourse to the Corporation.
- --------------------------------------------------------------------------------
LIQUIDITY AND
SOURCES OF
FUNDS Effective liquidity management allows a banking institution to
accommodate the changing net funds flow requirements of customers who
may deposit or withdraw funds, or modify their credit needs. The
Corporation manages its liquidity position through continuous
monitoring of profitability trends, asset quality, interest rate
sensitivity, maturity schedules of earning assets and supporting
liabilities, the composition of managed and other (primarily demand)
liabilities, and prospective customer demand based upon knowledge of
major customers and overall economic conditions. Appropriate
responses to changes in these conditions preserve customer confidence
in the ability of the Corporation to continually serve their credit
and deposit withdrawal requirements. Some level of liquidity is
provided by maintaining assets which mature within a short timeframe
or could be sold quickly without significant loss. The Corporation's
liquid assets include cash and demand balances due from banks, money
market assets, portfolio securities available-for-sale and trading
account assets. Liquid assets represented approximately 37% of the
Corporation's total assets and amounted to $7.14 billion at September
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.
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 $10.09 billion
or 66% of total non-equity funding for the quarter ending September
30, 1996 to $10.55 billion or 62% of non-equity funding during third
quarter 1997. Total deposits averaged $13.47 billion in the current
quarter, an increase of $1.42 billion compared to the same quarter
last year. Total average wholesale deposits and short-term borrowings
increased from $5.30 billion or 34% of total non-equity funding for
the quarter ending September 30, 1996 to $6.48 billion or 38% of
total non-equity funding for the quarter ending September 30, 1997.
Average money market assets in the third quarter of 1997
decreased $92 million or 11% from the same quarter last year. These
assets represented 5% of average earning assets in 1997, a decrease
of 1% from one year ago. Average money market liabilities increased
2% to $2.96 billion this quarter from $2.90 billion in the same
quarter last year.
16
<PAGE> 19
- --------------------------------------------------------------------------------
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 September 30,
1997, $605 million of short-term notes were outstanding compared to
$439 million at September 30, 1996.
- --------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
COMPARED
WITH 1996 The Corporation's earnings for the nine months ended September 30,
1997 were $116.9 million compared to $104.5 million a year ago. 1996
results included a $10.0 million one-time after-tax charge for the
recapitalization of the Savings Association Insurance Fund. Excluding
the impact of this charge, earnings rose 2% for the first nine months
of 1997 versus the comparable period of 1996. Earnings comparability
between years 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 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 services business for
large institutions. Excluding the impact of the Household transaction
(which includes the SAIF charge) and the gain from the sale of the
custody business for large institutions, core earnings increased 7%
from a year ago.
Net interest income on a fully taxable equivalent basis was
$447.4 million in the current period, an increase of $37.3 million or
9% from $410.1 million in the first nine months of 1996. Average
earning assets increased to $16.56 billion from $14.81 billion a year
ago, primarily attributable to an increase of 11% or $1.09 billion in
average loans. Commercial, installment and residential real estate
lending were all contributors to this growth. Net interest margin
declined to 3.61% from 3.70% in 1996, principally reflecting a higher
average cost of funds. Excluding the contribution of the Household
transaction, net interest income would have increased $11.2 million
or 3% from a year ago.
The 1997 provision for loan losses of $45.3 million was up $3.1
million from $42.2 million a year ago. Net charge-offs increased by
$15.6 million to $48.7 million, primarily reflecting higher charge
card portfolio writeoffs.
Noninterest income increased $38.6 million to $279.7 million in
1997 compared to a year ago. 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 $10.7 million, charge card
income increased $3.2 million and service charge income increased
$11.6 million. Foreign exchange income declined $5.2 million. Other
sources of noninterest income which include syndication fees, gains
on mortgage loan sales and fees on letters of credit increased $13.7
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 $36.7 million
or 15% from the prior year.
Noninterest expenses of $490.7 million rose $53.3 million from a
year ago. Excluding all Household-related charges, total expenses
increased $33.2 million or 8% 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
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 THIRD QUARTER REPORT
SEPTEMBER 30, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,252,362
<INT-BEARING-DEPOSITS> 550,234
<FED-FUNDS-SOLD> 402,379
<TRADING-ASSETS> 35,467
<INVESTMENTS-HELD-FOR-SALE> 4,896,536
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 11,198,157
<ALLOWANCE> 138,867
<TOTAL-ASSETS> 19,519,347
<DEPOSITS> 13,929,863
<SHORT-TERM> 3,356,677
<LIABILITIES-OTHER> 219,151
<LONG-TERM> 379,234
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,314,877
<TOTAL-LIABILITIES-AND-EQUITY> 19,519,347
<INTEREST-LOAN> 234,386
<INTEREST-INVEST> 74,264
<INTEREST-OTHER> 11,063
<INTEREST-TOTAL> 319,713
<INTEREST-DEPOSIT> 124,175
<INTEREST-EXPENSE> 178,820
<INTEREST-INCOME-NET> 140,893
<LOAN-LOSSES> 15,035
<SECURITIES-GAINS> 5,927
<EXPENSE-OTHER> 168,275
<INCOME-PRETAX> 58,061
<INCOME-PRE-EXTRAORDINARY> 40,092
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,092
<EPS-PRIMARY> 5.39
<EPS-DILUTED> 5.39
<YIELD-ACTUAL> 3.48
<LOANS-NON> 31,565
<LOANS-PAST> 60,539
<LOANS-TROUBLED> 946
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 141,963
<CHARGE-OFFS> 21,797
<RECOVERIES> 3,665
<ALLOWANCE-CLOSE> 138,867
<ALLOWANCE-DOMESTIC> 138,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
