<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, 1998, 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.
111 West Monroe Street
Chicago, Illinois 60603
(312) 461-2121
Incorporated in the State of Delaware
IRS Employer Identification No. 36-2722782
-------------------------
Harris Bankcorp, Inc. (the "Corporation") has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and has been subject to such filing requirements for the
past 90 days.
At November 12, 1998 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, 1998, December
31, 1997 and September 30, 1997.
Consolidated Statement of Income for the quarters and nine months ended
September 30, 1998 and 1997.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the nine months ended September
30, 1998 and 1997.
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 1998 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, 1998, 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 12th day of November 1998.
/s/
- ------------------------------------------------
Pierre O. Greffe
Chief Financial Officer
/s/
- ------------------------------------------------
Paul R. Skubic
Chief Accounting Officer
<PAGE> 3
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
----------------------------- ---------------------------------
1998 1997 Change 1998 1997 Change
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income................................ $122,885 $140,893 (13)% $378,085 $427,774 (12)%
Net interest income (fully taxable equivalent)..... 130,626 147,534 (11) 400,589 447,354 (10)
Provision for loan losses.......................... 7,000 15,035 (53) 19,761 45,327 (56)
Noninterest income................................. 116,337 100,478 16 335,021 279,740 20
Noninterest expenses............................... 170,375 168,275 1 503,579 490,722 3
Net income......................................... 46,068 40,092 15 136,900 116,861 17
Cash and noncash dividends -- common stock......... 89,000 14,455 516 165,500 37,455 342
Cash dividends -- preferred stock.................. 4,148 4,148 0 12,446 12,446 0
Cash earnings (1).................................. 49,876 44,681 12 148,432 130,526 14
- -------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity...... 12.17% 10.59% 158 bp 12.01% 10.67% 134 bp
Return on average assets........................... 0.85 0.83 2 0.88 0.82 6
Cash flow return on average common stockholder's
equity (2)....................................... 16.57 15.35 122 16.43 15.75 68
Cash flow return on average assets (3)............. 0.93 0.93 0 0.96 0.94 2
Tier 1 risk-based capital ratio.................... 8.71 8.03 68
Total risk-based capital ratio..................... 11.67 10.98 69
Tier 1 leverage ratio.............................. 7.34 6.88 46
Allowance for possible loan losses to total loans
(period-end)..................................... 1.14 1.24 (10)
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DAILY AVERAGE BALANCES (IN MILLIONS)
Loans, net of unearned income...................... $ 11,782 $ 11,008 7% $ 11,582 $ 10,862 7%
Portfolio securities available-for-sale............ 6,391 5,001 28 5,948 4,830 23
Money market assets................................ 456 771 (41) 505 813 (38)
Total interest-earning assets...................... 18,694 16,831 11 18,085 16,563 9
Total assets....................................... 21,637 19,259 12 20,877 18,964 10
Deposits........................................... 14,826 13,474 10 14,163 13,052 9
Short-term borrowings.............................. 4,193 3,556 18 4,177 3,694 13
Common stockholder's equity........................ 1,367 1,347 1 1,386 1,308 6
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BALANCES AT QUARTER-END (IN MILLIONS)
Loans, net of unearned income...................... $ 11,975 $ 11,198 7%
Allowance for possible loan losses................. 137 139 (1)
Portfolio securities available-for-sale............ 6,607 4,897 35
Total assets....................................... 21,888 19,519 12
Deposits........................................... 14,725 13,930 6
Common stockholder's equity........................ 1,423 1,368 4
Total stockholder's equity......................... 1,648 1,593 3
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</TABLE>
(1) Cash earnings are defined as earnings before amortization of goodwill and
other valuation intangibles.
(2) Cash flow return on average common stockholder's equity is calculated as
annualized 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 average intangible assets.
(3) Cash flow return on average assets is calculated as annualized 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 earnings of $46.1 million for third quarter
1998 and $136.9 million for the nine months ended September 30, 1998,
representing increases of 15% and 17%, respectively.
This is the Corporation's third consecutive quarter of
double-digit earnings growth and reflects continued growth and
expansion. For the current quarter, cash flow return on average
common stockholder's equity (cash flow ROE) was 16.57 percent
compared to 15.35 percent in third quarter 1997. Increased earnings
resulted from continued strong revenue growth in corporate, private,
and community banking and effective control of operating costs.
Net interest income on a fully taxable equivalent basis was
$130.6 million, down $16.9 million or 11% from third quarter last
year. Net interest margin declined from 3.48% in the third quarter
last year to 2.77% currently, reflecting the impact of the sale of
Harris Trust and Savings Bank's ("HTSB") credit card portfolio in
January 1998. Average earning assets rose 11% to $18.69 billion from
$16.83 billion in third quarter 1997, attributable to an increase of
$774 million in average loans and $1.35 billion in the investment
securities portfolio. Excluding the credit card portfolio, average
loans rose $1.52 billion or 15%. Commercial loans and residential
mortgages were the primary contributors to this growth.
Third quarter noninterest income of $116.3 million increased 16%
from the same quarter last year, despite a $6.1 million decline in
merchant and charge card fees resulting from the 1998 first quarter
card portfolio sale. Trust and investment management fees increased
$2.8 million while service charge fees rose $2.4 million. Other
income, which includes syndication fees, mortgage loan sales, gain on
asset sales and other fees, increased $11.9 million during the
current quarter. Net gains from portfolio securities sales increased
from $5.9 million in third quarter 1997 to $7.7 million during the
current quarter, while money market and bond trading profits of $3.6
million were up $2.8 million from the year-ago quarter.
Third quarter 1998 noninterest expenses of $170.4 million were up
1% from third quarter a year ago. Income tax expense declined,
reflecting a reduction in the effective tax rate.
The third quarter 1998 provision for loan losses of $7.0 million
was down from $15.0 million in the third quarter of 1997. Net loan
charge-offs during the current quarter were $5.6 million compared to
$18.1 million in the same period last year, with the difference
primarily attributable to lower write-offs as a result of the credit
card portfolio sale.
Nonperforming assets at September 30, 1998, were $36 million or
0.3% of total loans, compared to $34 million or 0.3% a year ago and
$29 million or 0.2% at June 30, 1998. At September 30, 1998, the
allowance for possible loan losses was $137 million, equal to 1.1% of
loans outstanding, compared to $139 million or 1.2% at the end of
third quarter 1997. As a result, the ratio of the allowance for
possible loan losses to nonperforming assets was 380% at September
30, 1998, compared to 410% at September 30, 1997.
At September 30, 1998, equity capital of Harris Bankcorp amounted
to $1.65 billion, up from $1.59 billion one year earlier. With the
volatility in global financial markets and associated "flight to
quality", unrealized gains in the Corporation's investment portfolio
included in equity capital increased to more than $100 million at
September 30, 1998. The regulatory leverage capital ratio was 7.34
percent for the third quarter of 1998, compared to 6.88 percent in
the same quarter of 1997. Harris Bankcorp's capital ratio exceeds the
prescribed regulatory minimum for bank holding companies.
Harris Bankcorp's net income for the nine months ended September
30, 1998 was $136.9 million, up 17% from $116.9 million a year
earlier. Current results were affected by the January 1998 sale of
HTSB's credit card portfolio resulting in a pretax gain of $12.0
million. At the date of sale, outstanding credit card loans amounted
to approximately $700 million, resulting in a reduction of 1998 net
interest income. Also, in first
2
<PAGE> 5
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quarter 1998, the Corporation recognized a one-time pretax charge of
$8.7 million for certain process improvements and system conversions,
including write-offs of discontinued systems. Net interest income on
a fully taxable equivalent basis declined by 10% or $46.8 million,
reflecting the aforementioned credit card portfolio sale. For the
same reason, net interest margin declined to 2.96% currently from
3.61% in the nine months ended September 30, 1997. Average earning
assets rose 9% to $18.08 billion. Excluding the credit card
portfolio, average loans increased $1.48 billion or 15%.
Noninterest income increased $55.3 million, or 20% year-to-year,
due to strong growth in trust and investment management fees,
syndication fees, service charge fees, bond trading profits and
portfolio securities gains. The $12 million gain from the first
quarter sale of the credit card portfolio was offset by a $16.9
million decline in merchant and charge card fees.
The provision for loan losses decreased by $25.5 million or 56%
to $19.8 million in the first nine months of 1998. Net charge-offs
declined by 72% reflecting lower write-offs from the credit card
portfolio. Noninterest expenses increased $12.9 million or 3%
year-to-year.
Cash flow ROE for the first nine months of 1998 was 16.43 percent
compared to 15.75 percent for the period ended September 30, 1997.
ALAN G. MCNALLY
Alan G. McNally
Chairman of the Board and
Chief Executive Officer October 29, 1998
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
Quarter Ended September 30 September 30
--------------------------- -----------------------
(in thousands except share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $227,865 $234,386 $678,085 $687,804
Money market assets:
Deposits at banks......................................... 1,840 7,134 10,054 24,054
Federal funds sold and securities purchased under
agreement to resell..................................... 3,049 3,088 7,076 8,842
Trading account............................................. 1,291 841 2,831 2,442
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 89,288 69,391 248,418 202,658
State and municipal....................................... 4,079 4,464 12,378 13,228
Other..................................................... 1,233 409 2,101 1,143
-------- -------- -------- --------
Total interest income....................................... 328,645 319,713 960,943 940,171
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 136,315 124,175 381,160 345,763
Short-term borrowings....................................... 42,589 39,217 130,302 115,510
Senior notes................................................ 14,472 8,433 37,979 31,594
Minority interest -- dividends on preferred stock of
subsidiary................................................ 4,609 -- 11,780 --
Long-term notes............................................. 7,775 6,995 21,637 19,530
-------- -------- -------- --------
Total interest expense.................................... 205,760 178,820 582,858 512,397
-------- -------- -------- --------
NET INTEREST INCOME......................................... 122,885 140,893 378,085 427,774
Provision for loan losses................................... 7,000 15,035 19,761 45,327
-------- -------- -------- --------
Net Interest Income after Provision for Loan Losses......... 115,885 125,858 358,324 382,447
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 37,078 34,320 106,787 99,073
Money market and bond trading............................... 3,632 793 8,395 3,352
Foreign exchange............................................ 1,650 1,348 4,950 3,462
Merchant and charge card fees............................... 6,867 12,940 20,467 37,372
Service fees and charges.................................... 27,445 25,079 81,347 71,641
Portfolio securities gains.................................. 7,674 5,927 19,651 9,896
Gain on sale of charge card portfolio....................... -- -- 12,000 --
Other....................................................... 31,991 20,071 81,424 54,944
-------- -------- -------- --------
Total noninterest income.................................. 116,337 100,478 335,021 279,740
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 82,596 79,131 242,275 230,816
Pension, profit sharing and other employee benefits......... 14,645 14,942 44,633 46,212
Net occupancy............................................... 12,355 14,917 38,016 43,004
Equipment................................................... 13,019 12,282 38,859 35,099
Marketing................................................... 6,837 6,026 19,433 18,978
Communication and delivery.................................. 5,263 6,126 16,379 17,463
Deposit insurance........................................... 741 736 2,294 2,157
Expert Services............................................. 8,902 9,101 22,647 22,727
Other....................................................... 20,048 17,978 61,006 53,358
-------- -------- -------- --------
164,406 161,239 485,542 469,814
Goodwill and other valuation intangibles.................... 5,969 7,036 18,037 20,908
-------- -------- -------- --------
Total noninterest expenses................................ 170,375 168,275 503,579 490,722
-------- -------- -------- --------
Income before income taxes.................................. 61,847 58,061 189,766 171,465
Applicable income taxes..................................... 15,779 17,969 52,866 54,604
-------- -------- -------- --------
NET INCOME................................................ 46,068 40,092 136,900 116,861
Dividends on preferred stock................................ 4,148 4,148 12,445 12,445
-------- -------- -------- --------
Net Income Applicable to Common Stock....................... $ 41,920 $ 35,944 $124,455 $104,416
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE (based on
6,667,490 average shares outstanding)
Net Income Applicable to Common Stock....................... $ 6.29 $ 5.39 $ 18.67 $ 15.66
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
4
<PAGE> 7
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Harris Bankcorp, Inc. and
Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
--------------------- -----------------------
(in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME.................................................. $46,068 $40,092 $136,900 $116,861
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period, net of
tax expense for the quarter of $32,566 in 1998 and
$15,493 in 1997 and net of tax expense for the
year-to-date period of $41,315 in 1998 and $10,875 in
1997.................................................. 48,510 19,440 61,737 16,495
Less reclassification adjustment for realized gains
included in income statement, net of tax expense for
the quarter of $3,050 in 1998 and $2,356 in 1997 and
net of tax expense for the year-to-date period of
$7,811 in 1998 and $3,934 in 1997..................... (4,624) (3,571) (11,840) (5,962)
------- ------- -------- --------
Other comprehensive income.................................. 43,886 15,869 49,897 10,533
------- ------- -------- --------
Comprehensive income........................................ $89,954 $55,961 $186,797 $127,394
======= ======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
5
<PAGE> 8
CONSOLIDATED STATEMENTS OF CONDITION Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31 September 30
(in thousands except share data) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,158,777 $ 1,304,374 $ 1,252,362
Money market assets:
Interest-bearing deposits at banks........................ 213,720 598,070 550,234
Federal funds sold and securities purchased under
agreement to resell..................................... 61,953 80,782 402,379
Trading account assets...................................... 91,040 53,209 35,467
Portfolio securities available-for-sale..................... 6,607,023 5,229,390 4,896,536
Loans, net of unearned income............................... 11,975,147 10,868,250 11,198,157
Allowance for possible loan losses.......................... (136,820) (130,876) (138,867)
Net loans................................................. 11,838,327 10,737,374 11,059,290
Premises and equipment...................................... 341,850 314,642 305,786
Customers' liability on acceptances......................... 34,997 46,480 41,205
Assets held for sale........................................ -- 725,760 --
Goodwill and other valuation intangibles.................... 271,560 292,981 297,724
Other assets................................................ 1,269,078 750,399 678,364
----------- ----------- -----------
TOTAL ASSETS.......................................... $21,888,325 $20,133,461 $19,519,347
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 3,269,482 $ 4,192,454 $ 3,177,985
-- interest-bearing.............. 10,201,337 8,489,732 8,772,543
Deposits in foreign offices -- noninterest-bearing.......... 23,329 18,431 23,421
-- interest-bearing............... 1,230,644 1,731,446 1,955,914
----------- ----------- -----------
Total deposits........................................ 14,724,792 14,432,063 13,929,863
Federal funds purchased and securities sold under agreement
to repurchase............................................. 2,946,203 2,451,873 2,369,070
Commercial paper outstanding................................ 240,983 351,427 354,372
Other short-term borrowings................................. 443,499 503,320 28,235
Senior notes................................................ 762,000 100,000 605,000
Acceptances outstanding..................................... 34,997 46,480 41,205
Accrued interest, taxes and other expenses.................. 194,443 154,373 156,857
Other liabilities........................................... 188,725 82,132 62,294
Minority interest -- preferred stock of subsidiary.......... 250,000 -- --
Long-term notes............................................. 454,370 379,278 379,234
----------- ----------- -----------
TOTAL LIABILITIES..................................... 20,240,012 18,500,946 17,926,130
----------- ----------- -----------
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..................................................... 493,492 486,545 484,877
Retained earnings........................................... 815,106 856,152 827,586
Accumulated other comprehensive income -- unrealized gains
on securities available-for-sale, net of deferred taxes of
$41,059 in 1998, $7,563 and $1,577 in 1997................ 61,375 11,478 2,414
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,648,313 1,632,515 1,593,217
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $21,888,325 $20,133,461 $19,519,347
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
6
<PAGE> 9
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY Harris Bankcorp,
Inc. and Subsidiaries
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<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,632,515 $1,515,166
Net income................................................ 136,900 116,861
Contributions to capital.................................. 6,947 558
Noncash dividend.......................................... -- (2,455)
Cash dividends -- Series A preferred stock................ (9,788) (9,788)
Cash dividends -- Series B preferred stock................ (2,658) (2,658)
Cash dividends -- common stock............................ (165,500) (35,000)
Other comprehensive income, net of tax.................... 49,897 10,533
---------- ----------
BALANCE AT SEPTEMBER 30..................................... $1,648,313 $1,593,217
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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CONSOLIDATED STATEMENTS OF CASH FLOWS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 136,900 $ 116,861
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 19,761 45,327
Depreciation and amortization, including intangibles...... 49,404 51,574
Deferred tax expense (benefit)............................ 9,177 (2,241)
Gain on sales of portfolio securities..................... (19,651) (9,896)
Gain on sale of credit card portfolio..................... (12,000) --
Trading account net (purchases) sales..................... (37,831) 74,888
Net decrease (increase) in interest receivable............ 17,084 (22,192)
Net increase (decrease) in interest payable............... 18,696 (2,123)
Net increase in loans held for resale..................... (107,642) (52,002)
Other, net................................................ (628) (22,573)
------------ ------------
Net cash provided by operating activities............... 73,270 177,623
------------ ------------
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits at banks........ 384,350 108,023
Net decrease (increase) in Federal funds sold and
securities purchased under agreement to resell.......... 18,829 (107,587)
Proceeds from sales of securities available-for-sale...... 1,703,049 1,043,072
Proceeds from maturities of securities
available-for-sale...................................... 10,973,120 8,131,227
Purchases of securities available-for-sale................ (13,947,750) (10,058,282)
Net increase in loans..................................... (980,475) (450,174)
Proceeds from sales of premises and equipment............. 30,993 19,230
Purchases of premises and equipment....................... (93,857) (80,591)
Purchases of bank owned insurance investments............. (447,956) --
Other, net................................................ (7,766) (1,610)
------------ ------------
Net cash used by investing activities................... (2,367,463) (1,396,692)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits.................................. 292,729 939,562
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 494,330 386,023
Net (decrease) increase in commercial paper outstanding... (110,444) 19,719
Net decrease in short-term borrowings..................... (59,821) (319,455)
Proceeds from issuance of senior notes.................... 6,954,080 5,310,000
Repayment of senior notes................................. (6,292,080) (5,055,000)
Proceeds from issuance of long-term notes................. 75,000 --
Proceeds from the sale of the credit card portfolio....... 722,748 --
Proceeds from issuance of preferred stock of subsidiary... 250,000 --
Cash dividends paid on preferred stock.................... (12,446) (12,446)
Cash dividends paid on common stock....................... (165,500) (35,000)
------------ ------------
Net cash provided by financing activities............... 2,148,596 1,233,403
------------ ------------
Net (decrease) increase in cash and demand balances due
from banks............................................. (145,597) 14,334
Cash and demand balances due from banks at January 1.... 1,304,374 1,238,028
------------ ------------
Cash and demand balances due from banks at September
30..................................................... $ 1,158,777 $ 1,252,362
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
7
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. BASIS OF Harris Bankcorp, Inc. (the "Corporation") is a wholly-owned
PRESENTATION 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 year's 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, 1997.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission. Because the results of operations are so
closely related to and responsive to changes in economic
conditions, the results for any interim period are not necessarily
indicative of the results that can be expected for the entire
year.
- --------------------------------------------------------------------------------
2. LEGAL
PROCEEDINGS Certain subsidiaries of the Corporation are defendants in various
legal proceedings arising in the normal course of business. In the
opinion of management, based on the advice of legal counsel, the
ultimate resolution of these matters will not have a material
adverse effect on the Corporation's consolidated financial
position.
- --------------------------------------------------------------------------------
3. CASH FLOWS For purposes of the Corporation's Consolidated Statement of Cash
Flows, cash and cash equivalents is defined to include cash and
demand balances due from banks. Cash interest payments (net of
amounts capitalized) for the nine months ended September 30,
totaled $564.2 million and $514.6 million in 1998 and 1997,
respectively. Cash income tax payments over the same periods
totaled $36.3 million and $60.0 million, respectively.
- -------------------------------------------------------------------------------
4. ACCOUNTING In February 1998, the Financial Accounting Standards Board (FASB)
CHANGES issued Statement of Financial Accounting Standards (SFAS) No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." The Statement revises financial statement disclosure
requirements for pension and other postretirement benefit plans.
It standardizes the disclosure requirements for pension and other
postretirement benefits, requires additional disclosure
information regarding changes in benefit obligations and fair
values of plan assets and eliminates certain disclosures that are
no longer considered useful. The Statement does not change the
measurement or recognition of the benefit plans. The Statement is
effective for fiscal years beginning after December 15, 1997. The
Corporation adopted this statement in 1998 and it did not have a
material effect on the Corporation's financial position or results
of operations. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires all
derivatives to be recognized as either assets or liabilities in
the statement of financial position and to be measured at fair
value. The Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Corporation is in
the process of assessing the impact of adopting this Statement on
its financial position and results of operations.
8
<PAGE> 11
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended September 30
--------------------------------------
1998 1997
Daily Average Balances (in millions) ----------------- -----------------
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........................ $ 246 2.96% $ 557 5.08%
Federal funds sold and securities purchased under agreement
to resell............................................... 210 5.77 214 5.73
-------- --------
Total money market assets........................... 456 4.25 771 5.26
Trading account assets...................................... 105 6.21 51 8.10
Portfolio securities available-for-sale: (1)(2)
U.S. Treasury and Federal agency.......................... 5,961 6.27 4,657 6.25
State and municipal....................................... 300 8.11 311 8.61
Other..................................................... 90 6.96 33 4.74
-------- --------
Total portfolio securities available-for-sale....... 6,351 6.36 5,001 6.38
Loans, net of unearned income............................... 11,782 7.76 11,008 8.47
Assets held for sale... -- -- -- --
-------- --------
TOTAL INTEREST-EARNING ASSETS....................... 18,694 7.14 16,831 7.70
-------- --------
Cash and demand balances due from banks..................... 1,212 1,221
Other assets................................................ 1,731 1,207
-------- --------
Total assets........................................ $ 21,637 $ 19,259
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts........ $ 3,520 3.59 $ 2,765 3.35
Savings deposits and certificates........................... 4,606 4.90 4,742 5.00
Other time deposits......................................... 2,114 5.62 1,058 5.60
Foreign office time deposits................................ 1,280 5.47 1,871 5.54
-------- --------
TOTAL INTEREST-BEARING DEPOSITS..................... 11,520 4.70 10,436 4.72
Short-term borrowings....................................... 4,193 5.40 3,556 5.32
Minority interest -- preferred stock of subsidiary.......... 250 7.38 -- --
Long-term notes............................................. 441 7.05 379 7.38
-------- --------
TOTAL INTEREST-BEARING LIABILITIES.................. 16,404 4.98 14,371 4.94
Noninterest-bearing deposits................................ 3,306 3,038
Other liabilities........................................... 335 278
Stockholder's equity........................................ 1,592 1,572
-------- --------
Total liabilities and stockholder's equity.......... $ 21,637 $ 19,259
======== ========
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING
ASSETS)................................................... 2.77% 3.48%
===== =====
<CAPTION>
Nine Months Ended September 30
---------------------------------------
1998 1997
Daily Average Balances (in millions) ----------------- -----------------
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........................ $ 351 3.84% $ 603 5.33%
Federal funds sold and securities purchased under agreement
to resell............................................... 154 6.14 210 5.62
-------- --------
Total money market assets........................... 505 4.54 813 5.41
Trading account assets...................................... 78 6.33 58 6.89
Portfolio securities available-for-sale: (1)(2)
U.S. Treasury and Federal agency.......................... 5,569 6.31 4,492 6.37
State and municipal....................................... 296 8.31 305 8.74
Other..................................................... 55 6.07 33 4.94
-------- --------
Total portfolio securities available-for-sale....... 5,920 6.41 4,830 6.51
Loans, net of unearned income............................... 11,512 7.79 10,862 8.47
Assets held for sale........................................ 70 15.84 -- --
-------- --------
TOTAL INTEREST-EARNING ASSETS....................... 18,085 7.27 16,563 7.74
-------- --------
Cash and demand balances due from banks..................... 1,231 1,211
Other assets................................................ 1,561 1,190
-------- --------
Total assets........................................ $ 20,877 $ 18,964
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts........ $ 3,363 3.58 $ 2,774 3.26
Savings deposits and certificates........................... 4,656 4.95 4,723 4.93
Other time deposits......................................... 1,628 5.61 814 5.56
Foreign office time deposits................................ 1,233 5.47 1,718 5.45
-------- --------
TOTAL INTEREST-BEARING DEPOSITS..................... 10,880 4.68 10,029 4.61
Short-term borrowings....................................... 4,177 5.39 3,694 5.28
Minority interest -- preferred stock of subsidiary.......... 212 7.38 -- --
Long-term notes............................................. 400 7.21 379 7.27
-------- --------
TOTAL INTEREST-BEARING LIABILITIES.................. 15,669 4.97 14,102 4.86
Noninterest-bearing deposits................................ 3,283 3,023
Other liabilities........................................... 314 306
Stockholder's equity........................................ 1,611 1,533
-------- --------
Total liabilities and stockholder's equity.......... $ 20,877 $ 18,964
======== ========
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING
ASSETS)... 2.96% 3.61%
===== =====
</TABLE>
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt income has been restated to a comparable taxable level. The Federal
and state statutory tax rates used for this purpose were 35 percent and 4.8
percent, respectively, in 1998 and 1997.
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 1998
COMPARED WITH
THIRD QUARTER 1997
- --------------------------------------------------------------------------------
SUMMARY The Corporation had third quarter 1998 earnings of $46.1 million, an
increase of $6.0 million or 15 percent from third quarter 1997. For
the current quarter, annualized return on average common
stockholder's equity was 12.17 percent compared to 10.59 percent in
the third quarter of 1997. Annualized return on average assets was
0.85 percent compared to 0.83 percent a year ago.
Third quarter net interest income on a fully taxable equivalent
basis was $130.6 million, down $16.9 million or 11 percent from
$147.5 million in 1997's third quarter. At the time of the January
1998 credit card sale, outstanding credit card loans amounted to
approximately $700 million, resulting in a reduction in net interest
income compared to third quarter 1997. Average earning assets rose 11
percent to $18.69 billion from $16.83 billion in 1997, primarily
attributable to an increase of $774 million in average loans and
$1.35 billion in the investment securities portfolio. Excluding the
credit card portfolio, average loans rose $1.52 billion or 15
percent. Commercial loans and residential mortgages were the most
significant contributors to this growth. Net interest margin declined
to 2.77 percent from 3.48 percent in the same quarter last year
primarily reflecting the impact of the sale of the credit card loans
earlier this year.
The third quarter provision for loan losses of $7.0 million was
down $8.0 million from $15.0 million in the third quarter of 1997
because of the change in the risk profile of the portfolio due to the
sale of the card loans in January of this year. Net charge-offs
decreased from $18.1 million to $5.6 million, primarily reflecting
the reduction in charge card loans and the related writeoffs.
Noninterest income increased $15.9 million or 16 percent to
$116.3 million for third quarter 1998 compared to the same quarter
last year. In the current quarter, service charge fees rose by $2.4
million and trust and investment management fees improved by $2.8
million compared to third quarter 1997, while money market and bond
trading income increased $2.8 million. Net gains from portfolio
securities sales increased from $5.9 million in third quarter 1997 to
$7.7 million during the current quarter. Other income increased by
$11.9 million due to increases in bank owned insurance investments,
gains on mortgage sales and other fees.
Third quarter 1998 noninterest expenses of $170.4 million
increased $2.1 million or 1 percent from last year.
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
--------------------------- -----------------------
(in thousands) 1998 1997 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income................................ $328,645 $319,713 $960,943 $940,171
Fully taxable equivalent adjustment............ 7,741 6,641 22,504 19,580
-------- -------- -------- --------
Interest income (fully taxable equivalent
basis)................................... 336,386 326,354 983,447 959,751
Interest expense............................... 205,760 178,820 582,858 512,397
-------- -------- -------- --------
Net interest income (fully taxable equivalent
basis)....................................... $130,626 $147,534 $400,589 $447,354
======== ======== ======== ========
Increase (decrease) due to change in:
Volume..................................... $ 14,584 $ 13,009 $ 38,611 $ 47,431
Rate....................................... (31,492) (12,308) (85,376) (10,154)
-------- -------- -------- --------
Total (decrease) increase in net
interest income..................... $(16,908) $ 701 $(46,765) $ 37,277
======== ======== ======== ========
</TABLE>
Third quarter net interest income on an FTE basis was $130.6 million,
down 11% from $147.5 million in third quarter 1997. The January 1998
sale of the $700 million credit card portfolio resulted in the
decline of current quarter net interest income, although average
earning assets increased 11% or $1.86 billion to $18.69 billion from
$16.83 billion in 1997. Average loans rose $774 million, or 7%.
Commercial loans and residential real estate loans increased $825
million and $639 million, respectively. Average portfolio securities
were up 27%, or $1.35 billion, primarily reflecting increased
holdings of Federal agency securities. Total money market assets
declined $315 million or 41% over third quarter 1997 levels.
Funding for this asset growth came primarily from money market
accounts, other time deposits and short-term borrowings, which
increased by an average of $1.27 billion, $1.06 billion and $637
million, respectively, offset by declines in interest checking,
savings deposits and certificates, and foreign time deposits.
Net interest margin, the other principal determinant of net
interest income, declined from 3.48% to 2.77% in the current quarter.
The Corporation's declining net interest margin principally reflects
the impact of the sale of the credit card portfolio. In addition,
most of the incremental funding for asset growth came in the form of
interest-bearing deposits and other borrowings; net
noninterest-bearing sources of funds were down slightly in 1998.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended September 30
-----------------------------------------
Daily Average Balances (in millions) 1998 1997
Average Rates Earned and Paid ------------------- -------------------
(fully taxable equivalent basis) Balances Rates Balances Rates
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets................... $ 18,694 7.14% $ 16,831 7.70%
======== ========
Interest-bearing liabilities.............. $ 16,404 4.98 $ 14,371 4.94
Noninterest-bearing sources of funds...... 2,290 2,460
-------- --------
Total supporting liabilities.......... $ 18,694 4.37 $ 16,831 4.22
======== ========
Net interest margin (related to average
interest-earning assets)................ 2.77% 3.48%
======== ========
<CAPTION>
Nine Months Ended September 30
-----------------------------------------
Daily Average Balances (in millions) 1998 1997
Average Rates Earned and Paid ------------------- -------------------
(fully taxable equivalent basis) Balances Rates Balances Rates
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets................... $ 18,085 7.27% $ 16,563 7.74%
======== ========
Interest-bearing liabilities.............. $ 15,669 4.97 $ 14,102 4.86
Noninterest-bearing sources of funds...... 2,416 2,461
-------- --------
Total supporting liabilities.......... $ 18,085 4.31 $ 16,563 4.13
======== ========
Net interest margin (related to average
interest-earning assets)................ 2.96% 3.61%
======== ========
</TABLE>
11
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30 Increase (Decrease) Ended September 30
NONINTEREST -------------------- -------------------- --------------------
INCOME (IN thousands) 1998 1997 Amount % 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees...... $ 37,078 $ 34,320 $ 2,758 8 $106,787 $ 99,073
Money market and bond
trading.............. 3,632 793 2,839 + 8,395 3,352
Foreign exchange....... 1,650 1,348 302 22 4,950 3,462
Merchant and charge
card fees............ 6,867 12,940 (6,073) (47) 20,467 37,372
Service fees and
charges.............. 27,445 25,079 2,366 9 81,347 71,641
Securities gains....... 7,674 5,927 1,747 29 19,651 9,896
Gain on sale of credit
card portfolio....... -- -- -- -- 12,000 --
Other.................. 31,991 20,071 11,920 59 81,424 54,944
-------- -------- ------- -------- --------
Total noninterest
income............... $116,337 $100,478 $15,859 16 $335,021 $279,740
======== ======== ======= === ======== ========
<CAPTION>
Increase (Decrease)
NONINTEREST -------------------
INCOME Amount %
-------------------
<S> <C> <C>
$ 7,714 8
5,043 +
1,488 43
(16,905) (45)
9,706 14
9,755 +
12,000 --
26,480 48
--------
$ 55,281 20
======== ===
</TABLE>
Noninterest income for the 1998 third quarter was $116.3 million, an
increase of $15.9 million or 16 percent from the third quarter of
1997. Money market and bond trading profits totaled $3.6 million, an
increase of $2.8 million from the third quarter of 1997. Trust and
investment management fees was $37.1 million, an increase of $2.8
million or 8 percent from the previous year. Service fees and charges
totaled $27.4 million, an increase of $2.4 million or 9 percent from
the prior year. Foreign exchange revenue was $1.7 million, up 22
percent from the third quarter of 1997. Other income, including
syndication fees, gains from mortgage sales, foreign fees, revenue
from bank owned insurance investments and other miscellaneous items,
increased $11.9 million or 59 percent over the previous year. Net
gains reported from the sale of portfolio securities totaled $7.7
million, up $1.7 million over 1997.
Merchant and charge card fees declined $6.1 million or 47 percent
from the previous year due to the sale of the credit card portfolio
in the first quarter of 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONINTEREST
EXPENSES
Quarter Nine Months
Ended September 30 Increase (Decrease) Ended September 30
AND INCOME -------------------- -------------------- --------------------
TAXES (in thousands) 1998 1997 Amount % 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation.......... $ 82,596 $ 79,131 $ 3,465 4 $242,275 $230,816
Pension, profit sharing
and other employee
benefits.............. 14,645 14,942 (297) (2) 44,633 46,212
Net occupancy........... 12,355 14,917 (2,562) (17) 38,016 43,004
Equipment............... 13,019 12,282 737 6 38,859 35,099
Marketing............... 6,837 6,026 811 13 19,433 18,978
Communication and
delivery.............. 5,263 6,126 (863) (14) 16,379 17,463
Deposit insurance....... 741 736 5 1 2,294 2,157
Expert services......... 8,902 9,101 (199) (2) 22,647 22,727
Restructuring charge.... -- -- -- -- 8,684 --
Other................... 20,048 17,978 2,070 12 52,322 53,358
-------- -------- ------- -------- --------
164,406 161,239 3,167 -- 485,542 469,814
Goodwill and other
valuation
intangibles........... 5,969 7,036 (1,067) (15) 18,037 20,908
-------- -------- ------- -------- --------
Total noninterest
expense............... $170,375 $168,275 $ 2,100 1 $503,579 $490,722
======== ======== ======= ======== ========
Provision for income
taxes................. $ 15,779 $ 17,969 $(2,190) (12) $ 52,866 $ 54,604
======== ======== ======= === ======== ========
<CAPTION>
NONINTEREST
EXPENSES
Increase (Decrease)
AND INCOME --------------------
TAXES Amount %
--------------------
<S> <C> <C>
$11,459 5
(1,579) (3)
(4,988) (12)
3,760 11
455 2
(1,084) (6)
137 6
(80) --
8,684 --
(1,036) (2)
-------
15,728 3
(2,871) (14)
-------
$12,857 3
=======
$(1,738) (3)
======= ===
</TABLE>
12
<PAGE> 15
- --------------------------------------------------------------------------------
Noninterest expenses for 1998 third quarter totaled $170.4 million,
an increase of $2.1 million or 1 percent from the third quarter of
1997.
Employment-related expenses totaled $97.2 million, an increase of
$3.2 million or 3 percent. Net occupancy expenses totaled $12.4
million, down $2.6 million from the prior year's third quarter, in
part reflecting favorable adjustments for real estate tax accruals.
Equipment expenses increased $0.7 million or 6 percent over third
quarter 1997. Expert services decreased $0.2 million to $8.9 million
in third quarter 1998. Other noninterest expenses increased $2.1
million or 12 percent. Goodwill and other valuation intangibles
declined $1.1 million or 15 percent, due to the credit card sale in
the first quarter of 1998.
Income tax expense totaled $15.8 million, a decrease of 12
percent from $18.0 million recorded in third quarter 1997. While
pretax income increased, the effective tax rate declined from 38
percent to 34 percent.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at September 30, 1998 was
$1.65 billion, compared with $1.63 billion and $1.59 billion at
December 31, 1997 and September 30, 1997, respectively. During the
preceding twelve months, the Corporation declared common and
preferred dividends of $172.5 million and $16.6 million,
respectively.
In February 1998, Harris Preferred Capital Corporation, a
subsidiary of HTSB, issued $250 million of noncumulative preferred
stock in a public offering. The preferred stock qualifies as Tier 1
capital at both HTSB and Bankcorp for U.S. banking regulatory
purposes.
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
percent and total regulatory capital to risk-weighted assets of 8
percent.
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 percent of total capital. Tier 2
capital basically includes subordinated debt (less a discount factor
during the five years prior to maturity), other types of preferred
stock and the allowance for possible loan losses. The Corporation's
Tier 1 and total risk-based capital ratios were 8.71 percent and
11.67 percent, respectively, at September 30, 1998. HTSB's Tier 1 and
total risk-based capital ratios were 8.62 percent and 10.86 percent,
respectively, at September 30, 1998.
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 percent for most holding companies. The Corporation's and HTSB's
Tier 1 leverage ratios were 7.34 percent and 7.65 percent,
respectively, for the third quarter of 1998.
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, 1998, 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, 1998, the
Corporation's intangible assets totaled $272 million, including
approximately $261 million of intangibles excluded under capital
guidelines. The Corporation's and HTSB's tangible Tier 1 leverage
ratios (which exclude all intangibles) were 7.29 percent and 7.59
percent, respectively, for the third quarter of 1998.
13
<PAGE> 16
- --------------------------------------------------------------------------------
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
September 30 December 31 September 30
(in thousands) 1998 1997 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $21,888,325 $20,133,461 $19,519,347
=========== =========== ===========
Average assets (quarter).................................. $21,637,109 $19,978,660 $19,259,009
=========== =========== ===========
Risk-based on-balance sheet assets........................ $13,702,895 $13,051,738 $12,575,085
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 4,485,067 $ 4,112,859 $ 3,946,740
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $17,920,902 $16,883,446 $16,235,367
=========== =========== ===========
Tier 1 capital............................................ $ 1,560,804 $ 1,339,949 $ 1,304,436
=========== =========== ===========
Supplementary capital..................................... $ 531,568 $ 470,443 $ 478,407
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 2,091,787 $ 1,809,767 $ 1,782,209
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.34% 6.81% 6.88%
Risk-based capital ratios
Tier 1.................................................. 8.71% 7.94% 8.03%
Total................................................... 11.67% 10.72% 10.98%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING September 30 December 31 September 30
ASSETS (in thousands) 1998 1997 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans............................................ $32,276 $17,790 $31,565
Restructured loans.......................................... 2,851 598 946
------- ------- -------
Total nonperforming loans................................ 35,127 18,388 32,511
Other assets received in satisfaction of debt............... 897 1,300 1,374
------- ------- -------
Total nonperforming assets............................... $36,024 $19,688 $33,885
======= ======= =======
Nonperforming loans to total loans (end of period).......... .29% .17% .29%
Nonperforming assets to total loans (end of period)......... .30% .18% .30%
======= ======= =======
90-day past due loans still accruing interest............... $29,603 $27,083 $60,539
======= ======= =======
</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 September 30, 1998 totaled $36 million,
or 0.30 percent of total loans, up from $29 million or 0.24 percent
of total loans at June 30, 1998. Nonperforming assets were up from
$34 million or 0.30 percent of total loans a year ago.
Interest shortfall for the quarters ended September 30, 1998 and
September 30, 1997 was $1.0 million for each quarter.
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
(in thousands) Related Allowance No Related Allowance Loans
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1998
Balance............................................ $21,961 $10,315 $32,276
Related allowance.................................. 8,159 -- 8,159
------- ------- -------
Balance, net of allowance.......................... $13,802 $10,315 $24,117
======= ======= =======
December 31, 1997
Balance............................................ $ 2,360 $15,430 $17,790
Related allowance.................................. 1,850 -- 1,850
------- ------- -------
Balance, net of allowance.......................... $ 510 $15,430 $15,940
======= ======= =======
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
--------------------------- -------------------------------
(in thousands) 1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average impaired loans.................... $32,766 $33,698 $31,020 $31,643
======= ======= ======= =======
Total interest income on impaired loans... $ 7 $ 17 $ 62 $ 79
======= ======= ======= =======
Interest income on impaired loans recorded
on a cash basis......................... $ 7 $ 17 $ 62 $ 79
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR POSSIBLE
Quarter Ended September 30 Nine Months Ended September 30
--------------------------- -------------------------------
LOAN LOSSES (in thousands) 1998 1997 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period............ $135,433 $141,963 $130,876 $142,211
-------- -------- -------- --------
Charge-offs............................. (9,368) (21,796) (21,592) (58,786)
Recoveries.............................. 3,755 3,665 7,775 10,115
-------- -------- -------- --------
Net charge-offs......................... (5,613) (18,131) (13,817) (48,671)
Provision charged to operations......... 7,000 15,035 19,761 45,327
-------- -------- -------- --------
Balance at September 30................. $136,820 $138,867 $136,820 $138,867
======== ======== ======== ========
Net charge-offs as a percentage of
provision charged to operations....... 80% 121% 70% 107%
Allowance for possible loan losses to
nonperforming loans (period-end)...... 390% 427%
Allowance for possible loan losses to
nonperforming assets (period-end)..... 380% 410%
Allowance for possible loan losses to
total loans outstanding
(period-end).......................... 1.14% 1.24%
</TABLE>
15
<PAGE> 18
- --------------------------------------------------------------------------------
The Corporation's provision for loan losses for the current quarter
was $7.0 million, down 53 percent from $15.0 million in last year's
third quarter. Net charge-offs decreased from $18.1 million to $5.6
million for the current quarter, bringing net charge-offs on a
year-to-date basis to $13.8 million compared to $48.7 million in the
same 1997 period. The decrease in 1998 third quarter net charge-offs
primarily reflects the sale of the charge card portfolio in first
quarter 1998 and the related reduction in charge card writeoffs. For
the third quarter of 1998, net charge-offs related to commercial and
installment loans were $4.4 million and $1.3 million, respectively,
compared to $3.2 million and $1.7 million, respectively, for the
third quarter of 1997.
At September 30, 1998, the allowance for possible loan losses was
$137 million, equal to 1.14 percent of total loans outstanding, down
from $139 million or 1.24 percent of total loans one year ago. The
allowance as a percentage of nonperforming loans decreased from 427
percent at September 30, 1997, to 390 percent at September 30, 1998.
- --------------------------------------------------------------------------------
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 percent of
the Corporation's total assets and amounted to $8.13 billion at
September 30, 1998. 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 1998 or 1997.
Total core deposits were $10.51 billion or 61 percent of total
non-equity funding at September 30, 1997 compared to $11.45 billion
or 60 percent of total non-equity funding at September 30, 1998. The
Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and
certificates, and money market accounts, rose 8 percent
quarter-to-quarter, reflecting increases in domestic demand deposits
and money market accounts. Total wholesale deposits and short-term
borrowings increased from $6.69 billion or 39 percent of total
non-equity funding at September 30, 1997 to $7.66 billion or 40
percent of total non-equity funding at September 30, 1998. Total
deposits averaged $14.83 billion in the third quarter of 1998, an
increase of $1.35 billion compared to the same quarter last year.
Average money market assets in the third quarter of 1998
decreased $315 million or 41 percent from the same quarter last year.
These assets represented 2 percent of average earning assets in 1998
compared to 5 percent a year ago. Average money market liabilities
increased 7 percent to $3.17 billion this quarter from $2.96 billion
in the same quarter last year.
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,
1998, $762 million of short-term notes were outstanding compared to
$605 million at September 30, 1997.
16
<PAGE> 19
- --------------------------------------------------------------------------------
FORWARD-
LOOKING
INFORMATIONThis Report contains certain forward-looking statements and
information that are based on the beliefs of, and information
currently available to, the Corporation's management, as well as
estimates and assumptions made by the Corporation's management.
Forward-looking statements, which describe future plans, strategies
and expectations of the Corporation, are generally identifiable by
use of words such as "anticipate", "believe", "estimate", "expect",
"future", "intend", "plan", "project" and similar expressions. The
Corporation's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations and future
prospects of the Corporation include, but are not limited to, changes
in: interest rates, general economic conditions, year 2000 issue,
legislative or regulatory environment, monetary and fiscal policies
of the U.S. Government, including policies of the U.S. Treasury and
the Federal Reserve Board, the quality or composition of the loan
securities portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Corporation's
market areas and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating
forward-looking statements.
- --------------------------------------------------------------------------------
MARKET RISK
MANAGEMENT As described in the Corporation's Form 10-K for the year ended
December 31, 1997, the Corporation's market risk is composed
primarily of interest rate risk. There have been no material changes
in market risk or the manner in which the Corporation manages market
risk since December 31, 1997.
- --------------------------------------------------------------------------------
YEAR 2000 A critical issue has emerged in the banking industry and for the
economy overall regarding how existing application software programs
and operating systems can accommodate the date value for the year
2000.
The Corporation and its parent company, Bank of Montreal, have
undertaken an enterprise-wide initiative to address the year 2000
issue and have developed a comprehensive plan to prepare, as
appropriate, the Corporation's computer systems to recognize the date
change on January 1, 2000. If not remedied, potential risks include
business interruption, financial loss, reputation loss, and/or legal
liability. An assessment of the readiness of third parties that the
Corporation interfaces with, such as vendors, counter-parties,
customers, payment systems, and others, is ongoing to mitigate the
potential risks that year 2000 poses to the Corporation. The
Corporation's objective is to try to ensure that all aspects of the
year 2000 issue affecting the Corporation, including those related to
the efforts of third parties, will be fully resolved in time. The
Corporation has consistently maintained contingency plans for vital
systems and business processes to protect the Corporation's assets
against unplanned events that would prevent normal operations. The
millennium changeover presents unique risks, some of which would not
be effectively addressed by the existing plans. The Corporation is
examining these risks and developing additional plans to mitigate the
effect of potential impacts and ensure continuity of operation
throughout the year 2000 and beyond. The use of the existing
contingency planning infrastructure will ensure optimum coverage and
re-usability of existing arrangements and responsibility assignments.
Emfisys, the Corporation's operations group, acting in support of
all of the lines of business, has overall responsibility for
converting systems to accommodate the calendar change. Each of the
Corporation's lines of business is responsible for ensuring that both
the technical and the business risks imposed by the year 2000 issue
are addressed. A governance structure has been established to deal
with this issue, which includes a Year 2000 Project Office and
regular monitoring of progress by the Corporation's Risk Management
Committee and reporting to the Board of Directors.
The process for year 2000 compliance is following four major
steps: inventory, impact assessment, implementation and
certification. The Corporation plans to substantially complete the
implementation of the Corporation's critical systems by the end of
1998. The implementation of non-critical business assets will be
completed by July 31, 1999, and implementation of all systems will be
achieved by October 31, 1999. The
17
<PAGE> 20
- --------------------------------------------------------------------------------
Corporation expects that the principal costs will be those associated with the
remediation and testing of computer applications. A major portion of these costs
will be met from existing resources, through a reprioritization of technology
development initiatives, with the remainder representing incremental costs. As a
result, the Corporation's management does not anticipate significant cost
savings to occur after the year 2000 issue is satisfactorily remedied.
In total the Corporation expects the cost of solving the year
2000 issue to be approximately $54.3 million, consisting of the
following:
<TABLE>
<S> <C> <C>
Estimated spending for year 2000 system changes for
mainframe and centrally supported client server
applications over five years (1996 to 2000)............... $26.0 million
Estimated business unit costs, including end-user developed
applications, and embedded systems, e.g., elevators,
security access systems, etc.............................. $19.0 million
Estimated capital costs for central information technology
and business units........................................ $ 9.3 million
Total estimated spending.................................... $54.3 million
</TABLE>
- --------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
COMPARED
WITH 1997 The Corporation's earnings for the nine months ended September 30,
1998 were $136.9 million. This represented a $20.0 million or 17
percent increase from 1997 earnings of $116.9 million. Annualized
return on average common stockholder's equity ("ROE") was 12.01
percent compared to 10.67 percent a year ago. Annualized return on
average assets was 0.88 percent compared to 0.82 percent in 1997.
Cash flow ROE was 16.43 percent for the current year-to-date period
compared to 15.75 percent a year ago.
Net interest income on a fully taxable equivalent basis was
$400.6 million in the current period, a decrease of $46.8 million or
10 percent from $447.4 million in the 1997 year-to-date period.
Average earning assets increased to $18.08 billion from $16.56
billion a year ago primarily attributable to an increase of $1.10
billion or 23 percent in investment securities and a 6 percent or
$651 million increase in average loans. Excluding the credit card
portfolio, average loans rose $1.48 billion or 15 percent.
Commercial, installment and residential real estate lending were all
contributors to this growth. Net interest margin declined to 2.96
percent from 3.61 percent in 1997 primarily reflecting the impact of
the sale of the credit card loans earlier this year.
The 1998 provision for loan losses of $19.8 million was down
$25.5 million from $45.3 million a year ago. Net charge-offs
decreased $34.9 million to $13.8 million, primarily reflecting the
reduction in charge card loans and the related writeoffs.
Noninterest income increased $55.3 million, or 20 percent
year-to-year, due to strong growth in trust and investment management
fees, syndication fees, service charge fees, money market and bond
trading profits and portfolio securities gains. The $12.0 million
gain from the first quarter sale of the credit card portfolio was
offset by a $16.9 million decline in merchant and charge card fees.
Other sources of noninterest income, which include syndication fees,
revenue from bank owned insurance investments, gains on mortgage
sales and fees on letters of credit, increased $26.5 million.
Noninterest expenses of $503.6 million increased $12.9 million or
3% year-to-year.
Income tax expense declined from $54.6 million in 1997 to $52.9
million in 1998, reflecting a reduction in the effective tax rate
from 39 percent to 36 percent.
18
<PAGE> 21
Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
HARRIS BANKCORP, INC.
111 West Monroe Street
Chicago, Illinois 60603
- ------------------------------
HARRIS BANKCORP, INC.
EXECUTIVE OFFICERS
Alan G. McNally
Chairman of the Board and
Chief Executive Officer
Edward W. Lyman, Jr.
Vice Chair of the Board
- ------------------------------
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
Chairman of the Board and
Chief Executive Officer
PathoGenesis Corporation
James J. Glasser
Chairman Emeritus
GATX Corporation
Dr. Leo M. Henikoff
President and
Chief Executive Officer
Rush-Presbyterian-St. Luke's Medical Center
Richard M. Jaffee
Chairman
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 TRUST/BANK OF MONTREAL
(FORMERLY HARRIS TRUST COMPANY OF FLORIDA)
West Palm Beach, Florida
HARRIS BANKCORP, INC.
NON-BANK SUBSIDIARIES
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
HARRIS PREFERRED CAPITAL CORPORATION
Chicago, Illinois
HARRIS PROCESSING CORPORATION
Chicago, Illinois
<PAGE> 22
EXHIBIT A -- HARRIS BANKCORP, INC.
1998 THIRD QUARTER REPORT
SEPTEMBER 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,158,777
<INT-BEARING-DEPOSITS> 213,720
<FED-FUNDS-SOLD> 61,953
<TRADING-ASSETS> 91,040
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 6,604,023
<LOANS> 11,975,147
<ALLOWANCE> 136,820
<TOTAL-ASSETS> 21,885,325
<DEPOSITS> 14,724,792
<SHORT-TERM> 4,392,685
<LIABILITIES-OTHER> 383,168
<LONG-TERM> 704,370
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,366,973
<TOTAL-LIABILITIES-AND-EQUITY> 21,885,325
<INTEREST-LOAN> 678,085
<INTEREST-INVEST> 262,897
<INTEREST-OTHER> 19,961
<INTEREST-TOTAL> 960,943
<INTEREST-DEPOSIT> 381,160
<INTEREST-EXPENSE> 582,858
<INTEREST-INCOME-NET> 378,085
<LOAN-LOSSES> 19,761
<SECURITIES-GAINS> 19,651
<EXPENSE-OTHER> 503,579
<INCOME-PRETAX> 189,766
<INCOME-PRE-EXTRAORDINARY> 136,900
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,900
<EPS-PRIMARY> 18.67
<EPS-DILUTED> 18.67
<YIELD-ACTUAL> 2.96
<LOANS-NON> 32,276
<LOANS-PAST> 29,603
<LOANS-TROUBLED> 2,851
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 130,876
<CHARGE-OFFS> 21,592
<RECOVERIES> 7,775
<ALLOWANCE-CLOSE> 136,820
<ALLOWANCE-DOMESTIC> 136,820
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
