<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18179
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 August 13, 1998 the Corporation had 6,667,490 shares of $8 par value
common stock outstanding.
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statement of Condition as of June 30, 1998, December 31,
1997 and June 30, 1997.
Consolidated Statement of Income for the quarters and six months ended
June 30, 1998 and 1997.
Consolidated Statement of Changes in Stockholder's Equity and
Consolidated Statement of Cash Flows for the six months ended June 30,
1998 and 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The above financial statements and financial review, included in the
Corporation's 1998 Second Quarter Report, are filed as Exhibit A and
incorporated herein by reference.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are being omitted from this report because such items
are not applicable to the reporting period.
Item 6. Exhibits and Reports on Form 8-K.
(a) Documents filed with Report:
27. Financial Data Schedule
(b) No Current Report on Form 8-K was filed during the quarter ended
June 30, 1998, for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Harris
Bankcorp, Inc., has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 13th day of August 1998.
/s/
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Pierre O. Greffe
Chief Financial Officer
/s/
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Paul R. Skubic
Chief Accounting Officer
<PAGE> 3
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
1998 1997 Change 1998 1997 Change
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<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS ($ IN THOUSANDS)
Net interest income.................................. $124,074 $146,350 (15)% $255,200 $287,582 (11)%
Net interest income (fully taxable equivalent)....... 131,546 153,168 (14) 269,963 300,522 (10)
Provision for loan losses............................ 7,244 16,410 (56) 12,761 30,292 (58)
Noninterest income................................... 108,904 90,550 20 218,683 178,402 23
Noninterest expenses................................. 163,609 165,308 (1) 333,204 322,283 3
Net income........................................... 45,433 37,441 21 90,832 76,774 18
Cash dividends -- common stock....................... 14,500 12,400 17 76,500 23,000 233
Cash dividends -- preferred stock.................... 4,148 4,148 0 8,297 8,297 0
Cash earnings (1).................................... 49,205 41,960 17 98,556 85,850 15
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SELECTED RATIOS
Return on average common stockholder's equity........ 11.87% 10.32% 155bp 11.93% 10.72% 121bp
Return on average assets............................. 0.87 0.79 8 0.89 0.82 7
Cash flow return on average common stockholder's
equity (2)......................................... 16.16 15.34 82 16.36 15.97 39
Cash flow return on average assets (3)............... 0.95 0.89 6 0.98 0.94 4
Tier 1 risk-based capital ratio...................... 8.98 7.95 103
Total risk-based capital ratio....................... 11.54 10.93 61
Tier 1 leverage ratio................................ 7.72 6.79 93
Allowance for possible loan losses to total loans
(period-end)....................................... 1.13 1.27 (14)
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DAILY AVERAGE BALANCES ($ IN MILLIONS)
Loans, net of unearned income........................ $ 11,747 $ 10,912 8% $ 11,481 $ 10,788 6%
Portfolio securities................................. 5,940 4,875 22 5,722 4,694 22
Money market assets.................................. 394 854 (54) 529 835 (37)
Total interest-earning assets........................ 18,129 16,753 8 17,774 16,427 8
Total assets......................................... 20,976 19,119 10 20,491 18,814 9
Deposits............................................. 14,063 12,982 8 13,826 12,839 8
Short-term borrowings................................ 4,359 3,935 11 4,169 3,764 11
Common stockholder's equity.......................... 1,395 1,295 8 1,396 1,288 8
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BALANCES AT QUARTER-END ($ IN MILLIONS)
Loans, net of unearned income........................ $ 12,035 $ 11,195 8%
Allowance for possible loan losses................... 135 142 (5)
Portfolio securities................................. 6,068 4,943 23
Total assets......................................... 21,905 20,163 9
Deposits............................................. 14,832 14,571 2
Common stockholder's equity.......................... 1,420 1,330 7
Total stockholder's equity........................... 1,645 1,555 6
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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
expense 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 expense of goodwill and other valuation
intangibles, divided by average assets less average intangible assets.
1
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REPORT FROM MANAGEMENT
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Harris Bankcorp had earnings of $45.4 million for the quarter ended
June 30, 1998. This represented an increase of 21 percent from the
same quarter a year ago when net income was $37.4 million.
For the current quarter, annualized return on average common
stockholder's equity (ROE) was 11.87 percent compared to 10.32
percent in second quarter 1997. Cash flow ROE was 16.16 percent
currently, up from 15.34 percent in the year-earlier quarter.
Increased earnings resulted from continued strong business momentum;
revenue growth in corporate, private, and community banking; and
effective control of operating costs.
Net interest income on a fully taxable equivalent basis was
$131.5 million, down $21.6 million or 14% from second quarter last
year. Net interest margin declined from 3.67 percent in the second
quarter last year to 2.91 percent 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 8 percent to
$18.13 billion from $16.75 billion in second quarter 1997,
attributable to an increase of $835 million in average loans and $989
million in the investment securities portfolio. Excluding the credit
card portfolio, average loans rose $1.65 billion or 16 percent.
Commercial and residential real estate lending were the primary
contributors to this growth.
Second quarter noninterest income of $108.9 million increased 22
percent from the same quarter last year, despite a $6.5 million
decline in credit card fees resulting from the 1998 first quarter
card portfolio sale. Service charge fees rose by $3.5 million while
trust and investment management revenue increased $2.9 million. Other
income, which includes syndication fees, mortgage loan sales, gains
on asset sales and other fees, increased $16.1 million during the
current quarter. Net gains from debt portfolio securities sales
increased from $2.6 million in second quarter 1997 to $3.9 million
during the current quarter, while bond trading profits doubled to
$3.2 million.
Second quarter 1998 noninterest expenses of $163.6 million
decreased $1.7 million or 1 percent from second quarter a year ago.
Income tax expense declined, reflecting a reduction in the effective
tax rate.
The second quarter 1998 provision for loan losses of $7.2 million
was down from $16.4 million in the second quarter of 1997. Net loan
charge-offs during the current quarter were $4.9 million compared to
$16.7 million in the same period last year, with the difference
primarily attributable to lower write-offs in the charge card
portfolio.
Nonperforming assets at June 30, 1998, were $29 million or 0.2
percent of total loans, compared to $33 million or 0.3 percent a year
ago and unchanged from March 31, 1998. At June 30, 1998, the
allowance for possible loan losses was $135 million, equal to 1.1
percent of loans outstanding, compared to $142 million or 1.3 percent
at the end of second quarter 1997. As a result, the ratio of the
allowance for possible loan losses to nonperforming assets was 466
percent at June 30, 1998, compared to 434 percent at June 30, 1997.
At June 30, 1998, equity capital of Harris Bankcorp amounted to
$1.65 billion, up from $1.56 billion one year earlier. The regulatory
leverage capital ratio was 7.72 percent for the second quarter of
1998 compared to 6.79 percent in the same quarter of 1997. Harris
Bankcorp's capital ratio exceeds the prescribed regulatory minimum
for bank holding companies. Harris Bankcorp's June 30, 1998 Tier 1
and total risk-based capital ratios were 8.98 percent and 11.54
percent compared to respective ratios of 7.95 percent and 10.93
percent at June 30, 1997.
Harris Bankcorp's net income for the six months ended June 30,
1998, was $90.8 million, up 18 percent from $76.8 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 in 1998 net
interest income. Also, in first
2
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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 percent or $30.6 million, reflecting the aforementioned credit
card portfolio sale. Net interest margin declined to 3.06 percent
currently from 3.68 percent in the six months ended June 30, 1997.
Average earning assets rose 8 percent to $17.77 billion. Excluding
the credit card portfolio, average loans increased $1.45 billion or
15 percent.
Noninterest income increased $40.3 million, or 23 percent
year-to-year, due to strong growth in trust and investment management
income, syndication fees, service charge fees, and investment
securities gains. The $12 million gain from the sale of the credit
card portfolio was offset by a $15.9 million decline in credit card
fees and writedowns in the value of certain accounts in the portfolio
prior to the sale.
The provision for loan losses decreased by $17.5 million or 58
percent to $12.8 million in the first six months of 1998. Net
charge-offs declined by 73 percent reflecting lower write-offs from
the credit card portfolio. Noninterest expenses increased $10.9
million or 3 percent year-to-year. Excluding the $8.7 million
one-time cost for restructuring charges, total expenses increased 1
percent in 1998 compared to a year ago.
Cash flow ROE for the first six months of 1998 was 16.36 percent
compared to 15.97 percent for the period ended June 30, 1997.
ALAN G. MCNALLY
Alan G. McNally
Chairman of the Board and
Chief Executive Officer July 29, 1998
3
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CONSOLIDATED STATEMENTS OF INCOME Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
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(in thousands except share data) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $227,424 $232,736 $450,221 $454,172
Money market assets:
Deposits at banks......................................... 1,850 8,790 8,214 16,920
Federal funds sold and securities purchased under
agreement to resell..................................... 2,023 2,985 4,027 5,754
Trading account............................................. 806 609 1,540 1,600
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 83,298 70,813 159,129 133,266
State and municipal....................................... 4,058 4,421 8,299 8,764
Other..................................................... 485 362 868 735
-------- -------- -------- --------
Total interest income..................................... 319,944 320,716 632,298 621,211
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 125,599 114,834 244,845 221,589
Short-term borrowings....................................... 44,836 39,246 87,714 76,345
Senior notes................................................ 13,910 14,214 23,507 23,160
Minority interest -- dividends on preferred stock of
subsidiary................................................ 4,609 -- 7,170 --
Long-term notes............................................. 6,916 6,072 13,862 12,535
-------- -------- -------- --------
Total interest expense.................................... 195,870 174,366 377,098 333,629
-------- -------- -------- --------
NET INTEREST INCOME......................................... 124,074 146,350 255,200 287,582
Provision for loan losses................................... 7,244 16,410 12,761 30,292
-------- -------- -------- --------
Net Interest Income after Provision for Loan Losses......... 116,830 129,940 242,439 257,290
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 36,019 33,159 69,709 64,753
Trading account............................................. 3,247 1,631 4,762 2,559
Foreign exchange............................................ 1,650 1,232 3,300 2,120
Merchant and charge card fees............................... 6,382 12,830 13,600 24,432
Service fees and charges.................................... 27,158 23,703 53,902 47,099
Portfolio securities gains.................................. 3,945 2,630 11,977 3,968
Gain on sale of charge card portfolio....................... -- -- 12,000 --
Other....................................................... 30,503 15,365 49,433 33,471
-------- -------- -------- --------
Total noninterest income.................................. 108,904 90,550 218,683 178,402
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 81,920 77,340 159,679 151,704
Pension, profit sharing and other employee benefits......... 15,204 15,485 29,989 31,222
Net occupancy............................................... 13,263 13,583 25,660 28,078
Equipment................................................... 13,076 12,263 25,839 22,816
Marketing................................................... 6,909 7,046 12,595 13,036
Communication and delivery.................................. 5,110 5,963 11,116 11,336
Deposit insurance........................................... 794 770 1,553 1,421
Expert services............................................. 6,893 8,276 13,745 13,504
Restructuring charges....................................... -- -- 8,684 --
Other....................................................... 14,578 17,671 32,276 35,294
-------- -------- -------- --------
157,747 158,397 321,136 308,411
Goodwill and other valuation intangibles.................... 5,862 6,911 12,068 13,872
-------- -------- -------- --------
Total noninterest expenses................................ 163,609 165,308 333,204 322,283
-------- -------- -------- --------
Income before income taxes.................................. 62,125 55,182 127,918 113,409
Applicable income taxes..................................... 16,692 17,741 37,086 36,635
-------- -------- -------- --------
NET INCOME................................................ 45,433 37,441 90,832 76,774
Dividends on preferred stock................................ 4,148 4,148 8,297 8,297
-------- -------- -------- --------
Net Income Applicable to Common Stock....................... $ 41,285 $ 33,293 $ 82,535 $ 68,477
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE (based on
6,667,490 average shares outstanding)
Net Income Applicable to Common Stock....................... $ 6.19 $ 4.99 $ 12.38 $ 10.27
</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 June 30 Six Months Ended June 30
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(in thousands) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
NET INCOME.................................................. $45,433 $37,441 $90,832 $76,774
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains/(losses) arising during period,
net of tax expense for the quarter of $6,935 in 1998
and $21,595 in 1997 and net of tax expense/(benefit)
for the year-to-date period of $8,749 in 1998 and
($4,619) in 1997...................................... 10,436 36,896 13,231 (2,945)
Less reclassification adjustment for realized gains
included in income statement, net of tax expense for
the quarter of $1,568 in 1998 and $1,045 in 1997 and
net of tax expense for the year-to-date period of
$4,761 in 1998 and $1,577 in 1997..................... (2,377) (1,585) (7,216) (2,391)
------- ------- ------- -------
Other comprehensive income (loss)........................... 8,059 35,311 6,015 (5,336)
------- ------- ------- -------
Comprehensive income........................................ $53,492 $72,752 $96,847 $71,438
======= ======= ======= =======
</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
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<TABLE>
<CAPTION>
June 30 December 31 June 30
(in thousands except share data) 1998 1997 1997
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<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,473,705 $ 1,304,374 $ 1,776,743
Money market assets:
Interest-bearing deposits at banks........................ 303,582 598,070 628,982
Federal funds sold and securities purchased under
agreement to resell..................................... 202,664 80,782 239,389
Trading account assets...................................... 109,350 53,209 101,569
Portfolio securities available-for-sale..................... 6,067,652 5,229,390 4,943,132
Loans, net of unearned income of $3,418 in 1998, $4,390 and
$5,228 in 1997............................................ 12,035,379 10,868,250 11,195,267
Allowance for possible loan losses.......................... (135,433) (130,876) (141,963)
Net loans................................................. 11,899,946 10,737,374 11,053,304
Premises and equipment...................................... 326,692 314,642 291,459
Customers' liability on acceptances......................... 39,065 46,480 46,107
Assets held for sale........................................ -- 725,760 --
Goodwill and other valuation intangibles.................... 274,445 292,981 302,259
Other assets................................................ 1,208,372 750,399 779,977
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TOTAL ASSETS.......................................... $21,905,473 $20,133,461 $20,162,921
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 3,550,547 $ 4,192,454 $ 3,889,181
-- interest-bearing.............. 9,800,454 8,489,732 8,858,599
Deposits in foreign offices -- noninterest-bearing.......... 27,188 18,431 127,332
-- interest-bearing............... 1,453,459 1,731,446 1,696,094
----------- ----------- -----------
Total deposits........................................ 14,831,648 14,432,063 14,571,206
Federal funds purchased and securities sold under agreement
to repurchase............................................. 3,124,375 2,451,873 2,887,073
Commercial paper outstanding................................ 350,070 351,427 274,370
Other short-term borrowings................................. 151,290 503,320 7,090
Senior notes................................................ 868,000 100,000 240,000
Acceptances outstanding..................................... 39,065 46,480 46,107
Accrued interest, taxes and other expenses.................. 156,259 154,373 140,527
Other liabilities........................................... 110,167 82,132 61,886
Minority interest -- preferred stock of subsidiary.......... 250,000 -- --
Long-term notes............................................. 379,370 379,278 379,191
----------- ----------- -----------
TOTAL LIABILITIES..................................... 20,260,244 18,500,946 18,607,450
----------- ----------- -----------
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..................................................... 487,209 486,545 484,483
Retained earnings........................................... 862,187 856,152 806,103
Accumulated other comprehensive income (loss) -- unrealized
gains (losses) on securities available-for-sale, net of
deferred taxes of $11,543 in 1998, $7,563 and ($11,560) in
1997...................................................... 17,493 11,478 (13,455)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,645,229 1,632,515 1,555,471
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $21,905,473 $20,133,461 $20,162,921
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
6
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY Harris Bankcorp,
Inc. and Subsidiaries
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<TABLE>
<CAPTION>
(in thousands) 1998 1997
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<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,632,515 $1,515,166
Net income................................................ 90,832 76,774
Contributions to capital.................................. 664 164
Cash dividends -- Series A preferred stock................ (6,525) (6,525)
Cash dividends -- Series B preferred stock................ (1,772) (1,772)
Cash dividends -- common stock............................ (76,500) (23,000)
Other comprehensive income (loss), net of tax............. 6,015 (5,336)
---------- ----------
BALANCE AT JUNE 30.......................................... $1,645,229 $1,555,471
========== ==========
</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
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<TABLE>
<CAPTION>
Six Months Ended June 30
----------------------------
(in thousands) 1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 90,832 $ 76,774
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses................................. 12,761 30,292
Depreciation and amortization, including intangibles...... 34,233 34,232
Deferred tax benefit...................................... (2,865) (1,445)
Gain on sales of portfolio securities..................... (11,977) (3,968)
Gain on sale of credit card portfolio..................... (12,000) --
Trading account net sales................................. (56,141) 8,786
Net (increase) decrease in interest receivable............ 5,721 (18,504)
Net increase (decrease) in interest payable............... 8,440 (10,742)
Net increase in loans held for resale..................... (98,910) (6,892)
Other, net................................................ 1,592 (19,329)
----------- -----------
Net cash (used) provided by operating activities........ (28,314) 89,204
----------- -----------
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits at banks........ 294,488 29,275
Net (increase) decrease in Federal funds sold and
securities purchased under agreement to resell.......... (121,882) 55,403
Proceeds from sales of securities available-for-sale...... 1,289,659 360,343
Proceeds from maturities of securities
available-for-sale...................................... 6,404,473 5,638,063
Purchases of securities available-for-sale................ (8,510,422) (6,963,919)
Net increase in loans..................................... (1,043,826) (474,262)
Proceeds from sales of premises and equipment............. 30,843 13,388
Purchases of premises and equipment....................... (67,345) (50,116)
Purchases of bank owned insurance......................... (437,847) --
Other, net................................................ (15,147) (101,415)
----------- -----------
Net cash used by investing activities................... (2,177,006) (1,493,240)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits.................................. 399,585 1,580,905
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 672,502 904,026
Net decrease in commercial paper outstanding.............. (1,357) (60,283)
Net decrease in short-term borrowings..................... (352,030) (340,600)
Proceeds from issuance of senior notes.................... 4,960,000 3,265,000
Repayment of senior notes................................. (4,192,000) (3,375,000)
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.................... (8,297) (8,297)
Cash dividends paid on common stock....................... (76,500) (23,000)
----------- -----------
Net cash provided by financing activities............... 2,374,651 1,942,751
----------- -----------
Net increase in cash and demand balances due from
banks.................................................. 169,331 538,715
Cash and demand balances due from banks at January 1.... 1,304,374 1,238,028
----------- -----------
Cash and demand balances due from banks at June 30...... $ 1,473,705 $ 1,776,743
=========== ===========
</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
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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 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.
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2. LEGAL
PROCEEDINGSCertain subsidiaries of the Corporation are defendants in various
legal proceedings arising in the normal course of business. In the
opinion of management, based on the advice of legal counsel, the
ultimate resolution of these matters will not have a material adverse
effect on the Corporation's consolidated financial position.
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3. CASH FLOWS
For purposes of the Corporation's Consolidated Statement of Cash
Flows, cash and cash equivalents is defined to include cash and
demand balances due from banks. Cash interest payments (net of
amounts capitalized) for the six months ended June 30, totaled $368.7
million and $377.4 million in 1998 and 1997, respectively. Cash
income tax payments over the same periods totaled $32.5 million and
$39.6 million, respectively.
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4. ACCOUNTING
CHANGES In February 1998, the Financial Accounting Standards Board (FASB)
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 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 June 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... $ 269 2.76% $ 643 5.49%
Federal funds sold and securities purchased under agreement
to resell... 125 6.50 211 5.66
-------- --------
Total money market assets... 394 3.95 854 5.53
Trading account assets... 68 6.39 55 5.77
Portfolio securities available-for-sale: (1)(2)
U.S. Treasury and Federal agency... 5,588 6.33 4,593 6.54
State and municipal... 291 8.31 306 8.66
Other... 41 5.11 33 5.09
-------- --------
Total portfolio securities available-for-sale... 5,920 6.43 4,932 6.66
Loans, net of unearned income... 11,747 7.77 10,912 8.56
Assets held for sale... -- -- -- --
-------- --------
TOTAL INTEREST-EARNING ASSETS... 18,129 7.24 16,753 7.84
-------- --------
Cash and demand balances due from banks... 1,244 1,190
Other assets... 1,603 1,176
-------- --------
Total assets... $ 20,976 $ 19,119
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts... $ 3,397 3.60 $ 2,741 3.23
Savings deposits and certificates... 4,629 4.93 4,717 4.92
Other time deposits... 1,595 5.60 972 5.59
Foreign office time deposits... 1,171 5.46 1,554 5.52
-------- --------
TOTAL INTEREST-BEARING DEPOSITS... 10,792 4.67 9,984 4.61
Short-term borrowings... 4,359 5.41 3,935 5.37
Minority interest -- preferred stock of subsidiary... 250 7.38 -- --
Long-term notes... 379 7.29 379 7.26
-------- --------
TOTAL INTEREST-BEARING LIABILITIES... 15,780 4.98 14,298 4.89
Noninterest-bearing deposits... 3,272 2,998
Other liabilities... 304 303
Stockholder's equity... 1,620 1,520
-------- --------
Total liabilities and stockholder's equity... $ 20,976 $ 19,119
======== ========
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING
ASSETS)... 2.91% 3.67%
===== =====
<CAPTION>
Six Months Ended June 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... $ 403 4.11% $ 627 5.45%
Federal funds sold and securities purchased under agreement
to resell... 126 6.45 208 5.57
-------- --------
Total money market assets... 529 4.66 835 5.48
Trading account assets... 63 6.44 62 6.39
Portfolio securities available-for-sale: (1)(2)
U.S. Treasury and Federal agency... 5,369 6.34 4,407 6.45
State and municipal... 294 8.42 303 8.65
Other... 38 4.95 32 5.13
-------- --------
Total portfolio securities available-for-sale... 5,701 6.45 4,742 6.58
Loans, net of unearned income... 11,372 7.84 10,788 8.49
Assets held for sale... 109 15.33 -- --
-------- --------
TOTAL INTEREST-EARNING ASSETS... 17,774 7.34 16,427 7.77
-------- --------
Cash and demand balances due from banks... 1,242 1,206
Other assets... 1,475 1,181
-------- --------
Total assets... $ 20,491 $ 18,814
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts... $ 3,282 3.57 $ 2,778 3.21
Savings deposits and certificates... 4,681 4.98 4,708 4.90
Other time deposits... 1,381 5.61 695 5.52
Foreign office time deposits... 1,209 5.47 1,641 5.40
-------- --------
TOTAL INTEREST-BEARING DEPOSITS... 10,553 4.68 9,822 4.55
Short-term borrowings... 4,169 5.38 3,764 5.27
Minority interest -- preferred stock of subsidiary... 194 7.38 -- --
Long-term notes... 379 7.33 379 7.22
-------- --------
TOTAL INTEREST-BEARING LIABILITIES... 15,295 4.97 13,965 4.81
Noninterest-bearing deposits... 3,273 3,017
Other liabilities... 302 319
Stockholder's equity... 1,621 1,513
-------- --------
Total liabilities and stockholder's equity... $ 20,491 $ 18,814
======== ========
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING
ASSETS)... 3.06% 3.68%
===== =====
</TABLE>
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt income (for Federal purposes) has been restated to a comparable
taxable level. The Federal statutory tax rate used for this purpose was 35
percent in 1998 and 1997 and includes a State tax component.
2. AVERAGE RATE ON PORTFOLIO SECURITIES AVAILABLE-FOR-SALE
Yields on securities classified as available-for-sale are based on amortized
cost.
9
<PAGE> 12
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SECOND QUARTER 1998
COMPARED WITH
SECOND QUARTER 1997
- --------------------------------------------------------------------------------
SUMMARY The Corporation had second quarter 1998 earnings of $45.4 million, an
increase of $8.0 million or 21 percent from second quarter 1997. For
the current quarter, annualized return on average common
stockholder's equity was 11.87 percent compared to 10.32 percent in
the second quarter of 1997. Annualized return on average assets was
0.87 percent compared to 0.79 percent a year ago.
Second quarter net interest income on a fully taxable equivalent
basis was $131.5 million, down $21.6 million or 14 percent from
$153.2 million in 1997's second quarter. At the time of the January
credit card sale, outstanding credit card loans amounted to
approximately $700 million, resulting in a reduction in net interest
income compared to second quarter 1997. Average earning assets rose 8
percent to $18.13 billion from $16.75 billion in 1997, primarily
attributable to an increase of $835 million in average loans and $989
million in the investment securities portfolio. Excluding the credit
card portfolio, average loans rose $1.65 billion or 16 percent.
Commercial and residential real estate lending were strong
contributors to this growth. Net interest margin declined to 2.91
percent from 3.67 percent in the same quarter last year primarily
reflecting the impact of the sale of the credit card loans earlier
this year.
The second quarter provision for loan losses of $7.2 million was
down $9.2 million from $16.4 million in the second 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 $16.7 million to $4.9 million, primarily reflecting
the reduction in charge card loans and the related writeoffs.
Noninterest income increased $19.4 million or 22 percent to
$108.9 million for second quarter 1998 compared to the same quarter
last year. In the current quarter, service charge fees rose by $3.5
million and trust and investment management fees improved by $2.9
million compared to second quarter 1997. Foreign exchange income
increased $0.4 million and trading income increased $1.6 million. Net
gains from debt securities sales increased from $2.6 million in the
second quarter 1997 to $3.9 million during the current quarter. Other
income increased by $16.1 million due to increases in syndication
fees, bank owned insurance investments, gains on mortgage loan sales
and other fees.
Second quarter 1998 noninterest expenses of $163.6 million
decreased $1.7 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>
Quarter Ended June 30 Six Months Ended June 30
----------------------- -------------------------
(in thousands) 1998 1997 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income................................ $319,944 $320,716 $632,298 $621,211
Fully taxable equivalent adjustment............ 7,472 6,818 14,762 12,940
-------- -------- -------- --------
Interest income (fully taxable equivalent
basis)................................... 327,416 327,534 647,060 634,151
Interest expense............................... 195,870 174,366 377,097 333,629
-------- -------- -------- --------
Net interest income (fully taxable
equivalent basis)........................ $131,546 $153,168 $269,963 $300,522
======== ======== ======== ========
Increase (decrease) due to change in:
Volume..................................... $ 11,841 $ 16,747 $ 22,982 $ 35,118
Rate....................................... (33,463) 1,876 (53,541) 2,160
-------- -------- -------- --------
Total increase (decrease) in net
interest income..................... $(21,622) $ 18,623 $(30,559) $ 37,278
======== ======== ======== ========
</TABLE>
Second quarter net interest income on an FTE basis was $131.5
million, down 14% from $153.2 million in second 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 8% or $1.38 billion to $18.13
billion from $16.75 billion in 1997. Average loans rose $835 million,
or 8%. Commercial and residential real estate loans increased $819
million and $663 million, respectively. Average portfolio securities
were up 20%, or $1.0 billion, primarily reflecting increased holdings
of Federal agency securities. Total money market assets declined $461
million or 54% over second 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 $1.25 billion, $622 million and $424
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 3.67% to 2.91% 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 as net
noninterest-bearing sources of funds were down slightly in 1998.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended June 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................... $ 18,129 7.24% $ 16,753 7.84%
======== ========
Interest-bearing liabilities.............. $ 15,780 4.98 $ 14,298 4.89
Noninterest-bearing sources of funds...... 2,349 2,455
-------- --------
Total supporting liabilities.......... $ 18,129 4.33 $ 16,753 4.17
======== ========
Net interest margin (related to average
interest-earning assets)................ 2.91% 3.67%
======== ========
<CAPTION>
Six Months Ended June 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................... $ 17,774 7.34% $ 16,427 7.77%
======== ========
Interest-bearing liabilities.............. $ 15,295 4.97 $ 13,965 4.81
Noninterest-bearing sources of funds...... 2,479 2,462
-------- --------
Total supporting liabilities.......... $ 17,774 4.28 $ 16,427 4.09
======== ========
Net interest margin (related to average
interest-earning assets)................ 3.06% 3.68%
======== ========
</TABLE>
11
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Six Months
Ended June 30 Increase (Decrease) Ended June 30
NONINTEREST ------------------- -------------------- --------------------
Income (dollars in thousands) 1998 1997 Amount % 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees....... $ 36,019 $33,159 $ 2,860 9 $ 69,709 $ 64,753
Trading account......... 3,247 1,631 1,616 99 4,762 2,559
Foreign exchange........ 1,650 1,232 418 34 3,300 2,120
Merchant and charge card
fees.................. 6,382 12,830 (6,448) (50) 13,600 24,432
Service fees and
charges............... 27,158 23,703 3,455 15 53,902 47,099
Securities gains........ 3,945 2,630 1,315 50 11,977 3,968
Gain on sale of credit
card portfolio........ -- -- -- -- 12,000 --
Other................... 30,503 15,365 15,138 99 49,433 33,471
-------- ------- ------- -------- --------
Total noninterest
income................ $108,904 $90,550 $18,354 20 $218,683 $178,402
======== ======= ======= === ======== ========
<CAPTION>
Increase (Decrease)
NONINTEREST -------------------
Income Amount %
-------------------
<S> <C> <C>
$ 4,956 8
2,203 86
1,180 56
(10,832) (44)
6,803 14
8,009 +
12,000 --
15,962 48
--------
$ 40,281 23
======== ===
</TABLE>
Noninterest income for the 1998 second quarter was $108.9 million, an
increase of $18.4 million or 20 percent from the second quarter of
1997. Service fees and charges totaled $27.2 million, an increase of
$3.5 million or 15 percent from the prior year. Trust and investment
management revenue was $36.0 million, an increase of $2.9 million or
9 percent from the previous year. Other income, including syndication
fees, gains from mortgage sales, foreign fees, revenue from bank
owned insurance investments and other miscellaneous items, increased
$15.1 million or 99 percent over the previous year. Foreign exchange
revenue was $1.7 million, up 34 percent from the second quarter of
1997. Net gains reported from the sale of debt portfolio securities
totaled $3.9 million, up $1.3 million over 1997.
Merchant and charge card fees declined $6.4 million or 50 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 Six Months
Ended June 30 Increase (Decrease) Ended June 30
AND INCOME -------------------- -------------------- --------------------
Taxes (dollars in thousands) 1998 1997 Amount % 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation.......... $ 81,920 $ 77,340 $ 4,580 6 $159,679 $151,704
Pension, profit sharing
and other employee
benefits.............. 15,204 15,485 (281) (2) 29,989 31,222
Net occupancy........... 13,263 13,583 (320) (2) 25,660 28,078
Equipment............... 13,076 12,263 813 7 25,839 22,816
Marketing............... 6,909 7,046 (137) (2) 12,595 13,036
Communication and
delivery.............. 5,110 5,963 (853) (14) 11,116 11,336
Deposit insurance....... 794 770 24 3 1,553 1,421
Expert services......... 6,893 8,276 (1,383) (17) 13,745 13,504
Restructuring charge.... -- -- -- -- 8,684 --
Other................... 14,578 17,671 (3,093) (18) 32,276 35,294
-------- -------- ------- -------- --------
157,747 158,397 (650) -- 321,136 308,411
Goodwill and other
valuation
intangibles........... 5,862 6,911 (1,049) (15) 12,068 13,872
-------- -------- ------- -------- --------
Total noninterest
expense............... $163,609 $165,308 $(1,699) (1) $333,204 $322,283
======== ======== ======= ======== ========
Provision for income
taxes................. $ 16,692 $ 17,741 $(1,049) (6) $ 37,086 $ 36,635
======== ======== ======= === ======== ========
<CAPTION>
NONINTEREST
EXPENSES
Increase (Decrease)
AND INCOME --------------------
Taxes Amount %
--------------------
<S> <C> <C>
$ 7,975 5
(1,233) (4)
(2,418) (9)
3,023 13
(441) (3)
(220) (2)
132 9
241 2
8,684 --
(3,018) (9)
-------
12,725 4
(1,804) (13)
-------
$10,921 3
=======
$ 451 1
======= ===
</TABLE>
12
<PAGE> 15
- --------------------------------------------------------------------------------
Noninterest expenses for 1998 second quarter totaled $163.6 million,
a decrease of $1.7 million or 1 percent from the second quarter of
1997.
Employment-related expenses totaled $97.1 million, an increase of
$4.3 million or 5 percent. Net occupancy expenses totaled $13.3
million, down $0.3 million from the prior year's second quarter.
Equipment expenses increased $0.8 million or 7 percent over second
quarter 1997. Expert services decreased $1.4 million to $6.9 million
in second quarter 1998. Other noninterest expenses declined $3.1
million or 17 percent. Goodwill and other valuation intangibles
declined $1.0 million or 15 percent, due to the credit card sale in
the first quarter of 1998.
Income tax expense totaled $16.7 million, a decrease of 6 percent
from $17.7 million recorded in second quarter 1997. While pretax
income increased, the effective tax rate declined from 40 percent to
35 percent.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at June 30, 1998 was $1.65
billion, compared with $1.63 billion and $1.56 billion at December
31, 1997 and June 30, 1997, respectively. During the preceding twelve
months, the Corporation declared common and preferred dividends of
$95.5 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 8.98 percent and
11.54 percent, respectively, at June 30, 1998. HTSB's Tier 1 and
total risk-based capital ratios were 8.48 percent and 10.71 percent,
respectively, at June 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 7.72 percent and 7.71 percent,
respectively, for the second 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 June 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 June 30, 1998, the
Corporation's intangible assets totaled $274 million, including
approximately $266 million of intangibles excluded under capital
guidelines. The Corporation's and HTSB's tangible Tier 1 leverage
ratios (which exclude all intangibles) were 7.68 percent and 7.67
percent, respectively, for the second quarter of 1998.
13
<PAGE> 16
- --------------------------------------------------------------------------------
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
June 30 December 31 June 30
(dollars in thousands) 1998 1997 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $21,905,473 $20,133,461 $20,162,921
=========== =========== ===========
Average assets (quarter).................................. $20,976,095 $19,978,660 $19,118,919
=========== =========== ===========
Risk-based on-balance sheet assets........................ $13,668,603 $13,051,738 $12,650,915
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 4,368,910 $ 4,112,859 $ 3,749,855
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $17,764,478 $16,883,446 $16,112,172
=========== =========== ===========
Tier 1 capital............................................ $ 1,595,617 $ 1,339,949 $ 1,280,354
=========== =========== ===========
Supplementary capital..................................... $ 455,181 $ 470,443 $ 481,478
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 2,050,268 $ 1,809,767 $ 1,761,237
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.72% 6.81% 6.79%
Risk-based capital ratios
Tier 1.................................................. 8.98% 7.94% 7.95%
Total................................................... 11.54% 10.72% 10.93%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING June 30 December 31 June 30
Assets (dollars in thousands) 1998 1997 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans............................................ $25,671 $26,557 $29,198
Restructured loans.......................................... 2,857 1,229 1,950
------- --------- -------
Total nonperforming loans................................... 28,528 27,786 31,148
Other assets received in satisfaction of debt............... 767 1,564 1,526
------- --------- -------
Total nonperforming assets.................................. $29,295 $29,350 $32,674
======= ========= =======
Nonperforming loans to total loans (end of period).......... .24% .24% .28%
Nonperforming assets to total loans (end of period)......... .24% .26% .29%
======= ========= =======
90-day past due loans still accruing interest............... $20,238 $17,631 $57,097
======= ========= =======
</TABLE>
Nonperforming assets consist of loans placed on nonaccrual status
when collection of interest is doubtful, restructured loans on which
interest is being accrued but which have terms that have been
renegotiated to provide for a reduction of interest or principal, and
real estate or other assets which have been acquired in full or
partial settlement of defaulted loans. These assets, as a group, are
not earning at rates comparable to earning assets.
Nonperforming assets at June 30, 1998 totaled $29 million,
virtually unchanged from March 31, 1998 but represented 0.24 percent
of total loans down from 0.26 percent of total loans at March 31,
1998. Nonperforming assets were down from $33 million or 0.29 percent
of total loans a year ago.
Interest shortfall for the quarter ended June 30, 1998 was $0.9
million compared to $0.8 million one year earlier.
Impaired loans are defined as those where it is probable that
amounts due according to contractual terms, including principal and
interest, will not be collected. Both nonaccrual and certain
restructured loans meet this definition. Impaired loans are measured
by the Corporation at the present value of expected future cash flows
or, alternatively, at the fair value of collateral. Known losses of
principal on these loans have been charged off.
14
<PAGE> 17
- --------------------------------------------------------------------------------
Interest income on nonaccrual loans is recognized only at the time cash is
received and only if the collection of the entire principal balance is expected.
Interest income on restructured loans is accrued according to the most recently
agreed upon contractual terms.
<TABLE>
<CAPTION>
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total Impaired
(dollars in thousands) Related Allowance No Related Allowance Loans
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1998
Balance............................................ $ 8,877 $16,794 $25,671
Related allowance.................................. 5,708 -- 5,708
------- ------- -------
Balance, net of allowance.......................... $ 3,169 $16,794 $19,963
======= ======= =======
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
======= ======= =======
June 30, 1997
Balance............................................ $11,725 $17,473 $29,198
Related allowance.................................. 4,940 -- 4,940
------- ------- -------
Balance, net of allowance.......................... $ 6,785 $17,473 $24,258
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------- -------------------------
(dollars in thousands) 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average impaired loans.................... $28,267 $29,210 $26,313 $30,599
======= ======= ======= =======
Total interest income on impaired loans... $ 29 $ 14 $ 55 $ 62
======= ======= ======= =======
Interest income on impaired loans recorded
on a cash basis......................... $ 29 $ 14 $ 55 $ 62
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR POSSIBLE
Quarter Ended June 30 Six Months Ended June 30
------------------------- -------------------------
Loan Losses (dollars in thousands) 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period............ $133,128 $142,263 $130,876 $142,211
-------- -------- -------- --------
Charge-offs............................. (7,233) (19,375) (12,224) (36,991)
Recoveries.............................. 2,294 2,665 4,020 6,451
-------- -------- -------- --------
Net charge-offs......................... (4,939) (16,710) (8,204) (30,540)
Provision charged to operations......... 7,244 16,410 12,761 30,292
-------- -------- -------- --------
Balance at June 30...................... $135,433 $141,963 $135,433 $141,963
======== ======== ======== ========
Net charge-offs as a percentage of
provision charged to operations....... 68% 102% 64% 101%
Allowance for possible loan losses to
nonperforming loans (period-end)...... 475% 456%
Allowance for possible loan losses to
nonperforming assets (period-end)..... 462% 434%
Allowance for possible loan losses to
total loans outstanding
(period-end).......................... 1.13% 1.27%
</TABLE>
15
<PAGE> 18
- --------------------------------------------------------------------------------
The Corporation's provision for loan losses for the current quarter
was $7.2 million, down 56 percent from $16.4 million in last year's
second quarter. Net charge-offs also decreased from $16.7 million to
$4.9 million for the current quarter, bringing net charge-offs on a
year-to-date basis to $8.2 million compared to $30.5 million in the
same 1997 period. The decrease in 1998 second quarter net charge-offs
primarily reflects the sale of the charge card portfolio in the first
quarter 1998 and the related reduction in charge card writeoffs,
offset somewhat by an increase in commercial loan net charge-offs.
For the second quarter of 1998, net charge-offs related to commercial
and installment loans were $3.7 million and $0.9 million,
respectively, compared to $0.8 million and $1.2 million,
respectively, for the second quarter of 1997.
At June 30, 1998, the allowance for possible loan losses was $135
million, equal to 1.13 percent of total loans outstanding, down from
$142 million or 1.27 percent of total loans one year ago; however,
the allowance as a percentage of nonperforming loans increased from
456 percent at June 30, 1997, to 475 percent at June 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 $8.16 billion at June
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 increased from $11.50 billion or 64 percent
of total non-equity funding at June 30, 1997 to $11.67 billion or 60
percent of total non-equity funding at June 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,
money market accounts and savings deposits and certificates. Total
wholesale deposits and short-term borrowings increased from $6.48
billion or 36 percent of total non-equity funding at June 30, 1997 to
$7.66 billion or 40 percent of total non-equity funding at June 30,
1998. Total deposits averaged $14.06 billion in the second quarter of
1998, an increase of $1.08 billion compared to the same quarter last
year.
Average money market assets in the second quarter of 1998
decreased $461 million or 54 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 13 percent to $3.37 billion this quarter from $2.97 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
16
<PAGE> 19
- --------------------------------------------------------------------------------
with all other senior unsecured indebtedness of HTSB. As of June 30, 1998, $868
million of short-term notes were outstanding compared to $240 million at June
30, 1997.
- --------------------------------------------------------------------------------
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, 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 In Form 10-K for the year ended December 31, 1997, the Corporation
reported its program to plan, implement and manage year 2000
compliance. The Corporation's renovation efforts are continuing as
planned. Management currently estimates the cost of achieving
compliance to be approximately $42 million (pre-tax) over the cost of
normal software upgrades and replacements that would have been
incurred over the four-year period ending with the year 2000. Through
June 30, 1998, approximately $20 million of costs have been incurred.
A significant portion of these costs would probably not have been
incremental to the Corporation, but would represent a redeployment of
existing information technology resources.
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, 1998
COMPARED
WITH 1997 The Corporation's earnings for the six months ended June 30, 1998
were $90.8 million. This represented a $14.1 million or 18 percent
increase from 1997 earnings of $76.8 million. Annualized return on
average common stockholder's equity was 11.93 percent compared to
10.72 percent a year ago. Annualized return on average assets was
0.89 percent compared to 0.82 percent in the first half of 1997. Cash
flow ROE was 16.36 percent for the current year-to-date period
compared to 15.97 percent a year ago.
Net interest income on a fully taxable equivalent basis was
$270.0 million in the current period, a decrease of $30.6 million or
10 percent from $300.5 million in the first six months of 1997.
Average earning assets increased to $17.77 billion from $16.43
billion a year ago primarily attributable to an increase of 5 percent
or $587 million in average loans. Excluding the credit card
portfolio, average loans rose $1.45 billion or 15 percent.
Commercial, installment and residential real estate lending were all
contributors to this growth. Net interest margin declined to 3.06
percent from 3.68 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 $12.8 million was down
$17.5 million from $30.3 million a year ago. Net charge-offs
decreased $22.3 million to $8.2 million, primarily reflecting the
reduction in charge card loans and the related writeoffs.
Noninterest income increased $40.3 million to $218.7 million in
1998 compared to a year ago. The $12.0 million gain on sale of the
credit card portfolio was more than offset by writedowns in the value
of
17
<PAGE> 20
- --------------------------------------------------------------------------------
certain accounts in the portfolio prior to sale, in addition to lower credit
card fees amounting to $15.9 million. In the current year, trust income
increased $5.0 million and service charge fees increased $6.8 million, while
foreign exchange income increased $1.2 million. Securities gains were $8.0
million greater compared to a year ago. Other sources of noninterest income,
which include syndication fees, revenue from bank owned insurance investments,
gains on mortgage loan sales and fees on letters of credit, increased $16.0
million.
Noninterest expenses of $333.2 million rose $10.9 million from a
year ago. Excluding the $8.7 million one-time cost for restructuring
charges, total expenses increased 1 percent in 1998 compared to a
year ago.
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
<PAGE> 22
EXHIBIT A -- HARRIS BANKCORP, INC.
1998 SECOND QUARTER REPORT
JUNE 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,473,705
<INT-BEARING-DEPOSITS> 303,582
<FED-FUNDS-SOLD> 202,664
<TRADING-ASSETS> 109,350
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 6,067,652
<LOANS> 12,035,379
<ALLOWANCE> 135,433
<TOTAL-ASSETS> 21,905,473
<DEPOSITS> 14,831,648
<SHORT-TERM> 4,493,735
<LIABILITIES-OTHER> 266,426
<LONG-TERM> 629,370
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,366,889
<TOTAL-LIABILITIES-AND-EQUITY> 21,905,473
<INTEREST-LOAN> 450,221
<INTEREST-INVEST> 168,296
<INTEREST-OTHER> 13,781
<INTEREST-TOTAL> 632,298
<INTEREST-DEPOSIT> 244,845
<INTEREST-EXPENSE> 377,098
<INTEREST-INCOME-NET> 255,200
<LOAN-LOSSES> 12,761
<SECURITIES-GAINS> 11,977
<EXPENSE-OTHER> 333,204
<INCOME-PRETAX> 127,918
<INCOME-PRE-EXTRAORDINARY> 90,832
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,832
<EPS-PRIMARY> 12.38
<EPS-DILUTED> 12.38
<YIELD-ACTUAL> 3.06
<LOANS-NON> 25,671
<LOANS-PAST> 20,238
<LOANS-TROUBLED> 2,857
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 130,876
<CHARGE-OFFS> 12,224
<RECOVERIES> 4,020
<ALLOWANCE-CLOSE> 135,433
<ALLOWANCE-DOMESTIC> 135,433
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
