<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, 1999 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 10, 1999 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 Statements of Income and Consolidated Statements of
Comprehensive Income for the quarters and nine months ended September
30, 1999 and 1998.
Consolidated Statements of Condition as of September 30, 1999, December
31, 1998 and September 30, 1998.
Consolidated Statements of Changes in Stockholder's Equity and
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Financial Review).
The above financial statements and financial review, included in the
Corporation's 1999 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, 1999, 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 10th day of November 1999.
/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
------------------------------ ------------------------------
1999 1998 Change 1999 1998 Change
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income................................ $137,876 $122,885 12% $400,739 $378,085 6%
Net interest income (fully taxable equivalent)..... 145,976 130,626 12 424,408 400,589 6
Provision for loan losses.......................... 6,259 7,000 (11) 19,866 19,761 1
Noninterest income................................. 116,525 116,337 -- 352,252 335,021 5
Noninterest expenses............................... 181,238 170,375 6 531,514 503,579 6
Net income......................................... 52,170 46,068 13 152,116 136,900 11
Dividends -- common stock.......................... 17,000 89,000 (81) 50,000 165,500 (70)
Dividends -- preferred stock....................... 4,148 4,148 -- 12,446 12,446 --
Cash earnings (1).................................. 56,166 49,876 13 163,955 148,432 10
- --------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity...... 14.19% 12.17% 202bp 13.52% 12.01% 151bp
Return on average assets........................... 0.89 0.85 4 0.88 0.88 --
Cash flow return on average common stockholder's
equity (2)....................................... 19.01 16.57 244 18.09 16.43 166
Cash flow return on average assets (3)............. 0.96 0.93 3 0.96 0.96 --
Tier 1 risk-based capital ratio.................... 8.91 8.71 20
Total risk-based capital ratio..................... 11.63 11.67 (4)
Tier 1 leverage ratio.............................. 7.31 7.34 (3)
Allowance for possible loan losses to total loans
(period-end)..................................... 1.14 1.14 --
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DAILY AVERAGE BALANCES (IN MILLIONS)
Loans, net of unearned income...................... $ 12,395 $ 11,782 5% $ 12,327 $ 11,512 7%
Securities available-for-sale...................... 7,555 6,351 19 7,322 5,920 24
Money market assets................................ 361 456 (21) 354 505 (30)
Total interest-earning assets...................... 20,403 18,694 9 20,086 18,085 11
Total assets....................................... 23,350 21,637 8 23,158 20,877 11
Deposits........................................... 15,030 14,826 1 15,090 14,163 7
Short-term borrowings.............................. 5,760 4,193 37 5,443 4,177 30
Common stockholder's equity........................ 1,343 1,367 -- 1,382 1,386 --
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BALANCES AT QUARTER-END (IN MILLIONS)
Loans, net of unearned income...................... $ 12,825 $ 11,975 7%
Allowance for possible loan losses................. 146 137 7
Securities available-for-sale...................... 7,439 6,607 13
Total assets....................................... 23,838 21,888 9
Deposits........................................... 15,072 14,725 2
Common stockholder's equity........................ 1,366 1,423 (4)
Total stockholder's equity......................... 1,591 1,648 (3)
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</TABLE>
(1) Cash earnings are defined as net income excluding the impact of 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 expense 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 had record earnings for the quarter ended September
30, 1999. Net income was $52.2 million, an increase of 13 percent
from the same quarter a year ago when earnings were $46.1 million.
For the current quarter, cash flow ROE was 19.01 percent compared to
16.57 percent one year earlier.
Net interest income on a fully taxable equivalent basis was
$146.0 million, up 12 percent from third quarter last year. Average
earning assets rose 9 percent to $20.40 billion from $18.69 billion
in third quarter 1998, attributable to an increase of $613 million in
average loans and $1.20 billion in the investment securities
portfolio. Commercial loans and residential mortgages were the
primary contributors to loan growth. Net interest margin rose from
2.77 percent in the year-ago quarter to 2.84 percent currently,
reflecting the lower cost of funds.
Third quarter noninterest income of $116.5 million increased
slightly from the same quarter last year despite a $7.6 million
decline in net gains from investment securities sales. Trust and
investment management fees increased $4.0 million or 11 percent,
while service charge fees rose $3.1 million or 11 percent. Other
sources of revenue growth included loan syndication fees and merchant
charge card fees.
Third quarter 1999 noninterest expenses of $181.2 million rose
$10.9 million or 6 percent from third quarter a year ago, primarily
reflecting continued business growth. Income tax expense declined by
7 percent, reflecting a reduction in the effective tax rate on pretax
income.
The third quarter 1999 provision for loan losses of $6.3 million
declined from $7.0 million in the third quarter of 1998. Net loan
charge-offs during the current quarter were $4.1 million compared to
$5.6 million in the same period last year. Nonperforming assets at
September 30, 1999 were $27 million or 0.21 percent of total loans,
compared to $38 million or 0.30 percent at June 30, 1999, and $36
million or 0.30 percent a year ago. At September 30, 1999, the
allowance for possible loan losses was $146 million, equal to 1.14
percent of loans outstanding, compared to $137 million or 1.14
percent at the end of third quarter 1998. As a result, the ratio of
the allowance for possible loan losses to nonperforming assets was
545 percent at September 30, 1999 compared to 380 percent at
September 30, 1998.
At September 30, 1999, Tier 1 capital of Harris Bankcorp amounted
to $1.70 billion, compared to $1.56 billion one year earlier. The
regulatory leverage capital ratio was 7.31 percent for the third
quarter of 1999 compared to 7.34 percent in the same quarter of 1998.
Harris Bankcorp's capital ratio exceeds the prescribed regulatory
minimum for bank holding companies. Harris Bankcorp's September 30,
1999 Tier 1 and total risk-based capital ratios were 8.91 percent and
11.63 percent compared to respective ratios of 8.71 percent and 11.67
percent at September 30, 1998.
Harris Bankcorp's net income for the nine months ended September
30, 1999, was $152.1 million, up 11 percent from $136.9 million a
year earlier. Net interest income on a fully taxable equivalent basis
increased 6 percent or $23.8 million, reflecting earning asset growth
of 11 percent. Net margin declined to 2.83 percent currently from
2.96 percent in the nine months ended September 30, 1998. Average
loans increased $815 million or 7 percent.
Noninterest income increased $17.2 million, or 5 percent
year-to-year, primarily due to strong growth in trust and investment
management income, income from tax-advantaged investments and service
charge fees. A $12.0 million gain from the sale of the credit card
portfolio was recognized in 1998. Excluding that gain, noninterest
income increased 9 percent from the prior year's nine-month period.
The provision for loan losses of $19.9 million was up slightly
from $19.8 million a year ago. Net charge-offs rose from $13.8
million in 1998 to $14.8 million currently. Noninterest expense rose
$27.9 million or 6 percent year-to-year.
2
<PAGE> 5
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Cash flow ROE for the first nine months of 1999 was 18.09 percent
compared to 16.43 percent for the period ended September 30, 1998.
Haven E. Cockerham, Senior Vice President of Human Resources at
R.R. Donnelley & Sons Company, and Martin R. Castro, an Attorney at
Law, were elected to the Board of Directors.
The Corporation announced the opening of its new Aurora, Illinois
branch as part of our efforts to expand our services to the Hispanic
community, including comprehensive bilingual capabilities, staffing
and marketing materials.
The Corporation/Bank of Montreal announced the expansion of our
discount brokerage business by acquiring Chicago-based discount
brokerage firm Burke, Christensen & Lewis Securities, Inc. The new
company will be known as Harris/BCL -- Investors Direct.
/s/ ALAN G. MCNALLY
Alan G. McNally October 29, 1999
Chairman of the Board and
Chief Executive Officer
3
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries
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Quarter Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
(in thousands except share data) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $233,310 $227,865 $673,804 $678,085
Money market assets:
Deposits at banks.......................................... 13 1,840 970 10,054
Federal funds sold and securities purchased under agreement
to resell................................................ 2,752 3,049 7,856 7,076
Trading account............................................. 1,136 1,291 3,002 2,831
Securities available-for-sale:
U.S. Treasury and Federal agency........................... 100,761 89,288 291,427 248,418
State and municipal........................................ 4,260 4,079 12,710 12,378
Other...................................................... 2,105 1,233 5,921 2,101
-------- -------- -------- --------
Total interest income...................................... 344,337 328,645 995,690 960,943
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 121,977 136,315 362,729 381,160
Short-term borrowings....................................... 53,136 42,589 146,689 130,302
Senior notes................................................ 19,136 14,472 48,625 37,979
Minority interest -- dividends on preferred stock of
subsidiary................................................. 4,609 4,609 13,828 11,780
Long-term notes............................................. 7,603 7,775 23,080 21,637
-------- -------- -------- --------
Total interest expense..................................... 206,461 205,760 594,951 582,858
-------- -------- -------- --------
NET INTEREST INCOME......................................... 137,876 122,885 400,739 378,085
Provision for loan losses................................... 6,259 7,000 19,866 19,761
-------- -------- -------- --------
Net Interest Income after Provision for Loan Losses......... 131,617 115,885 380,873 358,324
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 41,105 37,078 116,419 106,787
Money market and bond trading............................... 3,890 3,632 6,862 8,395
Foreign exchange............................................ 1,850 1,650 6,164 4,950
Merchant and charge card fees............................... 8,060 6,867 22,226 20,467
Service fees and charges.................................... 30,592 27,445 86,659 81,347
Securities gains............................................ 60 7,674 14,051 19,651
Gain on sale of charge card portfolio....................... -- -- -- 12,000
Bank-owned insurance investments............................ 10,221 10,109 30,746 22,457
Foreign fees................................................ 4,421 4,385 14,439 14,534
Other....................................................... 16,326 17,497 54,686 44,433
-------- -------- -------- --------
Total noninterest income................................... 116,525 116,337 352,252 335,021
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 87,974 82,596 261,414 242,275
Pension, profit sharing and other employee benefits......... 17,567 14,645 53,962 44,633
Net occupancy............................................... 13,633 12,355 35,833 38,016
Equipment................................................... 15,416 13,019 45,333 38,859
Marketing................................................... 8,099 6,837 21,102 19,433
Communication and delivery.................................. 5,626 5,263 18,455 16,379
Expert services............................................. 5,684 8,902 22,130 22,647
Contract programming........................................ 3,483 7,020 8,942 17,826
Other....................................................... 17,445 13,769 45,667 45,474
-------- -------- -------- --------
174,927 164,406 512,838 485,542
Goodwill and other valuation intangibles.................... 6,311 5,969 18,676 18,037
-------- -------- -------- --------
Total noninterest expenses................................. 181,238 170,375 531,514 503,579
-------- -------- -------- --------
Income before income taxes.................................. 66,904 61,847 201,611 189,766
Applicable income taxes..................................... 14,734 15,779 49,495 52,866
-------- -------- -------- --------
NET INCOME................................................. 52,170 46,068 152,116 136,900
Dividends on preferred stock................................ 4,148 4,148 12,446 12,446
-------- -------- -------- --------
Net Income Applicable to Common Stock....................... $ 48,022 $ 41,920 $139,670 $124,454
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 6,667,490 average shares
outstanding)
Net Income Applicable to Common Stock....................... $ 7.20 $ 6.29 $ 20.95 $ 18.67
======== ======== ======== ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
4
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries
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Quarter Ended Nine Months Ended
September 30 September 30
------------------- ---------------------
(in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME.................................................. $ 52,170 $46,068 $ 152,116 $136,900
Other comprehensive income:
Unrealized (losses)/gains on available-for-sale
securities:
Unrealized holding (losses)/gains arising during
period, net of tax (benefit)/expense for the quarter
of ($9,149) in 1999 and $32,566 in 1998 and net of tax
(benefit)/expense for the year-to-date period of
($94,298) in 1999 and $41,315 in 1998................. (14,072) 48,510 (143,020) 61,737
Less reclassification adjustment for realized gains
included in income statement, net of tax expense for
the quarter of $23 in 1999 and $3,050 in 1998 and net
of tax expense for the year-to-date period of $5,466
in 1999 and $7,811 in 1998............................ (37) (4,624) (8,585) (11,840)
-------- ------- --------- --------
Other comprehensive (loss) income........................... (14,109) 43,886 (151,605) 49,897
-------- ------- --------- --------
Comprehensive income........................................ $ 38,061 $89,954 $ 511 $186,797
======== ======= ========= ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
5
<PAGE> 8
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(in thousands except share data) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,193,348 $ 1,492,270 $ 1,158,777
Money market assets:
Interest-bearing deposits at banks........................ 172,044 98,937 213,720
Federal funds sold and securities purchased under
agreement to resell..................................... 128,515 155,709 61,953
Trading account assets...................................... 103,992 120,668 91,040
Securities available-for-sale............................... 7,493,266 6,963,654 6,607,023
Loans, net of unearned income............................... 12,824,573 12,228,400 11,975,147
Allowance for possible loan losses.......................... (145,691) (140,608) (136,820)
----------- ----------- -----------
Net loans................................................. 12,678,882 12,087,792 11,838,327
Premises and equipment...................................... 390,513 369,802 341,850
Customers' liability on acceptances......................... 44,067 30,829 34,997
Bank-owned insurance investments............................ 753,239 725,302 715,419
Goodwill and other valuation intangibles.................... 254,052 268,203 271,560
Other assets................................................ 626,506 484,664 553,659
----------- ----------- -----------
TOTAL ASSETS.......................................... $23,838,424 $22,797,830 $21,888,325
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 3,246,855 $ 3,930,920 $ 3,269,482
-- interest-bearing............. 10,442,496 10,473,612 10,201,337
Deposits in foreign offices -- noninterest-bearing.......... 21,682 69,215 23,329
-- interest-bearing............... 1,361,395 849,095 1,230,644
----------- ----------- -----------
Total deposits........................................ 15,072,428 15,322,842 14,724,792
Federal funds purchased and securities sold under agreement
to repurchase............................................. 3,876,249 3,440,832 2,946,203
Commercial paper outstanding................................ 269,188 261,905 240,983
Other short-term borrowings................................. 481,243 168,151 443,499
Senior notes................................................ 1,500,000 940,000 762,000
Acceptances outstanding..................................... 44,067 30,829 34,997
Accrued interest, taxes and other expenses.................. 192,893 182,097 194,443
Other liabilities........................................... 106,686 95,755 188,725
Minority interest -- preferred stock of subsidiary.......... 250,000 250,000 250,000
Long-term notes............................................. 454,561 454,387 454,370
----------- ----------- -----------
TOTAL LIABILITIES..................................... 22,247,315 21,146,798 20,240,012
----------- ----------- -----------
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..................................................... 495,824 493,812 493,492
Retained earnings........................................... 930,353 840,683 815,106
Accumulated other comprehensive (loss) income............... (113,408) 38,197 61,375
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,591,109 1,651,032 1,648,313
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $23,838,424 $22,797,830 $21,888,325
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
6
<PAGE> 9
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries
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(in thousands) 1999 1998
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<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,651,032 $1,632,515
Net income................................................ 152,116 136,900
Contributions to capital.................................. 2,012 6,947
Dividends -- Series A preferred stock..................... (9,788) (9,788)
Dividends -- Series B preferred stock..................... (2,658) (2,658)
Dividends -- common stock................................. (50,000) (165,500)
Other comprehensive (loss) income......................... (151,605) 49,897
---------- ----------
BALANCE AT SEPTEMBER 30..................................... $1,591,109 $1,648,313
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
-------------------------------
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 152,116 $ 136,900
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 19,866 19,761
Depreciation and amortization, including intangibles...... 57,167 49,404
Deferred tax expense...................................... 717 9,177
Gain on sales of securities............................... (14,051) (19,651)
Gain on sale of credit card portfolio..................... -- (12,000)
Trading account net sales (purchases)..................... 16,676 (37,831)
Net (increase) decrease in interest receivable............ (13,403) 17,084
Net increase in interest payable.......................... 26,157 18,696
Net decrease (increase) in loans held for resale.......... 164,637 (107,642)
Other, net................................................ (1,455) (628)
----------- ------------
Net cash provided by operating activities............... 408,427 73,270
----------- ------------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks................................................... (73,107) 384,350
Net decrease in Federal funds sold and securities
purchased under agreement to resell..................... 27,194 18,829
Proceeds from sales of securities available-for-sale...... 811,666 1,703,049
Proceeds from maturities of securities
available-for-sale...................................... 7,990,782 10,973,120
Purchases of securities available-for-sale................ (9,569,378) (13,947,750)
Net increase in loans..................................... (775,593) (980,475)
Proceeds from sales of premises and equipment............. 334 30,993
Purchases of premises and equipment....................... (59,536) (93,857)
Net increase in bank-owned insurance investments.......... (27,937) (447,956)
Other, net................................................ (34,705) (7,766)
----------- ------------
Net cash used by investing activities................... (1,710,280) (2,367,463)
----------- ------------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits....................... (250,414) 292,729
Net increase in Federal funds purchased and securities
sold under agreement to repurchase...................... 435,417 494,330
Net increase (decrease) in commercial paper outstanding... 7,283 (110,444)
Net increase (decrease) in short-term borrowings.......... 313,091 (59,821)
Proceeds from issuance of senior notes.................... 3,460,500 6,954,080
Repayment of senior notes................................. (2,900,500) (6,292,080)
Proceeds from the 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....................... (50,000) (165,500)
----------- ------------
Net cash provided by financing activities............... 1,002,931 2,148,596
----------- ------------
Net decrease in cash and demand balances due from
banks.................................................. (298,922) (145,597)
Cash and demand balances due from banks at January 1.... 1,492,270 1,304,374
----------- ------------
Cash and demand balances due from banks at September
30..................................................... $ 1,193,348 $ 1,158,777
=========== ============
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
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, 1998.
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 The Corporation and certain of its subsidiaries are defendants in
PROCEEDINGS 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 Statements 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 $568.8 million and $564.2 million in 1999 and 1998,
respectively. Cash income tax payments over the same periods
totaled $64.5 million and $36.3 million, respectively.
- --------------------------------------------------------------------------------
4. ACCOUNTING In June 1998, the FASB issued SFAS No. 133, "Accounting for
CHANGES 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. As issued, the Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133." The Statement is effective upon
issuance and it amends SFAS No. 133 to be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
The Corporation is in the process of assessing the impact of
adopting the Statements on its financial position and results of
operations.
- --------------------------------------------------------------------------------
5. SEGMENT The Corporation's segments are identified by the customers
REPORTING served, the products and services they offer and the channels by
which the products and services are delivered. The Corporation's
reportable segments are Corporate and Institutional Financial
Services, Chicagoland Banking and Electronic Financial Services.
Corporate and Institutional Financial Services is comprised of
the Corporation's corporate banking distribution to middle-market
companies across the Midwest and nationally in selected
specialties and corporate trust activities, including national
stock transfer and indenture trust services. Chicagoland Banking
comprises community banking, which serves individuals through a
Chicagoland retail bank network; private banking, which serves
the needs of affluent individuals in Chicagoland and nationally
through the integrated delivery of a comprehensive portfolio of
wealth management services, including personal trust, investment
management, customized lending and financial planning; and small
business/lower middle-market banking. Electronic Financial
Services includes cash management services, mbanx(sm), the
Corporation's virtual banking unit, and the bankcard business
unit, including merchant services and, until its sale in January
1998, the Corporation's charge card business.
8
<PAGE> 11
- --------------------------------------------------------------------------------
The remaining reporting unit is comprised of a smaller segment,
Global Asset Management, and the Corporation's Treasury unit, which
serves as the Corporation's investment/funding unit, as well as
inter-segment eliminations and residual revenues and expenses,
representing the difference between actual amounts incurred and the
amounts allocated to operating segments.
Segment results are presented on a fully taxable equivalent
("FTE") basis and income tax expense is allocated to the segments by
an application of the Corporation's statutory tax rate to the pretax
FTE basis profit or loss of each segment. Segment data includes
intersegment revenues, as well as corporate overhead costs allocated
to each segment based upon estimated usage of centrally provided
services. The Corporation evaluates the performance of its segments
and allocates resources to them based on FTE basis income before
income taxes.
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
Corporate and
Institutional Electronic
Financial Chicagoland Financial Consolidated
Quarter Ended September 30 Services Banking Services Other Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
(in millions)
Net interest income (FTE basis)............. $ 50.5 $ 78.1 $ 16.2 $ 1.2 $ 146.0
Noninterest income.......................... 27.0 41.0 28.1 20.4 116.5
Provision for loan losses................... 4.1 2.2 -- -- 6.3
Noninterest expense......................... 35.3 96.8 35.8 13.3 181.2
------- ------- ------- ------- -------
Income before income taxes.................. 38.1 20.1 8.5 8.3 75.0
Income taxes................................ 14.6 7.8 3.3 (2.9) 22.8
------- ------- ------- ------- -------
Net income.................................. $ 23.5 $ 12.3 $ 5.2 $ 11.2 $ 52.2
======= ======= ======= ======= =======
(in millions)
Average Assets.............................. $ 6,722 $ 9,272 $ 1,227 $ 6,129 $23,350
======= ======= ======= ======= =======
Average Loans............................... $ 6,674 $ 7,409 $ 24 $(1,712) $12,395
======= ======= ======= ======= =======
Average Deposits............................ $ 374 $ 9,203 $ 2,305 $ 3,148 $15,030
======= ======= ======= ======= =======
1998
(in millions)
Net interest income (FTE basis)............. $ 46.5 $ 69.9 $ 13.9 $ 0.3 $ 130.6
Noninterest income.......................... 23.2 42.8 25.5 24.8 116.3
Provision for loan losses................... 5.9 1.0 -- 0.1 7.0
Noninterest expense......................... 29.4 90.1 37.9 13.0 170.4
------- ------- ------- ------- -------
Income before income taxes.................. 34.4 21.6 1.5 12.0 69.5
Income taxes................................ 13.0 8.4 0.6 1.4 23.4
------- ------- ------- ------- -------
Net income.................................. $ 21.4 $ 13.2 $ 0.9 $ 10.6 $ 46.1
======= ======= ======= ======= =======
(in millions)
Average Assets.............................. $ 6,386 $ 8,772 $ 1,151 $ 5,328 $21,637
======= ======= ======= ======= =======
Average Loans............................... $ 6,219 $ 6,926 $ 75 $(1,438) $11,782
======= ======= ======= ======= =======
Average Deposits............................ $ 400 $ 8,911 $ 2,978 $ 2,537 $14,826
======= ======= ======= ======= =======
</TABLE>
9
<PAGE> 12
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corporate and
Institutional Electronic
Financial Chicagoland Financial Consolidated
Nine Months Ended September 30 Services Banking Services Other Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
(in millions)
Net interest income (FTE basis)............. $ 143.8 $ 223.5 $ 46.7 $ 10.4 $ 424.4
Noninterest income.......................... 83.0 124.6 78.4 66.3 352.3
Provision for loan losses................... 14.3 5.6 -- -- 19.9
Noninterest expense......................... 101.1 292.4 98.3 39.7 531.5
------- ------- ------- ------- -------
Income before income taxes.................. 111.4 50.1 26.8 37.0 225.3
Income taxes................................ 42.5 19.3 10.4 1.0 73.2
------- ------- ------- ------- -------
Net income.................................. $ 68.9 $ 30.8 $ 16.4 $ 36.0 $ 152.1
======= ======= ======= ======= =======
(in millions)
Average Assets.............................. $ 6,736 $ 9,163 $ 1,240 $ 6,019 $23,158
======= ======= ======= ======= =======
Average Loans............................... $ 6,671 $ 7,294 $ 35 $(1,673) $12,327
======= ======= ======= ======= =======
Average Deposits............................ $ 407 $ 9,202 $ 2,344 $ 3,137 $15,090
======= ======= ======= ======= =======
1998
(in millions)
Net interest income (FTE basis)............. $ 132.5 $ 211.6 $ 51.9 $ 4.6 $ 400.6
Noninterest income.......................... 71.2 113.9 85.2(1) 64.7 335.0
Provision for loan losses................... 15.2 4.3 0.1 0.2 19.8
Noninterest expense......................... 84.7 276.5 101.6 40.8 503.6
------- ------- ------- ------- -------
Income before income taxes.................. 103.8 44.7 35.4 28.3 212.2
Income taxes................................ 39.2 17.2 13.8 5.1 75.3
------- ------- ------- ------- -------
Net income.................................. $ 64.6 $ 27.5 $ 21.6 $ 23.2 $ 136.9
======= ======= ======= ======= =======
(in millions)
Average Assets.............................. $ 6,242 $ 8,849 $ 1,223 $ 4,563 $20,877
======= ======= ======= ======= =======
Average Loans............................... $ 6,067 $ 7,075 $ 62 $(1,692) $11,512
======= ======= ======= ======= =======
Average Deposits............................ $ 412 $ 8,766 $ 2,944 $ 2,041 $14,163
======= ======= ======= ======= =======
</TABLE>
(1) Includes gain on sale of charge card portfolio. A $12.0 million
gain was reported in January 1998.
10
<PAGE> 13
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
THIRD QUARTER 1999
COMPARED WITH
THIRD QUARTER 1998
- --------------------------------------------------------------------------------
SUMMARY The Corporation had third quarter 1999 earnings of $52.2 million, an
increase of $6.1 million or 13 percent from third quarter 1998. For
the current quarter, annualized cash flow return on average common
stockholder's equity was 19.01 percent compared to 16.57 percent in
the third quarter of 1998. Annualized cash flow return on average
assets was 0.96 percent compared to 0.93 percent a year ago.
Third quarter net interest income on a fully taxable equivalent
basis was $146.0 million, up $15.4 million or 12 percent from $130.6
million in 1998's third quarter. Average earning assets rose 9
percent to $20.40 billion from $18.69 billion in 1998, primarily
attributable to an increase of $613 million in average loans and
$1.20 billion in the investment securities portfolio. Commercial and
residential real estate lending were strong contributors to this loan
growth. Net interest margin rose to 2.84 percent from 2.77 percent in
the same quarter last year primarily reflecting lower cost of funds.
The third quarter provision for loan losses of $6.3 million was
down $0.7 million from $7.0 million in the third quarter of 1998. Net
charge-offs decreased from $5.6 million to $4.1 million, primarily
reflecting lower writeoffs in the commercial loan portfolio.
Noninterest income of $116.5 million for third quarter 1999
remained virtually unchanged from the same quarter last year despite
a $7.6 million decline in net gains from investment securities sales.
In the current quarter, trust and investment management fees
increased $4.0 million or 11 percent, while service charge fees rose
$3.1 million or 11 percent. Other sources of revenue growth included
loan syndication fees and merchant charge card fees.
Third quarter 1999 noninterest expenses of $181.2 million
increased $10.9 million or 6 percent from last year primarily
reflecting continued business growth.
Annualized return on average common stockholder's equity was
14.19 percent currently compared to 12.17 percent in the year-earlier
quarter.
Additional commentary on the matters included in the above
summary is provided in the following sections of this Report.
11
<PAGE> 14
- --------------------------------------------------------------------------------
OPERATING
SEGMENT
REVIEW CORPORATE AND INSTITUTIONAL FINANCIAL SERVICES
Net income for Corporate and Institutional Financial Services for the
third quarter of 1999 was $23.5 million, an increase of $2.1 million
or 10 percent from the year-ago quarter. Total revenue of $77.5
million rose 11 percent from $69.7 million in the third quarter of
1998. Growth in net interest income of $4.0 million was primarily the
result of a 7 percent or $455 million increase in loans. The increase
in noninterest income of $3.8 million or 16 percent was largely due
to foreign exchange, cash management, letters of credit, corporate
trust fees and other fee revenue. The provision for loan losses
declined by $1.8 million due to continued strong credit quality.
Noninterest expense increased $5.9 million or 20 percent to $35.3
million from $29.4 million in the 1998 third quarter, primarily in
support of business volume growth. Income taxes increased by $1.6
million compared to the year ago quarter, reflecting higher pretax
income.
CHICAGOLAND BANKING
Net income for Chicagoland Banking in the third quarter of 1999 was
$12.3 million, down 7 percent from the third quarter of 1998. Total
revenue of $119.1 million represented growth of $6.4 million or 6
percent from $112.7 million in 1998. Net interest income increased by
$8.2 million or 12 percent from $69.9 million a year ago. Noninterest
income of $41.0 million decreased $1.8 million or 4 percent over
1998, primarily due to the sale of mortgages in 1998 resulting in
gains on the sale. Noninterest expense increased $6.7 million or 7
percent to $96.8 million from $90.1 million in 1998 third quarter.
ELECTRONIC FINANCIAL SERVICES
Net income for Electronic Financial Services was $5.2 million in the
third quarter of 1999, reflecting an increase of $4.3 million from
$0.9 million a year ago. Net interest income increased $2.3 million
or 17 percent from the year ago quarter primarily attributable to an
increase in balances. Noninterest income increased $2.6 million or 10
percent largely generated by increases in bankcard fees and cash
management service fee growth for the quarter. Noninterest expense
decreased $2.1 million or 6 percent to $35.8 million from $37.9
million in 1998, primarily attributed to a reduction in operating
expenses related to the credit card sale. Income taxes increased by
$2.7 million during the current quarter, reflecting higher pretax
income.
12
<PAGE> 15
<TABLE>
<CAPTION>
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30 Nine Months Ended September 30
----------------------------------- -----------------------------------
Daily Average Balances (in millions) 1999 1998 1999 1998
Average Rates Earned and Paid ---------------- ---------------- ---------------- ----------------
(fully taxable equivalent basis) Balances Rates Balances Rates Balances Rates Balances Rates
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Money market assets:
Interest-bearing deposits at banks................. $ 163 0.03% $ 246 2.96% $ 146 0.89% $ 351 3.84%
Federal funds sold and securities purchased under
agreement to resell.............................. 198 5.51 210 5.77 208 5.06 154 6.14
------- ------- ------- -------
Total money market assets.................... 361 3.04 456 4.25 354 3.33 505 4.54
Trading account assets............................... 92 7.00 105 6.21 83 6.71 78 6.33
Securities available-for-sale:(1)(2)
U.S. Treasury and Federal agency................... 7,077 5.92 5,961 6.27 6,848 5.96 5,569 6.31
State and municipal................................ 335 7.48 300 8.11 332 7.52 296 8.31
Other.............................................. 143 7.89 90 6.96 142 7.53 55 6.07
------- ------- ------- -------
Total securities available-for-sale.......... 7,555 6.02 6,351 6.36 7,322 6.06 5,920 6.41
Loans, net of unearned income........................ 12,395 7.48 11,782 7.76 12,327 7.31 11,512 7.79
Assets held for sale................................. -- -- -- -- -- -- 70 15.84
------- ------- ------- -------
TOTAL INTEREST-EARNING ASSETS................ 20,403 6.86 18,694 7.14 20,086 6.78 18,085 7.27
------- ------- ------- -------
Cash and demand balances due from banks.............. 1,307 1,212 1,315 1,231
Other assets......................................... 1,640 1,731 1,757 1,561
------- ------- ------- -------
Total assets................................. $23,350 $21,637 $23,158 $20,877
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market
accounts........................................... $ 4,023 3.19 $ 3,520 3.59 $ 3,990 3.21 $ 3,363 3.58
Savings deposits and certificates.................... 4,362 4.31 4,606 4.90 4,408 4.39 4,656 4.95
Other time deposits.................................. 1,617 5.24 2,114 5.62 1,681 5.08 1,628 5.61
Foreign office time deposits......................... 1,625 5.10 1,280 5.47 1,609 4.87 1,233 5.47
------- ------- ------- -------
TOTAL INTEREST-BEARING DEPOSITS.............. 11,627 4.16 11,520 4.70 11,688 4.15 10,880 4.68
Short-term borrowings................................ 5,760 4.98 4,193 5.40 5,443 4.80 4,177 5.39
Minority interest -- preferred stock of subsidiary... 250 7.38 250 7.38 250 7.38 212 7.38
Long-term notes...................................... 454 6.69 441 7.05 454 6.77 400 7.21
------- ------- ------- -------
TOTAL INTEREST-BEARING LIABILITIES........... 18,091 4.53 16,404 4.98 17,835 4.46 15,669 4.97
Noninterest-bearing deposits......................... 3,403 3,306 3,402 3,283
Other liabilities.................................... 288 335 314 314
Stockholder's equity................................. 1,568 1,592 1,607 1,611
------- ------- ------- -------
Total liabilities and stockholder's equity... $23,350 $21,637 $23,158 $20,877
======= ======= ======= =======
NET INTEREST MARGIN (RELATED TO AVERAGE
INTEREST-EARNING ASSETS)........................... 2.84% 2.77% 2.83% 2.96%
==== ==== ==== =====
</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 1999 and 1998.
2. AVERAGE RATE ON SECURITIES AVAILABLE-FOR-SALE
Yields on securities classified as available-for-sale are based on amortized
cost.
13
<PAGE> 16
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
INCOME
Quarter Ended September 30 Nine Months Ended September 30
--------------------------- -------------------------------
(in thousands) 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income............................... $344,337 $328,645 $ 995,690 $960,943
Fully taxable equivalent adjustment........... 8,100 7,741 23,669 22,504
-------- -------- ---------- --------
Interest income (fully taxable equivalent
basis).................................. 352,437 336,386 1,019,359 983,447
Interest expense.............................. 206,461 205,760 594,951 582,858
-------- -------- ---------- --------
Net interest income (fully taxable
equivalent basis)....................... $145,976 $130,626 $ 424,408 $400,589
======== ======== ========== ========
Increase (decrease) due to change in:
Volume.................................... $ 12,024 $ 14,584 $ 42,230 $ 38,611
Rate...................................... 3,326 (31,492) (18,411) (85,376)
-------- -------- ---------- --------
Total increase (decrease) in net
interest income.................... $ 15,350 $(16,908) $ 23,819 $(46,765)
======== ======== ========== ========
</TABLE>
Third quarter net interest income on an FTE basis was $146.0
million, up 12 percent from $130.6 million in third quarter 1998.
Average earning assets increased 9 percent or $1.71 billion to $20.40
billion from $18.69 billion in 1998. Average loans rose $613 million,
or 5 percent. Commercial loans and residential real estate loans
increased $369 million and $115 million, respectively. Average
securities were up 19 percent, or $1.20 billion, primarily reflecting
increased holdings of Federal agency securities. Total money market
assets declined $95 million or 21 percent over third quarter 1998
levels.
Funding for this asset growth came primarily from money market
accounts, foreign time deposits and short-term borrowings, which
increased by an average of $601 million, $345 million and $1.14
billion, respectively, offset by declines in interest checking,
savings deposits and certificates and other time deposits.
Net interest margin, the other principal determinant of net
interest income, rose from 2.77 percent to 2.84 percent in the
current quarter. The increase in the Corporation's net interest
margin reflects the lower cost of funds.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
------------------------------------ ------------------------------------
Daily Average Balances (in millions) 1999 1998 1999 1998
Average Rates Earned and Paid ---------------- ---------------- ---------------- ----------------
(fully taxable equivalent basis) Balances Rates Balances Rates Balances Rates Balances Rates
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets............. $20,403 6.86% $18,694 7.14% $20,086 6.78% $18,085 7.27%
======= ======= ======= =======
Interest-bearing liabilities........ $18,091 4.53 $16,404 4.98 $17,835 4.46 $15,669 4.97
Noninterest-bearing sources of
funds............................. 2,312 2,290 2,251 2,416
------- ------- ------- -------
Total supporting
liabilities............... $20,403 4.02 $18,694 4.37 $20,086 3.95 $18,085 4.31
======= ======= ======= =======
Net interest margin (related to
average interest-earning
assets)........................... 2.84% 2.77% 2.83% 2.96%
==== ==== ==== ====
</TABLE>
14
<PAGE> 17
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Nine Months
Ended September 30 Increase (Decrease) Ended September 30
------------------- -------------------- -------------------
NONINTEREST (in thousands) 1999 1998 Amount % 1999 1998
Income --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment
management fees......... $ 41,105 $ 37,078 $ 4,027 11 $116,419 $106,787
Money market and bond
trading................. 3,890 3,632 258 7 6,862 8,395
Foreign exchange.......... 1,850 1,650 200 12 6,164 4,950
Merchant and charge card
fees.................... 8,060 6,867 1,193 17 22,226 20,467
Service fees and
charges................. 30,592 27,445 3,147 11 86,659 81,347
Securities gains.......... 60 7,674 (7,614) (99) 14,051 19,651
Gain on sale of credit
card portfolio.......... -- -- -- -- -- 12,000
Bank-owned insurance
investments............. 10,221 10,109 112 1 30,746 22,457
Foreign fees.............. 4,421 4,385 36 1 14,439 14,534
Other..................... 16,326 17,497 (1,171) (7) 54,686 44,433
-------- -------- ------- -------- --------
Total noninterest
income.................. $116,525 $116,337 $ 188 -- $352,252 $335,021
======== ======== ======= === ======== ========
<CAPTION>
Increase (Decrease)
-------------------
NONINTEREST Amount %
Income -------------------
<S> <C> <C>
$ 9,632 9
(1,533) (18)
1,214 25
1,759 9
5,312 7
(5,600) (28)
(12,000) --
8,289 37
(95) (1)
10,253 23
--------
$ 17,231 5
======== ===
</TABLE>
Noninterest income for the 1999 third quarter of $116.5 million was
up slightly from the third quarter of 1998. Trust and investment
management revenue was $41.1 million, an increase of $4.0 million or
11 percent from the previous year. Service fees and charges totaled
$30.6 million, an increase of $3.1 million or 11 percent from the
prior year. Merchant and charge card fees rose $1.2 million or 17
percent from the previous year. Foreign exchange revenue was $1.9
million, up 12 percent from the third quarter of 1998. Other sources
of revenue growth included syndication fees and income from
tax-advantaged assets. Net gains from securities sales declined by
$7.6 million to virtually nothing as increased market rates reduced
prices on debt securities.
<TABLE>
<CAPTION>
NONINTEREST
EXPENSES
Quarter Nine Months
Ended September 30 Increase (Decrease) Ended September 30
------------------- -------------------- -------------------
AND INCOME (in thousands) 1999 1998 Amount % 1999 1998
Taxes ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation............. $ 87,974 $ 82,596 $ 5,378 7 $261,414 $242,275
Pension, profit sharing and
other employee
benefits................. 17,567 14,645 2,922 20 53,962 44,633
Net occupancy.............. 13,633 12,355 1,278 10 35,833 38,016
Equipment.................. 15,416 13,019 2,397 18 45,333 38,859
Marketing.................. 8,099 6,837 1,262 18 21,102 19,433
Communication and
delivery................. 5,626 5,263 363 7 18,455 16,379
Expert services............ 5,684 8,902 (3,218) (36) 22,130 22,647
Contract programming....... 3,483 7,020 (3,537) (50) 8,942 17,826
Other...................... 17,445 13,769 3,676 27 45,667 45,474
-------- -------- ------- -------- --------
174,927 164,406 10,521 6 512,838 485,542
Amortization of goodwill
and other valuation
intangibles.............. 6,311 5,969 342 6 18,676 18,037
-------- -------- ------- -------- --------
Total noninterest
expenses................. $181,238 $170,375 $10,863 6 $531,514 $503,579
======== ======== ======= ======== ========
Provision for income
taxes.................... $ 14,734 $ 15,779 $(1,045) (7) $ 49,495 $ 52,866
======== ======== ======= === ======== ========
<CAPTION>
NONINTEREST
EXPENSES
Increase (Decrease)
--------------------
AND INCOME Amount %
Taxes --------------------
<S> <C> <C>
$19,139 8
9,329 21
(2,183) (6)
6,474 17
1,669 9
2,076 13
(517) (2)
(8,884) (50)
193 --
-------
27,296 6
639 4
-------
$27,935 6
=======
$(3,371) (6)
======= ===
</TABLE>
15
<PAGE> 18
- --------------------------------------------------------------------------------
Noninterest expenses for 1999 third quarter totaled $181.2 million,
an increase of $10.9 million or 6 percent from the third quarter of
1998.
Employment-related expenses totaled $105.5 million, an increase
of $8.3 million or 9 percent from the year ago quarter, reflecting
both salary adjustments and growth in benefit costs. Employee benefit
increases were in part a function of lower discount rates applied to
projected retirement liabilities. Net occupancy expenses totaled
$13.6 million, up $1.3 million from the prior year's third quarter.
Equipment expenses increased $2.4 million or 18 percent over third
quarter 1998. Expert services decreased $3.2 million to $5.7 million
in third quarter 1999. Contract programming totaled $3.5 million,
down $3.5 million from the prior year's third quarter, due to limits
on new systems development in order to devote resources to ensuring
that all current systems are Y2K compliant. Other noninterest
expenses increased $3.7 million or 27 percent. Goodwill and other
valuation intangibles increased $0.3 million or 6 percent.
Income tax expense totaled $14.7 million, a decrease of 7 percent
from $15.8 million recorded in third quarter 1998, reflecting a
reduction in the effective tax rate from 34 percent to 30 percent.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at September 30, 1999 was
$1.59 billion, compared with $1.65 billion at both December 31, 1998
and September 30, 1998. Excluding adjustments for unrealized gains
and losses from securities available-for-sale, total equity increased
$117.6 million from September 30, 1998. During the preceding twelve
months, the Corporation declared common and preferred dividends of
$66.0 million and $16.6 million, respectively. 1998 common dividends
included special dividends of $125 million of which $50 million
related to the sale of Harris Trust and Savings Bank's ("HTSB")
credit card portfolio.
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 the Corporation 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 8.91 percent and
11.63 percent, respectively, at September 30, 1999. HTSB's Tier 1 and
total risk-based capital ratios were 8.77 percent and 10.92 percent,
respectively, at September 30, 1999.
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 7.31 percent and 7.47 percent,
respectively, for the third quarter of 1999.
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, 1999, 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, servicing assets 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
16
<PAGE> 19
- --------------------------------------------------------------------------------
(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, 1999, the Corporation's intangible assets totaled $255
million, including approximately $238 million of intangibles excluded
under capital guidelines. The Corporation's and HTSB's tangible Tier
1 leverage ratios (which exclude all intangibles) were 7.25 percent
and 7.39 percent, respectively, for the third quarter of 1999.
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
September 30 December 31 September 30
(in thousands) 1999 1998 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $23,838,424 $22,797,830 $21,888,325
=========== =========== ===========
Average assets (quarter).................................. $23,349,539 $22,265,475 $21,637,109
=========== =========== ===========
Risk-based on-balance sheet assets........................ $14,668,292 $14,077,289 $13,702,895
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 4,690,348 $ 4,559,231 $ 4,485,067
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $19,115,873 $18,374,480 $17,920,902
=========== =========== ===========
Tier 1 capital............................................ $ 1,703,022 $ 1,591,846 $ 1,560,804
=========== =========== ===========
Supplementary capital..................................... $ 520,603 $ 535,363 $ 531,568
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 2,222,975 $ 2,126,585 $ 2,091,787
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.31% 7.26% 7.34%
Risk-based capital ratios
Tier 1.................................................. 8.91% 8.66% 8.71%
Total................................................... 11.63% 11.57% 11.67%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING September 30 June 30 September 30
Assets (in thousands) 1999 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans............................................ $23,429 $34,501 $32,276
Restructured loans.......................................... 2,986 1,948 2,851
------- ------- -------
Total nonperforming loans................................... 26,415 36,449 35,127
Other assets received in satisfaction of debt............... 338 1,181 897
------- ------- -------
Total nonperforming assets.................................. $26,753 $37,630 $36,024
======= ======= =======
Nonperforming loans to total loans (end of period).......... .21% .29% .29%
Nonperforming assets to total loans (end of period)......... .21% .30% .30%
======= ======= =======
90-day past due loans still accruing interest............... $37,411 $28,279 $29,603
======= ======= =======
</TABLE>
Nonperforming assets consist of loans placed on nonaccrual status
when collection of principal or 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, 1999 totaled $27 million,
or 0.21 percent of total loans, down from $38 million or 0.30 percent
of total loans at June 30, 1999. Nonperforming assets were down from
$36 million or 0.30 percent of total loans a year ago.
Interest shortfall for the quarter ended September 30, 1999 was
$0.5 million compared to $1.0 million one year earlier.
17
<PAGE> 20
- --------------------------------------------------------------------------------
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 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
(in thousands) Related Allowance No Related Allowance Impaired Loans
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1999
Balance....................................... $ 7,336 $19,079 $26,415
Related allowance............................. 2,293 -- 2,293
------- ------- -------
Balance, net of allowance..................... $ 5,043 $19,079 $24,122
======= ======= =======
December 31, 1998
Balance....................................... $13,542 $ 6,676 $20,218
Related allowance............................. 2,661 -- 2,661
------- ------- -------
Balance, net of allowance..................... $10,881 $ 6,676 $17,557
======= ======= =======
September 30, 1998
Balance....................................... $21,961 $13,166 $35,127
Related allowance............................. 8,159 -- 8,159
------- ------- -------
Balance, net of allowance..................... $13,802 $13,166 $26,968
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
Quarter Ended September 30 September 30
--------------------------- ---------------------
(dollars in thousands) 1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average impaired loans............................ $31,005 $32,766 $35,317 $31,020
======= ======= ======= =======
Total interest income on impaired loans........... $ 186 $ 7 $ 288 $ 62
======= ======= ======= =======
Interest income on impaired loans recorded on a
cash basis...................................... $ 186 $ 7 $ 288 $ 62
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE> 21
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR POSSIBLE Nine Months Ended
LOAN LOSSES Quarter Ended September 30 September 30
--------------------------- -----------------------
(in thousands) 1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period................. $143,575 $135,433 $140,608 $130,876
-------- -------- -------- --------
Charge-offs.................................. (6,028) (9,368) (20,285) (21,592)
Recoveries................................... 1,885 3,755 5,502 7,775
-------- -------- -------- --------
Net charge-offs.............................. (4,143) (5,613) (14,783) (13,817)
Provision charged to operations.............. 6,259 7,000 19,866 19,761
-------- -------- -------- --------
Balance at September 30...................... $145,691 $136,820 $145,691 $136,820
======== ======== ======== ========
Net charge-offs as a percentage of provision
charged to operations...................... 66% 80% 74% 70%
Allowance for possible loan losses to
nonperforming loans (period-end)........... 552% 390%
Allowance for possible loan losses to
nonperforming assets (period-end).......... 545% 380%
Allowance for possible loan losses to total
loans outstanding (period-end)............. 1.14% 1.14%
</TABLE>
The Corporation's provision for loan losses for the current quarter
was $6.3 million, down 11 percent from $7.0 million in last year's
third quarter. Net charge-offs decreased from $5.6 million to $4.1
million for the current quarter, bringing net charge-offs on a
year-to-date basis to $14.8 million compared to $13.8 million in the
same 1998 period. The decrease in 1999 third quarter net charge-offs
primarily reflects a decrease in commercial loan write-offs. For the
third quarter of 1999, net charge-offs related to commercial loans
were $3.2 million, compared to $4.4 million for the third quarter of
1998.
At September 30, 1999, the allowance for possible loan losses was
$146 million, equal to 1.14 percent of total loans outstanding, up
from $137 million or 1.14 percent of total loans one year ago;
however, the allowance as a percentage of nonperforming loans
increased from 390 percent at September 30, 1998, to 552 percent at
September 30, 1999.
- --------------------------------------------------------------------------------
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, securities available-for-sale and trading account
assets. Liquid assets represented approximately 38 percent of the
Corporation's total assets and amounted to $9.09 billion at September
30, 1999. 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 1999 or 1998.
19
<PAGE> 22
- --------------------------------------------------------------------------------
Total core deposits increased from $11.45 billion or 60 percent
of total non-equity funding at September 30, 1998 to $11.89 billion
or 56 percent of total non-equity funding at September 30, 1999. The
Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and
certificates, and money market accounts rose 3 percent
quarter-to-quarter, reflecting increases in domestic demand deposits
and money market accounts. Total wholesale deposits and short-term
borrowings increased from $7.66 billion or 40 percent of total
non-equity funding at September 30, 1998 to $9.30 billion or 44
percent of total non-equity funding at September 30, 1999. Total
deposits averaged $15.03 billion in the third quarter of 1999, an
increase of $204 million compared to the same quarter last year.
Average money market assets in the third quarter of 1999
decreased $95 million or 21 percent from the same quarter last year.
These assets represented 2 percent of average earning assets in 1999
remaining unchanged from one year ago. Average money market
liabilities increased 36 percent to $4.31 billion this quarter from
$3.17 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,
1999, $1.50 billion of short-term notes were outstanding compared to
$762 million at September 30, 1998.
- --------------------------------------------------------------------------------
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, the 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, 1998, 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, 1998.
- --------------------------------------------------------------------------------
YEAR 2000 A critical issue has emerged in the banking industry and for the
economy overall regarding how existing application software programs,
operating systems and other date sensitive assets can accommodate the
date value for the year 2000. The Year 2000 issue is pervasive, as
almost all companies use date-sensitive systems which could be
affected to some degree by the rollover of the two-digit year from 99
to 00. Potential risks of not addressing this issue include business
interruption, financial loss, reputation loss and/or legal liability.
The U.S. banking industry has aggressively worked towards avoiding
problems associated with Year 2000 and is considered among the
industries best prepared for the impending date change.
The Corporation's systems and other date sensitive assets have
been updated to manage the Year 2000 date issue seamlessly, and the
Corporation anticipates that the transition will be a non-event for
its customers. The Corporation has assessed and continues to monitor
the readiness of third parties that it interfaces with, such as
vendors, counterparties, customers, and payment systems, to mitigate
the potential risks that Year 2000
20
<PAGE> 23
- --------------------------------------------------------------------------------
poses. In addition, the Corporation has assessed the readiness of
companies that have borrowed from or are counterparties of the
Corporation or its subsidiaries to ensure that incremental Year
2000-related credit risks are addressed as part of the Corporation's
existing credit risk management framework. While the Corporation's
objective is to ensure that all aspects of the Year 2000 issue
affecting the Corporation will be fully resolved on time, it is not
possible to be completely certain that all aspects of the Year 2000
issue that may affect the Corporation, particularly those related to
the effects of customers, suppliers, or other third parties with whom
the Corporation conducts business, will be addressed in their
entirety. Accordingly, the Corporation has incorporated Y2K risks
into its regular contingency plans that protect its systems and
business processes against unplanned events that would prevent normal
operations. The Corporation then tested these modified contingency
plans.
Emfisys, the Corporation's operations group, acting in support of
all of the operating segments, has overall responsibility for
converting systems to accommodate the calendar change. Each of the
Corporation's lines of business is responsible for remediation of the
assets used to conduct its operations and provide services or
products to its clients, while attempting to ensure 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 Management Committee,
Risk Management Committee, Year 2000 Steering Committees and the
Board of Directors.
The process for Year 2000 compliance has followed four major
phases: inventory, impact assessment and plan, implementation, and
integration testing. The implementation phase includes remediation,
validation, conversion, and replacement or retirement of the asset.
Integration testing is to confirm that the business functions work
accurately and without disruption under year 2000-specific dates,
with all applications functioning correctly with interfaces and
infrastructure. All four steps have been completed for all critical
business applications. The principal costs are 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 $51.9 million, including $11.7 million of
capital costs, as follows:
<TABLE>
<S> <C> <C>
Estimated spending for Year 2000 system changes for
mainframe and centrally supported client server
applications over 5 years (1996 to 2000).................. $26.3 million
Estimated business unit costs, including end-user developed
applications, and embedded systems, e.g., elevators,
security access systems, etc.............................. 13.9 million
Estimated capital costs for central information technology
and business units........................................ 11.7 million
-------------
Total estimated spending over five years.................... $51.9 million
-------------
-------------
</TABLE>
The total cost of the Corporation's Year 2000 program from
inception through September 30, 1999, was $47.4 million, of which
$11.0 million was capitalized.
- --------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
COMPARED
WITH 1998 The Corporation's earnings for the nine months ended September 30,
1999 were $152.1 million. This represented a $15.2 million or 11
percent increase from 1998 earnings of $136.9 million. Annualized
cash flow return on average common stockholder's equity was 18.09
percent compared to 16.43 percent a year ago.
Net interest income on a fully taxable equivalent basis was
$424.4 million in the current period, an increase of $23.8 million or
6 percent from $400.6 million in the 1998 year-to-date period.
Average earning assets rose to $20.09 billion from $18.08 billion a
year ago attributable to an increase of 7 percent or $815 million in
average loans and $1.40 billion in investment securities. Commercial
and residential real estate lending were the major contributors to
loan growth. Net interest margin declined to 2.83 percent from
21
<PAGE> 24
- --------------------------------------------------------------------------------
2.96 percent in 1998 primarily reflecting the continued growth in new
business and the relatively higher cost of additional funding in
1999.
The 1999 provision for loan losses of $19.9 million was up
slightly from $19.8 million a year ago. Net charge-offs increased
$1.0 million to $14.8 million, primarily reflecting increased
writeoffs in the commercial loan portfolio.
Noninterest income increased $17.2 million or 5 percent to $352.3
million in 1999 compared to a year ago. A $12.0 million gain on sale
of the credit card portfolio was recognized in 1998. Excluding that
gain, noninterest income increased 9 percent from the prior year. In
the current year, trust and investment management income increased
$9.6 million and service charge fees increased $5.3 million, while
foreign exchange income increased $1.2 million. Securities gains
declined $5.6 million compared to a year ago while trading income
decreased $1.5 million from the prior year. Other sources of revenue
growth include income from tax-advantaged investments and merchant
charge card fees.
Noninterest expenses of $531.5 million rose $27.9 million or 6
percent from a year ago. Income tax expense declined by $3.4 million,
reflecting a lower effective tax rate.
Annualized return on average common stockholder's equity was
13.52 percent for the current year-to-date period compared to 12.01
percent in the same period a year ago.
- --------------------------------------------------------------------------------
OPERATING
SEGMENT
REVIEW CORPORATE AND INSTITUTIONAL FINANCIAL SERVICES
Net income for Corporate and Institutional Financial Services for
year-to-date 1999 was $68.9 million, up 7 percent from the year-ago
period. The increase of $11.3 million, or 9 percent, in net interest
income was primarily the result of a 10 percent or $604 million
increase in loans from $6.07 billion in 1998 to $6.67 billion in
1999, offset somewhat by lower margins. The growth in noninterest
income of $11.8 million or 17 percent was largely due to foreign
exchange, global finance, corporate trust fees and other revenue. The
decrease in the provision for loan losses of $0.9 million is
attributable to continued strong credit quality. Noninterest expense
rose $16.4 million or 19 percent to $101.1 million from $84.7 million
in 1998, primarily in support of business volume growth. Income taxes
increased by $3.3 million compared to a year ago, reflecting higher
pretax income.
CHICAGOLAND BANKING
Net income for Chicagoland Banking in 1999 was $30.8 million, up 12
percent from the 1998 year-to-date period. Total revenue of $348.1
million represented growth of $22.6 million or 7 percent from $325.5
million in 1998. Net interest income increased by $11.9 million or 6
percent from $211.6 million a year ago, largely generated by growth
in loan volume. Noninterest income of $124.6 million rose $10.7
million or 9 percent over 1998 levels, primarily due to higher
mortgage loan originations in 1999 and increased personal trust and
investment management revenue. Noninterest expense increased $15.9
million or 6 percent to $292.4 million from $276.5 million in 1998.
The increase was primarily due to continuing increased investments in
various retail initiatives including the creation of private banking
activities in Florida, expansion of private banking activities in
Arizona, and enhancement of products and services for retail and
business banking customers.
22
<PAGE> 25
- --------------------------------------------------------------------------------
ELECTRONIC FINANCIAL SERVICES
Net income for Electronic Financial Services was $16.4 million in
1999, a decrease of $5.2 million or 24 percent from $21.6 million a
year ago. Comparability between years is impacted by the first
quarter 1998 gain on the sale of the Corporation's credit card
portfolio. Excluding the gain, net income on a comparative basis
increased $2.1 million, an increase of 15 percent from $14.3 million
a year ago. Net interest income fell by $5.2 million or 10 percent
from $51.9 million, primarily due to the reduction in balances as a
result of the credit card sale. Noninterest income declined $6.8
million or 8 percent. Excluding the gain on the sale of the credit
card portfolio, noninterest revenue growth was $5.2 million or 7
percent. Growth was primarily due to increases in bankcard fees and
cash management service fees. Noninterest expense decreased $3.3
million or 3 percent to $98.3 million from $101.6 million in 1998,
primarily attributed to a reduction in operating expenses related to
the credit card sale. Income taxes decreased by $3.4 million during
the year, reflecting lower pretax income.
23
<PAGE> 26
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
Martin R. Castro
Attorney at Law
Haven E. Cockerham
Senior Vice President Human
Resources
R.R. Donnelley & Sons Company
F. Anthony Comper
President and
Chief Executive Officer
Bank of Montreal
Susan T. Congalton
Managing Director
Lupine L.L.C.
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 Charles H. 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
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
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
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
HARRIS CAPITAL HOLDINGS, INC.
Dover, Delaware
<PAGE> 27
EXHIBIT A--HARRIS BANKCORP, INC.
1999 THIRD QUARTER REPORT
SEPTEMBER 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,193,348
<INT-BEARING-DEPOSITS> 172,044
<FED-FUNDS-SOLD> 128,515
<TRADING-ASSETS> 103,992
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 7,493,266
<LOANS> 12,824,573
<ALLOWANCE> 145,691
<TOTAL-ASSETS> 23,838,424
<DEPOSITS> 15,072,428
<SHORT-TERM> 6,126,680
<LIABILITIES-OTHER> 299,579
<LONG-TERM> 704,561
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,312,769
<TOTAL-LIABILITIES-AND-EQUITY> 23,838,424
<INTEREST-LOAN> 673,804
<INTEREST-INVEST> 310,058
<INTEREST-OTHER> 11,828
<INTEREST-TOTAL> 995,690
<INTEREST-DEPOSIT> 362,729
<INTEREST-EXPENSE> 594,951
<INTEREST-INCOME-NET> 400,739
<LOAN-LOSSES> 19,866
<SECURITIES-GAINS> 14,051
<EXPENSE-OTHER> 531,514
<INCOME-PRETAX> 201,611
<INCOME-PRE-EXTRAORDINARY> 152,116
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,116
<EPS-BASIC> 20.95
<EPS-DILUTED> 20.95
<YIELD-ACTUAL> 2.83
<LOANS-NON> 23,429
<LOANS-PAST> 37,411
<LOANS-TROUBLED> 2,986
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 140,608
<CHARGE-OFFS> 20,285
<RECOVERIES> 5,502
<ALLOWANCE-CLOSE> 145,691
<ALLOWANCE-DOMESTIC> 145,691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
