<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 JUNE 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 August 12, 1999 the Corporation had 6,667,490 shares of $8 par value
common stock outstanding.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income and Consolidated Statements of
Comprehensive Income for the quarters and six months ended June 30, 1999
and 1998.
Consolidated Statements of Condition as of June 30, 1999, December 31,
1998 and June 30, 1998.
Consolidated Statements of Changes in Stockholder's Equity and
Consolidated Statements of Cash Flows for the six months ended June 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 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, 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 12th day of August 1999.
/s/
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Pierre O. Greffe
Chief Financial Officer
/s/
- ------------------------------------------------
Paul R. Skubic
Chief Accounting Officer
<PAGE> 3
EXHIBIT A--HARRIS BANKCORP, INC.
1999 SECOND QUARTER REPORT
JUNE 30, 1999
<PAGE> 4
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
------------------------------ ------------------------------
1999 1998 Change 1999 1998 Change
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<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income.............................. $133,387 $124,074 8% $262,863 $255,200 3%
Net interest income (fully taxable equivalent)... 141,241 131,546 7 278,432 269,963 3
Provision for loan losses........................ 6,362 7,244 (12) 13,607 12,761 7
Noninterest income............................... 118,344 108,904 9 235,727 218,683 8
Noninterest expenses............................. 177,891 163,609 9 350,277 333,204 5
Net income....................................... 50,580 45,433 11 99,946 90,832 10
Dividends -- common stock........................ 18,000 14,500 24 33,000 76,500 (57)
Dividends -- preferred stock..................... 4,148 4,148 -- 8,297 8,297 --
Cash earnings(1)................................. 54,537 49,205 11 107,789 98,556 9
- --------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity.... 13.38% 11.87% 151bp 13.19% 11.93% 126bp
Return on average assets......................... 0.87 0.87 -- 0.87 0.89 (2)
Cash flow return on average common stockholder's
equity(2)...................................... 17.89 16.16 173 17.64 16.36 128
Cash flow return on average assets(3)............ 0.95 0.95 -- 0.95 0.98 (3)
Tier 1 risk-based capital ratio.................. 8.85 8.98 (13)
Total risk-based capital ratio................... 11.60 11.54 6
Tier 1 leverage ratio............................ 7.14 7.72 (58)
Allowance for possible loan losses to total loans
(period-end)................................... 1.14 1.13 1
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DAILY AVERAGE BALANCES (IN MILLIONS)
Loans, net of unearned income.................... $ 12,447 $ 11,747 6% $ 12,293 $ 11,375 8%
Securities available-for-sale.................... 7,372 5,940 24 7,194 5,722 26
Money market assets.............................. 361 394 (8) 351 529 (34)
Total interest-earning assets.................... 20,312 18,129 12 19,925 17,774 12
Total assets..................................... 23,388 20,976 11 23,060 20,491 13
Deposits......................................... 15,114 14,063 7 15,120 13,826 9
Short-term borrowings............................ 5,633 4,359 29 5,282 4,169 27
Common stockholder's equity...................... 1,392 1,395 -- 1,402 1,396 --
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BALANCES AT QUARTER-END (IN MILLIONS)
Loans, net of unearned income.................... $ 12,628 $ 12,035 5%
Allowance for possible loan losses............... 144 135 7
Securities available-for-sale.................... 7,361 6,068 21
Total assets..................................... 23,553 21,905 8
Deposits......................................... 15,674 14,832 6
Common stockholder's equity...................... 1,349 1,420 (5)
Total stockholder's equity....................... 1,574 1,645 (4)
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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 expenses of goodwill and other valuation
intangibles, divided by average assets less average intangible assets.
1
<PAGE> 5
REPORT FROM MANAGEMENT
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Harris Bankcorp had record earnings for the quarter ended June
30, 1999. Net income was $50.6 million, an increase of 11 percent
from the same quarter a year ago when earnings were $45.4 million.
Cash flow ROE was 17.89 percent in the current quarter compared to
16.16 percent one year earlier.
Net interest income on a fully taxable equivalent basis was
$141.2 million, up 7 percent from second quarter last year. Average
earning assets rose 12 percent to $20.31 billion from $18.13 billion
in second quarter 1998, attributable to an increase of $700 million
in average loans and $1.51 billion in the investment securities
portfolio. Commercial loans and residential mortgages were the
primary contributors to loan growth. Net interest margin declined
from 2.91 percent in the year-ago quarter to 2.79 percent currently,
reflecting continued growth in new business and the relatively higher
cost of additional supporting funds.
Second quarter noninterest income of $118.3 million increased 9
percent from the same quarter last year. Trust and investment
management fees increased $1.4 million or 4 percent, while merchant
and charge card fees rose $1.7 million. Other sources of income,
which includes tax-advantaged investments, syndication fees, mortgage
loan sales and other fees, increased $4.8 million. Net gains from
investment securities sales rose $2.1 million but were essentially
offset by a $2.2 million decline in bond trading profits.
Second quarter 1999 noninterest expenses of $177.9 million rose
$14.3 million or 9 percent from second quarter a year ago, reflecting
expenditures related to preparing systems for year 2000. Pretax
income rose $5.4 million. The effective tax rate declined and income
tax expense increased slightly.
The second quarter 1999 provision for loan losses of $6.4 million
declined from $7.2 million in the second quarter of 1998. Net loan
charge-offs during the current quarter were $6.3 million compared to
$4.9 million in the same period last year. Nonperforming assets at
June 30, 1999 were $38 million or 0.30 percent of total loans,
compared to $48 million or 0.39 percent at March 31, 1999, and $29
million or 0.24 percent a year ago. At June 30, 1999, the allowance
for possible loan losses was $144 million, equal to 1.14 percent of
loans outstanding, compared to $135 million or 1.13 percent at the
end of the second quarter 1998. As a result, the ratio of the
allowance for possible loan losses to nonperforming assets was 382
percent at June 30, 1999 compared to 462 percent at June 30, 1998.
At June 30, 1999, equity capital of Harris Bankcorp amounted to
$1.57 billion, compared to $1.65 million one year earlier. The
regulatory leverage capital ratio was 7.14 percent for the second
quarter of 1999 compared to 7.72 percent in the same quarter of 1998.
Harris Bankcorp's capital ratio exceeds the prescribed regulatory
minimum for bank holding companies. Harris Bankcorp's June 30, 1999
Tier 1 and total risk-based capital ratios were 8.85 percent and
11.60 percent compared to respective ratios of 8.98 percent and 11.54
percent at June 30, 1998.
Harris Bankcorp's net income for the six months ended June 30,
1999, was $99.9 million, up 10 percent from $90.8 million a year
earlier. Prior year results were affected by the January 1998 sale of
Harris Trust and Savings Bank's ("HTSB") credit card portfolio
resulting in a pretax gain of $12.0 million. Also, in first quarter
1998, Harris Bankcorp recognized a one-time charge for certain
process improvements and system conversions, including write-offs of
discontinued systems. Excluding the aforementioned items, core
earnings rose 15 percent.
Net interest income on a fully taxable equivalent basis increased
3 percent or $8.5 million, reflecting earning asset growth of 12
percent. Net margin declined to 2.82 percent currently from 3.06
percent in the six months ended June 30, 1998. Average loans
increased $918 million or 8 percent.
Noninterest income increased $17.0 million, or 8 percent
year-to-year, primarily due to strong growth in trust and investment
management income, income from tax-advantaged investments, service
charge fees,
2
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and investment securities gains. A $12.0 million gain from the sale
of the credit card portfolio was recognized in 1998. Excluding that
gain, noninterest income increased 14 percent from the prior year's
six-month period.
The provision for loan losses increased by $0.8 million or 7
percent to $13.6 million in the first six months of 1999. Net
charge-offs rose from $8.2 million in 1998 to $10.6 million
currently. Noninterest expense rose $17.1 million or 5 percent
year-to-year. Excluding the one-time reengineering charge in 1998,
core expense growth was 8 percent.
Cash flow ROE for the first six months of 1999 was 17.64 percent
compared to 16.36 percent for the period ended June 30, 1998.
/s/ ALAN G. MCNALLY
Alan G. McNally July 30, 1999
Chairman of the Board and
Chief Executive Officer
3
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
---------------------- ------------------------
(in thousands except share data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $222,680 $227,424 $440,496 $450,221
Money market assets:
Deposits at banks......................................... 582 1,850 957 8,214
Federal funds sold and securities purchased under
agreement to resell..................................... 2,614 2,023 5,103 4,027
Trading account............................................. 926 806 1,866 1,540
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 97,940 83,298 190,665 159,129
State and municipal....................................... 4,225 4,058 8,450 8,299
Other..................................................... 1,954 485 3,817 868
-------- -------- -------- --------
Total interest income..................................... 330,921 319,944 651,354 632,298
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 118,982 125,599 240,752 244,845
Short-term borrowings....................................... 49,830 44,836 93,554 87,714
Senior notes................................................ 16,385 13,910 29,489 23,507
Minority interest -- dividends on preferred stock of
subsidiary................................................ 4,609 4,609 9,219 7,170
Long-term notes............................................. 7,728 6,916 15,477 13,862
-------- -------- -------- --------
Total interest expense.................................... 197,534 195,870 388,491 377,098
-------- -------- -------- --------
NET INTEREST INCOME......................................... 133,387 124,074 262,863 255,200
Provision for loan losses................................... 6,362 7,244 13,607 12,761
-------- -------- -------- --------
Net Interest Income after Provision for Loan Losses......... 127,025 116,830 249,256 242,439
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 37,464 36,019 75,314 69,709
Money market and bond trading............................... 1,095 3,247 2,972 4,762
Foreign exchange............................................ 1,800 1,650 4,314 3,300
Merchant and charge card fees............................... 8,115 6,382 14,166 13,600
Service fees and charges.................................... 28,457 27,158 56,068 53,902
Securities gains............................................ 6,089 3,945 13,991 11,977
Gain on sale of charge card portfolio....................... -- -- -- 12,000
Bank-owned insurance investments............................ 10,699 8,292 20,525 12,347
Foreign fees................................................ 4,427 4,651 10,017 10,150
Other....................................................... 20,198 17,560 38,360 26,936
-------- -------- -------- --------
Total noninterest income.................................. 118,344 108,904 235,727 218,683
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 87,385 81,920 173,440 159,679
Pension, profit sharing and other employee benefits......... 18,477 15,204 36,395 29,989
Net occupancy............................................... 12,869 13,263 22,200 25,660
Equipment................................................... 15,343 13,076 29,918 25,839
Marketing................................................... 6,774 6,909 13,003 12,595
Communication and delivery.................................. 6,073 5,110 12,829 11,116
Expert services............................................. 8,980 6,893 16,446 13,745
Contract programming........................................ 2,153 6,196 5,458 10,806
Other....................................................... 13,596 9,176 28,222 31,707
-------- -------- -------- --------
171,650 157,747 337,911 321,136
Goodwill and other valuation intangibles.................... 6,241 5,862 12,366 12,068
-------- -------- -------- --------
Total noninterest expenses................................ 177,891 163,609 350,277 333,204
-------- -------- -------- --------
Income before income taxes.................................. 67,478 62,125 134,706 127,918
Applicable income taxes..................................... 16,898 16,692 34,760 37,086
-------- -------- -------- --------
NET INCOME................................................ 50,580 45,433 99,946 90,832
Dividends on preferred stock................................ 4,148 4,148 8,297 8,297
-------- -------- -------- --------
Net Income Applicable to Common Stock....................... $ 46,432 $ 41,285 $ 91,649 $ 82,535
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 6,667,490 average shares
outstanding)
Net Income Applicable to Common Stock....................... $ 6.96 $ 6.19 $ 13.75 $ 12.38
======== ======== ======== ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
4
<PAGE> 8
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Harris Bankcorp,
Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
--------------------- -------------------------
(in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME.................................................. $ 50,580 $45,433 $ 99,946 $90,832
Other comprehensive income:
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains/(losses) arising during period,
net of tax (benefit)/expense for the quarter of
($58,419) in 1999 and $6,935 in 1998 and net of tax
(benefit)/expense for the year-to-date period of
($85,149) in 1999 and $8,749 in 1998.................. (88,643) 10,436 (128,948) 13,231
Less reclassification adjustment for realized gains
included in income statement, net of tax expense for
the quarter of $2,369 in 1999 and $1,568 in 1998 and
net of tax expense for the year-to-date period of
$5,443 in 1999 and $4,761 in 1998..................... (3,720) (2,377) (8,548) (7,216)
-------- ------- -------- -------
Other comprehensive (loss) income........................... (92,363) 8,059 (137,496) 6,015
-------- ------- -------- -------
Comprehensive (loss) income................................. $(41,783) $53,492 $(37,550) $96,847
======== ======= ======== =======
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
5
<PAGE> 9
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
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<TABLE>
<CAPTION>
June 30 December 31 June 30
(in thousands except share data) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,290,227 $ 1,492,270 $ 1,473,705
Money market assets:
Interest-bearing deposits at banks........................ 159,217 98,937 303,582
Federal funds sold and securities purchased under
agreement to resell..................................... 169,011 155,709 202,664
Trading account assets...................................... 86,712 120,668 109,350
Securities available-for-sale............................... 7,361,213 6,963,654 6,067,652
Loans, net of unearned income............................... 12,628,345 12,228,400 12,035,379
Allowance for possible loan losses.......................... (143,575) (140,608) (135,433)
----------- ----------- -----------
Net loans................................................. 12,484,770 12,087,792 11,899,946
Premises and equipment...................................... 389,476 369,802 326,692
Customers' liability on acceptances......................... 45,488 30,829 39,065
Bank-owned insurance investments............................ 744,670 725,302 705,310
Goodwill and other valuation intangibles.................... 259,132 268,203 274,445
Other assets................................................ 563,418 484,664 503,062
----------- ----------- -----------
TOTAL ASSETS.......................................... $23,553,334 $22,797,830 $21,905,473
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 3,312,394 $ 3,930,920 $ 3,550,547
-- interest-bearing.............. 10,434,724 10,473,612 9,800,454
Deposits in foreign offices -- noninterest-bearing.......... 25,877 69,215 27,188
-- interest-bearing............... 1,901,274 849,095 1,453,459
----------- ----------- -----------
Total deposits........................................ 15,674,269 15,322,842 14,831,648
Federal funds purchased and securities sold under agreement
to repurchase............................................. 3,403,680 3,440,832 3,124,375
Commercial paper outstanding................................ 294,208 261,905 350,070
Other short-term borrowings................................. 255,761 168,151 151,290
Senior notes................................................ 1,385,500 940,000 868,000
Acceptances outstanding..................................... 45,533 30,829 39,065
Accrued interest, taxes and other expenses.................. 166,274 182,097 156,259
Other liabilities........................................... 50,076 95,755 110,167
Minority interest -- preferred stock of subsidiary.......... 250,000 250,000 250,000
Long-term notes............................................. 454,503 454,387 379,370
----------- ----------- -----------
TOTAL LIABILITIES..................................... 21,979,804 21,146,798 20,260,244
----------- ----------- -----------
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..................................................... 495,157 493,812 487,209
Retained earnings........................................... 899,332 840,683 862,187
Accumulated other comprehensive (loss) income............... (99,299) 38,197 17,493
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,573,530 1,651,032 1,645,229
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $23,553,334 $22,797,830 $21,905,473
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
6
<PAGE> 10
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED) Harris
Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,651,032 $1,632,515
Net income................................................ 99,946 90,832
Contributions to capital.................................. 1,345 664
Dividends -- Series A preferred stock..................... (6,525) (6,525)
Dividends -- Series B preferred stock..................... (1,772) (1,772)
Dividends -- common stock................................. (33,000) (76,500)
Other comprehensive (loss) income......................... (137,496) 6,015
---------- ----------
BALANCE AT JUNE 30.......................................... $1,573,530 $1,645,229
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
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<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 99,946 $ 90,832
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses................................. 13,607 12,761
Depreciation and amortization, including intangibles...... 37,050 34,233
Deferred tax expense (benefit)............................ 2,836 (2,865)
Gain on sales of securities............................... (13,991) (11,977)
Gain on sale of credit card portfolio..................... -- (12,000)
Trading account net sales (purchases)..................... 33,956 (56,141)
Net (increase) decrease in interest receivable............ (3,943) 5,721
Net increase in interest payable.......................... 4,725 8,440
Net decrease (increase) in loans held for resale.......... 134,538 (98,910)
Other, net................................................ (30,778) 1,592
---------- ----------
Net cash provided (used) by operating activities........ 277,946 (28,314)
---------- ----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks................................................... (60,280) 294,488
Net increase in Federal funds sold and securities
purchased under agreement to resell..................... (13,302) (121,882)
Proceeds from sales of securities available-for-sale...... 664,355 1,289,659
Proceeds from maturities of securities
available-for-sale...................................... 5,992,553 6,404,473
Purchases of securities available-for-sale................ (7,268,564) (8,510,422)
Net increase in loans..................................... (545,122) (1,043,826)
Proceeds from sales of premises and equipment............. 27 30,843
Purchases of premises and equipment....................... (44,386) (67,345)
Net increase in bank-owned insurance investments.......... (19,367) (437,847)
Other, net................................................ (24,293) (15,147)
---------- ----------
Net cash used by investing activities................... (1,318,379) (2,177,006)
---------- ----------
FINANCING ACTIVITIES:
Net increase in deposits.................................. 351,427 399,585
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase........... (37,153) 672,502
Net increase (decrease) in commercial paper outstanding... 32,303 (1,357)
Net increase (decrease) in short-term borrowings.......... 87,610 (352,030)
Proceeds from issuance of senior notes.................... 3,246,000 4,960,000
Repayment of senior notes................................. (2,800,500) (4,192,000)
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....................... (33,000) (76,500)
---------- ----------
Net cash provided by financing activities............... 838,390 2,374,651
---------- ----------
Net (decrease) increase in cash and demand balances due
from banks............................................. (202,043) 169,331
Cash and demand balances due from banks at January 1.... 1,492,270 1,304,374
---------- ----------
Cash and demand balances due from banks at June 30...... $1,290,227 $1,473,705
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
7
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. BASIS OF
PRESENTATION
Harris Bankcorp, Inc. (the "Corporation") is a wholly-owned
subsidiary of Bankmont Financial Corp. (a wholly-owned subsidiary of
Bank of Montreal). The consolidated financial statements of the
Corporation include the accounts of the Corporation and its
wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Certain reclassifications were
made to conform prior 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
PROCEEDINGSThe Corporation and certain of its subsidiaries are defendants in
various legal proceedings arising in the normal course of business.
In the opinion of management, based on the advice of legal counsel,
the ultimate resolution of these matters will not have a material
adverse effect on the Corporation's consolidated financial position.
- --------------------------------------------------------------------------------
3. CASH FLOWS
For purposes of the Corporation's Consolidated 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 six months ended June 30 totaled $383.8
million and $368.7 million in 1999 and 1998, respectively. Cash
income tax payments over the same periods totaled $49.4 million and
$32.5 million, respectively.
- --------------------------------------------------------------------------------
4. ACCOUNTING
CHANGES 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. 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
REPORTING The Corporation's segments are identified by the customers 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> 12
- --------------------------------------------------------------------------------
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.
9
<PAGE> 13
- --------------------------------------------------------------------------------
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
Corporate and
Institutional Electronic
Financial Chicagoland Financial Consolidated
Quarter Ended June 30 Services Banking Services Other Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
(in thousands)
Net interest income (FTE basis)...... $ 47.9 $ 74.3 $ 15.5 $ 3.5 $ 141.2
Noninterest income................... 28.4 43.1 25.9 21.0 118.4
Provision for loan losses............ 5.1 1.3 -- -- 6.4
Noninterest expense.................. 33.3 98.1 31.0 15.5 177.9
-------- -------- ---------- --------- ------------
Income before income taxes........... 37.9 18.0 10.4 9.0 75.3
Income taxes......................... 15.5 6.9 3.9 (1.6) 24.7
-------- -------- ---------- --------- ------------
Net income........................... $ 22.4 $ 11.1 $ 6.5 $ 10.6 $ 50.6
======== ======== ========== ========= ============
(in millions)
Average Assets....................... $6,900.5 $9,118.4 $ 1,219.8 $ 6,148.9 $ 23,387.6
======== ======== ========== ========= ============
Average Loans........................ $6,833.4 $7,235.2 $ 38.4 $(1,660.0) $ 12,447.0
======== ======== ========== ========= ============
Average Deposits..................... $ 407.7 $9,281.9 $ 2,296.6 $ 3,127.3 $ 15,113.5
======== ======== ========== ========= ============
1998
(in thousands)
Net interest income (FTE basis)...... $ 43.4 $ 72.7 $ 15.9 $ (0.5) $ 131.5
Noninterest income................... 23.8 38.5 24.2 22.4 108.9
Provision for loan losses............ 5.5 1.4 -- 0.3 7.2
Noninterest expense.................. 25.5 96.9 27.4 13.8 163.6
-------- -------- ---------- --------- ------------
Income before income taxes........... 36.2 12.9 12.7 7.8 69.6
Income taxes......................... 13.7 4.4 5.0 1.1 24.2
-------- -------- ---------- --------- ------------
Net income........................... $ 22.5 $ 8.5 $ 7.7 $ 6.7 $ 45.4
======== ======== ========== ========= ============
(in millions)
Average Assets....................... $6,449.9 $9,028.9 $ 1,138.8 $ 4,358.5 $ 20,976.1
======== ======== ========== ========= ============
Average Loans........................ $6,259.7 $7,207.1 $ 50.7 $(1,770.6) $ 11,746.9
======== ======== ========== ========= ============
Average Deposits..................... $ 420.7 $8,817.3 $ 2,888.9 $ 1,936.2 $ 14,063.1
======== ======== ========== ========= ============
</TABLE>
10
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corporate and
Institutional Electronic
Financial Chicagoland Financial Consolidated
Six Months Ended June 30 Services Banking Services Other Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
(in thousands)
Net interest income (FTE basis)...... $ 93.4 $ 145.3 $ 30.5 $ 9.2 $ 278.4
Noninterest income................... 56.0 83.7 50.3 45.7 235.7
Provision for loan losses............ 10.2 3.4 -- -- 13.6
Noninterest expense.................. 65.8 195.5 62.5 26.5 350.3
-------- -------- ---------- --------- ------------
Income before income taxes........... 73.4 30.1 18.3 28.4 150.2
Income taxes......................... 28.9 11.6 7.0 2.8 50.3
-------- -------- ---------- --------- ------------
Net income........................... $ 44.5 $ 18.5 $ 11.3 $ 25.6 $ 99.9
======== ======== ========== ========= ============
(in millions)
Average Assets....................... $6,745.0 $9,113.6 $ 1,246.9 $ 5,954.4 $ 23,059.9
======== ======== ========== ========= ============
Average Loans........................ $6,669.5 $7,245.3 $ 40.5 $(1,662.3) $ 12,293.0
======== ======== ========== ========= ============
Average Deposits..................... $ 423.3 $9,201.9 $ 2,363.7 $ 3,131.4 $ 15,120.3
======== ======== ========== ========= ============
1998
(in thousands)
Net interest income (FTE basis)...... $ 86.1 $ 141.7 $ 38.1 $ 4.1 $ 270.0
Noninterest income................... 48.0 71.2 59.8(1) 39.7 218.7
Provision for loan losses............ 9.3 3.3 0.1 0.1 12.8
Noninterest expense.................. 55.4 186.4 63.7 27.7 333.2
-------- -------- ---------- --------- ------------
Income before income taxes........... 69.4 23.2 34.1 16.0 142.7
Income taxes......................... 26.2 8.9 13.5 3.3 51.9
-------- -------- ---------- --------- ------------
Net income........................... $ 43.2 $ 14.3 $ 20.6 $ 12.7 $ 90.8
======== ======== ========== ========= ============
(in millions)
Average Assets....................... $6,168.9 $8,898.3 $ 1,260.3 $ 4,163.6 $ 20,491.1
======== ======== ========== ========= ============
Average Loans........................ $5,990.3 $7,266.7 $ 55.1 $(1,937.2) $ 11,374.9
======== ======== ========== ========= ============
Average Deposits..................... $ 418.6 $8,691.5 $ 2,926.2 $ 1,790.0 $ 13,826.3
======== ======== ========== ========= ============
</TABLE>
(1) Includes gain on sale of charge card portfolio. A $12 million
gain was reported in January 1998.
11
<PAGE> 15
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SECOND QUARTER 1999
COMPARED WITH
SECOND QUARTER 1998
- --------------------------------------------------------------------------------
SUMMARY The Corporation had second quarter 1999 earnings of $50.6 million, an
increase of $5.1 million or 11 percent from second quarter 1998. For
the current quarter, annualized cash flow return on average common
stockholder's equity was 17.89 percent compared to 16.16 percent in
the second quarter of 1998. Annualized cash flow return on average
assets was 0.95 percent which remained unchanged from a year ago.
Second quarter net interest income on a fully taxable equivalent
basis was $141.2 million, up $9.7 million or 7 percent from $131.5
million in 1998's second quarter. Average earning assets rose 12
percent to $20.31 billion from $18.13 billion in 1998, primarily
attributable to an increase of $700 million in average loans and
$1.51 billion in the investment securities portfolio. Commercial and
residential real estate lending were strong contributors to this loan
growth. Net interest margin declined to 2.79 percent from 2.91
percent in the same quarter last year primarily reflecting continued
growth in new business and the relatively higher cost of additional
supporting funds.
The second quarter provision for loan losses of $6.4 million was
down $0.8 million from $7.2 million in the second quarter of 1998.
Net charge-offs increased from $4.9 million to $6.3 million,
primarily reflecting higher writeoffs in the commercial loan
portfolio.
Noninterest income increased $9.4 million or 9 percent to $118.3
million for second quarter 1999 compared to the same quarter last
year. In the current quarter, service charge fees rose by $1.3
million and trust and investment management fees improved by $1.4
million compared to second quarter 1998, while income from
tax-advantaged investments increased $2.4 million. Foreign exchange
income increased $0.2 million. Net gains from securities sales
increased $2.1 million to $6.1 million during the current quarter but
were essentially offset by a $2.2 million decline in bond trading
profits.
Second quarter 1999 noninterest expenses of $177.9 million
increased $14.3 million or 9 percent from last year reflecting
expenditures related to preparing systems for year 2000.
Annualized return on average common stockholder's equity was
13.38 percent currently compared to 11.87 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.
12
<PAGE> 16
- --------------------------------------------------------------------------------
OPERATING
SEGMENT
REVIEW CORPORATE AND INSTITUTIONAL FINANCIAL SERVICES
Net income for Corporate and Institutional Financial Services for the
second quarter of 1999 was $22.4 million which remained virtually
unchanged from the year ago quarter. Total revenue of $76.3 million
rose 14 percent from $67.2 million in the second quarter of 1998.
Growth in net interest income of $4.5 million was primarily the
result of a 9 percent or $574 million increase in loans. The increase
in noninterest income of $4.6 million or 19 percent was largely due
to foreign exchange, cash management fees, letters of credit,
corporate trust fees, and other fee revenue. The provision for loan
losses declined by $0.4 million. Noninterest expense increased $7.8
million or 31 percent to $33.3 million from $25.5 million in the 1998
second quarter, primarily in support of business volume growth.
Income taxes increased by $1.8 million compared to the year ago
quarter, reflecting higher pretax income.
CHICAGOLAND BANKING
Net income for Chicagoland Banking in the second quarter of 1999 was
$11.1 million, up 31 percent from the second quarter of 1998. Total
revenue of $117.4 million represented growth of $6.2 million or 6
percent from $111.2 million in 1998. Net interest income increased by
$1.6 million or 2 percent from $72.7 million a year ago. Noninterest
income of $43.1 million increased $4.6 million or 12 percent over
1998, primarily due to higher mortgage loan originations in 1999 and
increased personal trust and investment management revenue.
Noninterest expense increased $1.2 million or 1 percent to $98.1
million from $96.9 million in the 1998 second quarter.
ELECTRONIC FINANCIAL SERVICES
Net income for Electronic Financial Services was $6.5 million in the
second quarter of 1999, reflecting a decrease of $1.2 million or 16
percent from $7.7 million a year ago. Net interest income was
virtually unchanged from the year ago quarter. Noninterest income
increased $1.7 million or 7 percent largely generated by increases in
Bankcard fee growth. Noninterest expense increased $3.6 million or 13
percent to $31.0 million from $27.4 million in 1998, primarily due to
costs necessary to support retooling existing infrastructures. Income
taxes decreased by $1.1 million during the current quarter,
reflecting lower pretax income.
13
<PAGE> 17
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 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......... $ 144 1.62% $ 269 2.76% $ 139 1.39% $ 403 4.11%
Federal funds sold and securities purchased
under agreement to resell................ 217 4.84 125 6.50 212 4.85 126 6.45
------- ------- ------- -------
Total money market assets........... 361 3.55 394 3.95 351 3.48 529 4.66
Trading account assets....................... 78 6.47 68 6.39 78 6.54 63 6.44
Securities available-for-sale:(1)(2)
U.S. Treasury and Federal agency........... 6,949 5.92 5,588 6.33 6,745 5.97 5,369 6.34
State and municipal........................ 332 7.46 291 8.31 317 7.87 294 8.42
Other...................................... 145 7.35 41 5.11 141 7.34 38 4.95
------- ------- ------- -------
Total securities
available-for-sale................ 7,426 6.02 5,920 6.43 7,203 6.08 5,701 6.45
Loans, net of unearned income................ 12,447 7.18 11,747 7.77 12,293 7.22 11,375 7.84
Assets held for sale......................... -- -- -- -- -- -- 106 15.33
------- ------- ------- -------
TOTAL INTEREST-EARNING ASSETS....... 20,312 6.69 18,129 7.24 19,925 6.75 17,774 7.34
------- ------- ------- -------
Cash and demand balances due from banks...... 1,292 1,244 1,319 1,242
Other assets................................. 1,784 1,603 1,816 1,475
------- ------- ------- -------
Total assets........................ $23,388 $20,976 $23,060 $20,491
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market
accounts................................... $ 4,039 3.15 $ 3,397 3.60 $ 3,973 3.21 $ 3,282 3.57
Savings deposits and certificates............ 4,388 4.33 4,629 4.93 4,432 4.42 4,681 4.98
Other time deposits.......................... 1,376 4.94 1,595 5.60 1,714 5.00 1,381 5.61
Foreign office time deposits................. 1,907 4.84 1,171 5.46 1,601 4.75 1,209 5.47
------- ------- ------- -------
TOTAL INTEREST-BEARING DEPOSITS..... 11,710 4.08 10,792 4.67 11,720 4.14 10,553 4.68
Short-term borrowings........................ 5,633 4.71 4,359 5.41 5,282 4.70 4,169 5.38
Minority interest -- preferred stock of
subsidiary................................. 250 7.38 250 7.38 250 7.38 194 7.38
Long-term notes.............................. 454 6.80 379 7.29 454 6.81 379 7.33
------- ------- ------- -------
TOTAL INTEREST-BEARING
LIABILITIES....................... 18,047 4.39 15,780 4.98 17,706 4.42 15,295 4.97
Noninterest-bearing deposits................. 3,404 3,272 3,400 3,273
Other liabilities............................ 320 304 327 302
Stockholder's equity......................... 1,617 1,620 1,627 1,621
------- ------- ------- -------
Total liabilities and stockholder's
equity............................ $23,388 $20,976 $23,060 $20,491
======= ======= ======= =======
NET INTEREST MARGIN (RELATED TO AVERAGE
INTEREST-EARNING ASSETS)................... 2.79% 2.91% 2.82% 3.06%
==== ==== ==== =====
</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.
14
<PAGE> 18
- --------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------- -------------------------
(in thousands) 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income................................ $330,921 $319,944 $651,354 $632,298
Fully taxable equivalent adjustment............ 7,854 7,472 15,569 14,763
-------- -------- -------- --------
Interest income (fully taxable equivalent
basis)................................... 338,775 327,416 666,923 647,061
Interest expense............................... 197,534 195,870 388,491 377,098
-------- -------- -------- --------
Net interest income (fully taxable equivalent
basis)....................................... $141,241 $131,546 $278,432 $269,963
======== ======== ======== ========
Increase (decrease) due to change in:
Volume..................................... $ 15,302 $ 11,841 $ 30,808 $ 22,982
Rate....................................... (5,607) (33,463) (22,339) (53,541)
-------- -------- -------- --------
Total increase (decrease) in net
interest income..................... $ 9,695 $(21,622) $ 8,469 $(30,559)
======== ======== ======== ========
</TABLE>
Second quarter net interest income on an FTE basis was $141.2
million, up 7 percent from $131.5 million in second quarter 1998.
Average earning assets increased 12 percent or $2.18 billion to
$20.31 billion from $18.13 billion in 1998. Average loans rose $700
million, or 6 percent. Commercial loans and residential real estate
loans increased $409 million and $125 million, respectively. Average
investment securities were up 25 percent, or $1.51 billion, primarily
reflecting increased holdings of Federal agency securities. Total
money market assets declined $33 million or 8 percent over second
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 $759 million, $736 million and $1.27
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, declined from 2.91 percent to 2.79 percent in the
current quarter. The Corporation's declining net interest margin
principally reflects the continued growth in new business and the
relatively higher cost of additional wholesale funding to support
asset growth.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS
NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 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.......... $20,312 6.69% $18,129 7.24% $19,925 6.75% $17,774 7.34%
======= ======= ======= =======
Interest-bearing liabilities..... $18,047 4.39 $15,780 4.98 $17,706 4.42 $15,295 4.97
Noninterest-bearing sources of
funds.......................... 2,265 2,349 2,219 2,479
------- ------- ------- -------
Total supporting liabilities... $20,312 3.90 $18,129 4.33 $19,925 3.93 $17,774 4.28
======= ======= ======= =======
Net interest margin (related to
average interest-earning assets).. 2.79% 2.91% 2.82% 3.06%
==== ==== ==== ====
</TABLE>
15
<PAGE> 19
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Six Months
Ended June 30 (Decrease) Ended June 30
NONINTEREST -------------------- -------------- --------------------
Income (in thousands) 1999 1998 Amount % 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust and investment management
fees.............................. $ 37,464 $ 36,019 $ 1,445 4 $ 75,314 $ 69,709
Money market and bond trading....... 1,095 3,247 (2,152) (66) 2,972 4,762
Foreign exchange.................... 1,800 1,650 150 9 4,314 3,300
Merchant and charge card fees....... 8,115 6,382 1,733 27 14,166 13,600
Service fees and charges............ 28,457 27,158 1,299 5 56,068 53,902
Securities gains.................... 6,089 3,945 2,144 54 13,991 11,977
Gain on sale of credit card
portfolio......................... -- -- -- -- -- 12,000
Bank-owned insurance investments.... 10,699 8,292 2,407 29 20,525 12,347
Other............................... 24,625 22,211 2,414 11 48,377 37,086
-------- -------- ------- -------- --------
Total noninterest income............ $118,344 $108,904 $ 9,440 9 $235,727 $218,683
======== ======== ======= === ======== ========
<CAPTION>
Increase
(Decrease)
NONINTEREST --------------
Income (in thousands) Amount %
------------------------------------ --------------
<S> <C> <C>
Trust and investment management
fees.............................. $ 5,605 8
Money market and bond trading....... (1,790) (38)
Foreign exchange.................... 1,014 31
Merchant and charge card fees....... 566 4
Service fees and charges............ 2,166 4
Securities gains.................... 2,014 17
Gain on sale of credit card
portfolio......................... (12,000) --
Bank-owned insurance investments.... 8,178 66
Other............................... 11,291 30
-------
Total noninterest income............ $17,044 8
======= ===
</TABLE>
Noninterest income for the 1999 second quarter was $118.3 million, an
increase of $9.4 million or 9 percent from the second quarter of
1998. Trust and investment management revenue was $37.5 million, an
increase of $1.4 million or 4 percent from the previous year. Service
fees and charges totaled $28.5 million, an increase of $1.3 million
or 5 percent from the prior year. Merchant and charge card fees rose
$1.7 million or 27 percent from the previous year while income from
tax-advantaged investments increased $2.4 million to $10.7 million in
the current quarter. Other income, including syndication fees, gains
from mortgage sales, and other miscellaneous items increased $2.4
million or 11 percent over the previous year. Foreign exchange
revenue was $1.8 million, up 9 percent from the second quarter of
1998. Net gains reported from securities sales totaled $6.1 million,
up $2.1 million over 1998. Bond trading profits declined $2.2 million
from the prior year.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Six Months
NONINTEREST Ended June 30 (Decrease) Ended June 30
EXPENSES AND -------------------- -------------- --------------------
Income Taxes (in thousands) 1999 1998 Amount % 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and other compensation.... $ 87,385 $ 81,920 $ 5,465 7 $173,440 $159,679
Pension, profit sharing and other
employee benefits................ 18,477 15,204 3,273 22 36,395 29,989
Net occupancy...................... 12,869 13,263 (394) (3) 22,200 25,660
Equipment.......................... 15,343 13,076 2,267 17 29,918 25,839
Marketing.......................... 6,774 6,909 (135) (2) 13,003 12,595
Communication and delivery......... 6,073 5,110 963 19 12,829 11,116
Expert services.................... 8,980 6,893 2,087 30 16,446 13,745
Contract programming............... 2,153 6,196 (4,043) (65) 5,458 10,806
Other.............................. 13,596 9,176 4,420 48 28,222 31,707
-------- -------- ------- -------- --------
171,650 157,747 13,903 9 337,911 321,136
Amortization of goodwill and other
valuation intangibles............ 6,241 5,862 379 6 12,366 12,068
-------- -------- ------- -------- --------
Total noninterest expenses......... $177,891 $163,609 $14,282 9 $350,277 $333,204
======== ======== ======= ======== ========
Provision for income taxes......... $ 16,898 $ 16,692 $ 206 1 $ 34,760 $ 37,086
======== ======== ======= === ======== ========
<CAPTION>
Increase
NONINTEREST (Decrease)
EXPENSES AND --------------
Income Taxes (in thousands) Amount %
----------------------------------- --------------
<S> <C> <C>
Salaries and other compensation.... $13,761 9
Pension, profit sharing and other
employee benefits................ 6,406 21
Net occupancy...................... (3,460) (13)
Equipment.......................... 4,079 16
Marketing.......................... 408 3
Communication and delivery......... 1,713 15
Expert services.................... 2,701 20
Contract programming............... (5,348) (49)
Other.............................. (3,485) (11)
-------
16,775 5
Amortization of goodwill and other
valuation intangibles............ 298 2
-------
Total noninterest expenses......... $17,073 5
=======
Provision for income taxes......... $(2,326) (6)
======= ===
</TABLE>
Noninterest expenses for 1999 second quarter totaled $177.9 million,
an increase of $14.3 million or 9 percent from the second quarter of
1998, reflecting expenditures related to preparing systems for year
2000.
Employment-related expenses totaled $105.9 million, an increase
of $8.7 million or 9 percent from the year ago quarter primarily due
to a 22 percent increase in benefit expenses as a result of higher
pension costs, including settlement losses related to recent
retirements. Net occupancy expenses totaled $12.9 million, down $0.4
million from the prior year's second quarter. Equipment expenses
increased $2.3 million or 17 percent over second quarter 1998. Expert
services increased $2.1 million to $9.0 million in second quarter
1999.
16
<PAGE> 20
- --------------------------------------------------------------------------------
Contract programming totaled $2.2 million, down $4.0 million from the
prior year's second quarter. Other noninterest expenses increased
$4.4 million or 48 percent. Goodwill and other valuation intangibles
increased $0.4 million or 6 percent.
Income tax expense totaled $16.9 million, an increase of 1
percent from $16.7 million recorded in second quarter 1998. While
pretax income increased, the effective tax rate declined from 35
percent to 33 percent.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at June 30, 1999 was $1.57
billion, compared with $1.65 billion at both December 31, 1998 and
June 30, 1998. During the preceding twelve months, the Corporation
declared common and preferred dividends of $138.0 million and $16.6
million, respectively. 1998 common dividends included special
dividends of $125 million of which $50 million related to the sale of
HTSB's 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 8.85 percent and
11.60 percent, respectively, at June 30, 1999. HTSB's Tier 1 and
total risk-based capital ratios were 8.71 percent and 10.88 percent,
respectively, at June 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 7.14 percent and 7.31 percent,
respectively, for the second 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 June 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 (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, 1999, the Corporation's
intangible assets totaled $259 million, including approximately $244
million of intangibles excluded under capital guidelines. The
Corporation's and HTSB's tangible Tier 1 leverage ratios (which
exclude all intangibles) were 7.08 percent and 7.23 percent,
respectively, for the second quarter of 1999.
17
<PAGE> 21
- --------------------------------------------------------------------------------
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
June 30 December 31 June 30
(in thousands) 1999 1998 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $23,553,334 $22,797,830 $21,905,473
=========== =========== ===========
Average assets (quarter).................................. $23,387,682 $22,265,475 $20,976,095
=========== =========== ===========
Risk-based on-balance sheet assets........................ $14,450,331 $14,077,289 $13,668,603
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 4,601,392 $ 4,559,231 $ 4,368,910
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $18,801,774 $18,374,480 $17,764,478
=========== =========== ===========
Tier 1 capital............................................ $ 1,664,077 $ 1,591,846 $ 1,595,617
=========== =========== ===========
Supplementary capital..................................... $ 518,476 $ 535,363 $ 455,181
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 2,181,941 $ 2,126,585 $ 2,050,268
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.14% 7.26% 7.72%
Risk-based capital ratios
Tier 1.................................................. 8.85% 8.66% 8.98%
Total................................................... 11.60% 11.57% 11.54%
</TABLE>
18
<PAGE> 22
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING June 30 March 31 June 30
Assets (in thousands) 1999 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans............................................ $34,501 $45,837 $25,671
Restructured loans.......................................... 1,948 1,521 2,857
------- ------- -------
Total nonperforming loans................................... 36,449 47,358 28,528
Other assets received in satisfaction of debt............... 1,181 753 767
------- ------- -------
Total nonperforming assets.................................. $37,630 $48,111 $29,295
======= ======= =======
Nonperforming loans to total loans (end of period).......... .29% .38% .24%
Nonperforming assets to total loans (end of period)......... .30% .39% .24%
======= ======= =======
90-day past due loans still accruing interest............... $28,279 $29,951 $20,238
======= ======= =======
</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 June 30, 1999 totaled $38 million, or
0.30 percent of total loans, down from $48 million or 0.39 percent of
total loans at March 31, 1999. Nonperforming assets were up from $29
million or 0.24 percent of total loans a year ago.
Interest shortfall for the quarter ended June 30, 1999 was $1.0
million compared to $0.9 million one year earlier.
Impaired loans are defined as those where it is probable that
amounts due according to contractual terms, including principal and
interest, will not be collected. Both nonaccrual and certain
restructured loans meet this definition. Impaired loans are measured
by the Corporation at the present value of expected future cash flows
or, alternatively, at the fair value of collateral. Known losses of
principal on these loans have been charged off. Interest income on
nonaccrual loans is recognized only at the time cash is received and
only if the collection of the entire principal balance is expected.
Interest income on restructured loans is accrued according to the
most recently agreed upon contractual terms.
<TABLE>
<CAPTION>
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total Impaired
(in thousands) Related Allowance No Related Allowance Loans
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1999
Balance............................................ $26,953 $ 9,496 $36,449
Related allowance.................................. 3,229 -- 3,229
------- ------- -------
Balance, net of allowance.......................... $23,724 $ 9,496 $33,220
======= ======= =======
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
======= ======= =======
June 30, 1998
Balance............................................ $ 8,877 $19,651 $28,528
Related allowance.................................. 5,708 -- 5,708
------- ------- -------
Balance, net of allowance.......................... $ 3,169 $19,651 $22,820
======= ======= =======
</TABLE>
19
<PAGE> 23
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarters Ended June 30 Six Months Ended June 30
---------------------- ------------------------
(in thousands) 1999 1998 1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average impaired loans............................ $42,816 $31,132 $37,509 $28,262
======= ======= ======= =======
Total interest income on impaired loans........... $ 49 $ 29 $ 102 $ 55
======= ======= ======= =======
Interest income on impaired loans recorded on a
cash basis...................................... $ 49 $ 29 $ 102 $ 55
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR POSSIBLE
Quarter Ended June 30 Six Months Ended June 30
---------------------- ------------------------
Loan Losses (in thousands) 1999 1998 1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period........................ $143,474 $133,128 $140,608 $130,876
-------- -------- -------- --------
Charge-offs......................................... (8,656) (7,233) (14,257) (12,224)
Recoveries.......................................... 2,395 2,294 3,617 4,020
-------- -------- -------- --------
Net charge-offs..................................... (6,261) (4,939) (10,640) (8,204)
Provision charged to operations..................... 6,362 7,244 13,607 12,761
-------- -------- -------- --------
Balance at June 30.................................. $143,575 $135,433 $143,575 $135,433
======== ======== ======== ========
Net charge-offs as a percentage of provision charged
to operations..................................... 98% 68% 78% 64%
Allowance for possible loan losses to nonperforming
loans (period-end)................................ 394% 475%
Allowance for possible loan losses to nonperforming
assets (period-end)............................... 382% 462%
Allowance for possible loan losses to total loans
outstanding (period-end).......................... 1.14% 1.13%
</TABLE>
The Corporation's provision for loan losses for the current quarter
was $6.4 million, down 12 percent from $7.2 million in last year's
second quarter. Net charge-offs increased from $4.9 million to $6.3
million for the current quarter, bringing net charge-offs on a
year-to-date basis to $10.6 million compared to $8.2 million in the
same 1998 period. The increase in 1999 second quarter net charge-offs
primarily reflects an increase in commercial loan write-offs. For the
second quarter of 1999, net charge-offs related to commercial loans
were $5.0 million, compared to $3.7 million for the second quarter of
1998.
At June 30, 1999, the allowance for possible loan losses was $144
million, equal to 1.14 percent of total loans outstanding, up from
$135 million or 1.13 percent of total loans one year ago; however,
the allowance as a percentage of nonperforming loans decreased from
475 percent at June 30, 1998, to 394 percent at June 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
20
<PAGE> 24
- --------------------------------------------------------------------------------
assets represented approximately 38 percent of the Corporation's
total assets and amounted to $9.07 billion at June 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.
Total core deposits increased from $11.67 billion or 60 percent
of total non-equity funding at June 30, 1998 to $12.06 billion or 57
percent of total non-equity funding at June 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 5 percent
quarter-to-quarter, reflecting increases in domestic and foreign
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 June 30, 1998 to $8.96 billion or 43
percent of total non-equity funding at June 30, 1999. Total deposits
averaged $15.11 billion in the second quarter of 1999, an increase of
$1.05 billion compared to the same quarter last year.
Average money market assets in the second quarter of 1999
decreased $33 million or 8 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 29 percent to $4.33 billion this quarter from
$3.37 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 June 30, 1999,
$1.39 billion of short-term notes were outstanding compared to $838
million at June 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
21
<PAGE> 25
- --------------------------------------------------------------------------------
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. 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
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 their regular contingency plans that protect their 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 Corporation expects that the principal
costs will be those associated with the remediation and testing of
computer applications. A major portion of these costs will be met
from existing resources, through a reprioritization of technology
development initiatives, with the remainder representing incremental
costs. As a result, the Corporation's management does not anticipate
significant cost savings to occur after the Year 2000 issue is
satisfactorily remedied. In total, the Corporation expects the cost
of solving the Year 2000 issue to be approximately $58.5 million,
including $12.3 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).................. $30.0 million
Estimated business unit costs, including end-user developed
applications, and embedded systems, e.g., elevators,
security access systems, etc. ............................ 16.2 million
Estimated capital costs for central information technology
and business units........................................ 12.3 million
-----
Total estimated spending over five years.................... $58.5 million
=====
</TABLE>
The total costs of the Corporation's Year 2000 program from
inception through June 30, 1999, was $48.4 million of which $11.3
million was capitalized.
22
<PAGE> 26
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, 1999
COMPARED
WITH 1998 The Corporation's earnings for the six months ended June 30, 1999
were $99.9 million. This represented a $9.1 million or 10 percent
increase from 1998 earnings of $90.8 million. Annualized cash flow
return on average common stockholder's equity was 17.64 percent
compared to 16.36 percent a year ago. Annualized cash flow return on
average assets was 0.95 percent compared to 0.98 percent in the first
half of 1998.
Net interest income on a fully taxable equivalent basis was
$278.4 million in the current period, an increase of $8.5 million or
3 percent from $270.0 million in the first six months of 1998.
Average earning assets rose to $19.93 billion from $17.77 billion a
year ago attributable to an increase of 8 percent or $918 million in
average loans and $1.50 billion in investment securities. Commercial
and residential real estate lending were the major contributors to
loan growth. Net interest margin declined to 2.82 percent from 3.06
percent in 1998 primarily reflecting the impact of the sale of the
credit card loans in 1998 combined with the continued growth in new
business and the relatively higher cost of additional funding in
1999.
The 1999 provision for loan losses of $13.6 million was up $0.8
million from $12.8 million a year ago. Net charge-offs increased $2.4
million to $10.6 million, primarily reflecting increased writeoffs in
the commercial loan portfolio.
Noninterest income increased $17.0 million or 8 percent to $235.7
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 14 percent from the prior year. In
the current year, trust and investment management income increased
$5.6 million and service charge fees increased $2.2 million, while
foreign exchange income increased $1.0 million. Securities gains were
$2.0 million greater compared to a year ago. Trading income decreased
$1.8 million from the prior year. Other sources of noninterest
income, which include syndication fees, income from tax-advantaged
investments, gains on mortgage loan sales and other fees, increased
$7.5 million.
Noninterest expenses of $350.3 million rose $17.1 million or 5
percent from a year ago. Excluding the $8.7 million one-time cost for
restructuring charges, total expenses increased 8 percent in 1999
compared to a year ago. Income tax expense declined by $2.3 million,
reflecting a lower effective tax rate.
Annualized return on average common stockholder's equity was
13.19 percent for the current year-to-date period compared to 11.93
percent 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 $44.5 million, up 3 percent from the year ago
period. The increase of $7.3 million, or 8 percent, in net interest
income was primarily the result of an 11 percent or $679 million
increase in loans from $5.99 billion in 1998 to $6.67 billion in
1999, offset somewhat by lower margins. The growth in noninterest
income of $8.0 million or 17 percent was largely due to foreign
exchange, global finance, corporate trust fees, and other revenue.
The increase in the provision for loan losses of $0.9 million is
attributable to the growth in the corporate loan portfolio.
Noninterest expense rose $10.4 million or 19 percent to $65.8 million
from $55.4 million in 1998, primarily in support of business volume
growth. Income taxes increased by $2.7 million compared to a year
ago, reflecting higher pretax income.
CHICAGOLAND BANKING
Net income for Chicagoland Banking in 1999 was $18.5 million, up 29
percent from the 1998 year-to-date period. Total revenue of $229.0
million represented growth of $16.1 million or 8 percent from $212.9
million in 1998. Net interest income increased by $3.6 million or 3
percent from $141.7 million a year ago, largely generated by loan
volume growth. Noninterest income of $83.7 million rose $12.5 million
or 18 percent over 1998 levels, primarily due to higher mortgage loan
originations in 1999 and increased personal trust and investment
management revenue. Noninterest expense increased $9.1 million or 5
percent to $195.5 million from $186.4 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 business
banking customers.
23
<PAGE> 27
- --------------------------------------------------------------------------------
ELECTRONIC FINANCIAL SERVICES
Net income for Electronic Financial Services was $11.3 million in
1999, a decrease of $9.3 million or 45 percent from $20.6 million a
year ago. Comparability between years is impacted by the first
quarter 1998 sale of the Corporation's credit card portfolio.
Excluding the effect of the sale, net income on a comparative basis
increased $2.6 million, an increase of 30 percent from $8.6 million a
year ago. Net interest income fell by $7.6 million or 20 percent from
$38.1 million, attributable to the charge card portfolio sale.
Noninterest income declined $9.5 million or 16 percent due to the
January 1998 gain on the sale of the credit card portfolio amounting
to $12.0 million. Noninterest expense decreased $1.2 million or 2
percent to $62.5 million from $63.7 million in 1998, primarily due to
a reduction in operating expenses related to the credit card sale.
Income taxes decreased by $6.5 million during the year, reflecting
lower pretax income.
24
<PAGE> 28
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 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
BANK OF MONTREAL TRUST COMPANY
New York, New York
HARRIS TRUST COMPANY OF CALIFORNIA
Los Angeles, California
HARRIS LIFE INSURANCE COMPANY
Scottsdale, Arizona
HARRIS INVESTMENT MANAGEMENT, INC.
Chicago, Illinois
HARRIS INVESTORS DIRECT, INC.
Chicago, Illinois
HARRISCORP CAPITAL CORPORATION
Chicago, Illinois
HARRISCORP FINANCE, INC.
Chicago, Illinois
HARRIS BANK INTERNATIONAL CORPORATION
New York, New York
HARRIS TRADING ADVISORY CORPORATION
Chicago, Illinois
BANK OF MONTREAL TRUST
COMPANY (C.I.), LTD.
St. Helier, Jersey
Channel Islands
HARRISCORP LEASING, INC.
Chicago, Illinois
BANK OF MONTREAL GLOBAL, INC.
Chicago, Illinois
MICHIGAN HOLDINGS, INC.
Chicago, Illinois
MIDWESTERN HOLDINGS, INC.
Chicago, Illinois
HARRIS BUILDING SERVICES CORPORATION
Chicago, Illinois
HARRIS TRADE SERVICES LIMITED
Hong Kong
HARRIS PREFERRED CAPITAL CORPORATION
Chicago, Illinois
HARRIS PROCESSING CORPORATION
Chicago, Illinois
HARRIS CAPITAL HOLDINGS, INC.
Dover, Delaware
<PAGE> 29
HARRIS BANKCORP, INC.
SECOND QUARTER REPORT 1999
[HARRIS BANKCORP, INC. LOGO]
[HARRIS BANKCORP, INC. LOGO]
<PAGE> 30
EXHIBIT A
HARRIS BANKCORP, INC.
SECOND QUARTER REPORT 1999
[HARRIS BANKCORP LOGO]
[HARRIS BANKCORP, INC. LOGO]
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,290,227
<INT-BEARING-DEPOSITS> 159,217
<FED-FUNDS-SOLD> 169,011
<TRADING-ASSETS> 86,712
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 7,361,213
<LOANS> 12,628,345
<ALLOWANCE> 143,575
<TOTAL-ASSETS> 23,553,334
<DEPOSITS> 15,674,269
<SHORT-TERM> 5,339,149
<LIABILITIES-OTHER> 216,350
<LONG-TERM> 704,503
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,295,190
<TOTAL-LIABILITIES-AND-EQUITY> 23,553,334
<INTEREST-LOAN> 440,496
<INTEREST-INVEST> 202,932
<INTEREST-OTHER> 7,926
<INTEREST-TOTAL> 651,354
<INTEREST-DEPOSIT> 240,752
<INTEREST-EXPENSE> 388,491
<INTEREST-INCOME-NET> 262,863
<LOAN-LOSSES> 13,607
<SECURITIES-GAINS> 13,991
<EXPENSE-OTHER> 350,277
<INCOME-PRETAX> 134,706
<INCOME-PRE-EXTRAORDINARY> 99,946
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,946
<EPS-BASIC> 13.75
<EPS-DILUTED> 13.75
<YIELD-ACTUAL> 2.82
<LOANS-NON> 34,501
<LOANS-PAST> 28,279
<LOANS-TROUBLED> 1,948
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 140,608
<CHARGE-OFFS> 14,257
<RECOVERIES> 3,617
<ALLOWANCE-CLOSE> 143,575
<ALLOWANCE-DOMESTIC> 143,575
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
