<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 MARCH 31, 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 May 13, 1999 the Corporation had 6,667,490 shares of $8 par value common
stock outstanding.
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income and Consolidated Statements of
Comprehensive Income for the quarters ended March 31, 1999 and 1998.
Consolidated Statements of Condition as of March 31, 1999, December 31,
1998 and March 31, 1998.
Consolidated Statements of Changes in Stockholder's Equity and
Consolidated Statements of Cash Flows for the quarters ended March 31,
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 First 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
March 31, 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 13th day of May 1999.
/s/
- ------------------------------------------------
Pierre O. Greffe
Chief Financial Officer
/s/
- ------------------------------------------------
Paul R. Skubic
Chief Accounting Officer
<PAGE> 3
FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
------------------------------
1999 1998 Change
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income......................................... $129,475 $131,128 (1)%
Net interest income (fully taxable equivalent).............. 137,191 138,417 (1)
Provision for loan losses................................... 7,246 5,517 31
Noninterest income.......................................... 117,384 109,778 7
Noninterest expenses........................................ 172,385 169,596 2
Net income.................................................. 49,366 45,399 9
Cash dividends -- common stock.............................. 15,000 62,000 (76)
Cash dividends -- preferred stock........................... 4,148 4,148 0
Cash earnings (1)........................................... 53,253 49,351 8
- ----------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity............... 12.99% 11.98% 101bp
Return on average assets.................................... 0.88 0.92 (4)
Cash flow return on average common stockholder's equity
(2)....................................................... 17.40 16.57 83
Cash flow return on average assets (3)...................... 0.96 1.02 (6)
Tier 1 risk-based capital ratio............................. 8.72 9.17 (45)
Total risk-based capital ratio.............................. 11.61 11.94 (33)
Tier 1 leverage ratio....................................... 7.24 7.95 (71)
Allowance for possible loan losses to total loans
(period-end).............................................. 1.16 1.16 0
- ----------------------------------------------------------------------------------------------
DAILY AVERAGE BALANCES (IN MILLIONS)
Loans, net of unearned income............................... $ 12,137 $ 10,991 10%
Securities available-for-sale............................... 7,013 5,502 27
Total interest-earning assets............................... 19,535 17,416 12
Total assets................................................ 22,729 20,001 14
Deposits.................................................... 15,127 13,587 11
Short-term borrowings....................................... 4,926 3,977 24
Common stockholder's equity................................. 1,412 1,397 1
- ----------------------------------------------------------------------------------------------
BALANCES AT QUARTER-END (IN MILLIONS)
Loans, net of unearned income............................... $ 12,413 $ 11,503 8%
Allowance for possible loan losses.......................... 143 133 8
Securities available-for-sale............................... 7,171 5,721 25
Total assets................................................ 22,990 20,125 14
Deposits.................................................... 15,006 13,379 12
Common stockholder's equity................................. 1,412 1,385 2
Total stockholder's equity.................................. 1,637 1,610 2
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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 net income plus
after-tax amortization expenses of goodwill and other valuation intangibles,
divided by average assets less average intangible assets.
1
<PAGE> 4
REPORT FROM MANAGEMENT
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Harris Bankcorp had record earnings for the quarter ended March 31,
1999. Net income was $49.4 million for the first quarter of 1999, an
increase of 9 percent from the same quarter a year earlier when net
income was $45.4 million.
Comparative results for the quarter 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. In addition,
in 1998 HTSB recognized a one-time charge for certain process
improvements and system conversions, including write-offs of
discontinued systems ("reengineering charges"). Excluding the effects
of these items, core earnings rose 16 percent quarter to quarter.
Total core revenue increased 8 percent.
For the current quarter, annualized return on average common
stockholder's equity (ROE) was 12.99 percent compared to 11.98
percent in first quarter 1998, while the annualized return on average
assets was 0.88 percent currently and 0.92 percent in the first
quarter a year ago. Cash flow return on average common stockholder's
equity (cash flow ROE) was 17.40 percent in the current quarter and
16.57 percent one year earlier. Record earnings were attributed to
continued strong business momentum and revenue growth in corporate,
private and community banking.
Net interest income on a fully taxable equivalent basis was
$137.2 million, down slightly from first quarter last year. Net
interest margin declined from 3.22 percent in the first quarter last
year to 2.85 percent currently, primarily reflecting the impact of
the sale of credit card loans in the 1998 quarter and the use of
interest-bearing liabilities to fund new business, causing narrower
spreads. Average earning assets rose 12 percent to $19.54 billion
from $17.42 billion in first quarter 1998, attributable to an
increase of $1.15 billion in average loans and $1.50 billion in the
investment securities portfolio. Commercial and residential real
estate lending were the primary contributors to loan growth.
First quarter noninterest income of $117.4 million increased 7
percent from the same quarter last year. Excluding the $12.0 million
gain on the sale of the credit card portfolio, noninterest revenue
rose 20 percent. Trust and investment management fees grew $4.2
million or 12%. Net gains from securities sales were essentially
unchanged from last year. Other sources of income, including income
on bank owned insurance investments, foreign fees, syndication fees,
mortgage loan sales and other fees, increased $14.6 million
(excluding the credit card gain).
First quarter 1999 noninterest expenses of $172.4 million rose
$2.8 million or 2 percent from first quarter a year ago. Excluding
last year's one-time cost for reengineering charges, total expenses
increased 6 percent in first quarter 1999 compared to the
year-earlier quarter. Income tax expense declined by 12 percent,
reflecting a lower effective tax rate.
The first quarter 1999 provision for loan losses of $7.2 million
was up from $5.5 million in the first quarter of 1998. Net loan
charge-offs during the current quarter were $4.4 million compared to
$3.3 million in the same period last year.
Nonperforming assets at March 31, 1999 were $48 million or 0.4
percent of total loans, compared to $21 million or 0.2 percent at
December 31, 1998 and $29 million or 0.3 percent a year ago. At March
31, 1999, the allowance for possible loan losses was $143 million,
equal to 1.2 percent of loans outstanding, compared to $133 million
or 1.2 percent at the end of first quarter 1998. As a result, the
ratio of the allowance for possible loan losses to nonperforming
assets of 298 percent at March 31, 1999 declined from 454 percent at
March 31, 1998.
2
<PAGE> 5
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At March 31, 1999, equity capital of Harris Bankcorp amounted to
$1.64 billion, up from $1.61 billion one year earlier. The regulatory
leverage capital ratio was 7.24 percent for the first quarter of 1999
compared to 7.95 percent in the same quarter of 1998. Harris
Bankcorp's capital ratio exceeds the prescribed regulatory minimum
for bank holding companies.
/s/ ALAN G. MCNALLY
Alan G. McNally April 30, 1999
Chairman of the Board and
Chief Executive Officer
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands except share data) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $217,816 $222,796
Money market assets:
Deposits at banks......................................... 375 6,364
Federal funds sold and securities purchased under
agreement to resell..................................... 2,489 2,005
Trading account............................................. 940 735
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 92,726 75,831
State and municipal....................................... 4,224 4,241
Other..................................................... 1,862 383
-------- --------
Total interest income..................................... 320,432 312,355
-------- --------
INTEREST EXPENSE
Deposits.................................................... 121,770 119,246
Short-term borrowings....................................... 43,725 42,877
Senior notes................................................ 13,104 9,597
Minority interest -- dividends on preferred stock of
subsidiary................................................ 4,609 2,561
Long-term notes............................................. 7,749 6,946
-------- --------
Total interest expense.................................... 190,957 181,227
-------- --------
NET INTEREST INCOME......................................... 129,475 131,128
Provision for loan losses................................... 7,246 5,517
-------- --------
Net Interest Income after Provision for Loan Losses......... 122,229 125,611
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 37,850 33,690
Money market and bond trading............................... 1,877 1,516
Foreign exchange............................................ 2,514 1,650
Merchant and charge card fees............................... 6,052 7,218
Service fees and charges.................................... 27,611 26,743
Securities gains............................................ 7,902 8,031
Gain on sale of charge card portfolio....................... -- 12,000
Bank-owned insurance investments............................ 9,826 4,056
Foreign fees................................................ 5,590 5,499
Other....................................................... 18,162 9,375
-------- --------
Total noninterest income.................................. 117,384 109,778
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 86,055 77,759
Pension, profit sharing and other employee benefits......... 17,918 14,785
Net occupancy............................................... 9,331 12,398
Equipment................................................... 14,574 12,764
Marketing................................................... 6,229 5,686
Communication and delivery.................................. 6,755 6,006
Expert services............................................. 7,467 6,852
Contract programming........................................ 3,305 4,610
Other....................................................... 14,627 22,530
-------- --------
166,261 163,390
Goodwill and other valuation intangibles.................... 6,124 6,206
-------- --------
Total noninterest expenses................................ 172,385 169,596
-------- --------
Income before income taxes.................................. 67,228 65,793
Applicable income taxes..................................... 17,862 20,394
-------- --------
NET INCOME................................................ 49,366 45,399
Dividends on preferred stock................................ 4,148 4,148
-------- --------
Net Income Applicable to Common Stock....................... $ 45,218 $ 41,251
======== ========
EARNINGS PER COMMON SHARE (based on 6,667,490 average shares
outstanding)
Net Income Applicable to Common Stock....................... $ 6.78 $ 6.19
======== ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
4
<PAGE> 7
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Harris Bankcorp,
Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended March 31
----------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME.................................................. $49,366 $45,399
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains/(losses) arising during period,
net of tax (benefit)/expense of ($26,730) in 1999 and
$1,805 in 1998......................................... (40,305) 2,795
Less reclassification adjustment for realized gains
included in income statement, net of tax expense of
$3,074 in 1999 and $3,192 in 1998...................... (4,828) (4,839)
------- -------
Other comprehensive loss.................................... (45,133) (2,044)
------- -------
Comprehensive income........................................ $ 4,233 $43,355
======= =======
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
5
<PAGE> 8
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
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<TABLE>
<CAPTION>
March 31 December 31 March 31
(in thousands except share data) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,287,494 $ 1,492,270 $ 1,090,811
Money market assets:
Interest-bearing deposits at banks........................ 137,093 98,937 290,929
Federal funds sold and securities purchased under
agreement to resell..................................... 87,798 155,709 82,769
Trading account assets...................................... 64,411 120,668 45,783
Securities available-for-sale............................... 7,171,078 6,963,654 5,720,835
Loans, net of unearned income............................... 12,412,768 12,228,400 11,502,797
Allowance for possible loan losses.......................... (143,474) (140,608) (133,128)
----------- ----------- -----------
Net loans................................................. 12,269,294 12,087,792 11,369,669
Premises and equipment...................................... 379,055 369,802 315,452
Customers' liability on acceptances......................... 40,893 30,829 46,688
Bank-owned insurance investments............................ 735,128 725,302 447,018
Goodwill and other valuation intangibles.................... 264,540 268,203 278,832
Other assets................................................ 553,023 484,664 436,606
----------- ----------- -----------
TOTAL ASSETS.......................................... $22,989,807 $22,797,830 $20,125,392
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 2,954,090 $ 3,930,920 $ 3,125,485
-- interest-bearing.............. 10,240,036 10,473,612 8,962,350
Deposits in foreign offices -- noninterest-bearing.......... 26,371 69,215 18,701
-- interest-bearing............... 1,785,060 849,095 1,272,535
----------- ----------- -----------
Total deposits........................................ 15,005,557 15,322,842 13,379,071
Federal funds purchased and securities sold under agreement
to repurchase............................................. 3,384,259 3,440,832 3,445,461
Commercial paper outstanding................................ 249,914 261,905 305,956
Other short-term borrowings................................. 663,049 168,151 4,764
Senior notes................................................ 1,022,000 940,000 468,000
Acceptances outstanding..................................... 40,893 30,829 46,688
Accrued interest, taxes and other expenses.................. 171,158 182,097 158,775
Other liabilities........................................... 111,963 95,755 77,296
Minority interest -- preferred stock of subsidiary.......... 250,000 250,000 250,000
Long-term notes............................................. 454,445 454,387 379,324
----------- ----------- -----------
TOTAL LIABILITIES..................................... 21,353,238 21,146,798 18,515,335
----------- ----------- -----------
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, 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..................................................... 494,264 493,812 486,880
Retained earnings........................................... 870,901 840,683 835,403
Accumulated other comprehensive (loss) income............... (6,936) 38,197 9,434
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,636,569 1,651,032 1,610,057
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $22,989,807 $22,797,830 $20,125,392
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
6
<PAGE> 9
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED) Harris
Bankcorp, Inc. and Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended March 31
--------------------------
(in thousands) 1999 1998
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<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,651,032 $1,632,515
Net income................................................ 49,366 45,399
Contributions to capital.................................. 452 335
Dividends -- Series A preferred stock..................... (3,262) (3,262)
Dividends -- Series B preferred stock..................... (886) (886)
Dividends -- common stock................................. (15,000) (62,000)
Other comprehensive loss.................................. (45,133) (2,044)
---------- ----------
BALANCE AT MARCH 31......................................... $1,636,569 $1,610,057
========== ==========
</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>
Quarter Ended March 31
--------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 49,366 $ 45,399
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 7,246 5,517
Depreciation and amortization, including intangibles...... 18,469 17,483
Deferred tax expense...................................... 1,746 5,478
Gain on sales of securities............................... (7,902) (8,031)
Gain on sale of credit card portfolio..................... -- (12,000)
Trading account net sales................................. 56,257 7,426
Net decrease in interest receivable....................... 5,159 18,823
Net increase in interest payable.......................... 9,979 11,813
Net decrease (increase) in loans held for resale.......... 65,982 (64,587)
Other, net................................................ (9,146) (19,152)
---------- ----------
Net cash provided by operating activities............... 197,156 8,169
---------- ----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks................................................... (38,156) 307,141
Net decrease (increase) in Federal funds sold and
securities purchased under agreement to resell.......... 67,911 (1,987)
Proceeds from sales of securities available-for-sale...... 388,617 980,181
Proceeds from maturities of securities
available-for-sale...................................... 2,523,033 4,145,859
Purchases of securities available-for-sale................ (3,186,109) (5,612,885)
Net increase in loans..................................... (254,730) (540,628)
Proceeds from sales of premises and equipment............. 14 16,225
Purchases of premises and equipment....................... (21,612) (30,666)
Net increase in bank-owned insurance investments.......... (9,826) (179,556)
Other, net................................................ (42,975) 23,415
---------- ----------
Net cash used by investing activities................... (573,833) (892,901)
---------- ----------
FINANCING ACTIVITIES:
Net decrease in deposits.................................. (317,285) (1,052,992)
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase........... (56,573) 993,588
Net decrease in commercial paper outstanding.............. (11,991) (45,471)
Net increase (decrease) in short-term borrowings.......... 494,898 (498,556)
Proceeds from issuance of senior notes.................... 847,000 2,448,000
Repayment of senior notes................................. (765,000) (2,080,000)
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.................... (4,148) (4,148)
Cash dividends paid on common stock....................... (15,000) (62,000)
---------- ----------
Net cash provided by financing activities............... 171,901 671,169
---------- ----------
Net decrease in cash and demand balances due from
banks.................................................. (204,776) (213,563)
Cash and demand balances due from banks at January 1.... 1,492,270 1,304,374
---------- ----------
Cash and demand balances due from banks at March 31..... $1,287,494 $1,090,811
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
7
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1. BASIS OF
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 quarter ended March 31, totaled $181.0
million and $169.4 million in 1999 and 1998, respectively. Cash
income tax payments over the same periods totaled $12.4 million and
$3.9 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. The Statement is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Corporation is in the process of assessing the
impact of adopting this Statement on its financial position and
results of operations.
- --------------------------------------------------------------------------------
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.
Other 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.
8
<PAGE> 11
- --------------------------------------------------------------------------------
Segment results are presented on a fully taxable equivalent
("FTE") basis and income tax expense is allocated to the segments by
an application of the Corporation's statutory tax rate to the pretax
FTE basis profit or loss of each segment. Segment data includes
intersegment revenues, as well as corporate overhead costs allocated
to each segment based upon estimated usage of centrally provided
services. The Corporation evaluates the performance of its segments
and allocates resources to them based on FTE basis income before
income taxes.
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
Corporate and
Institutional Electronic
Financial Chicagoland Financial Consolidated
Quarter Ended March 31 Services Banking Services Other Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
(in thousands)
Net interest income (FTE basis)...... $ 45.5 $ 71.1 $ 15.0 $ 5.6 $ 137.2
Noninterest income................... 27.6 40.5 24.2 25.1 117.4
Provision for loan losses............ 5.1 2.1 -- -- 7.2
Noninterest expense.................. 32.5 97.4 31.5 11.0 172.4
-------- -------- ---------- --------- ------------
Income before income taxes........... 35.5 12.1 7.7 19.7 75.0
Income taxes......................... 13.4 4.7 3.0 4.5 25.6
-------- -------- ---------- --------- ------------
Net income........................... $ 22.1 $ 7.4 $ 4.7 $ 15.2 $ 49.4
======== ======== ========== ========= ============
(in millions)
Average Assets....................... $6,587.8 $9,111.4 $ 1,272.4 $ 5,756.9 $ 22,728.5
======== ======== ========== ========= ============
Average Loans........................ $6,503.7 $7,255.5 $ 42.6 $(1,664.6) $ 12,137.2
======== ======== ========== ========= ============
Average Deposits..................... $ 439.1 $9,143.1 $ 2,409.5 $ 3,135.4 $ 15,127.1
======== ======== ========== ========= ============
1998
(in thousands)
Net interest income (FTE basis)...... $ 42.7 $ 69.0 $ 22.1 $ 4.6 $ 138.4
Noninterest income................... 24.1 32.6 35.5(1) 17.6 109.8
Provision for loan losses............ 3.8 1.9 -- (0.2) 5.5
Noninterest expense.................. 29.8 89.4 36.3 14.1 169.6
-------- -------- ---------- --------- ------------
Income before income taxes........... 33.2 10.3 21.3 8.3 73.1
Income taxes......................... 12.5 4.5 8.4 2.3 27.7
-------- -------- ---------- --------- ------------
Net income........................... $ 20.7 $ 5.8 $ 12.9 $ 6.0 $ 45.4
======== ======== ========== ========= ============
(in millions)
Average Assets....................... $5,884.8 $8,769.0 $ 1,380.6 $ 3,966.4 $ 20,000.8
======== ======== ========== ========= ============
Average Loans........................ $5,717.8 $6,884.0 $ 52.1 $(1,662.9) $ 10,991.0
======== ======== ========== ========= ============
Average Deposits..................... $ 416.4 $8,584.1 $ 2,944.2 $ 1,642.2 $ 13,586.9
======== ======== ========== ========= ============
</TABLE>
(1) Includes gain on sale of charge card portfolio. A $12 million
gain was reported in January 1998.
9
<PAGE> 12
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST QUARTER 1999
COMPARED WITH
FIRST QUARTER 1998
- --------------------------------------------------------------------------------
SUMMARY The Corporation had first quarter 1999 earnings of $49.4 million, an
increase of $4.0 million or 9 percent from first quarter 1998. For
the current quarter, annualized return on average common
stockholder's equity was 12.99 percent compared to 11.98 percent in
the first quarter of 1998. Annualized return on average assets was
0.88 percent compared to 0.92 percent a year ago. The year ago
quarter was affected by the January 1998 sale of Harris Trust and
Savings Bank's credit card portfolio resulting in a pretax gain of
$12.0 million. In addition, in the first quarter of 1998, the
Corporation recognized a one-time charge for certain process
improvements and system conversions, including write-offs of
discontinued systems. Excluding the effects of these items, core
earnings rose 16 percent quarter to quarter. Total core revenue
increased 8 percent.
First quarter net interest income on a fully taxable equivalent
basis was $137.2 million, down $1.2 million or 1 percent from $138.4
million in 1998's first quarter. Average earning assets rose 12
percent to $19.54 billion from $17.42 billion in 1998, primarily
attributable to an increase of $1.15 billion in average loans and
$1.50 billion in the investment securities portfolio. Commercial and
residential real estate lending were strong contributors to this
growth. Net interest margin declined to 2.85 percent from 3.22
percent in the same quarter last year primarily reflecting the impact
of the sale of the credit card loans earlier in the prior year's
quarter and the use of interest-bearing liabilities to fund new
business, causing narrower spreads.
The first quarter provision for loan losses of $7.2 million was
up $1.7 million from $5.5 million in the first quarter of 1998. Net
charge-offs increased from $3.3 million to $4.4 million in the
current quarter, primarily reflecting an increase in commercial loan
write-offs somewhat offset by a decrease in installment loan
write-offs.
Noninterest income increased $7.6 million or 7 percent to $117.4
million for first quarter 1999 from the same quarter last year.
Excluding the gain on the sale of the charge card portfolio of $12.0
million, non-interest income increased by 20 percent. In the current
quarter, trust revenue increased $4.2 million and service charge fees
rose by $0.9 million compared to first quarter 1998. Foreign exchange
income increased $0.9 million and trading income increased $0.4
million. Net gains from securities were $7.9 million in the current
quarter and remained virtually unchanged from a year ago. Other
sources of income, including income from bank-owned insurance
investments, foreign fees, syndication fees, gains on mortgage loan
sales and other fees, increased $14.6 million (excluding the credit
card gain).
First quarter 1999 noninterest expenses of $172.4 million rose
$2.8 million from first quarter last year. Excluding the one-time
reengineering charges, total expenses increased 6 percent in first
quarter 1999 compared to the year-earlier quarter. Income tax expense
declined by 12 percent, reflecting a lower effective tax rate due
primarily to the increase in income from tax-exempt investments.
Additional commentary on the matters included in the above
summary is provided in the following sections of this Report.
10
<PAGE> 13
- --------------------------------------------------------------------------------
OPERATING
SEGMENT
REVIEW CORPORATE AND INSTITUTIONAL FINANCIAL SERVICES
Net income for Corporate and Institutional Financial Services for the
first quarter of 1999 was $22.1 million, up 7 percent from the year
ago quarter. Total revenue of $73.1 million represented a growth of 9
percent from $66.9 million in the first quarter of 1998. The growth
of $2.8 million or 7 percent, in net interest income was primarily
the result of a 14 percent or $786 million increase in loans from
$5.72 billion in 1998 to $6.50 billion in 1999, offset somewhat by
lower margins. The growth in noninterest income of $3.5 million or 14
percent was largely due to foreign exchange, global finance,
corporate trust fees, and other revenue. The increase in the
provision for loan losses of $1.3 million is attributable to the
growth in the corporate loan portfolio. Noninterest expense increased
$2.7 million or 9 percent to $32.5 million from $29.8 million in the
1998 first quarter, primarily in support of business volume growth.
Income taxes increased by $0.9 million compared to the year ago
quarter, reflecting higher pretax income.
CHICAGOLAND BANKING
Net income for Chicagoland Banking in the first quarter of 1999 was
$7.4 million, up 27 percent from the first quarter of 1998. Total
revenue of $111.6 million represented growth of $10.0 million or 10
percent from $101.6 million in 1998. Net interest income increased by
$2.1 million or 3 percent from $69.0 million a year ago, largely
generated by loan volume growth. Noninterest income of $40.5 million
increased $7.9 million or 24 percent over 1998 levels, primarily due
to higher mortgage loan originations in 1999 and increased personal
trust and investment management revenue. Noninterest expense
increased $8.0 million or 9 percent to $97.4 million from $89.4
million in 1998 first quarter. The increase was primarily due to
continuing increased investments in various retail initiatives
including expansion of the consumer loan utility and call center in
support of increased business volumes; creation of a distinct
mortgage loan utility; and expansion of private banking activities in
Arizona and Florida.
ELECTRONIC FINANCIAL SERVICES
Net income for Electronic Financial Services was $4.7 million in
1999, reflecting a decrease of $8.2 million or 63 percent from $12.9
million a year ago. Comparability between years is impacted by the
first quarter 1998 sale of the Corporation's credit card portfolio.
Total revenue of $39.1 million decreased by $18.4 million or 32
percent from $57.6 million in 1998. Net interest income fell by $7.1
million or 32 percent from $22.1 million, attributable to the charge
card portfolio sale. Noninterest income declined $11.3 million or 32
percent due to the January 1998 gain on the sale of the credit card
portfolio amounting to $12 million pre-tax ($7.2 million after-tax).
Noninterest expense decreased $4.7 million or 13 percent to $31.5
million from $36.3 million in 1998, primarily due to a reduction in
operating expenses related to the credit card sale. Income taxes
decreased by $5.4 million during the year, reflecting lower pretax
income.
11
<PAGE> 14
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
--------------------------------------
1999 1998
Daily Average Balances (in millions) ----------------- -----------------
Average Rates Earned and Paid (fully taxable equivalent basis) Balances Rates Balances Rates
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Money market assets:
Interest-bearing deposits at banks......................... $ 133 1.14% $ 540 4.78%
Federal funds sold and securities purchased under agreement
to resell................................................ 208 4.86 127 6.40
------- -------
Total money market assets........................... 341 3.41 667 5.09
Trading account assets....................................... 78 6.61 59 6.51
Securities available-for-sale:
U.S. Treasury and Federal agency........................... 6,513 6.05 5,147 6.35
State and municipal........................................ 328 7.63 296 8.54
Other...................................................... 138 7.32 35 4.56
------- -------
Total securities available-for-sale................. 6,979 6.15 5,478 6.46
Loans, net of unearned income................................ 12,137 7.27 10,991 7.92
Assets held for sale......................................... -- -- 220 15.33
------- -------
TOTAL INTEREST-EARNING ASSETS....................... 19,535 6.80 17,415 7.43
------- -------
Cash and demand balances due from banks...................... 1,346 1,240
Other assets................................................. 1,848 1,346
------- -------
Total assets........................................ $22,729 $20,001
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts......... $ 3,906 3.28 $ 3,166 3.53
Savings deposits and certificates............................ 4,477 4.52 4,734 5.03
Other time deposits.......................................... 2,055 5.04 1,164 5.62
Foreign office time deposits................................. 1,292 4.62 1,249 5.49
------- -------
TOTAL INTEREST-BEARING DEPOSITS..................... 11,730 4.21 10,313 4.69
Short-term borrowings........................................ 4,926 4.68 3,977 5.35
Minority interest -- dividends on preferred stock of
subsidiary................................................. 250 7.38 136 7.38
Long-term notes.............................................. 454 6.82 379 7.33
------- -------
TOTAL INTEREST-BEARING LIABILITIES.................. 17,360 4.45 14,805 4.96
Noninterest-bearing deposits................................. 3,397 3,274
Other liabilities............................................ 335 300
Stockholder's equity......................................... 1,637 1,622
------- -------
Total liabilities and stockholder's equity.......... $22,729 $20,001
======= =======
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING
ASSETS).................................................... 2.85% 3.22%
==== =====
</TABLE>
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt interest 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 PORTFOLIO SECURITIES AVAILABLE-FOR-SALE
Yields on securities classified as available-for-sale are based on amortized
cost.
12
<PAGE> 15
- --------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands) 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Interest income............................................. $320,432 $312,355
Fully taxable equivalent adjustment......................... 7,716 7,289
-------- --------
Interest income (fully taxable equivalent basis)........ 328,148 319,644
Interest expense............................................ 190,957 181,227
-------- --------
Net interest income (fully taxable equivalent basis)........ $137,191 $138,417
======== ========
Increase (decrease) due to change in:
Volume.................................................. $ 15,711 $ 11,291
Rate.................................................... (16,937) (20,228)
-------- --------
Total decrease in net interest income.............. $ (1,226) $ (8,937)
======== ========
</TABLE>
First quarter net interest income on a fully taxable equivalent basis
was $137.2 million, remaining flat from $138.4 million in first
quarter 1998. Average earning assets increased 12 percent or $2.12
billion to $19.54 billion from $17.42 billion in 1998. Net interest
margin, the other principal determinant of net interest income,
declined from 3.22 percent to 2.85 percent in the current quarter.
Average loans rose $1.15 billion, or 10 percent. Commercial and
residential real estate loans increased $408 million and $600
million, respectively. Average portfolio securities were up 27
percent, or $1.50 billion, primarily reflecting increased holdings of
Federal agency securities. Total money market assets declined $326
million or 49 percent over first quarter 1998 levels.
Funding for asset growth came primarily from money market
accounts, other time deposits and short-term borrowings, which
increased by an average of $797 million, $891 million and $949
million, respectively, offset by decreases in interest checking and
savings deposits and certificates.
The Corporation's declining net interest margin principally
reflects the impact of the sale of the credit card portfolio in the
first quarter of 1998 and the use of interest-bearing liabilities to
fund new business, causing narrower spreads.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended March 31
------------------------------------
Daily Average Balances (in millions) 1999 1998
Average Rates Earned and Paid ---------------- ----------------
(fully taxable equivalent basis) Balances Rates Balances Rates
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets..................................... $19,535 6.80% $17,415 7.43%
======= =======
Interest-bearing liabilities................................ $17,361 4.45 $14,805 4.96
Noninterest-bearing sources of funds........................ 2,174 -- 2,610 --
------- -------
Total supporting liabilities............................ $19,535 3.95 $17,415 4.21
======= =======
Net interest margin (related to average interest-earning
assets)................................................... 2.85% 3.22%
==== ====
</TABLE>
13
<PAGE> 16
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
Ended March 31 Increase (Decrease)
NONINTEREST ----------------------- --------------------
Income (dollars in thousands) 1999 1998 Amount %
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust and investment management fees................. $ 37,850 $ 33,690 $ 4,160 12
Money market and bond trading........................ 1,877 1,516 361 24
Foreign exchange..................................... 2,514 1,650 864 52
Merchant and charge card fees........................ 6,052 7,218 (1,166) (16)
Service fees and charges............................. 27,611 26,743 868 3
Portfolio securities gains........................... 7,902 8,031 (129) (2)
Gain on sale of credit card portfolio................ -- 12,000 (12,000) (100)
Bank-owned insurance investments..................... 9,826 4,056 5,770 142
Foreign fees......................................... 5,590 5,499 91 2
Other................................................ 18,162 9,375 8,787 94
-------- -------- -------
Total noninterest income............................. $117,384 $109,778 $ 7,606 7
======== ======== ======= ====
</TABLE>
Noninterest income for the first quarter was $117.4 million, an
increase of $7.6 million or 7 percent from the first quarter of 1998.
In the first quarter of 1998, the Corporation realized a gain of
$12.0 million on the sale of its credit card portfolio. Excluding the
effect of the gain on the sale of the credit card portfolio,
noninterest income would have increased $19.6 million or 20 percent.
Trust and investment management revenue was $37.9 million, an
increase of $4.2 million or 12 percent from the previous year. Income
from bank-owned insurance investments increased $5.8 million to $9.8
million in the current quarter. Other income including syndication
fees, gains from mortgage sales, and other miscellaneous items,
increased $8.8 million or 94 percent over the previous year. Foreign
exchange revenue was $2.5 million, up 52 percent from the first
quarter of 1998. Net gains reported from securities sales totaled
$7.9 million, down slightly from first quarter 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONINTEREST
EXPENSES
Quarter
Ended March 31 Increase (Decrease)
AND INCOME ----------------------- -------------------
Taxes (dollars in thousands) 1999 1998 Amount %
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and other compensation....................... $ 86,055 $ 77,759 $ 8,296 11
Pension, profit sharing and other employee benefits... 17,918 14,785 3,133 21
Net occupancy......................................... 9,331 12,398 (3,067) (25)
Equipment............................................. 14,574 12,764 1,810 14
Marketing............................................. 6,229 5,686 543 10
Communication and delivery............................ 6,755 6,006 749 12
Expert services....................................... 7,467 6,852 615 9
Contract programming.................................. 3,305 4,610 (1,305) (28)
Other................................................. 14,627 22,530 (7,903) (35)
-------- -------- -------
166,261 163,390 2,871 2
Amortization of goodwill and other valuation
intangibles......................................... 6,124 6,206 (82) (1)
-------- -------- -------
Total noninterest expenses............................ $172,385 $169,596 $ 2,789 2
======== ======== =======
Provision for income taxes............................ $ 17,862 $ 20,394 $(2,532) (12)
======== ======== ======= ===
</TABLE>
14
<PAGE> 17
- --------------------------------------------------------------------------------
Noninterest expenses for the first quarter totaled $172.4 million, an
increase of $2.8 million or 2 percent from the first quarter of 1998.
In the first quarter of 1998, the Corporation recognized a one-time
pretax charge of $8.7 million for certain process improvements and
system conversions, including write-offs of discontinued systems.
Excluding the effect of the reengineering charges, total expenses
increased 6 percent in first quarter 1999 compared to the
year-earlier quarter.
Employment-related expenses totaled $104.0 million, an increase
of $11.4 million or 12 percent. Net occupancy expenses totaled $9.3
million, down $3.1 million from the prior year's first quarter due
primarily to real estate tax refunds from prior years. Equipment
expenses increased $1.8 million or 14 percent over first quarter
1998. Excluding the effect of the reengineering charges, other
noninterest expenses decreased $0.9 million or 6 percent from the
year-earlier quarter.
Income tax expense totaled $17.9 million, a decrease of $2.5
million or 12 percent from the $20.4 million recorded in first
quarter 1998. Although pretax income increased, the effective tax
rate declined from 38 percent to 34 percent primarily due to an
increase in income from tax-exempt investments.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at March 31, 1999 was $1.64
billion, compared with $1.65 billion and $1.61 billion at December
31, 1998 and March 31, 1998, respectively. During the preceding
twelve months, the Corporation declared common and preferred
dividends of $134.5 million and $16.6 million, respectively. 1998
common dividends included special dividends of $125 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 8.72 percent and
11.61 percent, respectively, at March 31, 1999. HTSB's Tier 1 and
total risk-based capital ratios were 8.59 percent and 10.77 percent,
respectively, at March 31, 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 to 5 percent for most holding companies. The
Corporation's and HTSB's Tier 1 leverage ratios were 7.24 percent and
7.45 percent, respectively, for the first quarter of 1999.
The Federal Deposit Insurance Corporation Improvement Act of 1991
contains several 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 March 31, 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
15
<PAGE> 18
- --------------------------------------------------------------------------------
deducted from Tier 1 capital for purposes of risk-based and leverage
capital ratio calculations. At March 31, 1999, the Corporation's
intangible assets totaled $265 million, including approximately $250
million of intangibles excluded under capital guidelines. The
Corporation's and HTSB's tangible Tier 1 leverage ratios (which
exclude all intangibles) were 7.18 percent and 7.38 percent,
respectively, for the first quarter of 1999.
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
March 31 December 31 March 31
(dollars in thousands) 1999 1998 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $22,989,807 $22,797,830 $20,125,392
=========== =========== ===========
Average assets (quarter).................................. $22,728,797 $22,265,475 $20,000,660
=========== =========== ===========
Risk-based on-balance sheet assets........................ $14,172,526 $14,077,289 $13,026,949
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 4,745,127 $ 4,559,231 $ 4,320,318
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $18,661,092 $18,374,480 $17,071,320
=========== =========== ===========
Tier 1 capital............................................ $ 1,628,067 $ 1,591,846 $ 1,565,893
=========== =========== ===========
Supplementary capital..................................... $ 538,252 $ 535,363 $ 472,722
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 2,165,712 $ 2,126,585 $ 2,037,970
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.24% 7.26% 7.95%
Risk-based capital ratios
Tier 1.................................................. 8.72% 8.66% 9.17%
Total................................................... 11.61% 11.57% 11.94%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NONPERFORMING March 31 December 31 March 31
Assets (dollars in thousands) 1999 1998 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans............................................ $45,837 $18,695 $26,557
Restructured loans.......................................... 1,521 1,523 1,229
------- ------- -------
Total nonperforming loans................................... 47,358 20,218 27,786
Other assets received in satisfaction of debt............... 753 559 1,564
------- ------- -------
Total nonperforming assets.................................. $48,111 $20,777 $29,350
======= ======= =======
Nonperforming loans to total loans (end of period).......... .38% .17% .24%
Nonperforming assets to total loans (end of period)......... .39% .17% .26%
======= ======= =======
90-day past due loans still accruing interest............... $29,951 $21,964 $17,631
======= ======= =======
</TABLE>
Nonperforming assets consist of loans placed on nonaccrual status
when collection of interest is doubtful, restructured loans on which
interest is being accrued but which have terms that have been
renegotiated to provide for a reduction of interest or principal, and
real estate or other assets which have been acquired in full or
partial settlement of defaulted loans. These assets, as a group, are
not earning at rates comparable to earning assets.
Nonperforming assets at March 31, 1999 totaled $48 million, or
0.39 percent of total loans, up from $21 million or 0.17 percent of
total loans at December 31, 1998 and up from $29 million or 0.26
percent of total loans a year ago.
Interest shortfall for the quarter ended March 31, 1999 was $0.8
million compared to $0.6 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.
16
<PAGE> 19
- --------------------------------------------------------------------------------
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>
March 31, 1999
Balance............................................ $36,018 $ 9,819 $45,837
Related allowance.................................. 12,203 -- 12,203
------- ------- -------
Balance, net of allowance.......................... $23,815 $ 9,819 $33,634
======= ======= =======
December 31, 1998
Balance............................................ $13,542 $ 5,153 $18,695
Related allowance.................................. 2,661 -- 2,661
------- ------- -------
Balance, net of allowance.......................... $10,881 $ 5,153 $16,034
======= ======= =======
March 31, 1998
Balance............................................ $10,447 $16,110 $26,557
Related allowance.................................. 4,632 -- 4,632
------- ------- -------
Balance, net of allowance.......................... $ 5,815 $16,110 $21,925
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(dollars in thousands) 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Average impaired loans...................................... $30,621 $24,337
======= =======
Total interest income on impaired loans..................... $ 53 $ 26
======= =======
Interest income on impaired loans recorded on a cash
basis..................................................... $ 53 $ 26
======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR POSSIBLE
Quarter Ended March 31
-------------------------
Loan Losses (in thousands) 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period................................ $140,608 $130,876
-------- --------
Charge-offs................................................. (5,602) (4,991)
Recoveries.................................................. 1,223 1,726
-------- --------
Net charge-offs............................................. (4,379) (3,265)
Provision charged to operations............................. 7,245 5,517
-------- --------
Balance at March 31......................................... $143,474 $133,128
======== ========
Net charge-offs as a percentage of provision charged to
operations................................................ 60% 59%
Allowance for possible loan losses to nonperforming loans
(period-end).............................................. 303 479
Allowance for possible loan losses to nonperforming assets
(period-end).............................................. 298 454
Allowance for possible loan losses to total loans
outstanding (period-end).................................. 1.16 1.16
</TABLE>
The Corporation's provision for loan losses for the current quarter
was $7.2 million, up 31 percent from $5.5 million in last year's
first quarter. Net charge-offs also increased from $3.3 million to
$4.4 million for the current quarter. The increase in 1999 first
quarter net charge-offs primarily reflects an increase in commercial
loan write-offs. For the first quarter of 1999, net charge-offs
related to commercial and installment loans were $3.5 million and
$1.2 million, respectively, compared to $1.7 million and $1.6
million, respectively, for the first quarter of 1998.
17
<PAGE> 20
- --------------------------------------------------------------------------------
At March 31, 1999, the allowance for possible loan losses was $143
million, equal to 1.16 percent of total loans outstanding, compared
to $133 million or 1.16 percent of total loans one year ago. The
allowance as a percentage of nonperforming loans decreased from 479
percent at March 31, 1998, to 303 percent at March 31, 1999.
- --------------------------------------------------------------------------------
LIQUIDITY AND
SOURCES OF
FUNDS Effective liquidity management allows a banking institution to
accommodate the changing net funds flow requirements of customers who
may deposit or withdraw funds, or modify their credit needs. The
Corporation manages its liquidity position through continuous
monitoring of profitability trends, asset quality, interest rate
sensitivity, maturity schedules of earning assets and supporting
liabilities, the composition of managed and other (primarily demand)
liabilities, and prospective customer demand based upon knowledge of
major customers and overall economic conditions. Appropriate
responses to changes in these conditions preserve customer confidence
in the ability of the Corporation to continually serve their credit
and deposit withdrawal requirements. Some level of liquidity is
provided by maintaining assets which mature within a short timeframe
or could be sold quickly without significant loss. The Corporation's
liquid assets include cash and demand balances due from banks, money
market assets, securities available-for-sale and trading account
assets. Liquid assets represented approximately 38 percent of the
Corporation's total assets and amounted to $8.75 billion at March 31,
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 were $11.74 billion or 58 percent of total
non-equity funding at March 31, 1999 compared to $11.12 billion or 63
percent of total non-equity funding at March 31, 1998. The
Corporation's average volume of core deposits, consisting of demand
deposits, interest checking deposits, savings deposits and
certificates, and money market accounts rose 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 $6.48 billion or 37 percent
of total non-equity funding at March 31, 1998 to $8.58 billion or 42
percent of total non-equity funding at March 31, 1999. Total deposits
averaged $15.13 billion in the first quarter of 1999, an increase of
$1.54 billion compared to the same quarter last year.
Average money market assets in the first quarter of 1999
decreased $326 million or 49 percent from the same quarter last year.
These assets represented 2 percent of average earning assets in 1999
compared to 4 percent a year ago. Average money market liabilities
increased 19 percent to $3.89 billion this quarter from $3.28 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 March 31, 1999,
$1.02 billion of short-term notes were outstanding compared to $468
million at March 31, 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
18
<PAGE> 21
- --------------------------------------------------------------------------------
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 systems can accommodate the date value
for the year 2000. The year 2000 issue is pervasive, as almost all
date-sensitive systems will 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 Corporation and its parent company, Bank of Montreal, have
undertaken an enterprise-wide initiative to address the year 2000
issue and have developed a comprehensive plan to prepare, as
appropriate, the Corporation's computer and other systems to
recognize the date change on January 1, 2000. An assessment of the
readiness of third parties that the Corporation interfaces with, such
as vendors, counterparties, customers, payment systems, and others,
is ongoing to mitigate the potential risks that year 2000 poses to
the Corporation. In addition, the Corporation is assessing the
readiness of companies that have borrowed from or are counterparties
of the Corporation's subsidiaries to ensure that incremental year
2000-related credit risks are addressed as part of the Corporation's
existing credit risk management framework. The Corporation's
objective is to ensure that all aspects of the year 2000 issue
affecting the Corporation, will be fully resolved in time. However,
it is not possible to be certain that all aspects of the year 2000
issue that may affect the Corporation, particularly those related to
the effects of third parties with whom the corporation conducts
business, will be addressed in their entirety. The Corporation
maintains contingency plans for systems and business processes to
protect the Corporation against unplanned events that would prevent
normal operations. The Corporation has examined these plans to
identify any enhancements necessary to mitigate the effect of
potential impacts and ensure continuity of operation throughout the
year 2000 and beyond. Testing of contingency plans relevant to the
year 2000 effort will continue throughout the year.
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 is following four major
steps: inventory, impact assessment and plan, implementation and
integration testing. The implementation step includes verification,
conversion and replacement or retirement of the asset. If an asset is
not retired, it is tested and verified, and only once it is verified
does it progress to the integration testing step. 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. As of
December 31, 1998, the Corporation had substantially completed the
implementation step for systems deemed critical. The implementation
step for non-critical business assets and the integration testing of
critical systems is planned to be completed by June 30, 1999. The
Corporation expects that the principal costs will be those associated
with the remediation and
19
<PAGE> 22
- --------------------------------------------------------------------------------
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 $57.6
million, including $10.7 million of capital costs, as follows:
<TABLE>
<S> <C> <C>
Estimated spending for Year 2000 system changes for
mainframe and centrally supported client server
applications over 5 years (1996 to 2000).................. $30.0 million
Estimated business unit costs, including end-user developed
applications, and embedded systems, e.g., elevators,
security access systems, etc.............................. 16.9 million
Estimated capital costs for central information technology
and business units........................................ 10.7 million
-------------
Total estimated spending.................................... $57.6 million
-------------
-------------
</TABLE>
The total costs of the Corporation's year 2000 program from
inception through March 31, 1999 was $38.8 million of which $9.6
million was capitalized.
20
<PAGE> 23
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> 24
EXHIBIT A--HARRIS BANKCORP, INC.
1999 FIRST QUARTER REPORT
MARCH 31, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,287,494
<INT-BEARING-DEPOSITS> 137,093
<FED-FUNDS-SOLD> 87,798
<TRADING-ASSETS> 64,411
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 7,171,078
<LOANS> 12,412,768
<ALLOWANCE> 143,474
<TOTAL-ASSETS> 22,989,807
<DEPOSITS> 15,005,557
<SHORT-TERM> 5,319,222
<LIABILITIES-OTHER> 283,121
<LONG-TERM> 704,445
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,358,229
<TOTAL-LIABILITIES-AND-EQUITY> 22,989,807
<INTEREST-LOAN> 217,816
<INTEREST-INVEST> 98,812
<INTEREST-OTHER> 3,804
<INTEREST-TOTAL> 320,432
<INTEREST-DEPOSIT> 121,770
<INTEREST-EXPENSE> 190,957
<INTEREST-INCOME-NET> 129,475
<LOAN-LOSSES> 7,246
<SECURITIES-GAINS> 7,902
<EXPENSE-OTHER> 172,385
<INCOME-PRETAX> 67,228
<INCOME-PRE-EXTRAORDINARY> 49,366
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,366
<EPS-PRIMARY> 6.78
<EPS-DILUTED> 6.78
<YIELD-ACTUAL> 2.85
<LOANS-NON> 45,837
<LOANS-PAST> 29,951
<LOANS-TROUBLED> 1,521
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 140,608
<CHARGE-OFFS> 5,602
<RECOVERIES> 1,223
<ALLOWANCE-CLOSE> 143,474
<ALLOWANCE-DOMESTIC> 143,474
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
