<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2000 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 12, 2000 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, 2000 and 1999.
Consolidated Statements of Condition as of March 31, 2000, December 31,
1999 and March 31, 1999.
Consolidated Statements of Changes in Stockholder's Equity and
Consolidated Statements of Cash Flows for the quarters ended March 31,
2000 and 1999.
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 2000 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, 2000, 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 May 2000.
/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
-------------------------------
2000 1999 Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income......................................... $145,153 $129,475 12%
Net interest income (fully taxable equivalent).............. 153,882 137,191 12
Provision for loan losses................................... 6,088 7,246 (16)
Noninterest income.......................................... 151,676 117,384 29
Noninterest expenses........................................ 170,377 172,385 (1)
Net income.................................................. 81,735 49,366 66
Dividends -- common stock................................... 19,000 15,000 27
Dividends -- preferred stock................................ 4,148 4,148 --
Cash earnings (1)........................................... 56,006 53,253 5
- -----------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity............... 23.45% 12.99% 1,046bp
Return on average assets.................................... 1.31 0.88 43
Cash return on average common stockholder's equity (2)...... 30.26 17.40 1,286
Cash return on average assets (3)........................... 1.39 0.96 43
Returns excluding gain on sale of corporate trust
businesses:
Return on average common stockholder's equity............. 14.47 12.99 148
Return on average assets.................................. 0.83 0.88 (5)
Cash return on average common stockholder's equity (2).... 19.24 17.40 184
Cash return on average assets (3)......................... 0.91 0.96 (5)
Tier 1 risk-based capital ratio............................. 8.91 8.72 19
Total risk-based capital ratio.............................. 11.42 11.61 (19)
Tier 1 leverage ratio....................................... 7.25 7.24 1
Allowance for possible loan losses to total loans
(period-end).............................................. 1.08 1.16 (8)
- -----------------------------------------------------------------------------------------------
DAILY AVERAGE BALANCES (IN MILLIONS)
Money market assets......................................... $ 442 $ 341 30%
Securities available-for-sale............................... 8,272 6,979 19
Loans, net of unearned income............................... 13,353 12,137 10
Total interest-earning assets............................... 22,119 19,535 13
Total assets................................................ 25,084 22,729 10
Deposits.................................................... 15,418 15,127 2
Short-term borrowings....................................... 7,092 4,926 44
Common stockholder's equity................................. 1,331 1,412 (6)
- -----------------------------------------------------------------------------------------------
BALANCES AT QUARTER-END (IN MILLIONS)
Securities available-for-sale............................... $ 8,049 $ 7,171 12%
Loans, net of unearned income............................... 13,756 12,413 11
Allowance for possible loan losses.......................... 149 143 4
Total assets................................................ 25,688 22,990 12
Deposits.................................................... 16,029 15,006 7
Common stockholder's equity................................. 1,422 1,412 1
Total stockholder's equity.................................. 1,647 1,637 1
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Cash earnings is defined as net income excluding the impact of amortization
of goodwill and other valuation intangibles. Cash earnings for first quarter
2000 excludes the gain on the sale of the corporate trust businesses.
Including the corporate trust gain, cash earnings would have been $85.7
million.
(2) Cash return on average common stockholder's equity ("Cash ROE") is
calculated as annualized net income applicable to common stock plus
after-tax amortization expense of goodwill and other valuation intangibles,
divided by average common stockholder's equity less average intangible
assets.
(3) Cash return on average assets ("Cash ROA") is calculated as net income plus
after-tax amortization expense of goodwill and other valuation intangibles,
divided by average assets less average intangible assets.
1
<PAGE> 4
REPORT FROM MANAGEMENT
- --------------------------------------------------------------------------------
Harris Bankcorp's net income for the quarter ended March 31, 2000 was
$81.7 million. First quarter earnings included a pretax gain of $50.2
million resulting from the sale of the indenture trust and
shareholder services businesses. In addition to the gain from the
corporate trust sale, comparative results were affected by net gains
from securities sales of $7.9 million in first quarter of 1999
compared to no gain in 2000. Excluding the effects of both
transactions, "core earnings" rose 17 percent. Cash ROE, excluding
the gain from the sale of the corporate trust businesses, was 19.24
percent in the current quarter compared to 17.40 percent one year
earlier. Record earnings were attributed to strong earnings growth in
community banking, private client and mid-market businesses;
disciplined cost control; and top tier asset quality. Earnings growth
remained solid despite a challenging interest rate environment that
reduced the contribution from treasury and trading activities.
Net interest income on a fully taxable equivalent basis was
$153.9 million, up 12 percent from first quarter last year. Net
interest margin declined from 2.85 percent in the first quarter last
year to 2.80 percent currently. Average earning assets rose 13
percent to $22.12 billion from $19.54 billion in first quarter 1999,
attributable to increases of $1.22 billion in average loans and $1.29
billion in the investment securities portfolio. Commercial lending
was the most significant contributor to the loan growth.
First quarter noninterest income of $151.7 million increased 29
percent from the same quarter last year. Excluding the $50.2 million
gain on the sale of the corporate trust businesses, noninterest
revenue declined 14 percent. Most of the decline resulted from the
reduction in net gains from securities sales of $7.9 million and a
decrease in bond trading profits of $1.5 million. The decrease in
current quarter's noninterest income also resulted from lower
mortgage and foreign exchange fees.
First quarter 2000 noninterest expenses of $170.4 million
declined $2.0 million or 1 percent from first quarter a year ago.
Income tax expense rose by $20.8 million, reflecting higher pretax
income, which included the gain on the sale of the corporate trust
businesses.
The first quarter 2000 provision for loan losses of $6.1 million
was down from $7.2 million in the first quarter of 1999. Net loan
charge-offs during the current quarter were $4.5 million up slightly
from the same period last year.
Nonperforming assets at March 31, 2000 were $38 million or 0.27
percent of total loans, compared to $27 million or 0.21 percent at
December 31, 1999 and $48 million or 0.39 percent a year ago. At
March 31, 2000, the allowance for possible loan losses was $149
million, equal to 1.08 percent of loans outstanding, compared to $143
million or 1.16 percent at the end of first quarter 1999. As a
result, the ratio of the allowance for possible loan losses to
nonperforming assets of 394 percent at March 31, 2000 increased from
298 percent at March 31, 1999.
At March 31, 2000, Tier 1 capital of Harris Bankcorp amounted to
$1.82 billion, compared to $1.63 billion one year earlier. The
regulatory leverage capital ratio was 7.25 percent for the first
quarter of 2000 compared to 7.24 percent in the same quarter of 1999.
Harris Bankcorp's capital ratio exceeds the prescribed regulatory
minimum for bank holding companies. Harris Bankcorp's March 31, 2000
Tier 1 and total risk-based capital ratios were 8.91 percent and
11.42 percent compared to respective ratios of 8.72 percent and 11.61
percent at March 31, 1999.
/s/ ALAN G. MCNALLY
Alan G. McNally April 28, 2000
Chairman of the Board and
Chief Executive Officer
2
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands except share data) 2000 1999
- -------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $266,959 $217,816
Money market assets:
Deposits at banks.......................................... 574 375
Federal funds sold and securities purchased under agreement
to resell................................................ 3,219 2,489
Trading account............................................. 682 940
Securities available-for-sale:
U.S. Treasury and Federal agency........................... 114,595 92,726
State and municipal........................................ 4,066 4,224
Other...................................................... 2,465 1,862
-------- --------
Total interest income...................................... 392,560 320,432
-------- --------
INTEREST EXPENSE
Deposits.................................................... 134,971 121,770
Short-term borrowings....................................... 83,575 43,725
Senior notes................................................ 16,087 13,104
Minority interest-dividends on preferred stock of
subsidiary................................................. 4,609 4,609
Long-term notes............................................. 8,165 7,749
-------- --------
Total interest expense..................................... 247,407 190,957
-------- --------
NET INTEREST INCOME......................................... 145,153 129,475
Provision for loan losses................................... 6,088 7,246
-------- --------
Net Interest Income after Provision for Loan Losses......... 139,065 122,229
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 38,113 37,850
Money market and bond trading............................... 414 1,877
Foreign exchange............................................ 1,800 2,514
Merchant and charge card fees............................... 5,348 6,052
Service fees and charges.................................... 27,868 27,611
Securities gains............................................ -- 7,902
Gain on sale of corporate trust businesses.................. 50,193 --
Bank-owned insurance investments............................ 9,859 9,826
Foreign fees................................................ 5,000 5,590
Other....................................................... 13,081 18,162
-------- --------
Total noninterest income................................... 151,676 117,384
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 86,223 86,055
Pension, profit sharing and other employee benefits......... 17,383 17,918
Net occupancy............................................... 12,956 9,331
Equipment................................................... 14,617 14,574
Marketing................................................... 5,863 6,229
Communication and delivery.................................. 5,111 6,755
Expert services............................................. 5,893 7,467
Contract programming........................................ 3,488 3,305
Other....................................................... 12,581 14,627
-------- --------
164,115 166,261
Goodwill and other valuation intangibles.................... 6,262 6,124
-------- --------
Total noninterest expenses................................. 170,377 172,385
-------- --------
Income before income taxes.................................. 120,364 67,228
Applicable income taxes..................................... 38,629 17,862
-------- --------
NET INCOME................................................. 81,735 49,366
Dividends on preferred stock................................ 4,148 4,148
-------- --------
Net Income Applicable to Common Stock....................... $ 77,587 $ 45,218
======== ========
EARNINGS PER COMMON SHARE (based on 6,667,490 average shares
outstanding)
Net Income Applicable to Common Stock...................... $ 11.64 $ 6.78
======== ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Harris Bankcorp,
Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
----------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME.................................................. $ 81,735 $ 49,366
Other comprehensive income:
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period, net
of tax benefit of $1,770 in 2000 and $26,730 in
1999................................................. (2,677) (40,305)
Less reclassification adjustment for realized gains
included in income
statement, net of tax expense of $0 in 2000 and
$3,074 in 1999....................................... -- (4,828)
-------- --------
Other comprehensive loss.................................... (2,677) (45,133)
-------- --------
Comprehensive income........................................ $ 79,058 $ 4,233
======== ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
4
<PAGE> 7
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) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,245,257 $ 1,485,408 $ 1,287,494
Money market assets:
Interest-bearing deposits at banks........................ 251,561 239,980 137,093
Federal funds sold and securities purchased under
agreement to resell..................................... 238,640 305,890 87,798
Trading account assets...................................... 27,953 68,910 64,411
Securities available-for-sale............................... 8,049,285 7,793,699 7,171,078
Loans, net of unearned income............................... 13,755,695 13,114,029 12,412,768
Allowance for possible loan losses.......................... (148,793) (147,235) (143,474)
----------- ----------- -----------
Net loans................................................. 13,606,902 12,966,794 12,269,294
Premises and equipment...................................... 358,731 392,811 379,055
Customers' liability on acceptances......................... 50,213 43,599 40,893
Bank-owned insurance investments............................ 871,857 772,579 735,128
Goodwill and other valuation intangibles.................... 237,629 249,899 264,540
Other assets................................................ 750,013 543,309 553,023
----------- ----------- -----------
TOTAL ASSETS.......................................... $25,688,041 $24,862,878 $22,989,807
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest bearing......... $ 3,398,869 $ 3,729,096 $ 2,954,090
-- interest-bearing............. 10,629,427 10,215,332 10,240,036
Deposits in foreign offices -- noninterest bearing.......... 35,549 35,537 26,371
-- interest-bearing............... 1,965,641 1,314,991 1,785,060
----------- ----------- -----------
Total deposits........................................ 16,029,486 15,294,956 15,005,557
Federal funds purchased and securities sold under agreement
to repurchase............................................. 4,395,596 4,536,831 3,384,259
Commercial paper outstanding................................ 206,131 245,050 249,914
Other short-term borrowings................................. 1,540,611 684,127 663,049
Senior notes................................................ 853,000 1,500,000 1,022,000
Acceptances outstanding..................................... 50,219 43,599 40,893
Accrued interest, taxes and other expenses.................. 209,005 213,574 171,158
Other liabilities........................................... 51,770 59,311 111,963
Minority interest -- preferred stock of subsidiary.......... 250,000 250,000 250,000
Long-term notes............................................. 454,727 454,673 454,445
----------- ----------- -----------
TOTAL LIABILITIES..................................... 24,040,545 23,282,121 21,353,238
----------- ----------- -----------
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..................................................... 507,319 496,490 494,264
Retained earnings........................................... 1,020,029 961,442 870,901
Accumulated other comprehensive loss........................ (158,192) (155,515) (6,936)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,647,496 1,580,757 1,636,569
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $25,688,041 $24,862,878 $22,989,807
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
5
<PAGE> 8
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) 2000 1999
- ----------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,580,757 $1,651,032
Net income................................................ 81,735 49,366
Contributions to capital.................................. 10,829 452
Dividends -- Series A preferred stock..................... (3,262) (3,262)
Dividends -- Series B preferred stock..................... (886) (886)
Dividends -- common stock................................. (19,000) (15,000)
Other comprehensive loss.................................. (2,677) (45,133)
---------- ----------
BALANCE AT MARCH 31......................................... $1,647,496 $1,636,569
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
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<TABLE>
<CAPTION>
Quarter Ended March 31
----------------------------
(in thousands) 2000 1999
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 81,735 $ 49,366
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 6,088 7,246
Depreciation and amortization, including intangibles...... 19,521 18,469
Deferred tax (benefit) expense............................ (134) 1,746
Gain on sales of securities............................... -- (7,902)
Gain on sale of corporate trust businesses................ (50,193) --
Trading account net sales................................. 40,957 56,257
Net decrease in interest receivable....................... 9,185 5,159
Net (decrease) increase in interest payable............... (26,036) 9,979
Net decrease in loans held for resale..................... 45,224 65,982
Other, net................................................ (4,044) (9,146)
----------- -----------
Net cash provided by operating activities............... 122,303 197,156
----------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits at banks........ (11,581) (38,156)
Net decrease in Federal funds sold and securities
purchased under agreement to resell..................... 67,250 67,911
Proceeds from sales of securities available-for-sale...... -- 388,617
Proceeds from maturities of securities
available-for-sale...................................... 2,133,429 2,523,033
Purchases of securities available-for-sale................ (2,393,462) (3,186,109)
Net increase in loans..................................... (691,420) (254,730)
Proceeds from sales of premises and equipment............. 29 14
Purchases of premises and equipment....................... (9,013) (21,612)
Net increase in bank-owned insurance investments.......... (99,278) (9,826)
Other, net................................................ (187,824) (42,975)
----------- -----------
Net cash used by investing activities................... (1,191,870) (573,833)
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 734,530 (317,285)
Net decrease in Federal funds purchased and securities
sold under agreement to repurchase...................... (141,235) (56,573)
Net decrease in commercial paper outstanding.............. (38,919) (11,991)
Net increase in short-term borrowings..................... 856,484 494,898
Proceeds from issuance of senior notes.................... 75,000 847,000
Repayment of senior notes................................. (722,000) (765,000)
Net cash proceeds from the sale of corporate trust
businesses.............................................. 88,704 --
Cash dividends paid on preferred stock.................... (4,148) (4,148)
Cash dividends paid on common stock....................... (19,000) (15,000)
----------- -----------
Net cash provided by financing activities............... 829,416 171,901
----------- -----------
Net decrease in cash and demand balances due from
banks.................................................. (240,151) (204,776)
Cash and demand balances due from banks at January 1.... 1,485,408 1,492,270
----------- -----------
Cash and demand balances due from banks at March 31..... $ 1,245,257 $ 1,287,494
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
6
<PAGE> 9
NOTES TO THE 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, 1999.
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 $273.4
million and $181.0 million in 2000 and 1999, respectively. Cash
income tax payments over the same periods totaled $7.6 million and
$12.4 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 was 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 was effective upon issuance and it amends SFAS
No. 133 to be effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 which for the Corporation would be the
quarter ending March 31, 2001. The Corporation is in the process of
assessing the impact of adopting this Statement on its financial
position and results of operations.
- --------------------------------------------------------------------------------
5. CORPORATE
TRUST SALE On February 1, 2000, the Corporation announced the sale of its
corporate trust businesses, which closed in March 2000. In separate
and unrelated transactions, the indenture trust business was sold to
a subsidiary of The Bank of New York Company, Inc., and the
shareholder services business to Computershare Limited. The combined
sales resulted in a pretax gain to the Corporation of $50.2 million
in first quarter 2000, not including revenue contingent upon the
outcome of certain events, expected in second half 2000. The
Corporation does not believe that the sale of these businesses will
have a material impact on the results of operations for future
periods.
- --------------------------------------------------------------------------------
6. 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 Personal and Commercial Client Group, Investment Banking
Group and Private Client Group. Personal and Commercial Client Group
comprises community banking, which serves individuals through a
Chicagoland retail bank network, small business/lower middle-market
banking, mbanx(sm), the Corporation's virtual banking unit, cash
7
<PAGE> 10
- --------------------------------------------------------------------------------
management services and the bankcard business unit, including
merchant services. It also reflects the gain on the sale of the
corporate trust businesses, income from bank-owned insurance
investments and inter-group eliminations and residual revenues and
expenses, representing the difference between actual amounts incurred
and the amounts allocated to operating segments. The Investment
Banking Group is comprised of the Corporation's corporate banking
distribution to middle-market companies across the Midwest and
nationally in selected specialties, and the Corporation's Treasury
unit, which serves as the Corporation's funding unit. The Private
Client Group serves the needs of affluent individuals both within
Chicagoland and nationally through the integrated delivery of a
comprehensive offering of wealth management services, including
investment management, personal trust, customized lending and
financial planning. Businesses within this group include private
banking, mutual fund management, retirement plan services and Harris
Investment Management (the Corporation's institutional investment
manager).
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 income before income
taxes.
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
Personal and Investment
Commercial Banking Private Client Consolidated
Quarter Ended March 31 Client Group Group Group Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
(in millions)
Net interest income (FTE basis).............. $ 78.9 $ 61.4 13.6 $ 153.9
Noninterest income........................... 104.4 12.3 35.0 151.7
Provision for loan losses.................... 2.0 4.0 0.1 6.1
Noninterest expense.......................... 104.4 24.7 41.3 170.4
-------- ------- ------ -------
Income before income taxes................... 76.9 45.0 7.2 129.1
Income taxes................................. 26.6 17.9 2.9 47.4
-------- ------- ------ -------
Net income................................... $ 50.3 $ 27.1 $ 4.3 $ 81.7
======== ======= ====== =======
Average Assets............................... $ 10,466 $13,281 $1,337 $25,084
======== ======= ====== =======
Average Loans................................ $ 5,454 $ 6,693 $1,206 $13,353
======== ======= ====== =======
Average Deposits............................. $ 10,664 $ 3,511 $1,243 $15,418
======== ======= ====== =======
1999
(in millions)
Net interest income (FTE basis).............. $ 62.5 $ 63.2 $ 11.5 $ 137.2
Noninterest income........................... 59.8 23.7 33.9 117.4
Provision for loan losses.................... 2.0 5.1 0.1 7.2
Noninterest expense.......................... 108.3 24.9 39.2 172.4
-------- ------- ------ -------
Income before income taxes................... 12.0 56.9 6.1 75.0
Income taxes................................. 0.5 22.6 2.5 25.6
-------- ------- ------ -------
Net income................................... $ 11.5 $ 34.3 $ 3.6 $ 49.4
======== ======= ====== =======
Average Assets............................... $ 9,914 $11,645 $1,170 $22,729
======== ======= ====== =======
Average Loans................................ $ 4,842 $ 6,288 $1,007 $12,137
======== ======= ====== =======
Average Deposits............................. $ 10,281 $ 3,578 $1,268 $15,127
======== ======= ====== =======
</TABLE>
8
<PAGE> 11
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FIRST QUARTER 2000
COMPARED WITH
FIRST QUARTER 1999
- --------------------------------------------------------------------------------
SUMMARY The Corporation had first quarter 2000 net income of $81.7 million.
First quarter earnings included a pretax gain of $50.2 million
resulting from the sale of the indenture trust and shareholder
services businesses. In addition to the gain from the corporate trust
sale, comparative results were affected by net gains from securities
sales of $7.9 million in the first quarter of 1999. Excluding the
effects of both transactions, "core earnings" rose 17 percent. For
the current quarter, cash ROE, excluding the gain from the sale of
the corporate trust businesses, was 19.24 percent compared to 17.40
percent in the first quarter of 1999. Cash ROA, excluding the
corporate trust gain, was 0.91 percent compared to 0.96 percent a
year ago.
First quarter net interest income on a fully taxable equivalent
basis was $153.9 million, up $16.7 million or 12 percent from $137.2
million in 1999's first quarter. Average earning assets rose 13
percent to $22.12 billion from $19.54 billion in 1999, primarily
attributable to an increase of $1.22 billion in average loans and
$1.29 billion in the investment securities portfolio. Commercial
lending was the most significant contributor to the loan growth. Net
interest margin declined to 2.80 percent from 2.85 percent in the
same quarter last year, primarily reflecting a higher cost of funds
associated with relatively greater levels of wholesale funding.
The first quarter provision for loan losses of $6.1 million was
down $1.1 million from $7.2 million in the first quarter of 1999. Net
charge-offs were $4.5 million in the current quarter, up slightly
from the same period last year.
Noninterest income increased $34.3 million or 29 percent to
$151.7 million for first quarter 2000 from the same quarter last
year. Excluding the $50.2 million gain on the sale of the corporate
trust businesses, noninterest income declined 14 percent. Most of the
decline resulted from the reduction in net gains from securities
sales of $7.9 million and a decrease in bond trading profits of $1.5
million. In addition, the decrease in current quarter's noninterest
income also resulted from lower mortgage and foreign exchange fees.
First quarter 2000 noninterest expenses of $170.4 million
declined $2.0 million or 1 percent from first quarter last year.
Income tax expense increased by 20.8 million, reflecting higher
pretax income, which included the gain on the sale of the corporate
trust businesses.
Additional commentary on the matters included in the above
summary is provided in the following sections of this Report.
9
<PAGE> 12
- --------------------------------------------------------------------------------
OPERATING
SEGMENT
REVIEW PERSONAL AND COMMERCIAL CLIENT GROUP
Net income for Personal and Commercial Client Group in the first
quarter of 2000 was $50.3 million, up $38.8 million from the first
quarter of 1999. First quarter earnings included a pretax gain of
$50.2 million resulting from the sale of the indenture trust and
shareholder services businesses. Total revenue was $183.3 million, an
increase of $61.0 million from $122.3 million in 1999. Excluding the
gain on the sale of the corporate trust businesses, total revenue was
$133.1 million representing growth of $10.8 million or 9 percent from
a year ago, primarily due to better margins and volume growth in
community banking and higher deposit levels and improved revenues in
cash management. Noninterest expense decreased $3.9 million or 4
percent to $104.4 million from $108.3 million in 1999 first quarter.
The decrease was primarily due to continued expense control. Income
taxes increased by $26.1 million in the current quarter, reflecting
higher pretax income, including the gain on the sale of corporate
trust businesses.
INVESTMENT BANKING GROUP
Net income for Investment Banking Group was $27.1 million in 2000,
reflecting a decrease of $7.2 million or 21 percent from $34.3
million a year ago. Total revenue of $73.7 million decreased by $13.2
million or 15 percent from the first quarter of 1999 due mostly to a
$11.4 million or 48 percent decline in noninterest income. Most of
the decline resulted from the reduction in net gains from securities
sales and a decrease in bond trading profits due to the difficult
trading environment in the current quarter. Noninterest expense
decreased $0.2 million or 1 percent to $24.7 million in the current
quarter. Income taxes decreased by $4.7 million during the year,
reflecting lower pretax income.
PRIVATE CLIENT GROUP
Net income for Private Client Group was $4.3 million in 2000,
reflecting an increase of $0.7 million or 20 percent from $3.6
million a year ago. Total revenue of $48.6 million increased by $3.2
million or 7 percent from $45.4 million in 1999. Net interest income
increased $2.1 million or 18 percent, attributable to the $199
million increase in loan volume. Noninterest income increased $1.1
million or 3 percent to $35.0 million. Growth was primarily due to
increased trust and investment management revenues as personal assets
under management approach $21.4 billion. Noninterest expense
increased $2.1 million or 5 percent to $41.3 million in the current
quarter, primarily due to expansion strategies and initiatives.
Income taxes increased by $0.4 million during the year, reflecting
higher pretax income.
10
<PAGE> 13
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31
--------------------------------------
Daily Average Balances (in millions) 2000 1999
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........................ $ 231 1.00% $ 133 1.14%
Federal funds sold and securities purchased under
agreement to resell..................................... 211 6.13 208 4.86
------- -------
Total money market assets........................... 442 3.45 341 3.41
Trading account assets...................................... 52 6.98 78 6.61
Securities available-for-sale:(1)(2)
U.S. Treasury and Federal agency.......................... 7,759 6.22 6,513 6.05
State and municipal....................................... 332 7.10 328 7.63
Other..................................................... 181 7.09 138 7.32
------- -------
Total securities available-for-sale................. 8,272 6.29 6,979 6.15
Loans, net of unearned income............................... 13,353 8.04 12,137 7.27
------- -------
TOTAL INTEREST-EARNING ASSETS....................... 22,119 7.29 19,535 6.80
------- -------
Cash and demand balances due from banks..................... 1,304 1,346
Other assets................................................ 1,661 1,848
------- -------
Total assets........................................ $25,084 $22,729
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market accounts........ $ 4,003 3.58 $ 3,906 3.28
Savings deposits and certificates........................... 4,418 4.61 4,477 4.52
Other time deposits......................................... 1,607 5.92 2,055 5.04
Foreign office time deposits................................ 1,761 5.72 1,292 4.62
------- -------
TOTAL INTEREST-BEARING DEPOSITS..................... 11,789 4.61 11,730 4.21
Short-term borrowings....................................... 7,092 5.65 4,926 4.68
Minority interest -- preferred stock of subsidiary.......... 250 7.38 250 7.38
Long-term notes............................................. 455 7.18 454 6.82
------- -------
TOTAL INTEREST-BEARING LIABILITIES.................. 19,586 5.08 17,360 4.45
Noninterest-bearing deposits................................ 3,629 3,397
Other liabilities........................................... 313 335
Stockholder's equity........................................ 1,556 1,637
------- -------
Total liabilities and stockholder's equity.......... $25,084 $22,729
======= =======
NET INTEREST MARGIN (RELATED TO AVERAGE INTEREST-EARNING
ASSETS)................................................... 2.80% 2.85%
==== ====
</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 2000 and 1999.
2. AVERAGE RATE ON SECURITIES AVAILABLE-FOR-SALE
Yields on securities classified as available-for-sale are based on amortized
cost.
11
<PAGE> 14
- --------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands) 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Interest income............................................. $392,560 $320,432
Fully taxable equivalent adjustment......................... 8,729 7,716
-------- --------
Interest income (fully taxable equivalent basis)............ 401,289 328,148
Interest expense............................................ 247,407 190,957
-------- --------
Net interest income (fully taxable equivalent basis).... $153,882 $137,191
======== ========
Increase (decrease) due to change in:
Volume.................................................. $ 19,037 $ 15,711
Rate.................................................... (2,346) (16,937)
-------- --------
Total increase (decrease) in net interest income... $ 16,691 $ (1,226)
======== ========
</TABLE>
First quarter net interest income on an FTE basis was $153.9
million, up 12 percent from $137.2 million in first quarter 1999.
Average earning assets increased 13 percent or $2.58 billion to
$22.12 billion from $19.54 billion in 1999. Average loans rose $1.22
billion, or 10 percent. Commercial lending was the most significant
contributor to the loan growth with an increase of $795 million.
Average securities were up 19 percent, or $1.29 billion, primarily
reflecting increased holdings of Federal agency securities. Total
money market assets increased $101 million or 30 percent over first
quarter 1999 levels.
Funding for this asset growth came primarily from foreign time
deposits and short-term borrowings, which increased by an average of
$470 million and $2.08 billion, respectively, offset by declines in
savings deposits and certificates and other time deposits.
Net interest margin, the other principal determinant of net
interest income, declined from 2.85 percent in 1999 to 2.80 percent
in the current quarter. The decrease in the Corporation's net
interest margin reflects the higher cost of funds associated with
relatively greater levels of wholesale funding.
- --------------------------------------------------------------------------------
AVERAGE EARNING ASSETS--NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended March 31
------------------------------------
Daily Average Balances (in millions) 2000 1999
Average Rates Earned and Paid ---------------- ----------------
(fully taxable equivalent basis) Balances Rates Balances Rates
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets..................................... $22,119 7.29% $19,535 6.80%
======= =======
Interest-bearing liabilities................................ $19,586 5.08 $17,360 4.45
Noninterest-bearing sources of funds........................ 2,533 -- 2,175 --
------- -------
Total supporting liabilities........................ $22,119 4.49 $19,535 3.95
======= =======
Net interest margin (related to average interest-earning
assets)................................................... 2.80% 2.85%
==== ====
</TABLE>
12
<PAGE> 15
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
Ended March 31 Increase (Decrease)
------------------- -------------------
NONINTEREST (in thousands) 2000 1999 Amount %
INCOME -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust and investment management fees........................ $ 38,113 $ 37,850 $ 263 1
Money market and bond trading............................... 414 1,877 (1,463) (78)
Foreign exchange............................................ 1,800 2,514 (714) (28)
Merchant and charge card fees............................... 5,348 6,052 (704) (12)
Service fees and charges.................................... 27,868 27,611 257 1
Securities gains............................................ -- 7,902 (7,902) (100)
Gain on sale of corporate trust businesses.................. 50,193 -- 50,193 --
Bank-owned insurance investments............................ 9,859 9,826 33 --
Foreign fees................................................ 5,000 5,590 (590) (11)
Other....................................................... 13,081 18,162 (5,081) (28)
-------- -------- -------
Total noninterest income.................................... $151,676 $117,384 $34,292 29
======== ======== ======= ====
</TABLE>
Noninterest income for the first quarter of 2000 was $151.7 million,
an increase of $34.3 million or 29 percent from the first quarter of
1999. In the first quarter of 2000, the Corporation realized a gain
of $50.2 million on the sale of its corporate trust businesses.
Excluding the effect of the gain on the sale of the corporate trust
businesses, noninterest income would have declined $15.9 million or
14 percent. Most of the decline resulted from the reduction in net
gains from securities sales of $7.9 million and a decrease in bond
trading profits of $1.5 million due to the rising interest rate
environment. In addition, the decrease in the current quarter's
noninterest income also resulted from lower mortgage and foreign
exchange fees.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
NONINTEREST Ended March 31 Increase (Decrease)
EXPENSES ------------------- --------------------
AND INCOME (in thousands) 2000 1999 Amount %
TAXES --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and other compensation............................. $ 86,223 $ 86,055 $ 168 --
Pension, profit sharing and other employee benefits......... 17,383 17,918 (535) (3)
Net occupancy............................................... 12,956 9,331 3,625 39
Equipment................................................... 14,617 14,574 43 --
Marketing................................................... 5,863 6,229 (366) (6)
Communication and delivery.................................. 5,111 6,755 (1,644) (24)
Expert services............................................. 5,893 7,467 (1,574) (21)
Contract programming........................................ 3,488 3,305 183 6
Other....................................................... 12,581 14,627 (2,046) (14)
-------- -------- -------
164,115 166,261 (2,146) (1)
Amortization of goodwill and other valuation intangibles.... 6,262 6,124 138 2
-------- -------- -------
Total noninterest expenses.................................. $170,377 $172,385 $(2,008) (1)
======== ======== =======
Provision for income taxes.................................. $ 38,629 $ 17,862 $20,767 116
======== ======== ======= ===
</TABLE>
13
<PAGE> 16
- --------------------------------------------------------------------------------
Noninterest expenses for the first quarter totaled $170.4 million, a
decrease of $2.0 million or 1 percent from the first quarter of 1999.
Employment-related expenses totaled $103.6 million, a decrease of
$0.4 million from the year ago quarter. Net occupancy expenses
totaled $13.0 million, up $3.6 million from the prior year's first
quarter due primarily to real estate tax refunds received in first
quarter 1999. Equipment expenses were virtually unchanged from first
quarter 1999. Expert services decreased $1.6 million to $5.9 million
in the current quarter primarily due to lower expenses for Y2K
compliance.
Income tax expense totaled $38.6 million, an increase of $20.8
million or 116 percent from the $17.9 million recorded in first
quarter 1999, reflecting higher pretax income, which included the
gain on the sale of the corporate trust businesses.
- --------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at March 31, 2000 was $1.65
billion, compared with $1.58 billion and $1.64 billion at December
31, 1999 and March 31, 1999, respectively. Excluding adjustments for
unrealized gains and losses from securities available-for-sale, total
equity increased $162.2 million from March 31, 1999. During the
preceding twelve months, the Corporation declared common and
preferred dividends of $69.7 million and $16.6 million, respectively.
In February 1998, Harris Preferred Capital Corporation, a
subsidiary of Harris Trust and Savings Bank ("HTSB"), issued $250
million of noncumulative preferred stock in a public offering. The
preferred stock qualifies as Tier 1 capital at both HTSB and the
Corporation for U.S. banking regulatory purposes.
U.S. banking regulators issued risk-based capital guidelines,
based on the international "Basle Committee" agreement, which are
applicable to all U.S. banks and bank holding companies. These
guidelines serve to: 1) establish a uniform capital framework which
is more sensitive to risk factors, including off-balance sheet
exposures; 2) promote the strengthening of capital positions; and 3)
diminish a source of competitive inequality arising from differences
in supervisory requirements among countries. The guidelines specify
minimum ratios for Tier 1 capital to risk-weighted assets of 4
percent and total regulatory capital to risk-weighted assets of 8
percent.
Risk-based capital guidelines define total capital to consist of
Tier 1 (core) and Tier 2 (supplementary) capital. In general, Tier 1
capital is comprised of stockholder's equity, including certain types
of preferred stock, less goodwill and certain other intangibles. Core
capital must equal at least 50 percent of total capital. Tier 2
capital basically includes subordinated debt (less a discount factor
during the five years prior to maturity), other types of preferred
stock and the allowance for possible loan losses. The Corporation's
Tier 1 and total risk-based capital ratios were 8.91 percent and
11.42 percent, respectively, at March 31, 2000. HTSB's Tier 1 and
total risk-based capital ratios were 8.66 percent and 10.61 percent,
respectively, at March 31, 2000.
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 7.25 percent and 7.24 percent,
respectively, for the first quarter of 2000.
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 effective
at March 31, 2000, 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 March 31, 2000, the Corporation's
intangible assets totaled $238 million, including approximately $221
million of
14
<PAGE> 17
- --------------------------------------------------------------------------------
intangibles excluded under capital guidelines. The Corporation's and
HTSB's tangible Tier 1 leverage ratios (which exclude all
intangibles) were 7.19 percent and 7.16 percent, respectively, for
the first quarter of 2000.
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
March 31 December 31 March 31
(in thousands) 2000 1999 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $25,688,041 $24,862,878 $22,989,807
=========== =========== ===========
Average assets (quarter).................................. $25,084,016 $24,574,252 $22,728,797
=========== =========== ===========
Risk-based on-balance sheet assets........................ $15,947,006 $15,118,070 $14,172,526
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 4,717,600 $ 4,718,669 $ 4,745,127
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)....................... $20,438,516 $19,598,872 $18,661,092
=========== =========== ===========
Tier 1 capital............................................ $ 1,821,022 $ 1,739,753 $ 1,628,067
=========== =========== ===========
Supplementary capital..................................... $ 513,739 $ 522,170 $ 538,252
=========== =========== ===========
Total capital, net of deductions (based on regulatory
accounting principles).................................. $ 2,334,094 $ 2,261,292 $ 2,165,712
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.25% 7.07% 7.24%
Risk-based capital ratios
Tier 1.................................................. 8.91% 8.88% 8.72%
Total................................................... 11.42% 11.54% 11.61%
</TABLE>
- --------------------------------------------------------------------------------
NONPERFORMING
ASSETS
<TABLE>
<CAPTION>
March 31 December 31 March 31
(in thousands) 2000 1999 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans............................................ $34,194 $ 23,558 $45,837
Restructured loans.......................................... 2,969 2,975 1,521
------- ----------------- -------
Total nonperforming loans................................... 37,163 26,533 47,358
Other assets received in satisfaction of debt............... 565 946 753
------- ----------------- -------
Total nonperforming assets.................................. $37,728 $ 27,479 $48,111
======= ================= =======
Nonperforming loans to total loans (end of period).......... .27% .20% .38%
Nonperforming assets to total loans (end of period)......... .27% .21% .39%
======= ================= =======
90-day past due loans still accruing interest............... $ 9,680 $ 35,899 $29,951
======= ================= =======
</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 March 31, 2000 totaled $38 million, or
0.27 percent of total loans, up from $27 million or 0.21 percent of
total loans at December 31, 1999 and down from $48 million or 0.39
percent of total loans a year ago.
Interest shortfall for the quarter ended March 31, 2000 was $0.9
million compared to $0.8 million one year earlier.
Impaired loans are defined as those where it is probable that
amounts due according to contractual terms, including principal and
interest, will not be collected. Both nonaccrual and certain
restructured loans meet this definition. Impaired loans are measured
by the Corporation at the present value of expected future cash flows
or, alternatively, at the fair value of collateral. Known losses of
principal on these loans have been charged off. Interest income on
nonaccrual loans is recognized only at the time cash is received and
only if the collection of
15
<PAGE> 18
- --------------------------------------------------------------------------------
the entire principal balance is expected. Interest income on
restructured loans is accrued according to the most recently agreed
upon contractual terms.
<TABLE>
<CAPTION>
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total
(in thousands) Related Allowance No Related Allowance Impaired Loans
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 2000
Balance....................................... $ 9,279 $27,884 $37,163
Related allowance............................. 5,625 -- 5,625
------- ------- -------
Balance, net of allowance..................... $ 3,654 $27,884 $31,538
======= ======= =======
December 31, 1999
Balance....................................... $ 9,173 $17,360 $26,533
Related allowance............................. 5,022 -- 5,022
------- ------- -------
Balance, net of allowance..................... $ 4,151 $17,360 $21,511
======= ======= =======
March 31, 1999
Balance....................................... $36,018 $11,340 $47,358
Related allowance............................. 12,203 -- 12,203
------- ------- -------
Balance, net of allowance..................... $23,815 $11,340 $35,155
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31
-----------------------
(in thousands) 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Average impaired loans...................................... $40,786 $32,143
======= =======
Total interest income on impaired loans recorded on a cash
basis..................................................... $ 210 $ 53
======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE Quarter Ended March 31
FOR POSSIBLE -----------------------
LOAN LOSSES (in thousands) 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period................................ $147,235 $140,608
-------- --------
Charge-offs................................................. (5,423) (5,602)
Recoveries.................................................. 893 1,222
-------- --------
Net charge-offs............................................. (4,530) (4,380)
Provision charged to operations............................. 6,088 7,246
-------- --------
Balance at March 31......................................... $148,793 $143,474
======== ========
Net charge-offs as a percentage of provision
charged to operations....................................... 74% 60%
Allowance for possible loan losses to
nonperforming loans (period-end)............................ 400 303
Allowance for possible loan losses to
nonperforming assets (period-end)........................... 394 298
Allowance for possible loan losses to
total loans outstanding (period-end)........................ 1.08 1.16
</TABLE>
The Corporation's provision for loan losses for the current quarter
was $6.1 million, down 16 percent from $7.2 million in last year's
first quarter. Net charge-offs totaled $4.5 million for the current
quarter up slightly from the prior year. For the first quarter of
2000, net charge-offs related to commercial and installment loans
were $3.7 million and $0.7 million, respectively, compared to $3.5
million and $1.2 million, respectively, for the first quarter of
1999.
16
<PAGE> 19
- --------------------------------------------------------------------------------
At March 31, 2000, the allowance for possible loan losses was
$149 million, equal to 1.08 percent of total loans outstanding,
compared to $143 million or 1.16 percent of total loans one year ago.
The allowance as a percentage of nonperforming loans increased from
303 percent at March 31, 1999, to 400 percent at March 31, 2000.
- --------------------------------------------------------------------------------
LIQUIDITY AND
SOURCES OF
FUNDS Effective liquidity management allows a banking institution to
accommodate the changing net funds flow requirements of customers who
may deposit or withdraw funds, or modify their credit needs. The
Corporation manages its liquidity position through continuous
monitoring of profitability trends, asset quality, interest rate
sensitivity, maturity schedules of earning assets and supporting
liabilities, the composition of managed and other (primarily demand)
liabilities, and prospective customer demand based upon knowledge of
major customers and overall economic conditions. Appropriate
responses to changes in these conditions preserve customer confidence
in the ability of the Corporation to continually serve their credit
and deposit withdrawal requirements. Some level of liquidity is
provided by maintaining assets which mature within a short timeframe
or could be sold quickly without significant loss. The Corporation's
liquid assets include cash and demand balances due from banks, money
market assets, securities available-for-sale and trading account
assets. Liquid assets represented approximately 38 percent of the
Corporation's total assets and amounted to $9.81 billion at March 31,
2000. 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, had a $150 million revolving
credit agreement with five nonaffiliated banks and Bank of Montreal
("BMO") that terminated on December 18, 1999. At that time, the
Corporation entered into a new $150 million revolving credit
agreement with five nonaffiliated banks and BMO that terminates on
December 8, 2000. There were no borrowings under either credit
facility in year-to-date 2000 or 1999.
Total core deposits were $12.36 billion or 54 percent of total
non-equity funding at March 31, 2000 compared to $11.74 billion or 58
percent of total non-equity funding at March 31, 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 2 percent
quarter-to-quarter, reflecting increases in domestic demand deposits
and money market accounts. Total wholesale deposits and short-term
borrowings increased from $8.58 billion or 42 percent of total
non-equity funding at March 31, 1999 to $10.66 billion or 46 percent
of total non-equity funding at March 31, 2000. Total deposits
averaged $15.42 billion in the first quarter of 2000, an increase of
$291 million compared to the same quarter last year.
Average money market assets in the first quarter of 2000
increased $101 million or 30 percent from the same quarter last year.
These assets represented 2 percent of average earning assets in 2000,
remaining unchanged from a year ago. Average money market liabilities
increased 53 percent to $5.97 billion this quarter from $3.89 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, 2000,
$853 million of senior notes were outstanding compared to $1.02
billion at March 31, 1999.
- --------------------------------------------------------------------------------
FORWARD-
LOOKING INFORMATION
This 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," "target," 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,
17
<PAGE> 20
- --------------------------------------------------------------------------------
but are not limited to, changes in: interest rates, general economic
conditions, legislative or regulatory environment, monetary and
fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or
composition of the loan or securities portfolios, demand for loan
products, deposit flows, competition, demand for financial services
in the Corporation's market areas, unforeseen business risks and
accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking
statements. The Corporation assumes no obligation to update any such
forward-looking statements.
- --------------------------------------------------------------------------------
MARKET RISK
MANAGEMENT As described in the Corporation's Form 10-K for the year ended
December 31, 1999, 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, 1999.
18
<PAGE> 21
Harris Bankcorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
HARRIS BANKCORP, INC.
111 West Monroe Street
Chicago, Illinois 60603
- ------------------------------
HARRIS BANKCORP, INC.
EXECUTIVE OFFICERS
Alan G. McNally
Chairman of the Board and
Chief Executive Officer
Edward W. Lyman, Jr.
Vice Chair of the Board
- ------------------------------
HARRIS BANKCORP, INC.
BOARD OF DIRECTORS
Alan G. McNally
Chairman of the Board and
Chief Executive Officer
Edward W. Lyman, Jr.
Vice Chair of the Board
Pastora San Juan Cafferty
Professor
University of Chicago
School of Social Service Administration
Martin R. Castro
Attorney at Law
Haven E. Cockerham
Senior Vice President Human
Resources
R.R. Donnelley & Sons Company
F. Anthony Comper
President and
Chief Executive Officer
Bank of Montreal
Susan T. Congalton
Managing Director
Lupine L.L.C.
Wilbur H. Gantz
Chairman of the Board and
Chief Executive Officer
PathoGenesis Corporation
James J. Glasser
Chairman Emeritus
GATX Corporation
Dr. Leo M. Henikoff
President and
Chief Executive Officer
Rush-Presbyterian-St. Luke's Medical Center
Richard M. Jaffee
Chairman
Oil-Dri Corporation of America
Charles H. Shaw
Chairman
The Charles H. Shaw Company
Richard E. Terry
Chairman and
Chief Executive Officer
Peoples Energy Corporation
James O. Webb
President
James O. Webb & Associates, Inc.
- ------------------------------
HARRIS BANKCORP, INC.
BANK SUBSIDIARIES
HARRIS TRUST AND SAVINGS BANK
Chicago, Illinois
HARRIS BANK ARGO
Summit, Illinois
HARRIS BANK BARRINGTON, N.A.
Barrington, Illinois
HARRIS BANK BATAVIA, N.A.
Batavia, Illinois
HARRIS BANK FRANKFORT
Frankfort, Illinois
HARRIS BANK GLENCOE-NORTHBROOK, N.A.
Glencoe, Illinois
HARRIS BANK HINSDALE, N.A.
Hinsdale, Illinois
HARRIS BANK LIBERTYVILLE
Libertyville, Illinois
HARRIS BANK NAPERVILLE
Naperville, Illinois
HARRIS BANK ROSELLE
Roselle, Illinois
HARRIS BANK ST. CHARLES
St. Charles, Illinois
HARRIS BANK WILMETTE, N.A.
Wilmette, Illinois
HARRIS BANK WINNETKA, N.A.
Winnetka, Illinois
HARRIS TRUST BANK OF ARIZONA
Scottsdale, Arizona
HARRIS TRUST/BANK OF MONTREAL
(FORMERLY HARRIS TRUST COMPANY OF FLORIDA)
West Palm Beach, Florida
- ------------------------------
HARRIS BANKCORP, INC.
Non-Bank Subsidiaries
HARRIS TRUST COMPANY OF NEW YORK
New York, New York
HARRIS TRUST COMPANY OF CALIFORNIA
Los Angeles, California
HARRIS LIFE INSURANCE COMPANY
Scottsdale, Arizona
HARRIS INVESTMENT
MANAGEMENT, INC.
Chicago, Illinois
HARRIS INVESTORS DIRECT, INC.
Chicago, Illinois
HARRISCORP CAPITAL CORPORATION
Chicago, Illinois
HARRISCORP FINANCE, INC.
Chicago, Illinois
HARRIS BANK INTERNATIONAL CORPORATION
New York, New York
BANK OF MONTREAL TRUST
COMPANY (C.I.), LTD.
St. Helier, Jersey
Channel Islands
HARRISCORP LEASING, INC.
Chicago, Illinois
BANK OF MONTREAL GLOBAL, INC.
Chicago, Illinois
MIDWESTERN HOLDINGS, INC.
Chicago, Illinois
HARRIS BUILDING SERVICES CORPORATION
Chicago, Illinois
HARRIS TRADE SERVICES LIMITED
Hong Kong
HARRIS PREFERRED CAPITAL CORPORATION
Chicago, Illinois
HARRIS PROCESSING CORPORATION
Chicago, Illinois
HARRIS CAPITAL HOLDINGS, INC.
Dover, Delaware
<PAGE> 22
EXHIBIT A--HARRIS BANKCORP, INC.
2000 FIRST QUARTER REPORT
MARCH 31, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,245,257
<INT-BEARING-DEPOSITS> 251,561
<FED-FUNDS-SOLD> 238,640
<TRADING-ASSETS> 27,953
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 8,049,285
<LOANS> 13,755,695
<ALLOWANCE> 148,793
<TOTAL-ASSETS> 25,688,041
<DEPOSITS> 16,029,486
<SHORT-TERM> 6,995,338
<LIABILITIES-OTHER> 260,775
<LONG-TERM> 704,727
0
225,000
<COMMON> 53,340
<OTHER-SE> 1,369,156
<TOTAL-LIABILITIES-AND-EQUITY> 25,688,041
<INTEREST-LOAN> 266,959
<INTEREST-INVEST> 121,126
<INTEREST-OTHER> 4,475
<INTEREST-TOTAL> 392,560
<INTEREST-DEPOSIT> 134,971
<INTEREST-EXPENSE> 247,407
<INTEREST-INCOME-NET> 145,153
<LOAN-LOSSES> 6,088
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 170,377
<INCOME-PRETAX> 120,364
<INCOME-PRE-EXTRAORDINARY> 81,735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,735
<EPS-BASIC> 11.64
<EPS-DILUTED> 11.64
<YIELD-ACTUAL> 2.80
<LOANS-NON> 34,194
<LOANS-PAST> 9,680
<LOANS-TROUBLED> 2,969
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 147,235
<CHARGE-OFFS> 5,423
<RECOVERIES> 893
<ALLOWANCE-CLOSE> 148,793
<ALLOWANCE-DOMESTIC> 148,793
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
