<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
<TABLE>
<S> <C>
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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 November 13, 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 and nine months ended September
30, 2000 and 1999.
Consolidated Statements of Condition as of September 30, 2000, December
31, 1999 and September 30, 1999.
Consolidated Statements of Changes in Stockholder's Equity and
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999.
Notes to the Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Financial Review).
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The above financial statements, financial review and quantitative and
qualitative disclosures about market risk, included in the Corporation's 2000
Third Quarter Report, are filed as Exhibit A and incorporated herein by
reference.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are being omitted from this report because such items
are not applicable to the reporting period.
Item 6. Exhibits and Reports on Form 8-K.
(a) Documents filed with Report:
27. Financial Data Schedule
27. Restated Financial Data Schedule
(b) A Current Report on Form 8-K, dated July 13, 2000 was filed on
behalf of Harris Bankcorp, Inc. reporting on
Item 2 -- Acquisition or Disposition of Assets.
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 November 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 September 30 Nine Months Ended September 30
------------------------------ ----------------------------------
2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AND DIVIDENDS (IN THOUSANDS)
Net interest income..................................... $163,284 $156,965 4% $488,804 $457,100 7%
Net interest income (fully taxable equivalent).......... 174,151 166,703 4 520,740 485,564 7
Provision for loan losses............................... 7,305 6,800 7 21,247 22,380 (5)
Noninterest income...................................... 108,520 120,526 (10) 373,690 364,512 3
Noninterest expenses.................................... 177,326 195,479 (9) 543,108 574,222 (5)
Net income.............................................. 63,110 58,054 9 210,317 168,763 25
Dividends -- common stock............................... 81,000 19,000 326 137,900 56,000 146
Dividends -- preferred stock............................ 4,511 4,511 -- 13,533 13,533 --
Cash earnings (1)....................................... 67,163 62,280 8 193,006 181,291 6
--------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average common stockholder's equity........... 14.97% 14.43% 54bp 17.33% 13.73% 360bp
Return on average assets................................ 0.88 0.90 (2) 1.00 0.89 11
Cash return on average common stockholder's equity
(2)................................................... 18.81 18.93 (12) 21.89 18.01 388
Cash return on average assets (3)....................... 0.95 0.97 (2) 1.07 0.96 11
Returns excluding gain on sale of corporate trust
business:
Return on average common stockholder's equity......... 14.97 14.43 54 14.71 13.73 98
Return on average assets.............................. 0.88 0.90 (2) 0.86 0.89 (3)
Cash return on average common stockholder's equity
(2)................................................. 18.81 18.93 (12) 18.78 18.01 77
Cash return on average assets (3)..................... 0.95 0.97 (2) 0.93 0.96 (3)
Tier 1 risk-based capital ratio......................... 8.52 9.04 (52)
Total risk-based capital ratio.......................... 11.07 11.74 (67)
Tier 1 leverage ratio................................... 7.01 7.22 (21)
Allowance for possible loan losses to total loans
(period-end).......................................... 1.07 1.13 (6)
--------------------------------------------------------------------------------------------------------------------------------
DAILY AVERAGE BALANCES (IN MILLIONS)
Money market assets..................................... $ 384 $ 403 (5)% $ 462 $ 396 17%
Securities available-for-sale........................... 9,489 8,415 13 9,296 8,175 14
Loans, net of unearned income........................... 15,349 13,746 12 15,040 13,660 10
Total interest-earning assets........................... 25,279 22,656 12 24,855 22,314 11
Total assets............................................ 28,374 25,706 10 27,960 25,493 10
Deposits................................................ 18,582 17,139 8 18,311 17,178 7
Short-term borrowings................................... 6,921 5,817 19 6,829 5,501 24
Common stockholder's equity............................. 1,557 1,472 6 1,517 1,511 --
--------------------------------------------------------------------------------------------------------------------------------
BALANCES AT QUARTER-END (IN MILLIONS)
Securities available-for-sale........................... $ 9,182 $ 8,353 10%
Loans, net of unearned income........................... 16,001 14,170 13
Allowance for possible loan losses...................... 171 161 6
Total assets............................................ 29,481 26,204 13
Deposits................................................ 19,571 17,190 14
Common stockholder's equity............................. 1,623 1,498 8
Total stockholder's equity.............................. 1,868 1,743 7
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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</TABLE>
(1) Cash earnings is defined as net income excluding the impact of amortization
of goodwill and other valuation intangibles. Cash earnings for the nine
months ended September 30, 2000 excludes the after-tax gain on the sale of
the corporate trust business. Including the corporate trust gain, cash
earnings would have been $222.7 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
--------------------------------------------------------------------------------
On July 1, 2000, Harris Bankcorp, Inc. legally combined with its
affiliated bank holding company, Harris Bankmont, Inc. Accordingly,
all current and prior year information for Harris Bankcorp, Inc.
includes the combined entities.
Harris Bankcorp had net income of $63.1 million for the quarter
ended September 30, 2000, an increase of 9 percent from $58.1 million
in the third quarter of 1999. Excluding gains from securities sales,
"core earnings" in the third quarter increased 6 percent compared to
the same quarter last year.
Net income for the nine months ended September 30, 2000, was
$210.3 million, up 25 percent from $168.8 million a year earlier.
Year-to-year comparative results were affected by the $50.2 million
pretax gain on the sale of the corporate trust business in first
quarter 2000 and by higher gains from securities sales last year.
Excluding both of these factors, "core earnings" grew 11 percent in
the first nine months compared to the same period a year earlier.
For the current quarter, cash ROE was 18.81 percent compared to
18.93 percent in third quarter 1999. Cash ROE for the first nine
months of 2000, excluding the gain on the sale of the corporate trust
business, was 18.78 percent compared to 18.01 percent for the
nine-month period ended September 30, 1999.
The increase in quarterly and year-to-date earnings was
attributable to strong business growth, sustained cost control and
continued low credit losses, partially offset by the impact of a
higher interest rate environment during the past year on securities
portfolio earnings.
For the current quarter, net interest income on a fully taxable
equivalent basis was $174.2 million, up $7.4 million or 4 percent
from third quarter last year. Average earning assets rose 12 percent
to $25.28 billion from $22.66 billion in third quarter 1999,
attributable to an increase of $1.60 billion in average loans and
$1.07 billion in the investment securities portfolio. Commercial and
consumer loans and residential mortgages contributed to loan growth
of 12 percent. Net margin declined from 2.92 percent in third quarter
1999 to 2.74 percent currently, reflecting the impact of a rising
rate environment during the past year.
Third quarter 2000 noninterest income of $108.5 million decreased
10 percent from the same quarter last year, primarily as a result of
this year's first quarter sale of the corporate trust business. Net
gains from securities sales were $3.1 million currently compared to
$0.1 million a year ago.
Third quarter 2000 noninterest expenses of $177.3 million were
down 9 percent from third quarter 1999, primarily reflecting a
decline from last year's operating expense for the corporate trust
business sold in the first quarter of 2000, and one-time systems
expenditures related to Y2K made in 1999. Income tax expense
increased by $6.9 million as a result of higher pretax income.
The third quarter 2000 provision for loan losses of $7.3 million
was up from $6.8 million in the third quarter of 1999. Net loan
charge-offs during the current quarter were $3.3 million compared to
$4.3 million in the same period last year, with the difference
primarily attributable to lower commercial loan write-offs.
At September 30, 2000, nonperforming assets were $96 million or
0.60 percent of total loans, compared to $30 million or 0.21 percent
a year ago and $42 million or 0.27 percent at June 30, 2000. The
increase from June 30, 2000 is comprised primarily of four loans in
the shared national credit portfolio ranging in size from $10 million
to $17 million, to borrowers in four different industry sectors.
At September 30, 2000, the allowance for possible loan losses was
$171 million, equal to 1.07 percent of loans outstanding, compared to
$161 million or 1.13 percent at the end of third quarter 1999. The
ratio of the allowance for possible loan losses to nonperforming
assets was 177 percent at September 30, 2000, compared to 536 percent
at September 30, 1999.
2
<PAGE> 5
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At September 30, 2000, regulatory Tier 1 capital of Harris
Bankcorp amounted to $1.98 billion, up from $1.85 billion one year
earlier. The regulatory leverage capital ratio was 7.01 percent for
the third quarter of 2000 compared to 7.22 percent in the same
quarter of 1999. Harris Bankcorp's capital ratio exceeds the
prescribed regulatory minimum for bank holding companies. Harris
Bankcorp's September 30, 2000 Tier 1 and total risk-based capital
ratios were 8.52 percent and 11.07 percent compared to respective
ratios of 9.04 percent and 11.74 percent at September 30, 1999.
For the nine months ended September 30, 2000, net interest income
on a fully taxable equivalent basis increased by 7 percent or $35.2
million, reflecting earning assets growth of 11 percent. Net interest
margin declined to 2.80 percent currently from 2.91 percent in the
nine months ended September 30, 1999. Average loans increased $1.38
billion or 10 percent.
Year-to-date noninterest income increased $9.2 million, or 3
percent over the first nine months of 1999. Excluding the $50.2
million gain on the sale of the corporate trust business, noninterest
income declined 11 percent. Most of this decrease was caused by the
$8.4 million decline in gains on securities sales and reduced
operating revenue from the corporate trust business sold in first
quarter 2000.
The provision for loan losses decreased by 5 percent to $21.2
million in the first nine months of 2000. Net charge-offs declined by
16 percent to $12.9 million from $15.3 million in 1999. Noninterest
expenses declined $31.1 million or 5 percent period-to-period.
Effective September 1, 2000 the Corporation entered into an
expanded outsourcing arrangement with ALLTEL. ALLTEL assumed systems
support for virtually all Harris Bankcorp applications. ALLTEL
offered employment to the approximately 160 full- and part-time
Solutions & Applications U.S. employees who develop and support
Harris Bankcorp applications. Solutions & Applications U.S.
relationship management remained with the Corporation to manage
systems planning, project prioritization and selection. This
outsourcing arrangement represents a cost-effective opportunity that
will enhance the Corporation's capabilities to grow and expand its
business.
/s/ ALAN G. MCNALLY
Alan G. McNally October 27, 2000
Chairman of the Board and
Chief Executive Officer
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Harris Bankcorp, Inc. and
Subsidiaries
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
(in thousands except share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $ 330,763 $ 258,660 $ 933,788 $ 748,663
Money market assets:
Deposits at banks.......................................... 2,024 13 4,490 970
Federal funds sold and securities purchased under agreement
to resell................................................ 3,814 3,299 11,938 9,366
Trading account............................................. 798 1,137 2,384 3,002
Securities available-for-sale:
U.S. Treasury and Federal agency........................... 136,257 110,158 390,239 319,876
State and municipal........................................ 6,338 6,404 18,899 18,877
Other...................................................... 2,998 2,132 8,893 5,963
---------- ---------- ---------- ----------
Total interest income...................................... 482,992 381,803 1,370,631 1,106,717
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits.................................................... 192,786 139,450 529,888 414,657
Short-term borrowings....................................... 95,966 53,715 269,811 148,452
Senior notes................................................ 16,752 19,136 41,532 48,625
Minority interest-dividends on preferred stock of
subsidiary................................................. 4,609 4,609 13,828 13,828
Long-term notes............................................. 9,595 7,928 26,768 24,055
---------- ---------- ---------- ----------
Total interest expense..................................... 319,708 224,838 881,827 649,617
---------- ---------- ---------- ----------
NET INTEREST INCOME......................................... 163,284 156,965 488,804 457,100
Provision for loan losses................................... 7,305 6,800 21,247 22,380
---------- ---------- ---------- ----------
Net Interest Income after Provision for Loan Losses......... 155,979 150,165 467,557 434,720
---------- ---------- ---------- ----------
NONINTEREST INCOME
Trust and investment management fees........................ 29,850 41,300 98,809 116,979
Money market and bond trading............................... 2,518 3,890 5,734 6,862
Foreign exchange............................................ 1,900 1,850 5,800 6,164
Merchant and charge card fees............................... 6,252 8,109 18,407 22,437
Service fees and charges.................................... 30,173 32,649 90,172 92,555
Securities gains............................................ 3,129 117 6,161 14,534
Gain on sale of corporate trust business.................... -- -- 50,193 --
Bank-owned insurance investments............................ 11,262 10,221 33,273 30,746
Foreign fees................................................ 4,035 4,428 16,561 14,449
Other....................................................... 19,401 17,962 48,580 59,786
---------- ---------- ---------- ----------
Total noninterest income................................... 108,520 120,526 373,690 364,512
---------- ---------- ---------- ----------
NONINTEREST INCOME
Salaries and other compensation............................. 88,675 92,188 268,917 274,706
Pension, profit sharing and other employee benefits......... 13,649 18,563 50,175 57,163
Net occupancy............................................... 13,455 14,705 41,752 39,198
Equipment................................................... 13,636 15,829 42,016 46,791
Marketing................................................... 9,316 8,278 22,573 21,582
Communication and delivery.................................. 5,807 5,782 17,182 18,950
Expert services............................................. 5,094 5,706 16,268 22,226
Contract programming........................................ 4,387 3,483 12,374 8,942
Other....................................................... 17,019 24,436 52,746 65,393
---------- ---------- ---------- ----------
171,038 188,970 524,003 554,951
Goodwill and other valuation intangibles.................... 6,288 6,509 19,105 19,271
---------- ---------- ---------- ----------
Total noninterest expenses................................. 177,326 195,479 543,108 574,222
---------- ---------- ---------- ----------
Income before income taxes.................................. 87,173 75,212 298,139 225,010
Applicable income taxes..................................... 24,063 17,158 87,822 56,247
---------- ---------- ---------- ----------
NET INCOME................................................. 63,110 58,054 210,317 168,763
Dividends on preferred stock................................ 4,511 4,511 13,533 13,533
---------- ---------- ---------- ----------
Net Income Applicable to Common Stock....................... $ 58,599 $ 53,543 $ 196,784 $ 155,230
========== ========== ========== ==========
EARNINGS PER COMMON SHARE (based on 6,667,490 average shares
outstanding)
Net Income Applicable to Common Stock...................... $ 8.79 $ 8.03 $ 29.52 $ 23.28
========== ========== ========== ==========
</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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
-------------------- -----------------------
(in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------ -----------------------
<S> <C> <C> <C> <C>
NET INCOME.................................................. $ 63,110 $ 58,054 $ 210,317 $ 168,763
Other comprehensive income:
Unrealized gains/(losses) on available-for-sale
securities:
Unrealized holding gains/(losses) arising during
period, net of tax expense/(benefit) for the
quarter of $33,237 in 2000 and ($10,049) in 1999
and net of tax expense/(benefit) for the
year-to-date period of $44,442 in 2000 and
($98,655) in 1999.................................. 50,513 (15,435) 67,482 (149,616)
Less reclassification adjustment for realized gains
included
in income statement, net of tax expense for the
quarter of $1,217 in 2000 and $45 in 1999 and net
of tax expense for the year-to-date period of
$2,397 in 2000 and $5,654 in 1999.................. (1,912) (72) (3,764) (8,880)
-------- -------- ---------- ---------
Other comprehensive income (loss)........................... 48,601 (15,507) 63,718 (158,496)
-------- -------- ---------- ---------
Comprehensive income........................................ $111,711 $ 42,547 $ 274,035 $ 10,267
======== ======== ========== =========
</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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31 September 30
(in thousands except share data) 2000 1999 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks..................... $ 1,317,123 $ 1,545,836 $ 1,256,102
Money market assets:
Interest-bearing deposits at banks........................ 165,101 239,984 172,049
Federal funds sold and securities purchased under
agreement to resell..................................... 231,659 384,856 176,473
Trading account assets...................................... 45,014 68,910 103,992
Securities available-for-sale............................... 9,182,273 8,591,432 8,353,435
Loans, net of unearned income............................... 16,000,593 14,447,674 14,169,881
Allowance for possible loan losses.......................... (170,513) (162,134) (160,539)
----------- ----------- -----------
Net loans................................................. 15,830,080 14,285,540 14,009,342
Premises and equipment...................................... 382,182 422,618 420,333
Customers' liability on acceptances......................... 31,587 43,599 44,067
Bank-owned insurance investments............................ 894,330 772,579 753,239
Goodwill and other valuation intangibles.................... 230,513 253,201 257,604
Other assets................................................ 1,170,663 571,941 656,955
----------- ----------- -----------
TOTAL ASSETS.......................................... $29,480,525 $27,180,496 $26,203,591
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest bearing......... $ 3,788,486 $ 3,834,285 $ 3,463,884
-- interest-bearing.............. 13,474,527 12,195,662 12,343,424
Deposits in foreign offices -- noninterest bearing.......... 38,521 35,537 21,682
-- interest-bearing............... 2,269,953 1,314,991 1,361,396
----------- ----------- -----------
Total deposits........................................ 19,571,487 17,380,475 17,190,386
Federal funds purchased and securities sold under agreement
to repurchase............................................. 4,510,087 4,580,886 3,932,302
Commercial paper outstanding................................ 218,630 245,050 269,188
Other short-term borrowings................................. 1,364,475 684,127 481,242
Senior notes................................................ 882,000 1,500,000 1,500,000
Acceptances outstanding..................................... 31,587 43,599 44,067
Accrued interest, taxes and other expenses.................. 205,444 227,879 211,732
Other liabilities........................................... 44,649 59,807 107,287
Minority interest -- preferred stock of subsidiary.......... 250,000 250,000 250,000
Long-term notes............................................. 534,841 474,673 474,561
----------- ----------- -----------
TOTAL LIABILITIES..................................... 27,613,200 25,446,496 24,460,765
----------- ----------- -----------
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............................................. 200,000 200,000 200,000
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..................................................... 533,717 521,425 520,731
Retained earnings........................................... 1,132,225 1,074,910 1,039,841
Accumulated other comprehensive loss........................ (96,957) (160,675) (116,086)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,867,325 1,734,000 1,742,826
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $29,480,525 $27,180,496 $26,203,591
=========== =========== ===========
</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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $ 1,734,000 $ 1,799,999
Net income................................................ 210,317 168,763
Contributions to capital.................................. 12,292 2,093
Dividends -- Series A preferred stock..................... (10,875) (10,875)
Dividends -- Series B preferred stock..................... (2,658) (2,658)
Dividends -- common stock................................. (137,900) (56,000)
Noncash distribution...................................... (1,569) --
Other comprehensive income (loss)......................... 63,718 (158,496)
----------- -----------
BALANCE AT SEPTEMBER 30..................................... $ 1,867,325 $ 1,742,826
=========== ===========
</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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 210,317 $ 168,763
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 21,247 22,380
Depreciation and amortization, including intangibles...... 60,429 59,277
Deferred tax (benefit) expense............................ (5,024) 488
Gain on sales of securities............................... (6,161) (14,534)
Gain on sale of corporate trust business.................. (50,193) --
Trading account net sales................................. 23,896 16,676
Net increase in interest receivable....................... (20,600) (15,844)
Net (decrease) increase in interest payable............... (15,640) 26,427
Net decrease in loans held for resale..................... 56,780 164,638
Other, net................................................ (46,535) 752
----------- -----------
Net cash provided by operating activities............... 228,516 429,023
----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks................................................... 74,883 (73,109)
Net decrease in Federal funds sold and securities
purchased under agreement to resell..................... 153,197 36,621
Proceeds from sales of securities available-for-sale...... 228,620 926,498
Proceeds from maturities of securities
available-for-sale...................................... 5,961,280 5,823,883
Purchases of securities available-for-sale................ (6,868,017) (7,534,169)
Net increase in loans..................................... (1,622,567) (838,752)
Purchases of premises and equipment....................... (30,693) (60,661)
Net increase in bank-owned insurance investments.......... (121,751) (27,938)
Other, net................................................ (325,593) (34,159)
----------- -----------
Net cash used by investing activities................... (2,550,641) (1,781,786)
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 2,191,012 (198,688)
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase........... (70,799) 428,753
Net (decrease) increase in commercial paper outstanding... (26,420) 7,283
Net increase in short-term borrowings..................... 680,348 313,091
Proceeds from issuance of senior notes.................... 2,232,000 3,460,500
Repayment of senior notes................................. (2,850,000) (2,900,500)
Net cash proceeds from the sale of corporate trust
business................................................ 88,704 --
Cash dividends paid on preferred stock.................... (13,533) (13,533)
Cash dividends paid on common stock....................... (137,900) (56,000)
----------- -----------
Net cash provided by financing activities............... 2,093,412 1,040,906
----------- -----------
Net decrease in cash and demand balances due from
banks.................................................. (228,713) (311,857)
Cash and demand balances due from banks at January 1.... 1,545,836 1,567,959
----------- -----------
Cash and demand balances due from banks at September
30..................................................... $ 1,317,123 $ 1,256,102
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
7
<PAGE> 10
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 nine months ended September 30 totaled
$897.5 million and $623.2 million in 2000 and 1999, respectively.
Cash income tax payments over the same periods totaled $79.4 million
and $72.4 million, respectively.
--------------------------------------------------------------------------------
4. RECENT
ACCOUNTING
DEVELOPMENTS
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. On June 15, 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of FASB Statement No. 133." The
Statement addresses a limited number of issues causing implementation
difficulties for numerous entities that are required to implement
SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137 and SFAS No.
138, continues to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Based on an analysis of the
Corporation's current derivative activity, it is management's opinion
that the impact of adoption of SFAS No. 133 would not have a material
impact on total assets, total liabilities, other comprehensive income
or net income.
--------------------------------------------------------------------------------
5. CORPORATE
TRUST SALE In March 2000, the Corporation sold its corporate trust business. 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 fourth quarter 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.
8
<PAGE> 11
--------------------------------------------------------------------------------
6. OTHER On July 1, 2000, Bankmont Financial Corp. ("Bankmont") contributed
100 percent of the common stock of its wholly-owned subsidiary,
Harris Bankmont, Inc. to the Corporation. Immediately thereafter,
Harris Bankmont, Inc. was liquidated and dissolved into the
Corporation under the corporation law of Delaware. Harris Bankcorp,
Inc. was the surviving corporation. The assets of Harris Bankmont,
Inc. consisted primarily of the stock of thirteen community banks
located in the Chicago area. This combination was accounted for at
historical cost, similar to a pooling-of-interests. All historical
information is presented on a combined basis, starting in the third
quarter of 2000. Presented below is selected historical information
as of June 30, 2000 and December 31, 1999 for the two combined
entities:
<TABLE>
<CAPTION>
HARRIS BANKCORP HARRIS BANKMONT
------------------------ ------------------------
June 30 December 31 June 30 December 31
2000 1999 2000 1999
------- ----------- ------- -----------
(in millions)
<S> <C> <C> <C> <C>
Loans................................. $13,958 $13,114 $1,357 $1,337
Assets................................ $26,203 $24,863 $2,402 $2,328
Deposits.............................. $15,754 $15,295 $2,013 $2,086
</TABLE>
--------------------------------------------------------------------------------
7. 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
management services and the bankcard merchant services. This segment
also reflects 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 gain on the sale of the
corporate trust business and the results of the corporate trust
business prior to its sale in the first quarter of 2000 are also
reflected in this segment. 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.
9
<PAGE> 12
--------------------------------------------------------------------------------
Selected segment information is included in the following table:
<TABLE>
<CAPTION>
Personal and Investment
Commercial Banking Private Client Consolidated
Quarter Ended September 30 Client Group Group Group Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
(in millions)
Net interest income (FTE basis).............. $ 93.8 $ 65.9 $ 14.5 $ 174.2
Noninterest income........................... 56.0 17.7 34.8 108.5
Provision for loan losses.................... 1.8 5.4 0.1 7.3
Noninterest expense.......................... 107.8 27.7 41.8 177.3
-------- ------- ------ -------
Income before income taxes................... 40.2 50.5 7.4 98.1
Income taxes/FTE............................. 11.7 20.1 3.2 35.0
-------- ------- ------ -------
Net income................................... $ 28.5 $ 30.4 $ 4.2 $ 63.1
======== ======= ====== =======
(in millions)
Average Assets............................... $ 11,705 $15,144 $1,525 $28,374
======== ======= ====== =======
Average Loans................................ $ 5,762 $ 8,238 $1,349 $15,349
======== ======= ====== =======
Average Deposits............................. $ 13,095 $ 4,154 $1,333 $18,582
======== ======= ====== =======
1999
(in millions)
Net interest income (FTE basis).............. $ 80.2 $ 73.7 $ 12.8 $ 166.7
Noninterest income........................... 69.8 15.5 35.2 120.5
Provision for loan losses.................... 2.6 4.1 0.1 6.8
Noninterest expense.......................... 130.0 26.2 39.3 195.5
-------- ------- ------ -------
Income before income taxes................... 17.4 58.9 8.6 84.9
Income taxes/FTE............................. (0.1) 23.4 3.5 26.8
-------- ------- ------ -------
Net income................................... $ 17.5 $ 35.5 $ 5.1 $ 58.1
======== ======= ====== =======
(in millions)
Average Assets............................... $ 11,607 $12,823 $1,276 $25,706
======== ======= ====== =======
Average Loans................................ $ 5,413 $ 7,215 $1,118 $13,746
======== ======= ====== =======
Average Deposits............................. $ 12,449 $ 3,453 $1,237 $17,139
======== ======= ====== =======
</TABLE>
10
<PAGE> 13
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Personal and Investment
Commercial Banking Private Client Consolidated
Nine Months Ended September 30 Client Group Group Group Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
(in millions)
Net interest income (FTE basis).............. $ 277.5 $ 200.7 $ 42.5 $ 520.7
Noninterest income........................... 219.1 50.2 104.4 373.7
Provision for loan losses.................... 5.9 15.0 0.3 21.2
Noninterest expense.......................... 343.1 78.1 121.9 543.1
-------- ------- ------ -------
Income before income taxes................... 147.6 157.8 24.7 330.1
Income taxes/FTE............................. 46.9 62.7 10.2 119.8
-------- ------- ------ -------
Net income................................... $ 100.7 $ 95.1 $ 14.5 $ 210.3
======== ======= ====== =======
(in millions)
Average Assets............................... $ 11,686 $14,862 $1,412 $27,960
======== ======= ====== =======
Average Loans................................ $ 5,686 $ 8,095 $1,259 $15,040
======== ======= ====== =======
Average Deposits............................. $ 12,988 $ 4,042 $1,281 $18,311
======== ======= ====== =======
1999
(in millions)
Net interest income (FTE basis).............. $ 233.0 $ 216.6 $ 36.0 $ 485.6
Noninterest income........................... 202.2 60.0 102.3 364.5
Provision for loan losses.................... 7.9 14.3 0.2 22.4
Noninterest expense.......................... 379.1 77.0 118.1 574.2
-------- ------- ------ -------
Income before income taxes................... 48.2 185.3 20.0 253.5
Income taxes/FTE............................. 3.0 73.6 8.1 84.7
-------- ------- ------ -------
Net income................................... $ 45.2 $ 111.7 $ 11.9 $ 168.8
======== ======= ====== =======
(in millions)
Average Assets............................... $ 11,485 $12,789 $1,219 $25,493
======== ======= ====== =======
Average Loans................................ $ 5,400 $ 7,200 $1,060 $13,660
======== ======= ====== =======
Average Deposits............................. $ 12,386 $ 3,523 $1,269 $17,178
======== ======= ====== =======
</TABLE>
11
<PAGE> 14
FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries
--------------------------------------------------------------------------------
THIRD QUARTER 2000
COMPARED WITH
THIRD QUARTER 1999
--------------------------------------------------------------------------------
SUMMARY The Corporation had third quarter 2000 net income of $63.1 million,
an increase of 9 percent compared to the third quarter of 1999.
Comparative results were affected by higher gains from securities
sales in third quarter 2000. Excluding this effect, "core earnings"
rose 6 percent. For the current quarter, cash ROE was 18.81 percent
compared to 18.93 percent in the third quarter of 1999. Cash ROA was
0.95 percent compared to 0.97 percent a year ago.
Third quarter net interest income on a fully taxable equivalent
basis was $174.2 million, up $7.4 million or 4 percent from $166.7
million in 1999's third quarter. Average earning assets rose 12
percent to $25.28 billion from $22.66 billion in 1999, primarily
attributable to an increase of $1.60 billion in average loans and
$1.07 billion in the investment securities portfolio. Commercial and
consumer loans and residential mortgages contributed to loan growth
of 12 percent. Net interest margin declined to 2.74 percent from 2.92
percent in the same quarter last year, primarily reflecting the
impact of the rising interest rate environment during the last year.
The third quarter provision for loan losses of $7.3 million was
up $0.5 million from $6.8 million in the third quarter of 1999. Net
charge-offs were $3.3 million in the current quarter, down $1.0
million from the same period last year.
Noninterest income decreased $12.0 million or 10 percent to
$108.5 million for third quarter 2000 from the same quarter last
year. Trust and investment management fees declined $11.5 million or
28 percent reflecting reduced corporate trust revenue. Merchant and
charge card fees declined $1.9 million or 23 percent, while service
charge income declined $2.5 million or 8 percent. Net gains from
investment securities sales were $3.1 million in the current quarter
compared to $0.1 million in the year ago quarter. Bond trading
profits declined by $1.4 million.
Third quarter 2000 noninterest expenses of $177.3 million
declined $18.2 million or 9 percent from third quarter last year
primarily reflecting a decline from last year's operating expense for
the corporate trust business sold in first quarter 2000, and one-time
systems expenditures related to Y2K made in 1999. Income tax expense
increased $6.9 million, reflecting higher pretax income.
Additional commentary on the matters included in the above
summary is provided in the following sections of this Report.
12
<PAGE> 15
--------------------------------------------------------------------------------
OPERATING
SEGMENT
REVIEW PERSONAL AND COMMERCIAL CLIENT GROUP
Net income for Personal and Commercial Client Group in the third
quarter of 2000 was $28.5 million, up $11.0 million from the third
quarter of 1999. Total revenue excluding corporate trust revenue was
$149.8 million, an increase of $11.5 million or 8 percent from the
year-ago quarter. Net interest income increased $13.6 million or 17
percent primarily due to strong loan growth in community banking.
Noninterest income excluding corporate trust revenue decreased $2.1
million or 4 percent. Noninterest expense decreased $22.2 million or
17 percent to $107.8 million in the current quarter. The decrease was
primarily due to a decline from last year's operating expense for the
corporate trust business sold this year. Excluding the impact of the
corporate trust sale, noninterest expenses decreased $7.1 million or
6 percent over the prior year quarter, reflecting continued cost
containment. Income taxes increased by $11.8 million in the current
quarter, reflecting higher pretax income.
INVESTMENT BANKING GROUP
Net income for Investment Banking Group was $30.4 million in the
third quarter of 2000, reflecting a decrease of $5.1 million or 14
percent from $35.5 million a year ago. Total revenue of $83.6 million
decreased by $5.6 million or 6 percent from the third quarter of 1999
due mostly to a $7.8 million or 11 percent decline in net interest
income. Net interest income for Mid-Market Corporate Banking
increased $12.5 million for the current quarter due to increased loan
volume and better spreads than in 1999. This was offset by a decline
in net interest income within the Treasury unit due primarily to an
increase in interest rates since the third quarter of 1999 which has
increased the funding cost on the investment portfolio. Noninterest
expense increased $1.5 million to $27.7 million in the current
quarter. Income taxes decreased by $3.3 million during the current
quarter, reflecting lower pretax income.
PRIVATE CLIENT GROUP
Net income for Private Client Group was $4.2 million in third quarter
2000, reflecting a decrease of $0.9 million or 18 percent from $5.1
million in the year-ago quarter. Total revenue of $49.3 million
increased by $1.3 million or 3 percent from $48.0 million in 1999.
Net interest income increased $1.7 million or 13 percent,
attributable to the $231 million increase in loan volume. Noninterest
income decreased $0.4 million to $34.8 million. Noninterest expense
increased $2.5 million or 6 percent to $41.8 million in the current
quarter. The increase is primarily due to expenses related to
expansion strategies and an advertising campaign aimed at private
banking and wealth management clients.
13
<PAGE> 16
CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
-------------------------------------- --------------------------------------
Daily Average Balances (in millions) 2000 1999 2000 1999
Average Rates Earned and Paid ----------------- ----------------- ----------------- -----------------
(fully taxable equivalent basis) Balances Rates Balances Rates Balances Rates Balances Rates
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Money market assets:
Interest-bearing deposits at banks......... $ 164 4.91% $ 162 0.03% $ 217 2.77% $ 146 0.89%
Federal funds sold and securities purchased
under agreement to resell................ 220 6.91 241 5.43 245 6.51 250 5.01
------- ------- ------- -------
Total money market assets............ 384 6.06 403 3.26 462 4.75 396 3.49
Trading account assets....................... 57 7.46 92 7.00 57 7.51 83 6.71
Securities available-for-sale:(1)(2)
U.S. Treasury and Federal agency........... 8,737 6.52 7,744 5.92 8,557 6.40 7,521 5.97
State and municipal........................ 523 7.04 519 7.27 520 7.03 507 7.31
Other...................................... 229 6.49 152 7.48 219 6.74 147 7.32
------- ------- ------- -------
Total securities
available-for-sale................. 9,489 6.55 8,415 6.03 9,296 6.45 8,175 6.07
Loans, net of unearned income................ 15,349 8.58 13,746 7.48 15,040 8.29 13,660 7.33
------- ------- ------- -------
TOTAL INTEREST-EARNING ASSETS........ 25,279 7.78 22,656 6.86 24,855 7.54 22,314 6.80
------- ------- ------- -------
Cash and demand balances due from banks...... 1,270 1,366 1,325 1,376
Other assets................................. 1,825 1,684 1,780 1,803
------- ------- ------- -------
Total assets......................... $28,374 $25,706 $27,960 $25,493
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest checking deposits and money market
accounts................................... $ 4,916 4.00 $ 4,785 3.22 $ 4,843 3.81 $ 4,723 3.24
Savings deposits and certificates............ 5,630 5.19 5,368 4.32 5,494 4.90 5,427 4.39
Other time deposits.......................... 1,903 6.67 1,617 5.24 1,807 6.34 1,681 5.08
Foreign office time deposits................. 2,288 6.61 1,625 5.10 2,224 6.28 1,609 4.87
------- ------- ------- -------
TOTAL INTEREST-BEARING DEPOSITS...... 14,737 5.20 13,395 4.13 14,368 4.93 13,440 4.13
Short-term borrowings........................ 6,921 6.48 5,817 4.97 6,829 6.09 5,501 4.79
Minority interest -- preferred stock of
subsidiary................................. 250 7.38 250 7.38 250 7.38 250 7.38
Long-term notes.............................. 517 7.42 474 6.68 489 7.30 474 6.76
------- ------- ------- -------
TOTAL INTEREST-BEARING LIABILITIES... 22,425 5.68 19,936 4.48 21,936 5.37 19,665 4.42
Noninterest-bearing deposits................. 3,844 3,744 3,943 3,738
Other liabilities............................ 303 309 319 334
Stockholder's equity......................... 1,802 1,717 1,762 1,756
------- ------- ------- -------
Total liabilities and stockholder's
equity............................. $28,374 $25,706 $27,960 $25,493
======= ======= ======= =======
NET INTEREST MARGIN (RELATED TO AVERAGE
INTEREST-EARNING ASSETS)................... 2.74% 2.92% 2.80% 2.91%
==== ==== ==== ====
</TABLE>
1. FULLY TAXABLE EQUIVALENT ADJUSTMENT
Tax-exempt income has been restated to a comparable taxable level. The Federal
and state statutory tax rates used for this purpose were 35 percent and 4.8
percent, respectively, in 2000 and 1999.
2. AVERAGE RATE ON SECURITIES AVAILABLE-FOR-SALE
Yields on securities classified as available-for-sale are based on amortized
cost.
14
<PAGE> 17
--------------------------------------------------------------------------------
NET INTEREST
INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
-------------------- ------------------------
(in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Interest income..................................... $482,992 $381,803 $1,370,631 $1,106,717
Fully taxable equivalent adjustment................. 10,867 9,738 31,936 28,464
-------- -------- ---------- ----------
Interest income (fully taxable equivalent basis).... 493,859 391,541 1,402,567 1,135,181
Interest expense.................................... 319,708 224,838 881,827 649,617
-------- -------- ---------- ----------
Net interest income (fully taxable equivalent
basis).......................................... $174,151 $166,703 $ 520,740 $ 485,564
======== ======== ========== ==========
Increase (decrease) due to change in:
Volume............................................ $ 18,274 $ 13,126 $ 54,075 $ 48,518
Rate.............................................. (10,826) 3,665 (18,899) (19,957)
-------- -------- ---------- ----------
Total increase in net interest income......... $ 7,448 $ 16,791 $ 35,176 $ 28,561
======== ======== ========== ==========
</TABLE>
Third quarter net interest income on an FTE basis was $174.2
million, up 4 percent from $166.7 million in third quarter 1999.
Average earning assets increased 12 percent or $2.62 billion to
$25.28 billion from $22.66 billion in 1999. Average loans rose $1.60
billion, or 12 percent. Commercial lending was the most significant
contributor to the loan growth with an increase of $915 million.
Average securities were up 13 percent, or $1.07 billion, primarily
reflecting increased holdings of Federal agency securities. Total
money market assets decreased $19 million or 5 percent over third
quarter 1999 levels.
Funding for this asset growth came primarily from foreign time
deposits, other time deposits, savings deposits and certificates and
short-term borrowings, which increased by an average of $664 million,
$286 million, $262 million and $1.56 billion, respectively, offset by
a decline in senior notes.
Net interest margin, the other principal determinant of net
interest income, declined from 2.92 percent in 1999 to 2.74 percent
in the current quarter. The decrease in the Corporation's net
interest margin reflects the impact of the rising interest rate
environment during the past year and the use of wholesale liabilities
to fund most of the earning asset growth.
--------------------------------------------------------------------------------
AVERAGE EARNING ASSETS -- NET INTEREST MARGIN
<TABLE>
<CAPTION>
Quarter Ended September 30
--------------------------------------
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............ $25,279 7.78% $22,656 6.86%
======= =======
Interest-bearing liabilities....... $22,425 5.68 $19,936 4.48
Noninterest-bearing sources of
funds............................ 2,854 2,720
------- -------
Total supporting
liabilities................ $25,279 5.04 $22,656 3.94
======= =======
Net interest margin (related to
average interest-earning
assets).......................... 2.74% 2.92%
==== ====
<CAPTION>
Nine Months Ended September 30
-------------------------------------
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............ $24,855 7.54% $22,314 6.80%
======= =======
Interest-bearing liabilities....... $21,936 5.37 $19,665 4.42
Noninterest-bearing sources of
funds............................ 2,919 2,649
------- -------
Total supporting
liabilities................ $24,855 4.74 $22,314 3.89
======= =======
Net interest margin (related to
average interest-earning
assets).......................... 2.80% 2.91%
==== ====
</TABLE>
15
<PAGE> 18
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Nine Months
Ended September 30 (Decrease) Ended September 30
-------------------- ---------------- --------------------
NONINTEREST (in thousands) 2000 1999 Amount % 2000 1999
INCOME ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust and investment management
fees......................... $ 29,850 $ 41,300 $(11,450) (28) $ 98,809 $116,979
Money market and bond
trading...................... 2,518 3,890 (1,372) (35) 5,734 6,862
Foreign exchange............... 1,900 1,850 50 3 5,800 6,164
Merchant and charge card
fees......................... 6,252 8,109 (1,857) (23) 18,407 22,437
Service fees and charges....... 30,173 32,649 (2,476) (8) 90,172 92,555
Securities gains............... 3,129 117 3,012 100+ 6,161 14,534
Gain on sale of corporate trust
business..................... -- -- -- -- 50,193 --
Bank-owned insurance
investments.................. 11,262 10,221 1,041 10 33,273 30,746
Foreign fees................... 4,035 4,428 (393) (9) 16,561 14,449
Other.......................... 19,401 17,962 1,439 8 48,580 59,786
-------- -------- -------- -------- --------
Total noninterest income....... $108,520 $120,526 $(12,006) (10) $373,690 $364,512
======== ======== ======== ==== ======== ========
<CAPTION>
Increase
(Decrease)
---------------
NONINTEREST Amount %
INCOME ---------------
<S> <C> <C>
$(18,170) (16)
(1,128) (16)
(364) (6)
(4,030) (18)
(2,383) (3)
(8,373) (58)
50,193 100
2,527 8
2,112 15
(11,206) (19)
--------
$ 9,178 3
======== ===
</TABLE>
Noninterest income for the third quarter of 2000 was $108.5 million,
a decrease of $12.0 million or 10 percent from the third quarter of
1999. Trust and investment management fees declined $11.5 million or
28 percent, as a result of this year's first quarter sale of the
corporate trust business. Excluding corporate trust revenue, total
trust and investment management fees were virtually unchanged from
the third quarter of 1999. Merchant and charge card fees declined
$1.9 million, while bond trading profits decreased $1.4 million.
Other non-interest income, including syndication fees, mortgage loans
sales, gains on equity securities and other fees, increased $1.4
million. Net gains from debt investment securities sales increased to
$3.1 million from $0.1 million in third quarter 1999.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Increase Nine Months
Ended September 30 (Decrease) Ended September 30
NONINTEREST -------------------- --------------- --------------------
EXPENSES AND (in thousands) 2000 1999 Amount % 2000 1999
INCOME TAXES ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation.................. $ 88,675 $ 92,188 $ (3,513) (4) $268,917 $274,706
Pension, profit sharing and
other employee benefits....... 13,649 18,563 (4,914) (26) 50,175 57,163
Net occupancy................... 13,455 14,705 (1,250) (9) 41,752 39,198
Equipment....................... 13,636 15,829 (2,193) (14) 42,016 46,791
Marketing....................... 9,316 8,278 1,038 13 22,573 21,582
Communication and delivery...... 5,807 5,782 25 -- 17,182 18,950
Expert services................. 5,094 5,706 (612) (11) 16,268 22,226
Contract programming............ 4,387 3,483 904 26 12,374 8,942
Other........................... 17,019 24,436 (7,417) (30) 52,746 65,393
-------- -------- -------- -------- --------
171,038 188,970 (17,932) (9) 524,003 554,951
Amortization of goodwill and
other valuation intangibles... 6,288 6,509 (221) (3) 19,105 19,271
-------- -------- -------- -------- --------
Total noninterest expenses...... $177,326 $195,479 $(18,153) (9) $543,108 $574,222
======== ======== ======== ======== ========
Provision for income taxes...... $ 24,063 $ 17,158 $ 6,905 40 $ 87,822 $ 56,247
======== ======== ======== === ======== ========
<CAPTION>
Increase
(Decrease)
NONINTEREST ---------------
EXPENSES AND Amount %
INCOME TAXES ---------------
<S> <C> <C>
$ (5,789) (2)
(6,988) (12)
2,554 7
(4,775) (10)
991 5
(1,768) (9)
(5,958) (27)
3,432 38
(12,647) (19)
--------
(30,948) (6)
(166) --
--------
$(31,114) (5)
========
$ 31,575 56
======== ===
</TABLE>
Noninterest expenses for the third quarter totaled $177.3 million, a
decrease of $18.2 million or 9 percent from the third quarter of 1999
primarily reflecting a decline in operating costs associated with the
corporate trust business sold in first quarter 2000.
Employment-related expenses totaled $102.3 million, a decrease of
$8.4 million or 8 percent from the year-ago quarter. Equipment
expenses decreased $2.2 million and net occupancy expenses decreased
$1.3 million from third quarter 1999. Expert services decreased $0.6
million to $5.1 million in the current quarter primarily as a result
of expenses for Y2K compliance incurred in 1999 and not replicated in
2000.
Income tax expense totaled $24.1 million, an increase of $6.9
million from the $17.2 million recorded in third quarter 1999,
reflecting higher pretax income.
--------------------------------------------------------------------------------
16
<PAGE> 19
--------------------------------------------------------------------------------
CAPITAL
POSITION The Corporation's total equity capital at September 30, 2000 was
$1.87 billion, compared with $1.73 billion and $1.74 billion at
December 31, 1999 and September 30, 1999, respectively. Excluding
adjustments for unrealized gains and losses from securities
available-for-sale, total equity increased $105.4 million from
September 30, 1999. During the preceding twelve months, the
Corporation declared common and preferred dividends of $156.1 million
and $18.0 million, respectively. In July 2000 the Corporation
declared a special dividend of $60 million and simultaneously issued
$60 million of subordinated debt.
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 previously 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 8.52 percent and
11.07 percent, respectively, at September 30, 2000. HTSB's Tier 1 and
total risk-based capital ratios were 8.25 percent and 10.09 percent,
respectively, at September 30, 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 7.01 percent and 7.18 percent,
respectively, for the third 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 September 30, 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 September 30, 2000, the Corporation's
intangible assets totaled $231 million, including approximately $213
million of intangibles excluded under capital guidelines. The
Corporation's and HTSB's tangible Tier 1 leverage ratios (which
exclude all intangibles) were 6.95 percent and 7.10 percent,
respectively, for the third quarter of 2000.
17
<PAGE> 20
--------------------------------------------------------------------------------
The following is a summary of the Corporation's capital ratios:
<TABLE>
<CAPTION>
September 30 December 31 September 30
(in thousands) 2000 1999 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets (end of period).............................. $29,480,525 $27,180,496 $26,203,591
=========== =========== ===========
Average assets (quarter).................................. $28,374,427 $26,937,024 $25,705,901
=========== =========== ===========
Risk-based on-balance sheet assets........................ $18,508,572 $16,488,277 $16,049,011
=========== =========== ===========
Risk-based off-balance sheet assets....................... $ 4,997,609 $ 4,742,337 $ 4,714,915
=========== =========== ===========
Total risk-based assets, net of deductions (based on
regulatory accounting principles)................ $23,286,515 $20,989,641 $20,517,586
=========== =========== ===========
Tier 1 capital............................................ $ 1,983,521 $ 1,895,050 $ 1,853,839
=========== =========== ===========
Supplementary capital..................................... $ 595,513 $ 557,069 $ 555,451
=========== =========== ===========
Total capital, net of deductions (based on
regulatory accounting principles)................ $ 2,578,321 $ 2,451,488 $ 2,408,640
=========== =========== ===========
Tier 1 leverage ratio..................................... 7.01% 7.03% 7.22%
Risk-based capital ratios
Tier 1.................................................. 8.52% 9.03% 9.04%
Total................................................... 11.07% 11.68% 11.74%
</TABLE>
--------------------------------------------------------------------------------
NONPERFORMING
ASSETS
<TABLE>
<CAPTION>
September 30 June 30 September 30
(in thousands) 2000 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans..................................... $ 92,330 $36,505 $ 26,042
Restructured loans................................... 2,961 3,804 2,986
----------------- ----------------- -----------------
Total nonperforming loans...................... 95,291 40,309 29,028
Other assets received in satisfaction of debt........ 1,055 1,308 937
----------------- ----------------- -----------------
Total nonperforming assets..................... $ 96,346 $41,617 $ 29,965
================= ================= =================
Nonperforming loans to total loans (end of period)... .60% .26% .20%
Nonperforming assets to total loans (end of
period)............................................ .60% .27% .21%
================= ================= =================
90-day past due loans still accruing interest........ $ 34,436 $14,707 $ 40,676
================= ================= =================
</TABLE>
Nonperforming assets consist of loans placed on nonaccrual status
when collection of principal or interest is doubtful, restructured
loans on which interest is being accrued but which have terms that
have been renegotiated to provide for a reduction of interest or
principal, and real estate or other assets which have been acquired
in full or partial settlement of defaulted loans. These assets, as a
group, are not earning at rates comparable to earning assets.
Nonperforming assets at September 30, 2000 totaled $96 million,
or 0.60 percent of total loans, up from $42 million or 0.27 percent
of total loans at June 30, 2000 and from $30 million or 0.21 percent
of total loans a year ago. This increase is comprised of four loans
in the shared national credit portfolio ranging in size from $10
million to $17 million, to borrowers in four different industry
sectors.
Interest shortfall for the quarter ended September 30, 2000 was
$1.8 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. Interest income on
nonaccrual loans is recognized only at the time cash is received and
only if collection of the
18
<PAGE> 21
--------------------------------------------------------------------------------
entire principal balance is expected. Interest income on restructured
loans is accrued according to the most recently agreed-upon
contractual terms.
<TABLE>
<CAPTION>
Impaired Loans Impaired Loans
For Which There Is For Which There Is Total
(in thousands) Related Allowance No Related Allowance Impaired Loans
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 2000
Balance....................................... $47,433 $47,858 $95,291
Related allowance............................. 27,774 -- 27,774
------- ------- -------
Balance, net of allowance..................... $19,659 $47,858 $67,517
======= ======= =======
December 31, 1999
Balance....................................... $ 9,219 $18,961 $28,180
Related allowance............................. 5,032 -- 5,032
------- ------- -------
Balance, net of allowance..................... $ 4,187 $18,961 $23,148
======= ======= =======
September 30, 1999
Balance....................................... $ 8,615 $20,413 $29,028
Related allowance............................. 2,354 -- 2,354
------- ------- -------
Balance, net of allowance..................... $ 6,261 $20,413 $26,674
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------ ------------------
(in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average impaired loans..................................... $61,674 $34,062 $49,802 $39,245
======= ======= ======= =======
Total interest income on impaired loans on a cash basis.... $ 528 $ 187 $ 864 $ 289
======= ======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALLOWANCE
FOR POSSIBLE Quarter Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
LOAN LOSSES (in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period........................... $166,506 $158,044 $162,134 $153,484
-------- -------- -------- --------
Charge-offs............................................ (5,425) (6,567) (18,394) (21,744)
Recoveries............................................. 2,127 2,262 5,526 6,419
-------- -------- -------- --------
Net charge-offs........................................ (3,298) (4,305) (12,868) (15,325)
Provision charged to operations........................ 7,305 6,800 21,247 22,380
-------- -------- -------- --------
Balance at September 30................................ $170,513 $160,539 $170,513 $160,539
======== ======== ======== ========
Net charge-offs as a percentage of provision charged to
operations............................................. 45% 63% 61% 68%
Allowance for possible loan losses to nonperforming
loans (period-end)..................................... 179% 553%
Allowance for possible loan losses to nonperforming
assets (period-end).................................... 177% 536%
Allowance for possible loan losses to total loans
outstanding (period-end)............................... 1.07% 1.13%
</TABLE>
The Corporation's provision for loan losses for the current quarter
was $7.3 million, up 7 percent from $6.8 million in last year's third
quarter. Net charge-offs decreased from $4.3 million to $3.3 million
for the current quarter, bringing net charge-offs on a year-to-date
basis to $12.9 million compared to $15.3 million in 1999 for the same
nine-month period. The decrease in the 2000 third quarter net
charge-offs primarily reflects
19
<PAGE> 22
--------------------------------------------------------------------------------
a decrease in commercial loan write-offs. For the third quarter of
2000, net charge-offs related to commercial loans were $2.5 million
compared to $3.2 million for the third quarter of 1999.
At September 30, 2000, the allowance for possible loan losses was
$171 million, equal to 1.07 percent of total loans outstanding,
compared to $161 million or 1.13 percent of total loans one year ago.
The allowance as a percentage of nonperforming loans decreased from
553 percent at September 30, 1999, to 179 percent at September 30,
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 37 percent of the
Corporation's total assets and amounted to $10.94 billion at
September 30, 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.
The Corporation's average volume of core deposits, consisting of
demand deposits, interest checking deposits, savings deposits and
certificates, and money market accounts increased from $13.90 billion
or 61 percent of total non-equity funding in the third quarter of
1999 to $14.39 billion or 56 percent of total non-equity funding in
the current quarter. This increase reflected increases in all core
deposit categories. The average volume of wholesale deposits and
short-term borrowings increased from $9.06 billion or 39 percent of
total non-equity funding in the third quarter of 1999 to $11.11
billion or 44 percent of total non-equity funding in the current
quarter. Total deposits averaged $18.58 billion in the third quarter
of 2000, an increase of $1.44 billion compared to the same quarter
last year.
Average money market assets in the third quarter of 2000
decreased $19 million or 5 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 36 percent to $5.93 billion this quarter from $4.37 billion
in the same quarter last year.
HTSB offers to institutional investors, from time to time,
unsecured short-term and medium-term bank notes in an aggregate
principal amount of up to $1.50 billion outstanding at any time. The
term of each note could range from fourteen days to fifteen years.
The notes are subordinated to deposits and rank pari passu with all
other senior unsecured indebtedness of HTSB. As of September 30,
2000, $882 million of senior notes were outstanding compared to $1.50
billion at September 30, 1999.
--------------------------------------------------------------------------------
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," "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, 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
20
<PAGE> 23
--------------------------------------------------------------------------------
should be considered in evaluating forward-looking statements. The
Corporation assumes no obligation to update any such forward-looking
statements.
--------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
2000
COMPARED
WITH 1999 The Corporation's earnings for the nine months ended September 30,
2000 were $210.3 million. This represented a $41.5 million or 25
percent increase from 1999 earnings of $168.8 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 $14.5
million in 1999 compared to $6.2 million in 2000. Excluding the
effects of both transactions, "core earnings" rose 11 percent. Cash
ROE, excluding the corporate trust gain, was 18.78 percent compared
to 18.01 percent a year ago. Cash ROA, excluding the corporate trust
gain, was 0.93 percent compared to 0.96 percent.
Net interest income on a fully taxable equivalent basis was
$520.7 million in the current period, an increase of $35.2 million or
7 percent from the 1999 year-to-date period. Average earning assets
rose to $24.86 billion from $22.31 billion a year ago attributable to
an increase of 10 percent or $1.38 billion in average loans and $1.12
billion in investment securities. Commercial and consumer loans and
residential mortgages contributed to the loan growth. Net interest
margin declined to 2.80 percent from 2.91 percent in 1999 primarily
reflecting the impact of the rising interest rate environment in
2000.
The year-to-date 2000 provision for loan losses of $21.2 million
was down slightly from $22.4 million a year ago. Net charge-offs
declined by 16 percent to $12.9 million in the current year from
$15.3 million in 1999.
Noninterest income increased $9.2 million or 3 percent to $373.7
million in 2000 compared to a year ago. Excluding the $50.2 million
gain on the sale of the corporate trust business, noninterest revenue
declined 11 percent. Most of this decrease was caused by the $8.4
million decline in net gains from securities sales and reduced
operating revenue from the corporate trust business sold in first
quarter 2000. Trust and investment management fees declined by $18.2
million reflecting reduced corporate trust revenue. Merchant and
charge card fees declined $4.0 million while service charge income
decreased $2.4 million compared to the prior year. Other noninterest
income, including syndication fees, mortgage loan sales, gains from
equity securities sales and other fees declined $11.2 million
compared to the year-ago period.
Noninterest expenses of $543.1 million decreased $31.1 million or
5 percent from a year ago. Income tax expense increased by $31.6
million, reflecting higher pretax income, including the gain on the
sale of the corporate trust business.
Annualized return on average common stockholder's equity,
excluding the corporate trust gain, was 14.71 percent for the current
year-to-date period compared to 13.73 percent in the same period a
year ago.
--------------------------------------------------------------------------------
OPERATING
SEGMENT
REVIEW PERSONAL AND COMMERCIAL CLIENT GROUP
Net income for Personal and Commercial Client Group in the
year-to-date period of 2000 was $100.7 million, up $55.5 million from
the year-ago period. First quarter 2000 earnings included a pretax
gain of $50.2 million resulting from the sale of the corporate trust
business. Total revenue was $496.6 million, an increase of $61.4
million or 14 percent from $435.2 million in 1999. Excluding the gain
on the sale of the corporate trust business and corporate trust
revenue, total revenue was $437.6 million representing growth of
$34.8 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
of $343.1 million decreased $36.0 million from 1999, primarily as a
result of the corporate trust sale. Excluding the impact of the
corporate trust sale, noninterest expenses decreased $7.3 million or
2 percent over the prior year, reflecting continued cost containment.
Income taxes increased by $43.9 million in the current year,
reflecting higher pretax income.
INVESTMENT BANKING GROUP
Net income for Investment Banking Group was $95.1 million in 2000,
reflecting a decrease of $16.6 million or 15 percent from $111.7
million a year ago. Total revenue of $250.9 million decreased by
$25.7 million or 9 percent from 1999. Net interest income declined
$15.9 million compared to the prior year. Net interest income for
Mid-Market Corporate Banking rose $35.7 million over the prior year
due to increased loan volume and better spreads. This was offset by a
decline in net interest income within the Treasury unit due
21
<PAGE> 24
--------------------------------------------------------------------------------
primarily to an increase in interest rates in the current year, which
increased the funding cost on the investment portfolio. Noninterest
income declined $9.8 million or 16 percent. 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 year. Noninterest expense increased $1.1
million to $78.1 million in the current year. Income taxes decreased
by $10.9 million during the year, reflecting lower pretax income.
PRIVATE CLIENT GROUP
Net income for Private Client Group was $14.5 million in 2000,
reflecting an increase of $2.6 million or 22 percent from $11.9
million a year ago. Total revenue of $146.9 million increased by $8.6
million or 6 percent from $138.3 million in 1999. Net interest income
increased $6.5 million or 18 percent, attributable to a $199 million
increase in loan volume. Noninterest income increased $2.1 million or
2 percent to $104.4 million. Growth was primarily due to increased
trust and investment management revenues. Noninterest expense
increased $3.8 million or 3 percent to $121.9 million in the current
year, primarily due to expansion strategies and initiatives. Income
taxes increased by $2.1 million during the year, reflecting higher
pretax income.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
22
<PAGE> 25
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
ARLINGTON-MEADOWS
Rolling Meadows, Illinois
HARRIS BANK AURORA, N.A.
Aurora, Illinois
HARRIS BANK BARRINGTON, N.A.
Barrington, Illinois
SUBURBAN BANK OF BARRINGTON
Barrington, Illinois
HARRIS BANK BARTLETT
Bartlett, Illinois
HARRIS BANK BATAVIA, N.A.
Batavia, Illinois
HARRIS BANK CARY-GROVE
Cary, Illinois
HARRIS BANK ELK GROVE, N.A.
Elk Grove Village, Illinois
HARRIS BANK FRANKFORT
Frankfort, Illinois
HARRIS BANK GLENCOE-
NORTHBROOK, N.A.
Glencoe, Illinois
HARRIS BANK HINSDALE, N.A.
Hinsdale, Illinois
HARRIS BANK HOFFMAN-SCHAUMBURG
Schaumburg, Illinois
HARRIS BANK HUNTLEY
Huntley, Illinois
HARRIS BANK LIBERTYVILLE
Libertyville, Illinois
HARRIS BANK MARENGO
Marengo, Illinois
HARRIS BANK NAPERVILLE
Naperville, Illinois
HARRIS BANK OAKBROOK TERRACE
Oakbrook Terrace, Illinois
HARRIS BANK PALATINE, N.A.
Palatine, Illinois
HARRIS BANK ROSELLE
Roselle, Illinois
HARRIS BANK ST. CHARLES
St. Charles, Illinois
HARRIS BANK WESTCHESTER
Westchester, Illinois
HARRIS BANK WILMETTE, N.A.
Wilmette, Illinois
HARRIS BANK WINNETKA, N.A.
Winnetka, Illinois
HARRIS BANK WOODSTOCK
Woodstock, 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
HARRISCORP CAPITAL CORPORATION
Chicago, Illinois
HARRISCORP FINANCE, INC.
Chicago, Illinois
HARRIS BANK INTERNATIONAL CORPORATION
New York, New York
HARRISCORP LEASING, INC.
Chicago, Illinois
MIDWESTERN HOLDINGS, INC.
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
HARRIS INFORMATION SYSTEMS, INC.
Chicago, Illinois
SUBURBAN HOLDINGS, INC.
Chicago, Illinois
<PAGE> 26
EXHIBIT A -- HARRIS BANKCORP, INC.
2000 THIRD QUARTER REPORT
SEPTEMBER 30, 2000
