<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998 Commission file number 1-13805
Harris Preferred Capital Corporation
(Exact name of registrant as specified in its charter)
Maryland #36-4183096
(State or other jurisdiction (I.R.S. Employer
of incorporation Identification No.)
or organization)
111 West Monroe Street, Chicago, Illinois 60603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 461-2121
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, $1.00 par value, outstanding on August
13, 1998 was 1,000.
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HARRIS PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheet.....................................................2
Statements of Operations..........................................3
Statement of Changes in Stockholders' Equity......................4
Statement of Cash Flows...........................................5
Notes to Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................10
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................21
Signatures...................................................................21
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Part I. Financial Information
Item 1. Financial Statements
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA) JUNE 30, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash on deposit with parent $ 341
Securities purchased from parent under agreement to resell 5,001
Notes receivable from parent 302,229
Securities available-for-sale:
Mortgage-backed 165,982
U.S. Treasury 19,780
Other assets 2,660
----------
TOTAL ASSETS $ 495,993
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses due to parent $ 91
----------
TOTAL LIABILITIES $ 91
==========
Commitments and contingencies -
STOCKHOLDERS' EQUITY
Common stock ($1 par value); 1,000 shares authorized, issued
and outstanding 1
7 3/8% Noncumulative Exchangeable Preferred Stock, Series A ($1 par value);
liquidation value of $250,000; 20,000,000 shares authorized,
10,000,000 shares issued and outstanding 250,000
Additional paid-in capital 240,733
Earnings in excess of distributions 4,409
Accumulated other comprehensive income - unrealized gains on available-for-sale securities 759
----------
TOTAL STOCKHOLDERS' EQUITY 495,902
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 495,993
==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 1998 AND
FROM INCEPTION (JANUARY 2, 1998) THROUGH
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
QUARTER (JANUARY 2, 1998)
ENDED THROUGH
(IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 1998 JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Securities purchased from parent under agreement to resell $ 309 $ 327
Notes receivable from parent 5,061 8,188
Securities available-for-sale:
Mortgage-backed 2,276 3,496
U.S. Treasury 34 34
----------- -----------
Total interest income 7,680 12,045
Operating expenses:
Loan servicing fees paid to parent 239 380
Advisory fees paid to parent 11 18
General and administrative 44 68
----------- -----------
Total operating expense 294 466
Net income 7,386 11,579
Preferred dividends 4,609 7,170
----------- -----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 2,777 $ 4,409
=========== ===========
Basic and diluted earnings per common share $ 2,777.00 $ 4,409.00
=========== ===========
Net income $ 7,386 $ 11,579
Other comprehensive income - unrealized gains on available-for-
sale-securities 1,314 759
----------- -----------
Comprehensive income $ 8,700 $ 12,338
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
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HARRIS PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
FROM INCEPTION (JANUARY 2, 1998) THROUGH
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Earnings in
Common Preferred Paid-in Excess of
(in thousands except per share data) Stock Stock Capital Distributions
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at inception $ - $ - $ - $ -
Issuance of common stock 1
Initial public offering of 7 3/8% Noncumulative Exchangable
Preferred Stock, Series A, par value $1, on February 11, 1998 - 250,000 - -
Contribution to capital surplus - - 240,733 -
Net income - - - 11,579
Other comprehensive income - - - -
Dividends (preferred stock $0.7170 per share) - - - (7,170)
---------- ----------- ---------- ---------
Balance at June 30, 1998 $ 1 $ 250,000 $ 240,733 $ 4,409
========== =========== ========== =========
<CAPTION>
Accumulated
Other
Comprehensive Stockholders'
(in thousands except per share data) Income Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at inception $ - $ -
Issuance of common stock 1
Initial public offering of 7 3/8% Noncumulative Exchangable
Preferred Stock, Series A, par value $1, on February 11, 1998 - 250,000
Contribution to capital surplus - 240,733
Net income - 11,579
Other comprehensive income 759 759
Dividends (preferred stock $0.7170 per share) - (7,170)
--------- ----------
Balance at June 30, 1998 $ 759 $ 495,902
========= ==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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HARRIS PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FROM INCEPTION (JANUARY 2, 1998) THROUGH
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
(JANUARY 2, 1998)
THROUGH
JUNE 30,
(IN THOUSANDS) 1998
- -----------------------------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES:
Net Income $ 11,579
Adjustments to reconcile net income to net cash provided by operating activities:
Net increase in accrued interest receivable (2,513)
Net increase in accrued expenses 91
Other, net (147)
----------
Net cash provided by operating activities 9,010
----------
INVESTING ACTIVITIES:
Net increase in securities purchased from parent under agreement to resell (5,001)
Purchases of notes receivable from parent (356,000)
Repayments of notes receivable from parent 53,771
Purchases of securities available-for-sale (188,647)
Proceeds from maturities of securities available-for-sale 3,644
----------
Net cash used by investing activities (492,233)
----------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 250,000
Proceeds from issuance of common stock 1
Contribution to additional paid-in capital, net of acquisition cost 240,733
Cash dividends paid on preferred stock (7,170)
----------
Net cash provided by financing activities 483,564
----------
Net increase in cash on deposit with parent 341
Cash on deposit with parent at January 2, 1998 -
----------
Cash on deposit with parent at June 30, 1998 $ 341
==========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Harris Preferred Capital Corporation (the "Company") is a Maryland corporation
incorporated on September 24, 1997, pursuant to the Maryland General Corporation
Law. The Company's principal business objective is to acquire, hold, finance
and manage qualifying Real Estate Investment Trust ("REIT") assets (the
"Mortgage Assets"), consisting of a limited recourse note or notes issued by
Harris Trust and Savings Bank (the "Bank") secured by real estate mortgage
assets and other obligations secured by real property, as well as certain other
qualifying REIT assets. The Company's assets are held in a Maryland real estate
trust. The Company expects to be subject to tax as a REIT under sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
will generally not be subject to Federal income tax to the extent that it
distributes 95% of its earnings to its stockholders and maintains its
qualification as a REIT. All of the shares of the Company's common stock, par
value $1.00 per share (the "Common Stock"), are owned by the Bank. The Bank is
required to maintain direct or indirect ownership of at least 80 % of the
outstanding Common Stock of the Company for as long as any 7 3/8% Noncumulative
Exchangeable Preferred Stock, Series A (the "Preferred Shares"), $1.00 par
value, are outstanding. The Company was formed by the Bank to provide investors
with the opportunity to invest in residential mortgages and other real estate
assets and to provide the Bank with a cost-effective means of raising capital
for federal regulatory purposes.
On February 11, 1998, the Company consummated an initial public offering (the
"Offering") of 10,000,000 shares of the Company's Preferred Shares, receiving
proceeds of $242,125,000, net of underwriting fees. The Preferred Shares are
traded on the New York Stock Exchange. Concurrent with the issuance of the
Preferred Shares, the Bank contributed additional capital of $250 million to
the Company.
The Company used the proceeds raised from the initial public offering of the
Preferred Shares and the additional capital contributed by the Bank to purchase
$356 million of notes (the "Notes") from the Bank and $135 million of
mortgage-backed securities at their estimated fair value.
In the opinion of management, all adjustments necessary for a fair presentation
have been made to the accompanying statements for the quarter ended June 30,
1998 and the period from inception (January 2, 1998) through June 30, 1998, and
all adjustments are of a normal and recurring nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with parent and securities
purchased from parent under agreement to resell.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs. Known
losses of principal on impaired loans are charged off. The provision for loan
losses is based on past loss experience, management's evaluation of the loan
portfolio securing the Mortgage Assets under current economic conditions and
management's estimate of anticipated, but as yet not specifically identified,
loan losses. Such estimates are reviewed periodically and adjustments, if
necessary, are recorded during the periods in which they become known. At June
30, 1998, no allowance for possible loan losses was recorded under this policy.
INCOME TAXES
The Company expects to elect to be taxed as a REIT commencing with its taxable
year ending December 31, 1998 and intends to comply with the provisions of the
Code with respect thereto. The Company does not expect to be subject to Federal
income tax to the extent it distributes 95% of its adjusted REIT taxable income
to stockholders and as long as certain assets, income and stock ownership tests
are met. Accordingly, no provision for income taxes is included in the
accompanying financial statements.
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SECURITIES
The Company classifies all securities as held-to-maturity or as available-for-
sale. Available-for-sale securities are reported at fair value with unrealized
gains and losses included as a separate component of stockholders' equity.
There were no held-to-maturity securities at June 30, 1998.
Interest income on securities, including amortization of discount or premium, is
included in earnings. Realized gains and losses, as a result of securities
sales, are included in securities' gains, with the cost of securities sold
determined on the specific identification basis.
The Company purchases U.S. Treasury and Federal agency securities from its
parent under agreements to resell identical securities. The amounts advanced
under these agreements represent short-term loans and are reflected as
receivables in the Balance Sheet. Securities purchased under agreement to
resell totaled $5 million at June 30, 1998. The securities underlying the
agreements are book-entry securities. Securities are transferred by appropriate
entry into the Company's account with the Bank under a written custodial
agreement with the Bank that explicitly recognizes the Company's interest in
these securities.
ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Since the Company does not conduct
its activities in more than one segment or operate outside of the United States,
reporting under SFAS No. 131 is not applicable.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." Because the Company has no
employees, reporting under SFAS No. 132 is not applicable.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial position and to be measured at fair value. The Statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company will adopt this Statement in 2000 and does not expect its
adoption to have a material effect on its financial position or results of
operations.
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. NOTES RECEIVABLE FROM PARENT
After capitalization on February 11, 1998, proceeds were used in part to
purchase $356 million of Notes at a rate of 6.4%. The Notes are secured by
mortgage loans originated by the Bank. The principal amount of the Notes equals
approximately 80% of the aggregate outstanding principal amount of the
collateralizing mortgage loans.
The Notes are recourse only to the securing mortgage loans that are secured by
real property. The Notes mature on October 1, 2027. Payments of principal and
interest on the notes are recorded monthly from payments received on the
securing mortgage loans. The Company has a security interest in the real
property securing the underlying mortgage loans and is entitled to enforce
payment on the securing mortgage loans in its own name if a mortgagor should
default. In the event of default, the Company has the same rights as the
original mortgagee to foreclose the mortgaged property and satisfy the
obligations of the Bank out of the proceeds. The securing mortgage loans are
serviced by the Bank, as agent of the Company.
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The Company intends that each mortgage loan securing the Notes will represent a
first lien position and will be originated in the ordinary course of the Bank's
real estate lending activities based on the underwriting standards generally
applied (at the time of origination) for the Bank's own account. The Company
also intends that all Mortgage Assets held by the Company will meet market
standards, with any servicing guidelines promulgated by the Company and, in the
case of residential mortgage loans, with Federal National Mortgage Association
("Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC") guidelines
and procedures.
The balance of securing mortgage loans at June 30, 1998 was $360 million. The
weighted average interest rate on those loans was 7.365% at June 30, 1998.
None of the mortgage loans collateralizing the Notes were on nonaccrual status
at June 30, 1998.
A majority of the collateral securing the underlying mortgage loans is located
in Illinois and Arizona. The financial viability of customers in these states
is, in part, dependent on the states' economies. The Company's maximum risk of
accounting loss, should all customers in Illinois and Arizona fail to perform
according to contract terms and all collateral prove to be worthless, was
approximately $198 million and $56 million, respectively, as of June 30, 1998.
4. SECURITIES
Mortgage-backed securities represent Government National Mortgage Association 6
1/2% Platinum Certificates. The fair value, amortized cost and gross and net
unrealized gains of such securities aggregated $166.0 million, $165.2 million
and $760 thousand, respectively, as of June 30, 1998. The contractual
maturities are November 15, 2027 through June 15, 2028. Expected maturities can
differ from contractual maturities since borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
U.S. Treasury securities represent 5.21% 90-day U. S. Treasury bills. The
amortized cost (which approximated fair value) was $19.8 million at June 30,
1998.
5. COMMON AND PREFERRED STOCK
On February 11, 1998, the Company issued 10,000,000 Preferred Shares at a price
of $25 per share pursuant to its Registration Statement on Form S-11. Proceeds
from this issuance, net of underwriting fees, totaled $242,125,000. The
liquidation value of each Preferred Share is $25 plus any authorized, declared
and unpaid dividends. Except upon the occurrence of certain events, the
Preferred Shares are not redeemable by the Company prior to March 30, 2003. On
or after such date, the Preferred Shares will be redeemable at the option of the
Company, in whole or in part, at the liquidation preference thereof, plus the
quarterly accrued and unpaid dividend, if any, to the date of redemption. Except
under certain limited circumstances, as defined, the holders of the Preferred
Shares have no voting rights. The Preferred Shares are automatically
exchangeable for a new series of preferred stock of the Bank upon the occurrence
of certain events.
Holders of Preferred Shares are entitled to receive, if declared by the Board of
Directors of the Company, noncumulative dividends at a rate of 7 3/8% per annum
of the $25 per share liquidation preference (an amount equivalent to $1.84375
per share per annum). Dividends on the Preferred Shares, if authorized and
declared, are payable quarterly in arrears on March 30, June 30, September 30,
and December 30 of each year. Dividends paid during the quarter ended June 30,
1998 to the holders of the Preferred Shares totaled $4,609,000.
Dividends on Common Stock are paid if and when authorized and declared by the
Board of Directors out of funds legally available after all preferred dividends
have been paid. No Common Stock dividends were declared or paid during the
quarter ended June 30, 1998.
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6. TRANSACTIONS WITH AFFILIATES
The Company entered into an advisory agreement (the "Advisory Agreement") with
the Bank pursuant to which the Bank administers the day-to-day operations of the
Company. The Bank is responsible for (i) monitoring the credit quality of
Mortgage Assets held by the Company, (ii) advising the Company with respect to
the reinvestment of income from and payments on, and with respect to the
acquisition, management, financing, and disposition of the Mortgage Assets held
by the Company, and (iii) monitoring the Company's compliance with the
requirements necessary to qualify as a REIT.
The Advisory Agreement has an initial term of one year and may be renewed for
additional one-year periods. The Bank is entitled to receive an advisory fee
equal to $50,000 per year, payable in equal quarterly installments.
The securing mortgage loans are serviced by the Bank pursuant to the terms of a
servicing agreement ("the Servicing Agreement"). The Bank will receive a fee
equal to 0.25% per annum on the principal balances of the loans serviced.The
Servicing Agreement requires the Bank to service the mortgage loans in a manner
generally consistent with accepted secondary market practices, with any
servicing guidelines promulgated by the Company and, in the case of the securing
mortgage loans, with Fannie Mae and FHLMC guidelines and procedures.
7. COMMITMENTS AND CONTINGENCIES
Legal proceedings in which the Company is a defendant may arise in the normal
course of business. At June 30, 1998, there is no pending litigation against
the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectation, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
the Company's statements regarding tax treatment as a REIT, liquidity, provision
for loan losses, capital resources and investment activities in "Management's
Discussion and Analysis of Financial Condition and Results of Operation." In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "expect," "intend" and other similar expressions, as they
relate to the Company or the Company's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. It is important to note that the Company's
actual results could differ materially from those described herein as
anticipated, believed, estimated or expected. Among the factors that could
cause the results to differ materially are the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form S-11
(File No. 333-40257), with respect to the Preferred Shares declared effective by
the Securities and Exchange Commission on February 5, 1998. The Company assumes
no obligation to update any such forward-looking statement.
OVERVIEW
Harris Preferred Capital Corporation is a Maryland corporation incorporated on
September 24, 1997, pursuant to the Maryland General Corporation Law. The
Company's principal business objective is to acquire, hold, finance and manage
assets consisting of a limited recourse note or notes issued by the Bank secured
by real estate mortgage assets and other obligations secured by real property,
as well as certain other qualifying REIT assets. The Company expects to qualify
as a REIT under the Code, and will generally not be subject to federal income
tax to the extent that it distributes 95% of its earnings to its stockholders
and maintains its qualification as a REIT. All of the shares of the Company's
Common Stock are owned by the Bank. The Bank is required to maintain direct or
indirect ownership of at least 80% of the outstanding Common Stock of the
Company for as long as any Preferred Shares are outstanding. The Company was
formed by the Bank to provide investors with the opportunity to invest in
residential mortgage and other real estate assets and to provide the Bank with a
cost-effective means of raising capital for federal regulatory purposes.
On February 11, 1998, the Company issued, in the Offering, 10,000,000 Preferred
Shares, $1.00 par value, which raised $250 million less $7.9 million of
underwriting fees. The Preferred Shares are traded on the New York Stock
Exchange under the symbol "HBC Pr A". Concurrent with the issuance of the
Preferred Shares, the Bank contributed additional capital of $250 million to
the Company.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1998
The Company's net income for the second quarter of 1998 was $7.4 million.
In the current quarter the Company purchased $34.5 million par value mortgage-
backed securities and $19.7 million of U.S. Treasury Bills. As of June 30,
1998, the Company had $302 million invested in Notes and $185 million invested
in securities at an estimated fair value of $186 million. Management intends to
continue to reinvest principal collections in notes issued by the Bank secured
by real estate mortgage assets, residential mortgage loans to be purchased from
either the Bank or its affiliates on a periodic basis, or mortgage-backed
securities.
Second quarter interest income on the Notes totaled $5.1 million and yielded
6.4% on average principal outstanding. Interest income on securities available-
for-sale for the quarter was $2.3 million resulting in a yield of 6.6%. The
average Notes and securities available-for-sale for the quarter were $316
million and $139 million, respectively. The average outstanding balance of the
securing mortgage loans for the same period was $377 million. There were no
Company borrowings during the quarter.
Second quarter operating expenses totaling $294 thousand were comprised of loan
servicing fees paid to parent, advisory fees paid to parent and general and
administrative expenses. Loan servicing expenses of $239 thousand were based on
an annual servicing fee rate of 0.25% of the outstanding principal balances of
the securing mortgage loans. Advisory fees paid to parent for the quarter
totaled $11 thousand. General and administrative expenses were $44 thousand.
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FROM INCEPTION THROUGH JUNE 30, 1998
The Company's net income for the period from inception (January 2, 1998) through
June 30, 1998 was $11.6 million. Interest income on the Notes for the
year-to-date period ended June 30, 1998 totaled $8.2 million and yielded 6.4% on
average principal outstanding . Interest income on securities available-for-
sale for the same period was $3.5 million resulting in a yield of 6.6%. The
average Notes and securities available-for-sale for the year-to-date period
ended June 30, 1998 were $329 million and $137 million, respectively. The
average outstanding balance of the securing mortgage loans for the same period
was $350 million. There were no Company borrowings during this period.
Operating expenses for the period ended June 30, 1998 totaled $466 thousand.
Loan servicing expenses for the same period were $380 thousand. Advisory fees
paid to parent were $18 thousand and general and administrative expenses were
$68 thousand.
On May 28, 1998, the Company declared a cash dividend of $.46094 per share on
the outstanding Preferred Shares to the stockholders of record on June 15, 1998.
The dividend of $4.6 million was subsequently paid to holders of Preferred
Shares on June 26, 1998. On a year-to-date basis, the Company has declared and
paid $7.2 million of dividends to holders of Preferred Shares.
At June 30, 1998, there were no securing mortgage loans on nonaccrual status.
ALLOWANCE FOR LOAN LOSSES
The Company does not currently maintain an allowance for loan losses due to the
over-collateralization of the securing mortgage loans.
CONCENTRATIONS OF CREDIT RISK
A majority of the collateral securing the underlying mortgage loans is located
in Illinois and Arizona. The financial viability of customers in these states
is, in part, dependent on the states' economies. The Company's maximum risk of
accounting loss, should all customers in Illinois and Arizona fail to perform
according to contract terms and all collateral prove to be worthless, was
approximately $198 million and $56 million, respectively, at June 30, 1998.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT.
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional notes or other qualifying assets and
to pay dividends to its stockholders after satisfying obligations to creditors.
The acquisition of additional notes or other qualifying assets is funded with
the proceeds obtained from repayment of principal balances by individual
mortgagees. The payment of dividends on the Preferred Shares will be made from
legally available funds, principally arising from operating activities of the
Company. The Company's cash flows from operating activities principally consist
of the collection of interest on the notes and mortgage-backed securities. The
Company does not have and does not anticipate having any material capital
expenditures.
In order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its adjusted REIT taxable income, as provided for under the Code,
to its common and preferred stockholders. The Company currently expects to
distribute dividends annually equal to 95% or more of its adjusted REIT taxable
income.
The Company anticipates that cash and cash equivalents on hand and the cash flow
from the notes and mortgage-backed securities will provide adequate liquidity
for its operating, investing and financing needs.
As presented in the accompanying Statement of Cash Flows, the primary sources of
funds during the period from inception (January 2, 1998) through June 30, 1998,
were $250 million from the issuance of Preferred Shares and $241 million
additional capital contributed by the Bank, net of acquisition costs. Additional
significant sources of funds were $54 million provided by principal payments on
the notes. The primary uses of funds were $302 million in purchases of Notes,
net of repayments, $185 million in purchases of securities available-for-sale,
and $7.2 million in preferred stock dividends paid.
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YEAR 2000
A critical issue has emerged in the REIT industry and for the economy overall
regarding how existing application software programs and operating systems can
accommodate the date value for the year 2000. Many existing application
software products in the marketplace were designed only to accommodate a two
digit date position which represents the year (e.g., '95' is stored on the
system and represents the year 1995). As a result, the year 1999 (i.e. '99')
could be the maximum date value these systems will be able to accurately
process. The Company utilizes and is dependent upon the Bank's data processing
systems and software to conduct its business. Management of the Company and the
Bank recognizes the need to ensure the Company's operations will not be
adversely impacted by year 2000 issues and is managing the related operational
risk accordingly. In 1996, the Bank formed a Year 2000 Project Office to plan,
implement and manage year 2000 compliance. The renovation effort is well
underway and the Bank is currently evaluating the need for testing activities
with customers, suppliers and various interfaces to the national and global
payments systems. The costs incurred in addressing the year 2000 problem are
borne by the Bank.
ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Since the Company does not conduct
its activities in more than one segment or operate outside of the United States,
reporting under SFAS No. 131 is not applicable.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." Because the Company has no
employees, reporting under SFAS No. 132 is not applicable.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial position and to be measured at fair value. The Statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company will adopt this Statement in 2000 and does not expect its
adoption to have a material effect on its financial position or results of
operations.
OTHER MATTERS
As of June 30, 1998, the Company believes that it is in full compliance with the
REIT tax rules, and expects to qualify as a REIT under the provisions of the
Code.
The Company expects to meet all REIT requirements regarding the ownership of its
stock and anticipates meeting the annual distribution requirements.
FINANCIAL STATEMENTS OF HARRIS TRUST AND SAVINGS BANK
The following unaudited financial information for Harris Trust and Savings Bank
is included because the Preferred Shares are automatically exchangeable for a
new series of preferred stock of the Bank upon the occurrence of certain events.
Page 12
<PAGE> 14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30 Six Months Ended June 30
----------------------- -------------------------
(in thousands except share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $170,202 $ 175,908 $335,356 $343,273
Money market assets:
Deposits at banks 1,849 8,787 8,198 16,915
Federal funds sold and securities purchased under agreement to resell 1,786 2,949 3,638 5,759
Trading account 806 608 1,540 1,601
Securities available-for-sale:
U.S. Treasury and Federal agency 64,854 57,188 124,546 105,696
State and municipal 809 1,207 1,858 2,359
Other 316 316 631 631
-------- -------- -------- --------
Total interest income 240,622 246,963 475,767 476,234
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 87,981 83,716 170,982 160,601
Short-term borrowings 43,073 36,855 84,110 71,497
Senior notes 13,910 14,214 23,507 23,160
Minority interest-dividends on preferred stock of subsidiary 4,609 -- 7,170 --
Long-term notes 4,761 4,513 10,108 9,403
-------- -------- -------- --------
Total interest expense 154,334 139,298 295,877 264,661
-------- -------- -------- --------
NET INTEREST INCOME 86,288 107,665 179,890 211,573
Provision for loan losses 6,985 15,643 11,976 31,089
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 79,303 92,022 167,914 180,484
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees 27,938 25,293 54,046 48,813
Trading account 3,209 1,547 4,684 2,395
Foreign exchange 1,650 1,225 3,300 2,114
Merchant and charge card fees 6,323 12,752 13,494 24,265
Service fees and charges 24,100 20,661 47,754 40,889
Portfolio securities gains 3,891 2,593 11,854 3,776
Gain on sale of credit card portfolio -- -- 12,000 --
Other 22,366 10,395 36,204 23,640
-------- -------- -------- --------
Total noninterest income 89,477 74,466 183,336 145,892
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation 65,976 61,568 129,501 120,819
Pension, profit sharing and other employee benefits 12,202 12,206 23,713 24,134
Net occupancy 10,547 10,716 20,340 22,246
Equipment 11,164 10,270 22,050 18,890
Marketing 6,240 5,991 11,310 11,040
Communication and delivery 4,861 5,217 10,322 10,146
Deposit insurance 674 647 1,314 1,198
Expert services 6,613 8,020 13,042 12,944
Restructuring charges -- -- 5,564 --
Other 2,451 9,308 6,802 18,790
-------- -------- -------- --------
120,728 123,943 243,958 240,207
Goodwill and other valuation intangibles 5,181 6,109 10,725 12,270
-------- -------- -------- --------
Total noninterest expenses 125,909 130,052 254,683 252,477
-------- -------- -------- --------
Income before income taxes 42,871 36,436 96,567 73,899
Applicable income taxes 10,560 11,559 27,486 23,405
-------- -------- -------- --------
NET INCOME $ 32,311 $ 24,877 $ 69,081 $ 50,494
======== ======== ======== =======
BASIC AND DILUTED EARNINGS PER COMMON SHARE (based on 10,000,000
average shares outstanding)
Net Income $ 3.23 $ 2.49 $ 6.91 $ 5.05
======== ======== ======== =======
The accompanying notes to financial statements are an
integral part of this statement
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 13
<PAGE> 15
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30 Six Months Ended June 30
----------------------- ------------------------------
(in thousands except share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 32,311 $ 24,877 $ 69,081 $ 50,494
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains/(losses) arising during the
period, net of tax expense for the quarter of $7,054 and
$19,773 in 1998 and 1997 and net of tax expense/(benefit) for the
year to date period of $8,775 and ($3,611) in 1998 and 1997 10,675 34,052 13,287 (1,396)
Less reclassification adjustment for realized gains included in
income statement, net of tax expense for the quarter of $1,547 and
$1,031 in 1998 and 1997 and net of tax expense for the year-to-date
period of $4,712 in 1998 and $1,501 in 1997 (2,344) (1,562) (7,142) (2,275)
-------- -------- -------- --------
Other comprehensive income (loss) 8,331 32,490 6,145 (3,671)
-------- -------- -------- --------
Comprehensive income $ 40,642 $ 57,367 $ 75,226 $ 46,823
======== ======== ======== ========
The accompanying notes to financial statements are an
integral part of this statement.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 14
<PAGE> 16
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION(UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30
(in thousands except share data) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks $ 1,418,006 $ 1,251,609 $ 1,707,133
Money market assets:
Interest-bearing deposits at banks 303,574 598,062 628,916
Federal funds sold and securities purchased
under agreement to resell 185,800 71,725 275,425
Trading account assets 109,350 53,209 101,569
Portfolio securities available-for-sale 4,490,777 3,879,399 3,766,728
Loans 9,223,491 8,088,060 8,439,144
Allowance for possible loan losses (103,410) (99,678) (110,230)
Net loans 9,120,081 7,988,382 8,328,914
Premises and equipment 242,826 231,594 208,246
Customers' liability on acceptances 39,065 46,480 46,107
Assets held for sale -- 725,760 --
Goodwill and other valuation intangibles 262,704 279,897 287,575
Other assets 1,132,616 673,810 696,338
------------ ------------ ------------
TOTAL ASSETS $ 17,304,799 $ 15,799,927 $ 16,046,951
============ ============ ============
LIABILITIES
Deposits in domestic offices - noninterest bearing $ 3,079,488 $ 3,665,951 $ 3,402,012
- interest-bearing 6,317,673 5,233,744 5,832,017
Deposits in foreign offices - noninterest bearing 27,188 18,431 127,332
- interest-bearing 1,468,028 1,741,459 1,704,485
------------ ------------ ------------
Total deposits 10,892,377 10,659,585 11,065,846
Federal funds purchased and securities sold under
agreement to repurchase 3,402,804 2,693,600 2,985,911
Other short-term borrowings 148,290 501,026 4,090
Senior notes 868,000 100,000 240,000
Acceptances outstanding 39,065 46,480 46,107
Accrued interest, taxes and other expenses 118,417 118,257 105,353
Other liabilities 85,622 76,548 57,316
Minority interest- preferred stock of subsidiary 250,000 -- --
Long-term notes 225,000 325,000 325,000
------------ ------------ ------------
TOTAL LIABILITIES 16,029,575 14,520,496 14,829,623
------------ ------------ ------------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized 10,000,000 shares;
issued and outstanding 10,000,000 shares 100,000 100,000 100,000
Surplus 601,594 601,027 600,715
Retained earnings 562,497 573,416 534,395
Accumulated other comprehensive income (loss) -
unrealized gains (losses) on securities
available-for-sale, net of deferred taxes of
$7,334 in 1998, $3,271 and ($14,420) in 1997 11,133 4,988 (17,782)
------------ ------------ ------------
TOTAL STOCKHOLDER'S EQUITY 1,275,224 1,279,431 1,217,328
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 17,304,799 $ 15,799,927 $ 16,046,951
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of this statement
Page 15
<PAGE> 17
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY(UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1 $ 1,279,431 $ 1,192,567
Net income 69,081 50,494
Contributions to capital 567 338
Dividends - common stock (80,000) (22,400)
Other comprehensive income (loss),
net of tax 6,145 (3,671)
----------- -----------
BALANCE AT JUNE 30 $ 1,275,224 $ 1,217,328
=========== ===========
The accompanying notes to financial statements are an
integral part of this statement.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Page 16
<PAGE> 18
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) Six Months Ended June 30
------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 69,081 $ 50,494
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses 11,976 31,089
Depreciation and amortization, including intangibles 29,051 27,930
Deferred tax benefit (745) (1,810)
Gain on sales of portfolio securities (11,854) (3,776)
Gain on sale of credit card portfolio (12,000) --
Trading account net (purchases) sales (56,141) 8,786
Net decrease (increase) in interest receivable 8,894 (16,428)
Net increase (decrease) in interest payable 8,136 (10,916)
Net increase in loans held for resale (98,910) (7,612)
Other, net (29,589) (16,700)
----------- -----------
Net cash (used) provided by operating activities (82,101) 61,057
----------- -----------
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits at banks 294,488 29,271
Net (increase) decrease in Federal funds sold and securities purchased under agreement to resell (114,075) 40,850
Proceeds from sales of securities available-for-sale 1,213,321 360,285
Proceeds from maturities of securities available-for-sale 5,114,228 4,766,052
Purchases of securities available-for-sale (6,916,870) (6,138,741)
Net increase in loans (1,012,168) (313,618)
Proceeds from sales of premises and equipment 22,605 12,818
Purchases of premises and equipment (54,450) (46,570)
Purchases of investments in Bank Owned Insurance (437,847) --
Other, net (10,741) (94,688)
----------- -----------
Net cash used by investing activities (1,901,509) (1,384,341)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 232,792 1,339,641
Net increase in Federal funds purchased and securities sold under agreement to repurchase 709,204 993,845
Net decrease in short-term borrowings (352,737) (340,282)
Proceeds from issuance of senior notes 4,960,000 3,265,000
Repayment of senior notes (4,192,000) (3,375,000)
Proceeds from issuance of long term notes -- 15,000
Repayment of long term notes (100,000) --
Proceeds from the sale of the credit card portfolio 722,748 --
Proceeds from issuance of preferred stock of subsidiary 250,000 --
Cash dividends paid on common stock (80,000) (22,400)
----------- -----------
Net cash provided by financing activities 2,150,007 1,875,804
----------- -----------
NET INCREASE IN CASH AND DEMAND BALANCES DUE FROM BANKS 166,397 552,520
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1 1,251,609 1,154,613
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT JUNE 30 $ 1,418,006 $ 1,707,133
=========== ===========
The accompanying notes to financial statements are an
integral part of this statement.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 17
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS Harris Trust and Savings Bank and Subsidiaries
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION Harris Trust and Savings Bank (the "Bank") is a
wholly-owned subsidiary of Harris Bankcorp, Inc., a
wholly-owned subsidiary of Bankmont Financial Corp.
(a wholly-owned subsidiary of Bank of Montreal). The
consolidated financial statements of the Bank include
the accounts of the Bank and its wholly-owned
subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Certain
reclassifications were made to conform prior years'
financial statements to the current year's
presentation.
The consolidated financial statements have been
prepared by management from the books and records of
the Bank, 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.
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 PROCEEDINGS The Bank is a defendant 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 Bank's
consolidated financial position.
- --------------------------------------------------------------------------------
3. CASH FLOWS For purposes of the Bank's Consolidated Statement of
Cash Flows, cash and cash equivalents is defined to
include cash and demand balances due from banks. Cash
interest payments (net of amounts capitalized) for
the six months ended June 30, totaled $287.7 million
and $275.6 million in 1998 and 1997, respectively.
Cash income tax payments over the same periods
totaled $23.4 million and $28.9 million,
respectively.
- --------------------------------------------------------------------------------
4. ACCOUNTING CHANGES In February 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits."
The Statement revises financial statement disclosure
requirements for pension and other postretirement
benefit plans. It standardizes the disclosure
requirements for pension and other postretirement
benefits, requires additional disclosure information
regarding changes in benefit obligations and fair
values of plan assets and eliminates certain
disclosures that are no longer considered useful. The
Statement does not change the measurement or
recognition of the benefit plans. The Statement is
effective for fiscal years beginning after December
15, 1997. The Bank adopted this statement in 1998
and it did not have a material effect on the Bank's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." The Statement establishes accounting
and reporting standards for derivative instruments
and for hedging activities. It requires all
derivatives to be recognized as either assets or
liabilities in the statement of financial position
and to be measured at fair value. The Statement is
effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Bank is assessing
the impact of adopting this Statement on its
financial position and results of operations.
Page 18
<PAGE> 20
FINANCIAL REVIEW Harris Trust and Savings Bank and Subsidiaries
- --------------------------------------------------------------------------------
SECOND QUARTER 1998
COMPARED WITH
SECOND QUARTER 1997
- --------------------------------------------------------------------------------
SUMMARY The Bank had second quarter 1998 earnings of $32.3 million,
an increase of $7.4 million or 30 percent from second
quarter 1997. For the current quarter, annualized return on
average common stockholder's equity was 10.27 percent
compared to 8.34 percent in the second quarter of 1997.
Annualized return on average assets was 0.79 percent
compared to 0.66 percent a year ago.
Second quarter net interest income on a fully taxable
equivalent basis was $90.7 million, down $21.2 million or 19
percent from $111.9 million in 1997's second quarter. At the
time of the January credit card sale, outstanding credit
card loans amounted to approximately $700 million, resulting
in a reduction in net interest income compared to second
quarter 1997. Average earning assets rose 7 percent to
$13.78 billion from $12.89 billion in 1997, primarily
attributable to an increase of $717 million in average loans
and $698 million in the investment securities portfolio,
somewhat offset by a decline in interest bearing deposits at
banks of $374 million. Excluding the credit card portfolio,
average loans rose $1.5 billion or 21 percent. Commercial
and residential real estate lending were strong contributors
to this growth. Net interest margin declined to 2.64 percent
from 3.48 percent in the same quarter last year primarily
reflecting the impact of the sale of the credit card loans
earlier this year.
The second quarter provision for loan losses of $7.0
million was down $8.6 million from $15.6 million in the
second quarter of 1997 because of the change in the risk
profile of the portfolio related to charge card sale.
Net charge-offs decreased from $16.4 million to $4.8
million, primarily reflecting the reduction in charge card
loans and the related writeoffs.
Noninterest income increased $15.0 million or 20
percent to $89.5 million for second quarter 1998 from the
same quarter last year. In the current quarter, service
charge fees rose by $3.4 million and trust and investment
management fees improved by $2.6 million compared to second
quarter 1997. Foreign exchange income increased $0.4
million and trading income increased $1.7 million. Net
gains from debt securities sales increased from $2.6 million
in the second quarter 1997 to $3.9 million during the
current quarter. Other income which includes syndication
fees, revenue from bank owned insurance investments, gains
on mortgage loan sales and other fees increased $12.0
million.
Second quarter 1998 noninterest expenses of $125.9
million declined $4.1 million or 3% from a year ago quarter.
Nonperforming assets at June 30, 1998 were $21 million
or 0.2 percent of total loans, compared to $18 million or
0.2 percent at March 31, 1998, and $23 million or 0.3
percent a year ago. At June 30, 1998, the allowance for
possible loan losses was $103 million, equal to 1.1 percent
of loans outstanding, compared to $110 million or 1.3
percent at the end of second quarter 1997. As a result, the
ratio of the allowance for possible loan losses to
nonperforming assets increased from 478 percent at June 30,
1997 to 490 percent at June 30, 1998.
At June 30, 1998 equity capital of the Bank amounted to
$1.28 billion, up from $1.22 billion one year earlier. The
regulatory leverage capital ratio was 7.71 percent for the
second quarter of 1998 compared to 6.49 percent in the same
quarter of 1997. The Bank's capital ratio exceeds the
prescribed regulatory minimum for banks. The Bank's June
30, 1998 Tier 1 and total risk-based capital ratios were
8.48 percent and 10.71 percent compared to respective ratios
of 7.26 percent and 10.56 percent at June 30, 1997.
Page 19
<PAGE> 21
Harris Trust and Savings Bank and Subsidiaries
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1998
COMPARED WITH 1997 The Bank's earnings for the six months ended June 30, 1998
were $69.1 million. This represented an $18.6 million or 37%
increase from 1997 earnings of $50.5 million. Annualized
return on average common equity was 10.98 percent compared
to 8.47 percent in the first half of 1997. Annualized return
on average assets was 0.87 percent compared to 0.69 percent
a year ago.
Net interest income on a fully taxable equivalent basis
was $188.8 million in the current period, a decrease of
$30.6 million or 14% from $219.3 million in the first six
months of 1997. Average earning assets increased to $13.51
billion from $12.58 billion a year ago primarily
attributable to an increase of $760 million or 22% in
investment portfolio securities and an increase of 5% or
$430 million in average loans. Excluding the credit card
portfolio, average loans rose $1.3 billion or 18%.
Commercial and residential real estate lending were
contributors to this growth. Net interest margin declined to
2.82% from 3.51% in 1997 primarily reflecting the impact of
the sale of the credit card loans earlier this year.
The 1998 provision for loan losses of $12.0 million
was down $19.1 million from $31.1 million a year ago. Net
charge-offs decreased $21.0 million to $8.2 million,
primarily reflecting the reduction in charge card loans and
the related writeoffs.
Noninterest income increased $37.4 million to $183.3
million in 1998 compared to a year ago. The $12.0 million
gain on sale of the credit card portfolio was more than
offset by writedowns in the value of certain accounts in the
portfolio prior to sale in addition to lower credit card
fees amounting to $15.9 million. In the current year, trust
income increased $5.2 million and service charge income
increased $6.9 million. Foreign exchange income increased
$1.2 million. Securities gains were $8.1 million greater
compared to a year ago. Other sources of noninterest income
which include syndication fees, revenue from bank owned
insurance investments, gains on mortgage loan sales and
fees on letters of credit increased $16.7 million excluding
the gain on the sale of the credit card portfolio and
writedowns.
Noninterest expenses of $254.7 million rose $2.2
million from a year ago. Excluding the $5.6 million
one-time cost for restructuring charges, total expenses
decreased 1% in 1998 compared to a year ago.
Page 20
<PAGE> 22
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. (a) EXHIBITS:
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Harris Preferred Capital Corporation has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
13th day of August, 1998.
/s/ MICHAEL D. WILLIAMS
---------------------------------
Michael D. Williams
Chairman of the Board
/s/ PIERRE O. GREFFE
---------------------------------
Pierre O. Greffe
Chief Financial Officer
/s/ PAUL R. SKUBIC
---------------------------------
Paul R. Skubic
President
Page 21
