<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 September 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 November
13, 1998 was 1,000.
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HARRIS PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION
<S> <C> <C>
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............................... 22
Signatures............................................................... 22
</TABLE>
1
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Part I. Financial Information
Item 1. Financial Statements
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA) SEPTEMBER 30, 1998
-----------------------------------------------------------------------
<S> <C>
ASSETS
Cash on deposit with parent $ 1,270
Securities purchased from parent under
agreement to resell 8,124
Notes receivable from parent 259,341
Securities available-for-sale:
Mortgage-backed 211,240
U.S. Treasury 19,866
Other assets 2,508
---------------
TOTAL ASSETS $ 502,349
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses due to parent $ 111
---------------
TOTAL LIABILITIES $ 111
---------------
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 7,172
Accumulated other comprehensive income - unrealized
gains on available-for-sale securities 4,332
---------------
TOTAL STOCKHOLDERS' EQUITY 502,238
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 502,349
---------------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
2
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HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND
FROM INCEPTION (JANUARY 2, 1998) THROUGH
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
QUARTER (JANUARY 2, 1998)
ENDED THROUGH
(IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Securities purchased from parent
under agreement to resell $ 306 $ 633
Notes receivable from parent 4,377 12,565
Securities available-for-sale:
Mortgage-backed 2,778 6,275
U.S. Treasury 254 287
--------- ---------
Total interest income 7,715 19,760
Operating expenses:
Loan servicing fees paid
to parent 244 624
Advisory fees paid to parent 13 31
General and administrative 86 154
--------- ---------
Total operating expense 343 809
Net income 7,372 18,951
Preferred dividends 4,609 11,779
--------- ---------
NET INCOME AVAILABLE TO
COMMON STOCKHOLDER $ 2,763 $ 7,172
========= =========
Basic and diluted earnings
per common share $2,763.00 $7,172.00
Net income $ 7,372 $ 18,951
Other comprehensive income -
unrealized gains on
available-for-sale-securities 3,573 4,332
--------- ---------
Comprehensive income $ 10,945 $ 23,283
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
3
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HARRIS PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
FROM INCEPTION (JANUARY 2, 1998) THROUGH
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Earnings in Other
Common Preferred Paid-in Excess of Comprehensive Stockholders'
(IN THOUSANDS EXCEPT PER SHARE DATA) Stock Stock Capital Distributions Income Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception $ - $ - $ - $ - $ - $ -
Issuance of common stock 1 1
Initial public offering of
7 3/8% Noncumulative Exchangable
Preferred Stock, Series A, par
value $1, on February 11, 1998 - 250,000 - - - 250,000
Contribution to capital surplus - - 240,733 - - 240,733
Net income - - - 18,951 - 18,951
Other comprehensive income - - - -
4,332 4,332
Dividends (preferred stock
$0.7170 per share) - - - -
(11,779) (11,779)
------- -------- -------- ----------- ----------- ------------
Balance at September 30, 1998 $ 1 $250,000 $240,733 $ 7,172 $ 4,332 $ 502,238
======= ======== ======== =========== ========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
4
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HARRIS PREFERRED CAPTIAL CORPORATION
STATEMENT OF CASH FLOWS
FROM INCEPTION (JANUARY 2, 1998) THROUGH
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
(JANUARY 2, 1998)
THROUGH
SEPTEMBER 30,
(IN THOUSANDS) 1998
- --------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES:
Net Income $ 18,951
Adjustments to reconcile net income to
net cash provided by operating activities:
Net increase in accrued interest receivable (2,508)
Net increase in accrued expenses 111
----------------
Net cash provided by operating activities 16,554
----------------
INVESTING ACTIVITIES:
Net increase in securities purchased
from parent under agreement to resell (8,124)
Purchases of notes receivable from parent (356,000)
Repayments of notes receivable from parent 96,659
Purchases of securities available-for-sale (253,552)
Proceeds from maturities of securities
available-for-sale 26,778
-----------------
Net cash used by investing activities (494,239)
----------------
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 costs 240,733
Cash dividends paid on preferred stock (11,779)
----------------
Net cash provided by financing activities 478,955
----------------
Net increase in cash on deposit with parent 1,270
Cash on deposit with parent at January 2, 1998 -
----------------
Cash on deposit with parent at September 30, 1998 $ 1,270
================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
5
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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 taxable 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 September
30, 1998 and the period from inception (January 2, 1998) through September 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
September 30, 1998, no allowance for possible loan losses was recorded under
this policy.
6
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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.
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 September 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 $8.1 million at September 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 will not have a significant effect.
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.
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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.
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, and servicing guidelines promulgated by the Company, and Federal
National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage
Corporation ("FHLMC") guidelines and procedures.
The balance of securing mortgage loans at September 30, 1998 was $309 million.
The weighted average interest rate on those loans was 7.140% at September 30,
1998.
None of the mortgage loans collateralizing the Notes were on nonaccrual status
at September 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 $176 million and $49 million, respectively, as of September 30,
1998.
4. SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE-SECURITIES
U.S. Treasury $ 19,855 $ 11 $ - $ 19,866
Mortgage-backed 206,919 4,321 - 211,240
--------- --------- ---------- ---------
Total Securities $ 226,774 $ 4,332 $ - $ 231,106
========= ========= ========== =========
</TABLE>
Mortgage-backed securities represent Government National Mortgage Association 6
1/2% Platinum Certificates. The contractual maturities are shown below.
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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------
AMORTIZED FAIR
COST VALUE
--------- ----------
<S> <C> <C>
(IN THOUSANDS)
Maturities:
Within 1 year $ 19,855 $ 19,866
Over 10 years 206,919 211,240
--------- ---------
Total Securities $ 226,774 $ 231,106
========= =========
</TABLE>
8
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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 to the holders of the Preferred
Shares during the quarter ended September 30, 1998 and the period from inception
(January 2, 1998) through September 30, 1998 were $4,609,000 and $11,779,000,
respectively.
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 September 30, 1998.
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, and servicing
guidelines promulgated by the Company and 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 September 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, investment activities and Year 2000
statements 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 taxable 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 SEPTEMBER 30, 1998
The Company's net income for the third quarter of 1998 was $7.4 million.
In the current quarter the Company purchased $45.7 million par value
mortgage-backed securities and $19.8 million of U.S. Treasury Bills. Also $20
million of U.S. Treasury Bills matured on September 17, 1998. As of September
30, 1998, the Company had $259 million invested in Notes and $227 million
invested in securities at an estimated fair value of $231 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.
Third quarter interest income on the Notes totaled $4.4 million and yielded 6.4%
on average principal outstanding. Interest income on securities
available-for-sale for the quarter was $3.0 million resulting in a yield of
6.5%. The average Notes balance and securities available-for-sale for the
quarter were $274 million and $188 million, respectively. The average
outstanding balance of the securing mortgage loans for the same period was $334
million. There were no Company borrowings during the quarter.
Third quarter operating expenses totaling $343 thousand were comprised of loan
servicing fees paid to parent, advisory fees paid to parent and general and
administrative expenses. Loan servicing expenses of $244 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
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<PAGE> 12
to parent for the quarter totaled $13 thousand. General and administrative
expenses were $86 thousand.
FROM INCEPTION THROUGH SEPTEMBER 30, 1998
The Company's net income for the period from inception (January 2, 1998) through
September 30, 1998 was $19.0 million. Interest income on the Notes for the
year-to-date period ended September 30, 1998 totaled $12.6 million and yielded
6.4% on average principal outstanding. Interest income on securities
available-for-sale for the same period was $6.6 million resulting in a yield of
6.6%. The average Notes and securities available-for-sale for the year-to-date
period ended September 30, 1998 were $310 million and $158 million,
respectively. The average outstanding balance of the securing mortgage loans for
the same period was $347 million. There were no Company borrowings during this
period.
Operating expenses for the period ended September 30, 1998 totaled $809
thousand. Loan servicing expenses for the same period were $624 thousand.
Advisory fees paid to parent were $31 thousand and general and administrative
expenses were $154 thousand.
On August 28, 1998, the Company declared a cash dividend of $.46094 per share on
the outstanding Preferred Shares to the stockholders of record on September 15,
1998. The dividend of $4.6 million was subsequently paid to holders of Preferred
Shares on September 30, 1998. On a year-to-date basis, the Company has declared
and paid $11.8 million of dividends to holders of Preferred Shares.
At September 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 $176 million and $49 million, respectively, at September 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 September 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
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<PAGE> 13
$97 million provided by principal payments on the Notes. The primary uses of
funds were $259 million in purchases of Notes, net of repayments, $227 million
in purchases of securities available-for-sale, and $11.8 million in preferred
stock dividends paid.
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.
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 that the Company's operations will not be
adversely impacted by year 2000 issues and is managing the related operational
risk accordingly. The Bank and its ultimate parent company, Bank of Montreal,
have undertaken an enterprise-wide initiative to address the year 2000 issue and
have developed a comprehensive plan to prepare, as appropriate, the Bank's
computer systems to recognize the date change on January 1, 2000. If not
remedied, potential risks include business interruption, financial loss,
reputation loss, and/or legal liability. An assessment of the readiness of third
parties that the Bank interfaces with, such as vendors, counter-parties,
customers, payment systems, and others, is ongoing to mitigate the potential
risks that year 2000 poses to the Bank. The Bank's objective is to try to ensure
that all aspects of the year 2000 issue affecting the Bank, including those
related to the efforts of third parties, will be fully resolved in time. The
Bank has consistently maintained contingency plans for vital systems and
business processes to protect the Bank's assets against unplanned events that
would prevent normal operations. The millennium changeover presents unique
risks, some of which would not be effectively addressed by the existing plans.
The Bank is examining these risks and developing additional plans to mitigate
the effect of potential impacts and ensure continuity of operation throughout
the year 2000 and beyond. The use of the existing contingency planning
infrastructure will ensure optimum coverage and re-usability of existing
arrangements and responsibility assignments.
Emfisys, the Bank's operations group, acting in support of all of the lines of
business, has overall responsibility for converting systems to accommodate the
calendar change. Each of the Bank's lines of business is responsible for
ensuring that both the technical and the business risks imposed by the year 2000
issue are addressed. A governance structure has been established to deal with
this issue, which include a Year 2000 Project Office and regular monitoring of
progress by the Bank's Risk Management Committee and reporting to the Board of
Directors of the Bank and the Company.
The process for year 2000 compliance is following four major steps: inventory,
impact assessment, implementation and certification. The Bank plans to
substantially complete the implementation of the Bank's critical systems by the
end of 1998. The implementation of non-critical business assets will be
completed by July 31, 1999, and implementation of all systems will be achieved
by October 31, 1999. 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 will not have a significant effect.
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.
12
<PAGE> 14
OTHER MATTERS
As of September 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.
13
<PAGE> 15
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30 Nine Months Ended
September 30
-------------------------------------------------------
(in thousands except share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 169,561 $ 175,723 $ 504,917 $ 518,995
Money market assets:
Deposits at banks 1,840 7,120 10,038 24,036
Federal funds sold and securities purchased under 2,777 3,457 6,415 9,216
agreement to resell
Trading account 1,291 841 2,831 2,442
Securities available-for-sale:
U.S. Treasury and Federal agency 70,918 55,789 195,465 161,484
State and municipal 723 1,166 2,580 3,525
Other 325 315 957 947
----------- ------------ ---------- ----------
Total interest income 247,435 244,411 723,203 720,645
----------- ------------ ---------- ----------
INTEREST EXPENSE
Deposits 98,390 90,218 269,373 250,818
Short-term borrowings 41,244 37,049 125,353 108,545
Senior notes 14,473 8,433 37,979 31,594
Minority interest-dividends on preferred stock of subsidiary 4,609 - 11,780 -
Long-term notes 3,696 5,389 13,804 14,792
----------- ------------ ---------- ----------
Total interest expense 162,412 141,089 458,289 405,749
----------- ------------ ---------- ----------
NET INTEREST INCOME 85,023 103,322 264,914 314,896
Provision for loan losses 6,800 15,466 18,776 46,555
----------- ------------ ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 78,223 87,856 246,138 268,341
----------- ------------ ---------- ----------
NONINTEREST INCOME
Trust and investment management fees 28,503 25,978 82,548 74,791
Trading account 3,589 735 8,273 3,130
Foreign exchange 1,650 1,348 4,950 3,462
Merchant and charge card fees 6,792 12,877 20,286 37,142
Service fees and charges 24,369 21,968 72,123 62,856
Portfolio securities gains 7,491 5,742 19,345 9,518
Gain on sale of credit card portfolio - - 12,000 -
Other 23,022 15,166 59,226 38,806
----------- ------------ ---------- ----------
Total noninterest income 95,416 83,814 278,751 229,705
----------- ------------ ---------- ----------
NONINTEREST EXPENSES
Salaries and other compensation 66,616 63,131 196,117 183,950
Pension, profit sharing and other employee benefits 11,703 12,385 35,417 36,520
Net occupancy 9,371 12,066 29,711 34,312
Equipment 11,260 10,344 33,311 29,235
Marketing 6,206 5,127 17,515 16,167
Communication and delivery 4,769 5,455 15,090 15,601
Deposit insurance 617 628 1,931 1,826
Expert services 8,414 8,600 21,456 21,544
Other 8,386 9,431 20,752 28,220
----------- ------------ ---------- ----------
127,342 127,167 371,300 367,375
Goodwill and other valuation intangibles 5,310 6,235 16,035 18,505
----------- ------------ ---------- ----------
Total noninterest expenses 132,652 133,402 387,335 385,880
----------- ------------ ---------- ----------
Income before income taxes 40,987 38,268 137,554 112,166
Applicable income taxes 9,214 11,406 36,700 34,810
----------- ------------ ---------- ----------
NET INCOME $ 31,773 $ 26,862 $ 100,854 $ 77,356
=========== ============ ========== ==========
BASIC AND DILUTED EARNINGS PER COMMON SHARE (based on
10,000,000 average shares outstanding)
Net Income $ 3.18 $ 2.69 $ 10.09 $ 7.74
=========== ============ ========== ==========
The accompanying notes to financial statements are an integral part of this statement.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30 Nine Months Ended September 30
-------------------------- ------------------------------
(in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net income $ 31,773 $ 26,862 $ 100,854 $ 77,356
Other comprehensive income:
Unrealized gains on available-for-sale
securities:
Unrealized holding gains arising during the period,
net of tax expense for the quarter of $29,320 and $14,229
in 1998 and 1997 and net of tax expense for the year
to date period of $38,095 and $10,618 in 1998 and 1997 44,598 17,507 57,880 16,111
Less reclassification adjustment for realized gains
included in income statement, net of tax expense for the
quarter of $2,978 and $2,282 in 1998 and 1997 and net of
tax expense for the year-to-date period of $7,690 in 1998
and $3,783 in 1997 (4,513) (3,460) (11,655) (5,735)
---------- ---------- ------------ -----------
Other comprehensive income 40,085 14,047 46,225 10,376
---------- ---------- ------------ -----------
Comprehensive income $ 71,858 $ 40,909 $ 147,079 $ 87,732
========== ========== ============ ===========
The accompanying notes to financial statements are an integral part of this statement.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) Harris Trust and Savings Bank and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(in thousands except share data) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks $ 1,098,161 $ 1,251,609 $ 1,188,255
Money market assets:
Interest-bearing deposits at banks 213,712 598,062 550,173
Federal funds sold and securities purchased under agreement to resell 48,950 71,725 396,400
Trading account assets 91,040 53,209 35,467
Portfolio securities available-for-sale 5,039,734 3,879,399 3,685,983
Loans 9,102,464 8,088,060 8,382,298
Allowance for possible loan losses (104,900) (99,678) (107,180)
Net loans 8,997,564 7,988,382 8,275,118
Premises and equipment 256,915 231,594 222,857
Customers' liability on acceptances 34,997 46,480 41,205
Assets held for sale - 725,760 -
Goodwill and other valuation intangibles 260,478 279,897 283,839
Other assets 1,192,158 673,810 611,872
------------- ------------- --------------
TOTAL ASSETS $ 17,233,709 $ 15,799,927 $ 15,291,169
============= ============= ==============
LIABILITIES
Deposits in domestic - noninterest bearing $ 2,778,839 $ 3,665,951 $ 2,729,525
- interest-bearing 6,680,424 5,233,744 5,604,026
Deposits in foreign - noninterest bearing 23,329 18,431 23,421
- interest-bearing 1,245,430 1,741,459 1,964,295
------------- ------------- --------------
Total deposits 10,728,022 10,659,585 10,321,267
Federal funds purchased and securities sold under agreement to repurchase 3,118,548 2,693,600 2,549,327
Other short-term borrowings 440,498 501,026 25,457
Senior notes 762,000 100,000 605,000
Acceptances outstanding 34,997 46,480 41,205
Accrued interest, taxes and other expenses 150,894 118,257 117,605
Other liabilities 184,432 76,548 55,932
Minority interest- preferred stock of subsidiary 250,000 - -
Long-term notes 225,000 325,000 325,000
------------- ------------- --------------
TOTAL LIABILITIES 15,894,391 14,520,496 14,040,793
------------- ------------- --------------
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 607,835 601,027 600,854
Retained earnings 580,270 573,416 553,257
Accumulated other comprehensive income (loss) - unrealized gains (losses)
on securities available-for-sale, net of deferred taxes of $33,676
in 1998, $3,271 and ($2,473) in 1997 51,213 4,988 (3,735)
------------ ------------- --------------
TOTAL STOCKHOLDER'S EQUITY 1,339,318 1,279,431 1,250,376
------------- ------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 17,233,709 $ 15,799,927 $ 15,291,169
============= ============= ==============
The accompanying notes to financial statements are an integral part of this statement.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
<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 100,854 77,356
Contributions to capital 6,808 477
Dividends - common stock (94,000) (30,400)
Other comprehensive income, net of tax 46,225 10,376
------------- ------------
BALANCE AT SEPTEMBER 30 $ 1,339,318 $ 1,250,376
============= ============
The accompanying notes to financial statements are an integral part of this statement.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Unaudited) Harris Trust and Savings Bank and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------
(in thousands) Nine Months Ended September 30
---------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 100,854 $ 77,356
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Provision for loan losses 18,776 46,555
Depreciation and amortization, including intangibles 43,689 42,554
Deferred tax expense (benefit) 10,452 (1,793)
Gain on sales of portfolio securities (19,345) (9,518)
Gain on sale of credit card portfolio (12,000)
Trading account net (purchases) sales (37,831) 74,888
Net decrease (increase) in interest receivable 21,833 (18,400)
Net increase (decrease) in interest payable 15,776 (5,260)
Net increase in loans held for resale (107,642) (43,101)
Other, net (14,161) (17,051)
---------- ---------
Net cash provided by operating activities 20,401 146,230
---------- ---------
Investing Activities:
Net decrease in interest-bearing deposits at banks 384,350 108,014
Net decrease (increase) in Federal funds sold and securities purchased under
agreement to resell 22,775 (80,125)
Proceeds from safes of securities available-for-sale 1,517,180 980,407
Proceeds from maturities of securities available-for-sale 8,830,749 6,725,657
Purchases of securities available-for-sale (11,409,289) (8,605,987)
Net increase in loans (887,718) (239,800)
Proceeds from sales of premises and equipment 22,755 17,989
Purchases of premises and equipment (78,017) (74,741)
Purchases of investments in Bank Owned Insurance (447,956)
Other, net (2,282) (17,011)
---------- ---------
Net cash used by investing activities (2,047,453) (1,185,597)
---------- ---------
Financing Activities:
Net increase in deposits 68,437 595,063
Net increase in Federal funds purchased and securities sold under agreement to
repurchase 424,948 557,261
Net decrease in short-term borrowings (60,529) (318,915)
Proceeds from issuance of senior notes 6,954,080 5,310,000
Repayment of senior notes (6,292,080) (5,055,000)
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 (94,000) (30,400)
---------- ---------
Net cash provided by financing activities 1,873,604 1,073,009
---------- ---------
Net (decrease) increase in cash and demand balances due from banks (153,448) 33,642
Cash and demand balances due from banks at January 1 1,251,609 1,154,613
---------- ---------
Cash and demand balances due from banks at September 30 $ 1,098,161 $ 1,188,255
========== ==========
The accompanying notes to financial statements are an integral part of this
statement.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
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 nine months ended September 30,
totaled $442.5 million and $411.0 million in 1998
and 1997, respectively. Cash income tax payments
over the same periods totaled $20.0 million and
$42.0 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.
19
<PAGE> 21
FINANCIAL REVIEW Harris Trust and Savings Bank and Subsidiaries
- -----------------------------------------------------------------------------
THIRD QUARTER 1998
COMPARED WITH
THIRD QUARTER 1997
- -----------------------------------------------------------------------------
SUMMARY The Bank had third quarter 1998 earnings of $31.8
million, an increase of $4.9 million or 18 percent from
third quarter 1997. For the current quarter, annualized
return on average common stockholder's equity was 9.72
percent compared to 8.58 percent in the second quarter
of 1997. Annualized return on average assets was 0.74
percent compared to 0.70 percent a year ago.
Third quarter net interest income on a fully
taxable equivalent basis was $89.3 million, down $18.0
million or 17 percent from $107.3 million in 1997's
third quarter. At the time of the January 1998 credit
card sale, outstanding credit card loans amounted to
approximately $700 million, resulting in a reduction in
net interest income compared to third quarter 1997.
Average earning assets rose 10 percent to $14.23
billion from $12.90 billion in 1997, primarily
attributable to an increase of $691 million in average
loans and $928 million in the investment securities
portfolio, somewhat offset by a decline in interest
bearing deposits at banks of $311 million. Excluding
the credit card portfolio, average loans rose $1.44
billion or 19 percent. Commercial loans and residential
mortgages were the most significant contributors to
this growth. Net interest margin declined to 2.49
percent from 3.30 percent in the same quarter last year
primarily reflecting the impact of the sale of the
credit card loans earlier this year.
The third quarter provision for loan losses of
$6.8 million was down $8.7 million from $15.5 million
in the third quarter of 1997 because of the change in
the risk profile of the portfolio related to charge
card sale. Net charge-offs decreased from $18.5 million
to $5.3 million, primarily reflecting the reduction in
charge card loans and the related writeoffs.
Noninterest income increased $11.6 million or 14
percent to $95.4 million for third quarter 1998 from
the same quarter last year. In the current quarter,
service charge fees rose by $2.4 million and trust and
investment management fees improved by $2.5 million
compared to third quarter 1997, while money market and
bond trading income increased $2.9 million. Net gains
from debt securities sales increased from $5.7 million
in third quarter 1997 to $7.5 million during the
current quarter. Other income, which includes
syndication fees, revenue from bank-owned insurance
investments, gains on mortgage sales and other fees,
increased $7.9 million.
Third quarter 1998 noninterest expenses of
$132.7 million were virtually unchanged from the year
ago quarter.
Nonperforming assets at September 30, 1998 were
$31 million or 0.3 percent of total loans, compared to
$21 million or 0.2 percent at June 30, 1998, and $27
million or 0.3 percent a year ago. At September 30,
1998, the allowance for possible loan losses was $105
million, equal to 1.2 percent of loans outstanding,
compared to $107 million or 1.3 percent at the end of
third quarter 1997. As a result, the ratio of the
allowance for possible loan losses to nonperforming
assets decreased from 396 percent at September 30, 1997
to 339 percent at September 30, 1998.
At September 30, 1998 equity capital of the Bank
amounted to $1.34 billion, up from $1.25 billion one
year earlier. The regulatory leverage capital ratio was
7.65 percent for the third quarter of 1998 compared to
6.61 percent in the same quarter of 1997. The Bank's
capital ratio exceeds the prescribed regulatory minimum
for banks. The Bank's September 30, 1998 Tier 1 and
total risk-based capital ratios were 8.62 percent and
10.86 percent compared to respective ratios of 7.38
percent and 10.63 percent at September 30, 1997.
20
<PAGE> 22
Harris Trust and Savings Bank and Subsidiaries
- -----------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1998
COMPARED WITH 1997 The Bank's earnings for the nine months ended
September 30, 1998 were $100.9 million. This
represented a $23.5 million or 30% increase from 1997
earnings of $77.4 million. Annualized return on average
common equity ("ROE") was 10.55 percent compared to
8.50 percent a year ago. Annualized return on average
assets was 0.83 percent compared to 0.69 percent a year
ago.
Net interest income on a fully taxable equivalent
basis was $278.1 million in the current period, a
decrease of $48.5 million or 15% from $326.6 million in
the 1997 year-to-date period. Average earning assets
increased to $13.75 billion from $12.69 billion a year
ago primarily attributable to an increase of $776
million or 21% in investment portfolio securities and
an increase of 6% or $518 million in average loans.
Excluding the credit card portfolio, average loans rose
$1.34 billion or 18%. Commercial loans and residential
mortgages were the most significant contributors to
this growth. Net interest margin declined to 2.70% from
3.44% in 1997 primarily reflecting the impact of the
sale of the credit card loans earlier this year.
The 1998 provision for loan losses of $18.8
million was down $27.8 million from $46.6 million a
year ago. Net charge-offs decreased $34.2 million to
$13.6 million, primarily reflecting the reduction in
charge card loans and the related writeoffs.
Noninterest income increased $49.0 million to
$278.8 million in 1998 compared to a year ago due to
strong growth in trust and investment management
income, syndication fees, service charge fees, bond
trading profits and investment portfolio securities
gains. The $12.0 million gain from the first quarter
sale of the credit card portfolio was offset by a $16.9
million decline in credit card fees. Other sources of
noninterest income which include syndication fees,
revenue from bank-owned insurance investments, gains on
mortgage sales and fees on letters of credit, increased
$24.6 million
Noninterest expenses of $387.3 million remained
virtually unchanged from a year ago.
Income tax expense increased from $34.8 million
to $36.7 million, but reflected a reduction in the
effective tax rate from 38 percent to 33 percent.
21
<PAGE> 23
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 November, 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
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-02-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,270
<SECURITIES> 231,106
<RECEIVABLES> 259,341
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 502,349
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 502,349
<CURRENT-LIABILITIES> 111
<BONDS> 0
0
250,000
<COMMON> 1
<OTHER-SE> 252,237
<TOTAL-LIABILITY-AND-EQUITY> 502,349
<SALES> 0
<TOTAL-REVENUES> 19,760
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 809
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,951
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,951
<EPS-PRIMARY> 7,172
<EPS-DILUTED> 7,172
</TABLE>
