<PAGE> 1
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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, 1999
COMMISSION FILE NUMBER 1-13805
HARRIS PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 36-4183096
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
111 WEST MONROE STREET, 60603
CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
</TABLE>
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,
1999 was 1,000.
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HARRIS PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets.............................................. 2
Statements of Operations.................................... 3
Statements of Changes in Stockholders' Equity............... 4
Statements of Cash Flows.................................... 5
Notes to Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures........................................................... 18
</TABLE>
1
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HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 JUNE 30, 1998
------------- ----------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash on deposit with Harris Trust and Savings
Bank.............................................. $ 812 $ 621 $ 341
Securities purchased from Harris Trust and Savings
Bank under agreement to resell.................... 4,000 17,004 5,001
Notes receivable from Harris Trust and Savings
Bank.............................................. 162,602 207,935 287,894
Securities available-for-sale:
Mortgage-backed................................... 307,529 261,494 165,982
U.S. Treasury..................................... -- -- 19,780
Securing mortgage collections due from Harris Trust
and Savings Bank.................................. 6,608 13,690 14,335
Other assets........................................ 2,652 2,646 2,660
-------- -------- --------
Total assets...................................... $484,203 $503,390 $495,993
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses.................................... $ 92 $ 62 $ 91
Dividends on common stock payable to parent......... -- 9,700 --
-------- -------- --------
Total liabilities................................. 92 9,762 91
-------- -------- --------
Commitments and contingencies....................... -- -- --
STOCKHOLDERS' EQUITY
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..................... 250,000 250,000 250,000
Common stock ($1 par value); 1,000 shares
authorized, issued and outstanding................ 1 1 1
Additional paid-in capital.......................... 240,733 240,733 240,733
Earnings in excess of distributions................. 6,247 392 4,409
Accumulated other comprehensive income -- unrealized
gains (losses) on available-for-sale securities... (12,870) 2,502 759
-------- -------- --------
Total stockholders' equity........................ 484,111 493,628 495,902
-------- -------- --------
Total liabilities and stockholders' equity........ $484,203 $503,390 $495,993
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
QUARTER ENDED JUNE 30 SIX MONTHS (JANUARY 2, 1998)
---------------------- ENDED THROUGH
1999 1998 JUNE 30, 1999 JUNE 30, 1998
---- ---- ------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Securities purchased from Harris Trust and
Savings Bank under agreement to
resell................................. $ 229 $ 309 $ 500 $ 327
Notes receivable from Harris Trust and
Savings Bank........................... 2,825 5,061 6,021 8,188
Securities available-for-sale:
Mortgage-backed........................ 4,779 2,276 9,017 3,496
U.S. Treasury.......................... 34 34
--------- --------- --------- ---------
Total interest income............. 7,833 7,680 15,538 12,045
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust
and Savings Bank....................... 133 239 284 380
Advisory fees paid to Harris Trust and
Savings Bank........................... 19 11 32 18
General and administrative................ 75 44 149 68
--------- --------- --------- ---------
Total operating expenses.......... 227 294 465 466
--------- --------- --------- ---------
Net income.................................. 7,606 7,386 15,073 11,579
Preferred dividends......................... 4,609 4,609 9,218 7,170
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON
STOCKHOLDER............................... $ 2,997 $ 2,777 $ 5,855 $ 4,409
========= ========= ========= =========
Basic and diluted earnings per common
share..................................... $2,997.00 $2,777.00 $5,854.00 $4,409.00
========= ========= ========= =========
Net income.................................. $ 7,606 $ 7,386 $ 15,073 $ 11,579
Other comprehensive income -- unrealized
gains (losses) on
available-for-sale-securities............. (11,428) 1,314 (15,372) 759
--------- --------- --------- ---------
Comprehensive income........................ $ (3,822) $ 8,700 $ (299) $ 12,338
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Balance at January 1, 1999 and January 2, 1998.............. $493,628 $ --
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................................................ 15,073 11,579
Other comprehensive income................................ (15,372) 759
Dividends (preferred stock $0.9218 and $0.7170 per share,
respectively).......................................... (9,218) (7,170)
-------- --------
Balance at June 30, 1999.................................... $484,111 $495,902
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
SIX MONTHS (JANUARY 2, 1998)
ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1998
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................................. $ 15,073 $ 11,579
Adjustments to reconcile net income to net cash provided by
operating activities:
Net decrease (increase) in other assets..................... (6) (2,660)
Net (decrease) increase in accrued expenses................. 30 91
-------- ---------
Net cash provided by operating activities.............. 15,097 9,010
-------- ---------
INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased from Harris
Trust and Savings Bank under agreement to resell.......... 13,004 (5,001)
Purchases of notes receivable from Harris Trust and Savings
Bank...................................................... -- (356,000)
Repayments of notes receivable from Harris Trust and Savings
Bank...................................................... 45,333 68,106
Decrease (increase) in securing mortgage collections due
from Harris Trust and Savings Bank........................ 7,082 (14,335)
Purchases of securities available-for-sale.................. (70,691) (188,647)
Proceeds from maturities of securities available-for-sale... 9,284 3,644
-------- ---------
Net cash provided (used) by investing activities....... 4,012 (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 costs......................................... -- 240,733
Cash dividends paid on preferred stock...................... 9,218 (7,170)
Cash dividends paid on common stock......................... (9,700) --
-------- ---------
Net cash (used) provided by financing activities....... (18,918) 483,564
-------- ---------
Net increase in cash on deposit with Harris Trust and
Savings Bank.............................................. 191 341
Cash on deposit with Harris Trust and Savings Bank at
beginning of period....................................... 621 --
-------- ---------
Cash on deposit with Harris Trust and Savings Bank at end of
period.................................................... $ 812 $ 341
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Harris Preferred Capital Corporation (the "Company") is a Maryland
corporation whose 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 (the "Notes") issued by
Harris Trust and Savings Bank (the "Bank") secured by real estate mortgage
assets (the "Securing Mortgage Loans") 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. Harris Capital Holdings, Inc., a
wholly-owned subsidiary of the Bank, owns 100% of the Company's common stock.
The accompanying financial statements have been prepared by management from
the books and records of the Company, without audit by independent certified
public accountants. These statements reflect all adjustments and disclosures
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented and should be read in conjunction
with the notes to financial statements included in the Company's 1998 Form 10-K.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain reclassifications were made to conform prior year's financial
statements to the current year's presentation.
2. COMMITMENTS AND CONTINGENCIES
Legal proceedings in which the Company is a defendant may arise in the
normal course of business. At June 30, 1999, there is no pending litigation
against the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD -- LOOKING INFORMATION
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 Operations." 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.
6
<PAGE> 8
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
The Company's net income for the second quarter of 1999 was $7.6 million
compared to $7.4 million in the second quarter of 1998.
Second quarter 1999 interest income on the Notes totaled $2.8 million and
yielded 6.4% on $177 million of average principal outstanding for the quarter
compared to $5.1 million and a 6.4% yield on $316 million average principal
outstanding for second quarter 1998. The decrease is attributable to the
reduction in the Note balance. Interest income on securities available-for-sale
for the current quarter was $4.8 million resulting in a yield of 6.6% on an
average balance of $289 million, compared to $2.3 million with a yield of 6.6%
on an average balance of $139 million for the same period a year ago, primarily
attributable to an increase of $125 million in the investment security
portfolio. The average outstanding balance of the Securing Mortgage Loans for
second quarter 1999 and 1998 was $217 million and $377 million, respectively.
There were no Company borrowings during the quarter.
Second quarter 1999 operating expenses totaled $227 thousand, a decrease of
$67 thousand or 23% from the second quarter of 1998. Loan servicing expenses
totaled $133 thousand, a decrease of $106 thousand or 44% from the prior year's
second quarter, attributable to the reduction in loan servicing fees payable to
the Bank, which is due to the reduction in the principal balance of the Notes.
Advisory fees of $19 thousand increased by $8 thousand or 64% over second
quarter 1998. General and administrative expenses totaled $75 thousand, an
increase of $31 thousand or 70% over second quarter 1998, primarily attributable
to operating activities not commencing until February 11, 1998.
At June 30, 1999 and 1998, there were no Securing Mortgage Loans on
nonaccrual status.
The Company does not currently maintain an allowance for loan losses due to
the over-collateralization of the Notes represented by the Securing Mortgage
Loans.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE PERIOD FROM INCEPTION
(JANUARY 2, 1998) THROUGH JUNE 30, 1998
The Company's net income for the six months ended June 30, 1999 was $15.1
million. This represented a $3.5 million or 30% increase from 1998 earnings of
$11.6 million.
Interest income on the Notes for the six months ended June 30, 1999 totaled
$6 million and yielded 6.4% on $188 million of average principal outstanding
compared to $8.2 million and a 6.4% yield on $329 million average principal
outstanding for the period from February 11, 1998 through June 30, 1998. The
decrease is attributable to the $125 million reduction in the Note balance.
Interest income on securities available-for-sale for the six months ended June
30, 1999 was $9 million resulting in a yield of 6.5% on an average balance of
$275 million, compared to $3.5 million with a yield of 6.6% on an average
balance of $137 million for the period from February 11, 1998 through June 30,
1998. The increase is attributable to an increase of $118 million in the
investment security portfolio. The average outstanding balance of the Securing
Mortgage Loans for the same period was $231 million and $350 million,
respectively. There were no Company borrowings during this period
Operating expenses for the six months ended June 30, 1999 totaled $465
thousand, a decrease of $1 thousand from the period from February 11, 1998
through June 30, 1998. Loan servicing expenses for the six months ended June 30,
1999 totaled $284 thousand, a decrease of $96 thousand or 25% from the period
from February 11, 1998 through June 30, 1998. This decrease is attributable to
the reduction in loan servicing fees payable to Harris Trust and Savings Bank,
which is due to the reduction in the principal balance of the Notes. Advisory
fees for the six months ended June 30, 1999 were $32 thousand compared to $14
thousand over the period from February 11, 1998 through June 30, 1998, primarily
attributable to an increase in costs due to other units of the Bank. General and
administrative expenses for the same period totaled $149 thousand, an increase
of $81 thousand or 119% over the period from February 11, 1998 through June 30,
1998. Generally, the higher general and administrative expenses in 1999 are
attributable to substantial operating activities not commencing until February
11, 1998.
7
<PAGE> 9
On June 30, 1999, the Company paid a cash dividend of $0.46094 per share on
outstanding preferred shares to the stockholders of record on June 15, 1999, as
declared on June 3, 1999. On May 28, 1998, the Company declared a cash dividend
of $0.46094 per share on outstanding preferred shares to stockholders of record
on June 15, 1998. The dividend of $4.6 million was subsequently paid on June 30,
1998. On January 28, 1999, the Company paid cash dividends of $9.7 million on
the outstanding common shares to the stockholder of record on December 30, 1998,
as declared on December 10, 1998. On a year-to-date basis, the Company has
declared and paid $9.2 million of dividends to holders of Preferred Shares for
the six months ended June 30, 1999 compared to $7.2 million of dividends paid
for the period from inception (January 2, 1998) through 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 Internal Revenue 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 Statements of Cash Flows, the primary
sources of funds during the six months ended June 30, 1999 were $45 million
provided by principal payments on the Notes and $9 million from the maturities
of securities available-for-sale. In the prior period ended June 30, 1998, the
primary sources of funds 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 for the six months
ended June 30, 1999 was $71 million in purchases of securities
available-for-sale and $9.2 million and $9.7 million in preferred stock
dividends and common stock dividends paid, respectively. For the period ended
June 30, 1998, the primary uses of funds were $302 million in purchases of
Notes, net of repayments and the change in securing mortgage collections due
from the Bank, $185 million in net purchases of securities available-for-sale,
and $7.2 million in preferred stock dividends paid.
MARKET RISK MANAGEMENT
As described in the Company's 1998 Form 10-K, the Company's market risk is
composed primarily of interest rate risk. There have been no material changes in
market risk or the manner in which the Company manages market risk since
December 31, 1998.
YEAR 2000
A critical issue has emerged in the REIT industry and for the economy
overall regarding how existing application software programs, operating systems
and other date sensitive assets can accommodate the date value for the year
2000. The year 2000 issue is pervasive, as almost all companies use
date-sensitive systems
8
<PAGE> 10
which could be affected to some degree by the rollover of the two-digit year
from 99 to 00. Potential risks of not addressing this issue include business
interruption, financial loss, reputation loss and/or legal liability.
The 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 recognize 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's systems and other date sensitive assets have been
updated to manage the Year 2000 date issue seamlessly, and the Bank anticipates
that the transition will be a non-event for its customers. The Bank has assessed
and continues to monitor the readiness of third parties that it interfaces with,
such as vendors, counterparties, customers, and payment systems, to mitigate the
potential risks that Year 2000 poses. In addition, the Bank has assessed the
readiness of companies that have borrowed from or are counterparties of the Bank
or its subsidiaries to ensure that incremental Year 2000-related credit risks
are addressed as part of the Corporation's existing credit risk management
framework. While the Bank's objective is to ensure that all aspects of the Year
2000 issue affecting the Bank, will be fully resolved on time, it is not
possible to be completely certain that all aspects of the year 2000 issue that
may affect the Bank, particularly those related to the effects of customers,
suppliers, or other third parties with whom the Bank conducts business, will be
addressed in their entirety. Accordingly, the Bank has incorporated Y2K risks
into their regular contingency plans that protect their systems and business
processes against unplanned events that would prevent normal operations. The
Bank then tested these modified contingency plans.
Emfisys, the Bank's operations group, acting in support of all areas of the
Bank, has overall responsibility for converting systems to accommodate the
calendar change. Each of the Bank's business units is responsible for
remediation of the assets used to conduct its operations and provide services or
products to its clients, while attempting to ensure that both the technical and
the business risks imposed by the year 2000 issue are addressed. A governance
structure has been established to deal with this issue, which includes a Year
2000 Project Office and regular monitoring of progress by the Bank's Risk
Management Committee, Year 2000 Steering Committees and the Board of Directors.
The process for year 2000 compliance has followed four major phases:
inventory, impact assessment and plan, implementation, and integration testing.
The implementation phase includes remediation, validation, conversion, and
replacement or retirement of the asset. Integration testing is to confirm that
the business functions work accurately and without disruption under year
2000-specific dates, with all applications functioning correctly with interfaces
and infrastructure. All four phases have been completed for all critical
business applications. The costs incurred in addressing the year 2000 problem
are borne by the Bank.
FINANCIAL STATEMENTS OF HARRIS TRUST AND SAVINGS BANK
The following unaudited financial information for the Bank is included
because the Company's preferred shares are automatically exchangeable for a new
series of preferred stock of the Bank upon the occurrence of certain events.
9
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HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $165,746 $170,202 $326,840 $335,356
Money market assets:
Deposits at banks......................................... 581 1,849 956 8,198
Federal funds sold and securities purchased under
agreement to resell..................................... 2,750 1,786 5,243 3,638
Trading account............................................. 909 806 1,848 1,540
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 80,196 64,854 155,727 124,546
State and municipal....................................... 461 809 1,065 1,858
Other..................................................... 367 316 745 631
-------- -------- -------- --------
Total interest income..................................... 251,010 240,622 492,424 475,767
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 84,927 87,981 172,113 170,982
Short-term borrowings....................................... 48,377 43,073 90,910 84,110
Senior notes................................................ 16,385 13,910 29,489 23,507
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,609 4,609 9,218 7,170
Long-term notes............................................. 3,561 4,761 7,143 10,108
-------- -------- -------- --------
Total interest expense............................. 157,859 154,334 308,873 295,877
-------- -------- -------- --------
NET INTEREST INCOME......................................... 93,151 86,288 183,551 179,890
Provision for loan losses................................... 5,906 6,985 11,791 11,976
-------- -------- -------- --------
Net Interest Income after Provision for Loan Losses......... 87,245 79,303 171,760 167,914
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 28,726 27,938 57,542 54,046
Money market and bond trading............................... 901 3,209 2,740 4,684
Foreign exchange............................................ 1,800 1,650 4,314 3,300
Merchant and charge card fees............................... 8,062 6,323 14,056 13,494
Service fees and charges.................................... 25,700 24,100 50,452 47,754
Securities gains............................................ 5,979 3,891 13,596 11,854
Gain on sale of credit card portfolio....................... -- -- -- 12,000
Bank-owned insurance investments............................ 10,699 8,292 20,525 12,347
Foreign fees................................................ 4,376 4,613 9,915 10,040
Other....................................................... 9,764 9,461 19,923 13,817
-------- -------- -------- --------
Total noninterest income.................................. 96,007 89,477 193,063 183,336
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 71,607 65,976 142,009 129,501
Pension, profit sharing and other employee benefits......... 14,796 12,202 28,710 23,713
Net occupancy............................................... 10,024 10,547 16,368 20,340
Equipment................................................... 13,772 11,164 26,766 22,050
Marketing................................................... 6,185 6,240 11,883 11,310
Communication and delivery.................................. 5,568 4,861 11,770 10,322
Expert services............................................. 8,490 6,613 15,580 13,042
Other....................................................... 1,726 3,125 5,099 13,680
-------- -------- -------- --------
132,168 120,728 258,185 243,958
Goodwill and other valuation intangibles.................... 5,658 5,181 11,198 10,725
-------- -------- -------- --------
Total noninterest expenses................................ 137,826 125,909 269,383 254,683
-------- -------- -------- --------
Income before income taxes.................................. 45,426 42,871 95,440 96,567
Applicable income taxes..................................... 10,091 10,560 22,993 27,486
-------- -------- -------- --------
Net Income................................................ $ 35,335 $ 32,311 $ 72,447 $ 69,081
======== ======== ======== ========
Earnings per Common Share (based on 10,000,000 average
shares outstanding)
Net Income.................................................. $ 3.53 $ 3.23 $ 7.24 $ 6.91
======== ======== ======== ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
10
<PAGE> 12
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income........................................... $ 35,335 $32,311 $ 72,447 $69,081
Other comprehensive income:
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains/(losses) arising during
the period, net of tax (benefit)/expense for
the quarter of ($52,572) in 1999 and $7,054 in
1998 and net of tax (benefit)/expense for the
year-to-date period of ($78,009) in 1999 and
$8,775 in 1998................................ (79,565) 10,675 (118,006) 13,287
Less reclassification adjustment for realized
gains included in income statement, net of tax
expense for the quarter of $2,326 in 1999 and
$1,547 in 1998 and net of tax expense for the
year-to-date period of $5,289 in 1999 and
$4,712 in 1998................................ (3,653) (2,344) (8,307) (7,142)
-------- ------- --------- -------
Other comprehensive (loss) income.................. (83,218) 8,331 (126,313) 6,145
-------- ------- --------- -------
Comprehensive (loss) income.......................... $(47,883) $40,642 $ (53,866) $75,226
======== ======= ========= =======
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
11
<PAGE> 13
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
-------- ------------ --------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks............... $ 1,228,175 $ 1,434,619 $ 1,418,006
Money market assets:
Interest-bearing deposits at banks.................. 159,159 98,929 303,574
Federal funds sold and securities purchased under
agreement to resell.............................. 193,550 151,575 185,800
Trading account assets................................ 84,881 120,668 109,350
Securities available-for-sale......................... 5,664,104 5,295,498 4,490,777
Loans................................................. 9,659,439 9,306,607 9,223,491
Allowance for possible loan losses.................... (110,414) (108,280) (103,410)
----------- ----------- -----------
Net loans........................................... 9,549,025 9,198,327 9,120,081
Premises and equipment................................ 306,760 284,962 242,826
Customers' liability on acceptances................... 45,488 30,829 39,065
Bank-owned insurance investments...................... 744,670 725,302 705,310
Goodwill and other valuation intangibles.............. 249,724 257,627 262,704
Other assets.......................................... 475,884 399,126 427,306
----------- ----------- -----------
TOTAL ASSETS................................ $18,701,420 $17,997,462 $17,304,799
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest bearing... $ 3,031,983 $ 3,382,309 $ 3,079,488
-- interest-bearing..... 6,552,992 6,859,778 6,317,673
Deposits in foreign offices -- noninterest bearing.... 25,877 69,215 27,188
-- interest-bearing....... 1,914,429 866,394 1,468,028
----------- ----------- -----------
Total deposits.............................. 11,525,281 11,177,696 10,892,377
Federal funds purchased and securities sold under
agreement to repurchase............................. 3,592,929 3,642,049 3,402,804
Other short-term borrowings........................... 253,284 166,510 148,290
Senior notes.......................................... 1,385,500 940,000 868,000
Acceptances outstanding............................... 45,534 30,829 39,065
Accrued interest, taxes and other expenses............ 127,764 141,431 118,417
Other liabilities..................................... 45,399 90,550 85,622
Minority interest- preferred stock of subsidiary...... 250,000 250,000 250,000
Long-term notes....................................... 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES........................... 17,450,691 16,664,065 16,029,575
----------- ----------- -----------
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............................................... 609,314 608,116 601,594
Retained earnings..................................... 636,420 593,973 562,497
Accumulated other comprehensive (loss) income......... (95,005) 31,308 11,133
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY.................. 1,250,729 1,333,397 1,275,224
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY.................................... $18,701,420 $17,997,462 $17,304,799
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
12
<PAGE> 14
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,333,397 $1,279,431
Net income................................................ 72,447 69,081
Contributions to capital.................................. 1,198 567
Dividends -- common stock................................. (30,000) (80,000)
Other comprehensive (loss) income......................... (126,313) 6,145
---------- ----------
BALANCE AT JUNE 30.......................................... $1,250,729 $1,275,224
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
13
<PAGE> 15
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 72,447 $ 69,081
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses................................... 11,791 11,976
Depreciation and amortization, including intangibles........ 32,535 29,051
Deferred tax expense (benefit).............................. 3,720 (745)
Gain on sales of securities................................. (13,597) (11,854)
Gain on sale of credit card portfolio....................... -- (12,000)
Trading account net sales (purchases)....................... 35,787 (56,141)
Net (increase) decrease in interest receivable.............. (1,908) 8,894
Net increase in interest payable............................ 6,924 8,136
Net decrease (increase) in loans held for resale............ 134,538 (98,910)
Other, net.................................................. (22,197) (29,589)
----------- -----------
Net cash provided (used) by operating activities....... 260,040 (82,101)
----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks..................................................... (60,230) 294,488
Net increase in Federal funds sold and securities purchased
under agreement to resell................................. (41,975) (114,075)
Proceeds from sales of securities available-for-sale........ 583,298 1,213,321
Proceeds from maturities of securities available-for-sale... 4,684,157 5,114,228
Purchases of securities available-for-sale.................. (5,832,076) (6,916,870)
Net increase in loans....................................... (497,027) (1,012,168)
Proceeds from sales of premises and equipment............... 27 22,605
Purchases of premises and equipment......................... (43,162) (54,450)
Net increase in bank-owned insurance investments............ (19,367) (437,847)
Other, net.................................................. (40,868) (10,741)
----------- -----------
Net cash used by investing activities.................. (1,267,223) (1,901,509)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits.................................... 347,585 232,792
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase............. (49,120) 709,204
Net increase (decrease) in short-term borrowings............ 86,774 (352,737)
Proceeds from issuance of senior notes...................... 3,246,000 4,960,000
Repayment of senior notes................................... (2,800,500) (4,192,000)
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......................... (30,000) (80,000)
----------- -----------
Net cash provided by financing activities.............. 800,739 2,150,007
----------- -----------
NET (DECREASE) INCREASE IN CASH AND DEMAND BALANCES DUE
FROM BANKS............................................ (206,444) 166,397
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,434,619 1,251,609
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT JUNE 30..... $ 1,228,175 $ 1,418,006
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
14
<PAGE> 16
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 and certain of its subsidiaries are defendants in various legal
proceedings arising in the normal course of business. In the opinion of
management, based on the advice of legal counsel, the ultimate resolution of
these matters will not have a material adverse effect on the Bank's consolidated
financial position.
3. CASH FLOWS
For purposes of the Bank's Consolidated Statements of Cash Flows, cash and
cash equivalents is defined to include cash and demand balances due from banks.
Cash interest payments (net of amounts capitalized) for the six months ended
June 30 totaled $301.9 million and $287.7 million in 1999 and 1998,
respectively. Cash income tax payments over the same periods totaled $34.0
million and $23.4 million, respectively.
4. ACCOUNTING CHANGES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial position and to be measured at fair value. As issued, the
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133". The Statement is effective upon issuance and it amends
SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Bank is in the process of assessing the impact of
adopting the Statements on its financial position and results of operations.
15
<PAGE> 17
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
SUMMARY
The Bank had second quarter 1999 earnings of $35.3 million, an increase of
$3.0 million or 9 percent from second quarter 1998. For the current quarter,
annualized return on average common stockholder's equity was 10.86 percent
compared to 10.27 percent in the second quarter of 1998. Annualized return on
average assets was 0.77 percent compared to 0.79 percent a year ago.
Second quarter net interest income on a fully taxable equivalent basis was
$97.2 million, up $6.5 million or 7 percent from $90.7 million in 1998's second
quarter. Average earning assets rose 13 percent to $15.62 billion from $13.78
billion in 1998, primarily attributable to an increase of $549 million in
average loans and $1.24 billion in the investment securities portfolio, somewhat
offset by a decline in interest bearing deposits at banks of $125 million.
Commercial and residential real estate lending were strong contributors to the
growth in loans. Net interest margin declined to 2.49 percent from 2.64 percent
in the same quarter last year primarily reflecting continued growth in new
business and the relatively higher cost of additional funding to support the
asset growth.
The second quarter provision for loan losses of $5.9 million was down $1.1
million from $7.0 million in the second quarter of 1998. Net charge-offs
increased from $4.8 million to $5.5 million, primarily reflecting increased
writeoffs in the commercial loan portfolio.
Noninterest income increased $6.5 million or 7 percent to $96.0 million for
second quarter 1999 from the same quarter last year. In the current quarter,
service charge fees rose by $1.6 million or 7 percent and trust and investment
management fees improved by $0.8 million or 3 percent compared to second quarter
1998. Net gains from securities sales increased from $3.9 million in the second
quarter 1998 to $6.0 million during the current quarter while trading income
decreased $2.3 million. Other sources of income, which includes syndication
fees, revenue from bank-owned insurance investments, gains on mortgage loan
sales and other fees increased $2.5 million.
Second quarter 1999 noninterest expenses of $137.8 million increased $11.9
million or 9 percent from the year ago quarter, reflecting expenditures related
to preparing systems for year 2000.
Nonperforming assets at June 30, 1999 were $32 million or 0.34 percent of
total loans, compared to $43 million or 0.46 percent at March 31, 1999, and $21
million or 0.23 percent a year ago. At June 30, 1999, the allowance for possible
loan losses was $110 million, equal to 1.1 percent of loans outstanding,
compared to $103 million or 1.1 percent at the end of second quarter 1998. As a
result, the ratio of the allowance for possible loan losses to nonperforming
assets decreased from 490 percent at June 30, 1998 to 341 percent at June 30,
1999.
At June 30, 1999 equity capital of the Bank amounted to $1.25 billion, down
from $1.28 billion one year earlier. The regulatory leverage capital ratio was
7.31 percent for the second quarter of 1999 compared to 7.71 percent in the same
quarter of 1998. The Bank's capital ratio exceeds the prescribed regulatory
minimum for banks. The Bank's June 30, 1999 Tier 1 and total risk-based capital
ratios were 8.71 percent and 10.88 percent compared to respective ratios of 8.48
percent and 10.71 percent at June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH 1998
The Bank's earnings for the six months ended June 30, 1999 were $72.4
million. This represented a $3.4 million or 5 percent increase from 1998
earnings of $69.1 million. Annualized return on average common equity was 11.11
percent compared to 10.98 percent in the first half of 1998. Annualized return
on average assets was 0.80 percent compared to 0.87 percent a year ago.
16
<PAGE> 18
Net interest income on a fully taxable equivalent basis was $191.6 million
in the current period, an increase of $2.8 million or 1 percent from $188.8
million in the first six months of 1998. Average earning assets increased to
$15.29 billion from $13.51 billion a year ago primarily attributable to an
increase of $1.23 billion or 29 percent in investment portfolio securities and
an increase of 9 percent or $783 million in average loans. Commercial and
residential real estate lending were contributors to this loan growth. Net
interest margin declined to 2.53 percent from 2.82 percent in 1998 primarily due
to continued growth in new business and the relatively higher cost of additional
funding to support the asset growth.
The 1999 provision for loan losses of $11.8 million was down $0.2 million
from $12.0 million a year ago. Net charge-offs increased $1.5 million to $9.7
million, primarily reflecting increased writeoffs in the commercial loan
portfolio.
Noninterest income increased $9.7 million to $193.1 million in 1999
compared to a year ago. A $12.0 million gain on the sale of the credit card
portfolio was recognized in 1998. In the current year, trust and investment
management income increased $3.5 million or 6 percent and service charge income
increased $2.7 million or 6 percent. Foreign exchange income increased $1.0
million. Securities gains were $1.7 million greater compared to a year ago while
trading account profits declined by $1.9 million. Other sources of noninterest
income which include syndication fees, revenue from bank-owned insurance
investments, gains on mortgage loan sales and other fees increased $14.2
million, excluding the gain on the sale of the credit card portfolio.
Noninterest expenses of $269.4 million rose $14.7 million or 6 percent from
a year ago. Excluding the $5.6 million one-time cost for one-time reengineering
charges, total expenses increased 8 percent in 1999 compared to a year ago.
17
<PAGE> 19
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, 1999.
/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
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 812
<SECURITIES> 307,528
<RECEIVABLES> 162,602
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,652
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 484,202
<CURRENT-LIABILITIES> 92
<BONDS> 0
0
250,000
<COMMON> 1
<OTHER-SE> 234,109
<TOTAL-LIABILITY-AND-EQUITY> 484,202
<SALES> 0
<TOTAL-REVENUES> 15,508
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,073
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,073
<EPS-BASIC> 5,854.00
<EPS-DILUTED> 5,854.00
</TABLE>
