<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 MARCH 31, 1999
COMMISSION FILE NUMBER 1-13805
HARRIS PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of
incorporation or organization)
36-4183096
(I.R.S. Employer
Identification No.)
111 WEST MONROE STREET, CHICAGO, ILLINOIS
(Address of principal executive offices)
60603
(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 May
13, 1999 was 1,000.
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<PAGE> 2
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................................... 7
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures ............................................................ 18
</TABLE>
1
<PAGE> 3
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
--------- ------------ ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash on deposit with Harris Trust and Savings Bank.......... $ 414 $ 621 $ 590
Securities purchased from Harris Trust and Savings Bank
under agreement to resell................................. 4,000 17,004 7,004
Notes receivable from Harris Trust and Savings Bank......... 183,354 207,935 332,197
Securities available-for-sale:
Mortgage-backed........................................... 293,857 261,494 133,187
Securing mortgage collections due from Harris Trust and
Savings Bank.............................................. 8,350 13,690 16,763
Other assets................................................ 2,622 2,646 2,591
-------- ------------ --------
TOTAL ASSETS........................................... $492,597 $ 503,390 $492,332
======== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 55 $ 62 $ 151
Dividends on common stock payable to parent................. -- 9,700 --
-------- ------------ --------
TOTAL LIABILITIES...................................... 55 9,762 151
-------- ------------ --------
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.................................. 240,733 240,733 241,103
Earnings in excess of distributions......................... 3,250 392 1,632
Accumulated other comprehensive income -- unrealized gains
(losses) on available-for-sale securities................. (1,442) 2,502 (555)
-------- ------------ --------
TOTAL STOCKHOLDERS' EQUITY............................. 492,542 493,628 492,181
-------- ------------ --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $492,597 $ 503,390 $492,332
======== ============ ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
(JANUARY 2, 1998)
QUARTER ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998
-------------- -----------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME:
Securities purchased from Harris Trust and Savings Bank
under agreement to resell.............................. $ 271 $ 18
Notes receivable from Harris Trust and Savings Bank....... 3,196 3,127
Securities available-for-sale:
Mortgage-backed........................................ 4,238 1,220
--------- ---------
Total interest income............................. 7,705 4,365
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and Savings
Bank................................................... 151 141
Advisory fees paid to Harris Trust and Savings Bank....... 13 7
General and administrative................................ 74 24
--------- ---------
Total operating expense........................... 238 172
--------- ---------
Net income.................................................. 7,467 4,193
Preferred dividends......................................... 4,609 2,561
--------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER.................. $ 2,858 $ 1,632
========= =========
Basic and diluted earnings per common share................. $2,858.00 $1,632.00
========= =========
Net income.................................................. $ 7,467 $ 4,193
Other comprehensive income -- unrealized gains (losses) on
available-for-sale-securities............................. (3,944) (555)
--------- ---------
Comprehensive income........................................ $ 3,523 $ 3,638
========= =========
</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,
respectively.............................................. $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........................... -- 241,103
Net income................................................ 7,467 4,193
Other comprehensive income................................ (3,944) (555)
Dividends (preferred stock $0.4609 and $0.2561 per share,
respectively).......................................... (4,609) (2,561)
-------- --------
Balance at March 31......................................... $492,542 $492,181
======== ========
</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
QUARTER (JANUARY 2, 1998)
ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 7,467 $ 4,193
Adjustments to reconcile net income to net cash provided
by operating activities:
Net decrease (increase) in other assets................ 24 (2,591)
Net (decrease) increase in accrued expenses............ (7) 151
-------- ---------
Net cash provided by operating activities............ 7,484 1,753
-------- ---------
INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased from
Harris Trust and Savings Bank under agreement to
resell................................................. 13,004 (7,004)
Purchases of notes receivable from Harris Trust and
Savings Bank........................................... -- (356,000)
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 24,581 23,803
Decrease (increase) in securing mortgage collections due
from Harris Trust and Savings Bank..................... 5,340 (16,763)
Purchases of securities available-for-sale................ (39,863) (134,442)
Proceeds from maturities of securities
available-for-sale..................................... 3,556 700
-------- ---------
Net cash provided (used) by investing activities..... 6,618 (489,706)
-------- ---------
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...................................... -- 241,103
Cash dividends paid on preferred stock.................... (4,609) (2,561)
Cash dividends paid on common stock....................... (9,700) --
-------- ---------
Net cash (used) provided by financing activities..... (14,309) 488,543
-------- ---------
Net (decrease) increase in cash on deposit with Harris
Trust and Savings Bank................................. (207) 590
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.............................................. $ 414 $ 590
======== =========
</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. ("HCH"),
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 March 31, 1999, there is no pending litigation
against the Company.
6
<PAGE> 8
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.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
The Company's net income for the first quarter of 1999 was $7.4 million
compared to $4.2 million in the first quarter of 1998.
First quarter 1999 interest income on the Notes totaled $3.2 million and
yielded 6.4% on $200 million of average principal outstanding for the quarter
compared to $3.1 million and a 6.67% yield on $352 million average principal
outstanding from February 11, 1998 through March 31, 1998. Interest income on
securities available-for-sale for the current quarter was $4.2 million resulting
in a yield of 6.48% on an average balance of $261 million, compared to $1.2
million with a yield of 6.83% on an average balance of $134 million for the same
period a year ago. The average outstanding balance of the Securing Mortgage
Loans for first quarter 1999 and 1998 was $245 million and $430 million,
respectively. There were no Company borrowings during the quarter.
First quarter 1999 operating expenses totaled $238 thousand, an increase of
$66 thousand or 38% from the first quarter of 1998. Loan servicing expenses
totaled $151 thousand, an increase of $10 thousand or 7% from the prior year's
first quarter. Advisory fees of $13 thousand increased by $6 thousand or 86%
over first quarter 1998. General and administrative expenses totaled $74
thousand, and increase of $50 thousand or 208% over first quarter 1998.
Generally, the higher operating expenses in first quarter 1999 are attributable
to substantial operating activities not commencing until February 11, 1998.
On March 30, 1999, the Company paid a cash dividend of $0.46094 per share
on outstanding preferred shares to the stockholders of record on March 15, 1999,
as declared on March 9, 1999. On February 26, 1998, the Company declared a cash
dividend of $0.2561 per share on outstanding preferred shares to stockholders of
record on March 15, 1998. The dividend of $2.6 million was subsequently paid on
March 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.
At March 31, 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.
7
<PAGE> 9
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 current quarter were $25 million provided by
principal payments on the Notes and $4 million from the maturities of securities
available-for-sale. In the prior year's quarter ended March 31, 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 $30 million provided by
principal payments on the Notes, net of the change in securing mortgage
collections due from the Bank. The primary uses of funds for the first quarter
1999 were $40 million in purchases of securities available-for-sale and $4.6
million and $9.7 million in preferred stock dividends and common stock dividends
paid, respectively. For the prior year's first quarter the primary uses of funds
were $349 million in purchases of Notes, net of repayments and the change in
securing mortgage collections due from the Bank, $134 million in purchases of
securities available-for-sale, and $2.6 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 systems can accommodate the date value for the year 2000. The year
2000 issue is pervasive, as almost all date-sensitive systems will 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 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 and other systems to recognize the date change on January 1, 2000. An
assessment of the readiness of third parties that the Bank interfaces with, such
as vendors, counterparties, customers, payment systems, and others, is ongoing
to mitigate the potential risks that year 2000 poses to the
8
<PAGE> 10
Bank. In addition, the Bank is assessing the readiness of companies that have
borrowed from it to ensure that incremental year 2000-related credit risks are
addressed as part of the Bank's existing credit risk management framework. 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. However, it is not possible to be sure that all
aspects of the year 2000 issue that may affect the Bank, including those related
to the effects of customers, suppliers, or other third parties with whom the
Bank conducts business, will not have a material impact on the Bank's operations
or financial condition. The Bank has consistently maintained contingency plans
for mission critical 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 assist in providing
optimum coverage and re-usability of existing arrangements and responsibility
assignments. The Bank completed all year 2000-specific contingency plans by
April 30, 1999 with related testing to continue throughout the year.
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 is following four major steps:
inventory, impact assessment and plan, implementation and integration testing.
The implementation step includes verification, conversion and replacement or
retirement of the asset. If an asset is not retired, it is tested and verified,
and only once it is verified does it progress to the integration testing step.
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. As of December 31,
1998, the Bank had substantially completed the implementation of critical
systems. The implementation of non-critical business assets and the integration
testing of critical systems is planned to be completed by June 30, 1999. 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 Harris Trust and Savings
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
<PAGE> 11
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
--------------------
1999 1998
---- ----
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $161,094 $165,153
Money market assets:
Deposits at banks......................................... 374 6,349
Federal funds sold and securities purchased under
agreement to resell..................................... 2,493 1,852
Trading account............................................. 940 734
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 75,531 59,692
State and municipal....................................... 604 1,048
Other..................................................... 378 316
-------- --------
Total interest income..................................... 241,414 235,144
-------- --------
INTEREST EXPENSE
Deposits.................................................... 87,186 83,001
Short-term borrowings....................................... 42,533 41,037
Senior notes................................................ 13,104 9,597
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,610 2,561
Long-term notes............................................. 3,582 5,347
-------- --------
Total interest expense.................................... 151,015 141,543
-------- --------
NET INTEREST INCOME......................................... 90,399 93,601
Provision for loan losses................................... 5,885 4,991
-------- --------
Net Interest Income after Provision for Loan Losses......... 84,514 88,610
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 28,816 26,107
Money market and bond trading............................... 1,839 1,476
Foreign exchange............................................ 2,514 1,650
Merchant and charge card fees............................... 5,994 7,170
Service fees and charges.................................... 24,752 23,654
Securities gains............................................ 7,618 7,964
Gain on sale of credit card portfolio....................... -- 12,000
Bank-owned insurance investments............................ 9,826 4,056
Foreign fees................................................ 5,539 5,426
Other....................................................... 10,159 4,356
-------- --------
Total noninterest income.................................. 97,057 93,859
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 70,402 63,525
Pension, profit sharing and other employee benefits......... 13,914 11,512
Net occupancy............................................... 6,345 9,793
Equipment................................................... 12,995 10,887
Marketing................................................... 5,698 5,070
Communication and delivery.................................. 6,201 5,460
Expert services............................................. 7,090 6,429
Contract programming........................................ 3,305 4,610
Other....................................................... 68 5,945
-------- --------
126,018 123,231
Goodwill and other valuation intangibles.................... 5,540 5,544
-------- --------
Total noninterest expenses................................ 131,558 128,775
-------- --------
Income before income taxes.................................. 50,013 53,694
Applicable income taxes..................................... 12,902 16,926
-------- --------
NET INCOME................................................ $ 37,111 $ 36,768
======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net Income.................................................. $ 3.71 $ 3.68
======== ========
</TABLE>
The accompanying notes to 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
MARCH 31
-------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net income.................................................. $ 37,111 $36,768
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains/(losses) arising during the
period, net of tax (benefit)/expense of ($25,437) in
1999 and $1,654 in 1998............................... (38,441) 2,680
Less reclassification adjustment for realized gains
included in income statement, net of tax expense of
$2,963 in 1999 and $3,098 in 1998..................... (4,655) (4,866)
-------- -------
Other comprehensive loss.................................. (43,096) (2,186)
-------- -------
Comprehensive (loss) income................................. $ (5,985) $34,582
======== =======
</TABLE>
The accompanying notes to 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>
MARCH 31 DECEMBER 31 MARCH 31
1999 1998 1998
-------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks............... $ 1,239,015 $ 1,434,619 $ 1,038,828
Money market assets:
Interest-bearing deposits at banks.................. 137,061 98,929 290,921
Federal funds sold and securities purchased under
agreement to resell.............................. 87,250 151,575 82,000
Trading account assets................................ 64,411 120,668 45,783
Securities available-for-sale......................... 5,455,837 5,295,498 4,266,201
Loans................................................. 9,491,564 9,306,607 8,716,586
Allowance for possible loan losses.................... (109,979) (108,280) (101,318)
----------- ----------- -----------
Net loans........................................... 9,381,585 9,198,327 8,615,268
Premises and equipment................................ 295,201 284,962 231,984
Customers' liability on acceptances................... 40,893 30,829 46,688
Bank-owned insurance investments...................... 735,128 725,302 447,018
Goodwill and other valuation intangibles.............. 254,549 257,627 266,411
Other assets.......................................... 470,263 399,126 366,891
----------- ----------- -----------
TOTAL ASSETS................................... $18,161,193 $17,997,462 $15,697,993
=========== =========== ===========
LIABILITIES
Deposits in domestic offices - noninterest bearing.... $ 2,699,556 $ 3,382,309 $ 2,674,863
- interest-bearing....... 6,356,686 6,859,778 5,585,785
Deposits in foreign offices - noninterest bearing.... 26,371 69,215 18,701
- interest-bearing....... 1,796,029 866,394 1,284,496
----------- ----------- -----------
Total deposits................................. 10,878,642 11,177,696 9,563,845
Federal funds purchased and securities sold under
agreement to repurchase............................. 3,534,582 3,642,049 3,599,510
Other short-term borrowings........................... 661,025 166,510 2,666
Senior notes.......................................... 1,022,000 940,000 468,000
Acceptances outstanding............................... 40,893 30,829 46,688
Accrued interest, taxes and other expenses............ 128,348 141,431 120,044
Other liabilities..................................... 107,897 90,550 72,947
Minority interest -- preferred stock of subsidiary.... 250,000 250,000 250,000
Long-term notes....................................... 225,000 225,000 325,000
----------- ----------- -----------
TOTAL LIABILITIES.............................. 16,848,387 16,664,065 14,448,700
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized, issued and
outstanding 10,000,000 shares....................... 100,000 100,000 100,000
Surplus............................................... 608,510 608,116 592,461
Retained earnings..................................... 616,084 593,973 554,030
Accumulated other comprehensive (loss) income......... (11,788) 31,308 2,802
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY..................... 1,312,806 1,333,397 1,249,293
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $18,161,193 $17,997,462 $15,697,993
=========== =========== ===========
</TABLE>
The accompanying notes to 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................................................ 37,111 36,768
Contributions to capital.................................. 394 280
Dividends -- common stock................................. (15,000) (65,000)
Other comprehensive loss.................................. (43,096) (2,186)
---------- ----------
BALANCE AT MARCH 31......................................... $1,312,806 $1,249,293
========== ==========
</TABLE>
The accompanying notes to 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>
QUARTER ENDED MARCH 31
--------------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 37,111 $ 36,768
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses................................. 5,885 4,991
Depreciation and amortization, including intangibles...... 16,193 14,754
Deferred tax (benefit) expense............................ 2,459 5,766
Gain on sales of securities............................... (7,618) (7,964)
Gain on sale of credit card portfolio..................... -- (12,000)
Trading account net sales................................. 56,257 7,426
Net decrease in interest receivable....................... 7,265 20,912
Net increase in interest payable.......................... 8,327 10,315
Net decrease (increase) in loans held for resale.......... 65,982 (64,587)
Other, net................................................ (6,738) (29,298)
----------- -----------
Net cash provided (used) by operating activities....... 185,123 (12,917)
----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks.................................................. (38,132) 307,141
Net decrease (increase) in Federal funds sold and
securities purchased under agreement to resell......... 64,325 (10,275)
Proceeds from sales of securities available-for-sale...... 329,919 961,345
Proceeds from maturities of securities
available-for-sale..................................... 1,888,647 3,521,305
Purchases of securities available-for-sale................ (2,442,783) (4,865,118)
Net increase in loans..................................... (255,125) (534,693)
Proceeds from sales of premises and equipment............. 14 11,967
Purchases of premises and equipment....................... (20,906) (23,921)
Net increase in bank-owned insurance investments.......... (9,826) (179,556)
Other, net................................................ (51,854) 24,384
----------- -----------
Net cash used by investing activities.................. (535,721) (787,421)
----------- -----------
FINANCING ACTIVITIES:
Net decrease in deposits.................................. (299,054) (1,095,740)
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase.......... (107,467) 905,910
Net increase (decrease) in short-term borrowings.......... 494,515 (498,361)
Proceeds from issuance of senior notes.................... 847,000 2,448,000
Repayment of senior notes................................. (765,000) (2,080,000)
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....................... (15,000) (65,000)
----------- -----------
Net cash provided by financing activities.............. 154,994 587,557
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. (195,604) (212,781)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,434,619 1,251,609
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT MARCH 31.... $ 1,239,015 $ 1,038,828
=========== ===========
</TABLE>
The accompanying notes to 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 year's
financial statements to the current year's presentation.
The consolidated financial statements have been prepared by management from
the books and records of the 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 its subsidiaries are 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 three months ended
March 31, totaled $142.7 million and $131.2 million in 1999 and 1998,
respectively. Cash income tax payments over the same periods totaled $9.3
million and $4.9 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. The Statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Bank is in the process of assessing the impact of adopting this
Statement on its financial position and results of operations.
15
<PAGE> 17
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
SUMMARY
The Bank had first quarter 1999 earnings of $37.1 million compared to $36.8
million in the year ago quarter. For the current quarter, annualized return on
average common stockholder's equity was 11.35 percent compared to 11.70 percent
in the first quarter of 1998. Annualized return on average assets was 0.84
percent compared to 0.95 percent a year ago.
First quarter net interest income on a fully taxable equivalent basis was
$94.4 million, down $3.7 million or 4 percent from $98.1 million in the year ago
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 first quarter 1998. Average earning assets rose
13 percent to $14.95 billion from $13.24 billion in 1998, primarily attributable
to an increase of $1.03 billion in average loans and $1.21 billion in the
investment securities portfolio, somewhat offset by a decline in interest
bearing deposits at banks of $407 million. Commercial loans and residential
mortgages were the most significant contributors to this growth. Net interest
margin declined to 2.56 percent from 3.00 percent in the same quarter last year
primarily reflecting the impact of the sale of the credit card business in first
quarter 1998 and the continued rapid growth in new business.
The first quarter provision for loan losses of $5.9 million was up $0.9
million from $5.0 million in the first quarter of 1998. Net charge-offs
increased from $3.4 million to $4.2 million, primarily reflecting increased
writeoffs in the commercial loan portfolio.
Noninterest income increased $3.2 million or 3 percent to $97.1 million for
first quarter 1999 from the same quarter last year. In the current quarter,
service charge fees rose by $1.1 million and trust and investment management
fees improved by $2.7 million compared to first quarter 1998, while money market
and bond trading income increased $0.4 million. Net gains from securities sales
of $7.6 million were essentially unchanged from the year ago quarter. Other
sources of income, including syndication fees, revenue from bank-owned insurance
investments, gains on mortgage sales and other fees, increased $11.7 million
(excluding the credit card gain).
First quarter 1999 noninterest expenses of $131.6 million increased $2.8
million or 2 percent from the year ago quarter.
Nonperforming assets at March 31, 1999 were $43 million or 0.5 percent of
total loans, compared to $16 million or 0.2 percent at December 31, 1998, and
$18 million or 0.2 percent a year ago. At March 31, 1999, the allowance for
possible loan losses was $110 million, equal to 1.2 percent of loans
outstanding, compared to $101 million or 1.2 percent at the end of first quarter
1998. As a result, the ratio of the allowance for possible loan losses to
nonperforming assets decreased from 576 percent at March 31, 1998 to 254 percent
at March 31, 1999.
At March 31, 1999 equity capital of the Bank amounted to $1.31 billion, up
from $1.25 billion one year earlier. The regulatory leverage capital ratio was
7.45 percent for the first quarter of 1999 compared to 7.98 percent in the same
quarter of 1998. The Bank's capital ratio exceeds the prescribed regulatory
minimum for banks. The Bank's March 31, 1999 Tier 1 and total risk-based capital
ratios were 8.59 percent and 10.77 percent compared to respective ratios of 8.70
percent and 11.72 percent at March 31, 1998.
16
<PAGE> 18
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
17
<PAGE> 19
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 May, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,414
<SECURITIES> 293,857
<RECEIVABLES> 191,704
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,622
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 492,597
<CURRENT-LIABILITIES> 55
<BONDS> 0
250,000
0
<COMMON> 1
<OTHER-SE> 242,541
<TOTAL-LIABILITY-AND-EQUITY> 492,597
<SALES> 0
<TOTAL-REVENUES> 7,705
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,467
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,467
<EPS-PRIMARY> 2,858
<EPS-DILUTED> 2,858
</TABLE>
