<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 MARCH 31, 2000
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 (I.R.S. Employer Identification
incorporation or organization) No.)
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 May 15,
2000 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 and Other Comprehensive Income..... 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............................ 16
Signatures............................................................. 16
</TABLE>
1
<PAGE> 3
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
2000 1999 1999
--------- ------------ ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash on deposit with Harris Trust and Savings Bank.......... $ 410 $ 1,262 $ 414
Securities purchased from Harris Trust and Savings Bank
under agreement to resell................................. 6,501 15,000 4,000
Notes receivable from Harris Trust and Savings Bank......... 129,577 136,749 183,354
Securities available-for-sale:
Mortgage-backed........................................... 309,516 315,265 293,857
U.S. Treasury............................................. 24,896 -- --
Securing mortgage collections due from Harris Trust and
Savings Bank.............................................. 3,102 3,125 8,350
Other assets................................................ 2,516 2,587 2,622
-------- -------- --------
Total assets...................................... $476,518 $473,988 $492,597
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 66 $ 97 $ 55
Dividends on common stock payable to parent................. -- -- --
-------- -------- --------
Total liabilities................................. 66 97 55
-------- -------- --------
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......................... 3,520 349 3,250
Accumulated other comprehensive income -- unrealized losses
on available-for-sale securities.......................... (17,802) (17,192) (1,442)
-------- -------- --------
Total stockholders' equity................................ 476,452 473,891 492,542
-------- -------- --------
Total liabilities and stockholders' equity................ $476,518 $473,988 $492,597
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
----------------------
2000 1999
---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME:
Securities purchased from Harris Trust and Savings Bank
under agreement to resell.............................. $ 313 $ 271
Notes receivable from Harris Trust and Savings Bank....... 2,150 3,196
Securities available-for-sale:
Mortgage-backed........................................ 5,462 4,238
U.S. Treasury.......................................... 4 --
--------- ---------
Total interest income............................. 7,929 7,705
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and Savings
Bank................................................... 103 151
Advisory fees paid to Harris Trust and Savings Bank....... 15 13
General and administrative................................ 31 74
--------- ---------
Total operating expenses.......................... 149 238
--------- ---------
Net income.................................................. 7,780 7,467
Preferred dividends......................................... 4,609 4,609
--------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER.................. $ 3,171 $ 2,858
========= =========
Basic and diluted earnings per common share................. $3,171.00 $2,858.00
========= =========
Net income.................................................. $ 7,780 $ 7,467
Other comprehensive income -- unrealized losses on
available-for-sale securities............................. (610) (3,944)
--------- ---------
Comprehensive income........................................ $ 7,170 $ 3,523
========= =========
</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>
QUARTER ENDED
MARCH 31
-------------
2000 1999
---- ----
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Balance at January 1........................................ $473,891 $493,628
Net income................................................ 7,780 7,467
Other comprehensive loss.................................. (610) (3,944)
Dividends (preferred stock $0.4609)....................... (4,609) (4,609)
-------- --------
Balance at March 31......................................... $476,452 $492,542
======== ========
</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>
QUARTER ENDED MARCH 31
----------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 7,780 $ 7,467
Adjustments to reconcile net income to net cash provided
by operating activities:
Net decrease in other assets........................... 71 24
Net decrease in accrued expenses....................... (31) (7)
-------- ---------
Net cash provided by operating activities............ 7,820 7,484
-------- ---------
INVESTING ACTIVITIES:
Net decrease in securities purchased from Harris Trust and
Savings Bank under agreement to resell................. 8,499 13,004
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 7,172 24,581
Decrease in securing mortgage collections due from Harris
Trust and Savings Bank................................. 23 5,340
Purchases of securities available-for-sale................ (24,883) (39,863)
Proceeds from maturities of securities
available-for-sale..................................... 5,126 3,556
-------- ---------
Net cash (used) provided by investing activities..... (4,063) 6,618
-------- ---------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (4,609) (4,609)
Cash dividends paid on common stock....................... -- (9,700)
-------- ---------
Net cash used by financing activities................ (4,609) (14,309)
-------- ---------
Net decrease in cash on deposit with Harris Trust and
Savings Bank........................................... (852) (207)
Cash on deposit with Harris Trust and Savings Bank at
beginning of period.................................... 1,262 621
-------- ---------
Cash on deposit with Harris Trust and Savings Bank at end
of period.............................................. $ 410 $ 414
======== =========
</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 statement 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 1999 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.
2. COMMITMENTS AND CONTINGENCIES
Legal proceedings in which the Company is a defendant may arise in the
normal course of business. 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 real estate investment
trust (a "REIT"), liquidity, provision for loan losses, capital resources and
investment activities. 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, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
The Company's net income for the first quarter of 2000 was $7.8 million
compared to $7.4 million in the first quarter of 1999.
First quarter 2000 interest income on the Notes totaled $2.2 million and
yielded 6.4% on $135 million of average principal outstanding for the quarter
compared to $3.2 million and a 6.4% yield on $200 million
6
<PAGE> 8
average principal outstanding for first quarter 1999. The decrease is
attributable to the reduction in the Notes balance because of customer payoffs
in the underlying collateralizing mortgages. Interest income on securities
available-for-sale for the current quarter was $5.5 million resulting in a yield
of 7.1% on an average balance of $309 million, compared to $4.2 million with a
yield of 6.5% on an average balance of $261 million for the same period a year
ago. The average outstanding balance of the Securing Mortgage Loans for first
quarter 2000 and 1999 was $167 million and $245 million, respectively. There
were no Company borrowings during the quarter.
First quarter 2000 operating expenses totaled $149 thousand, a decrease of
$89 thousand or 38% from the first quarter of 1999. Loan servicing expenses
totaled $103 thousand, a decrease of $48 thousand or 32% from the prior year's
first quarter, resulting from the reduction in the principal balance of the
Notes, thereby reducing servicing fees payable to the Bank. General and
administrative expenses totaled $31 thousand, a decrease of $43 thousand or 59%
over first quarter 1999, primarily attributable to higher operating expenses for
the prior year relating to the cost of initial regulatory filings.
At March 31, 2000 and 1999, 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.
On March 30, 2000, the Company paid a cash dividend of $0.46094 per share
on outstanding preferred shares to the stockholders of record on March 15, 2000,
as declared on March 6, 2000. 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.
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 three months ended March 31, 2000 were $7 million
provided by principal payments on the Notes and $5 million from the maturities
of securities available-for-sale. In the prior period ended March 31, 1999, the
primary sources of funds were $25 million provided by principal payments on the
Notes and $4 million from the maturities of securities available-for-sale. The
primary uses of funds for the three months ended March 31, 2000 were $25 million
in purchases of securities available-for-sale and $5 million in preferred stock
dividends. For the prior year ended March 31, 1999 the primary uses of funds
were $40 million in purchases of securities available-for-sale, and $5 million
and $10 million in preferred stock dividends and common stock dividends paid,
respectively.
7
<PAGE> 9
MARKET RISK MANAGEMENT
As described in the Company's 1999 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, 1999.
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.
8
<PAGE> 10
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 30, DECEMBER 31, MARCH 31,
2000 1999 1999
--------- ------------ ---------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks............... $ 1,204,405 $ 1,423,043 $ 1,239,015
Money market assets:
Interest-bearing deposits at banks.................. 251,413 239,832 137,061
Federal funds sold and securities purchased under
agreement to resell.............................. 228,400 298,000 87,250
Trading account assets................................ 24,118 66,996 64,411
Securities available-for-sale......................... 6,423,333 6,265,013 5,455,837
Loans................................................. 10,661,073 10,063,801 9,491,564
Allowance for possible loan losses.................... (114,583) (113,702) (109,979)
----------- ----------- -----------
Net loans........................................... 10,546,490 9,950,099 9,381,585
Premises and equipment................................ 279,410 311,353 295,201
Customers' liability on acceptances................... 50,213 43,599 40,893
Bank-owned insurance investments...................... 871,857 772,579 735,128
Goodwill and other valuation intangibles.............. 230,929 241,568 254,549
Other assets.......................................... 625,621 425,983 470,263
----------- ----------- -----------
TOTAL ASSETS................................... $20,736,189 $20,038,065 $18,161,193
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest bearing... $ 3,138,066 $ 3,449,650 $ 2,699,556
-- interest-bearing..... 6,644,802 6,314,523 6,356,686
Deposits in foreign offices -- noninterest bearing.... 35,549 35,537 26,371
-- interest-bearing........ 1,976,374 1,329,977 1,796,029
----------- ----------- -----------
Total deposits................................. 11,794,791 11,129,687 10,878,642
Federal funds purchased and securities sold under
agreement to repurchase............................. 4,510,048 4,739,578 3,534,582
Other short-term borrowings........................... 1,539,403 681,097 661,025
Senior notes.......................................... 853,000 1,500,000 1,022,000
Acceptances outstanding............................... 50,219 43,599 40,893
Accrued interest, taxes and other expenses............ 160,221 167,465 128,348
Other liabilities..................................... 50,461 50,545 107,897
Minority interest-preferred stock of subsidiary....... 250,000 250,000 250,000
Long-term notes....................................... 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES.............................. 19,433,143 18,786,971 16,848,387
----------- ----------- -----------
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............................................... 611,254 610,512 608,510
Retained earnings..................................... 730,378 678,275 616,084
Accumulated other comprehensive loss.................. (138,586) (137,693) (11,788)
TOTAL STOCKHOLDER'S EQUITY..................... 1,303,046 1,251,094 1,312,806
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $20,736,189 $20,038,065 $18,161,193
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
9
<PAGE> 11
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
----------------------
2000 1999
---- ----
(IN THOUSANDS EXCEPT
SHARE DATE)
<S> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $205,972 $161,094
Money market assets:
Deposits at banks......................................... 571 374
Federal funds sold and securities purchased under
agreement to resell..................................... 3,190 2,493
Trading account............................................. 665 940
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 98,081 75,531
State and municipal....................................... 338 604
Other..................................................... 356 378
-------- --------
Total interest income..................................... 309,173 241,414
-------- --------
INTEREST EXPENSE
Deposits.................................................... 97,643 87,186
Short-term borrowings....................................... 81,749 42,533
Senior notes................................................ 16,087 13,104
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,609 4,610
Long-term notes............................................. 3,756 3,582
-------- --------
Total interest expense.................................... 203,844 151,015
-------- --------
NET INTEREST INCOME......................................... 105,329 90,399
Provision for loan losses................................... 5,145 5,885
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 100,184 84,514
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 29,814 28,816
Money market and bond trading............................... 265 1,839
Foreign exchange............................................ 1,800 2,514
Merchant and charge card fees............................... 5,329 5,994
Service fees and charges.................................... 24,661 24,752
Securities gains............................................ -- 7,618
Gain on sale of corporate trust businesses.................. 47,193 --
Bank-owned insurance investments............................ 9,859 9,826
Foreign fees................................................ 4,981 5,539
Other....................................................... 8,059 10,159
-------- --------
Total noninterest income.................................. 131,961 97,057
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 70,683 70,402
Pension, profit sharing and other employee benefits......... 13,688 13,914
Net occupancy............................................... 10,671 6,345
Equipment................................................... 13,370 12,995
Marketing................................................... 5,229 5,698
Communication and delivery.................................. 4,546 6,201
Expert services............................................. 5,423 7,090
Contract programming........................................ 3,488 3,305
Other....................................................... 507 68
-------- --------
127,605 126,018
Goodwill and other valuation intangibles.................... 5,686 5,540
-------- --------
Total noninterest expenses................................ 133,291 131,558
-------- --------
Income before income taxes.................................. 98,854 50,013
Applicable income taxes..................................... 31,751 12,902
-------- --------
NET INCOME................................................ $ 67,103 $ 37,111
======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net Income.................................................. $ 6.71 $ 3.71
======== ========
</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 MARCH 31
----------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net income.................................................. $67,103 $37,111
Other comprehensive income:
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period,
net of tax benefit of $589 in 2000 and $25,437 in
1999.................................................. (893) (38,441)
Less reclassification adjustment for realized gains
included in income statement, net of tax expense of $0
in 2000 and $2,963 in 1999............................ -- (4,655)
------- -------
Other comprehensive loss.................................. (893) (43,096)
------- -------
Comprehensive income (loss)................................. $66,210 $(5,985)
======= =======
</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 CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
----------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,251,094 $1,333,397
Net income................................................ 67,103 37,111
Contributions to capital.................................. 742 394
Dividends -- common stock................................. (15,000) (15,000)
Other comprehensive loss.................................. (893) (43,096)
---------- ----------
BALANCE AT MARCH 31......................................... $1,303,046 $1,312,806
========== ==========
</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 CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
--------------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 67,103 $ 37,111
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 5,145 5,885
Depreciation and amortization, including intangibles...... 17,460 16,193
Deferred tax (benefit) expense............................ (91) 2,459
Gain on sales of securities............................... -- (7,618)
Gain on sale of corporate trust businesses................ (47,193) --
Trading account net sales................................. 42,878 56,257
Net decrease in interest receivable....................... 11,582 7,265
Net (decrease) increase in interest payable............... (26,153) 8,327
Net decrease in loans held for resale..................... 45,224 65,982
Other, net................................................ (8,810) (6,738)
----------- -----------
Net cash provided by operating activities.............. 107,145 185,123
----------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits at banks........ (11,581) (38,132)
Net decrease in Federal funds sold and securities
purchased under agreement to resell.................... 69,600 64,325
Proceeds from sales of securities available-for-sale...... 0 329,919
Proceeds from maturities of securities
available-for-sale..................................... 1,927,646 1,888,647
Purchases of securities available-for-sale................ (2,087,471) (2,442,783)
Net increase in loans..................................... (646,760) (255,125)
Proceeds from sales of premises and equipment............. 17 14
Purchases of premises and equipment....................... (8,719) (20,906)
Net increase in bank-owned insurance investments.......... (99,278) (9,826)
Other, net................................................ (189,821) (51,854)
----------- -----------
Net cash used by investing activities.................. (1,046,367) (535,721)
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 665,104 (299,054)
Net decrease in Federal funds purchased and securities
sold under agreement to repurchase..................... (229,530) (107,467)
Net increase in short-term borrowings..................... 858,306 494,515
Proceeds from issuance of senior notes.................... 75,000 847,000
Repayment of senior notes................................. (722,000) (765,000)
Net cash proceeds from the sale of the corporate trust
businesses............................................. 88,704 --
Cash dividends paid on common stock....................... (15,000) (15,000)
----------- -----------
Net cash provided by financing activities.............. 720,584 154,994
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. (218,638) (195,604)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,423,043 1,434,619
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT MARCH 31.... $ 1,204,405 $ 1,239,015
=========== ===========
</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
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Harris Trust and Savings Bank (the "Bank") is a wholly-owned subsidiary of
Harris Bankcorp, Inc., ("Bankcorp") 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 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 three months ended
March 31 totaled $ 230.0 million and $142.7 million in 2000 and 1999,
respectively. Cash income tax payments over the same periods totaled $6.1
million and $9.3 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 was effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." The Statement was effective upon issuance and it amends
SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 which for the Bank would be the quarter ending March 31,
2001. The Bank is in the process of assessing the impact of adopting the
Statements on its financial position and results of operations.
5. CORPORATE TRUST SALE
On February 1, 2000 Bankcorp announced the sale of its corporate trust
businesses, which closed in March 2000. In separate and unrelated transactions,
the indenture trust business was sold to a subsidiary of The Bank of New York
Company, Inc., and the shareholder services business to Computershare Limited.
The combined sales resulted in a pre-tax gain to Bankcorp of $50.2 million in
first quarter 2000, not including revenue contingent upon the outcome of certain
events, expected in second half 2000. The Bank recognized $47.2 million of that
gain. The Bank does not believe that the sale of these businesses will have a
material impact on the results of operations for future periods.
14
<PAGE> 16
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FIRST QUARTER 2000 COMPARED WITH FIRST QUARTER 1999
SUMMARY
The Bank had first quarter 2000 net income of $67.1 million, an increase of
$30.0 million or 81 percent from first quarter 1999. First quarter earnings
included a pretax gain of $47.2 million resulting from the sale of the indenture
trust and shareholder services businesses. In addition to the gain from the
corporate trust sale, comparative results were affected by net gains from
securities sales of $7.6 million in first quarter 1999 compared to no gain in
2000. Excluding the effects of both transactions, "core earnings" rose 21
percent. Cash ROE, excluding the gain on the sale of the corporate trust
businesses, was 17.10 percent in the current quarter compared to 15.33 percent
one year earlier.
First quarter net interest income on a fully taxable equivalent basis was
$110.5 million, up $16.1 million or 17 percent from $94.4 million in 1999's
first quarter. Average earning assets rose 17 percent to $17.42 billion from
$14.95 billion in 1999, primarily attributable to an increase of $1.05 billion
in average loans and $1.33 billion in the investment securities portfolio,
somewhat offset by a decline in trading accounting assets of $29 million.
Commercial lending was the most significant contributor to the growth in loans.
Net interest margin declined slightly to 2.55 percent from 2.56 percent in the
same quarter last year.
The first quarter provision for loan losses of $5.1 million was down $0.8
million from $5.9 million in the first quarter of 1999. Net charge-offs were
$4.3 million, remaining relatively unchanged from the prior year.
First quarter noninterest income of $132.0 million increased $34.9 million
from the same quarter last year. Excluding the $47.2 million gain on the sale of
the corporate trust businesses, non-interest income declined 13 percent. Most of
the decline resulted from the reduction in net gains from securities gains of
$7.6 million and a decrease in bond trading profits of $1.6 million. In
addition, the decrease in current quarter's noninterest income also resulted
from lower mortgage and foreign exchange fees.
First quarter 2000 noninterest expenses of $133.3 million increased $1.7
million or 1 percent from the year ago quarter.
Nonperforming assets at March 31, 2000 were $34 million or 0.32 percent of
total loans, compared to $24 million or 0.24 percent at December 31, 1999, and
$43 million or 0.45 percent a year ago. At March 31, 2000, the allowance for
possible loan losses was $115 million, equal to 1.07 percent of loans
outstanding, compared to $110 million or 1.16 percent at the end of first
quarter 1999. As a result, the ratio of the allowance for possible loan losses
to nonperforming assets increased from 254 percent at March 31, 1999 to 300
percent at March 31, 2000.
At March 31, 2000, Tier 1 capital of the Bank amounted to $1.46 billion, up
from $1.32 billion one year earlier. The regulatory leverage capital ratio was
7.24 percent for the first quarter of 2000 compared to 7.45 percent in the same
quarter of 1999. The Bank's capital ratio exceeds the prescribed regulatory
minimum for banks. The Bank's March 31, 2000 Tier 1 and total risk-based capital
ratios were 8.66 percent and 10.61 percent compared to respective ratios of 8.59
percent and 10.77 percent at March 31, 1999.
15
<PAGE> 17
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 15th day of May, 2000.
/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
16
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