<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 SEPTEMBER 30, 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 November
14, 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............................ 17
Signatures............................................................. 17
</TABLE>
1
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HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999 SEPTEMBER 30, 1999
------------------ ----------------- ------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash on deposit with Harris Trust and
Savings Bank.............................. $ 812 $ 1,262 $ 167
Securities purchased from Harris Trust and
Savings Bank under agreement to resell.... 22,004 15,000 9,000
Notes receivable from Harris Trust and
Savings Bank.............................. 112,560 136,749 147,047
Securities available-for-sale:
Mortgage-backed........................... 351,180 315,265 324,237
Securing mortgage collections due from
Harris Trust and Savings Bank............. 1,527 3,125 2,941
Other assets................................ 2,648 2,587 2,677
-------- -------- --------
Total assets......................... $490,731 $473,988 $486,069
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................ $ 61 $ 97 $ 46
-------- -------- --------
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......... 10,098 349 9,070
Accumulated other comprehensive income --
unrealized losses on available-for-sale
securities................................ (10,162) (17,192) (13,781)
-------- -------- --------
Total stockholders' equity........... 490,670 473,891 486,023
-------- -------- --------
Total liabilities and stockholders'
equity............................ $490,731 $473,988 $486,069
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(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... $ 646 $ 219 $ 1,420 $ 719
Notes receivable from Harris Trust and
Savings Bank............................. 1,884 2,493 6,061 8,514
Securities available-for-sale:
Mortgage-backed.......................... 5,450 5,236 16,266 14,253
U.S. Treasury............................ 126 -- 300 --
---------- --------- ---------- -----------
Total interest income.................. 8,106 7,948 24,047 23,486
NONINTEREST INCOME:
Securities gains............................ 257 -- 257 --
---------- --------- ---------- -----------
Total noninterest income............... 257 -- 257 --
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and
Savings Bank............................. 90 118 290 402
Advisory fees paid to Harris Trust and
Savings Bank............................. 15 10 45 42
General and administrative.................. 29 55 168 204
---------- --------- ---------- -----------
Total operating expenses............... 134 183 503 648
---------- --------- ---------- -----------
Net Income.................................... 8,229 7,765 23,801 22,838
Preferred dividends........................... 4,609 4,609 13,828 13,828
---------- --------- ---------- -----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER.... $ 3,620 $ 3,156 $ 9,973 $ 9,010
========== ========= ========== ===========
Basic and diluted earnings per common share... $ 3,620.00 $3,156.00 $ 9,973.00 $ 9,010.00
========== ========= ========== ===========
Net Income.................................... $ 8,229 $ 7,765 $ 23,801 $ 22,838
Other comprehensive income -- unrealized
income (loss) on available-for-sale
securities.................................. 4,410 (911) 7,030 (16,283)
---------- --------- ---------- -----------
Comprehensive Income.......................... $ 12,639 $ 6,854 $ 30,831 $ 6,555
========== ========= ========== ===========
</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>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1........................................ $473,891 $493,628
Net income................................................ 23,801 22,838
Other comprehensive income (loss)......................... 7,030 (16,283)
Dividends -- common stock................................. (224) (332)
Dividends -- Series A preferred stock..................... (13,828) (13,828)
-------- --------
Balance at September 30..................................... $490,670 $486,023
======== ========
</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>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 23,801 $ 22,838
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of securities............................. (257) --
Net increase in other assets........................... (61) (31)
Net decrease in accrued expenses....................... (36) (16)
--------- --------
Net cash provided by operating activities............ 23,447 22,791
--------- --------
INVESTING ACTIVITIES:
Net (increase) decrease in securities purchased from
Harris Trust and Savings Bank under agreement to
resell................................................. (7,004) 8,004
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 24,189 60,887
Decrease in securing mortgage collections due from Harris
Trust and Savings Bank................................. 1,598 10,749
Purchases of securities available-for-sale................ (144,825) (95,628)
Proceeds from maturities of securities
available-for-sale..................................... 116,197 16,603
--------- --------
Net cash (used) provided by investing activities..... (9,845) 615
--------- --------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (13,828) (13,828)
Cash dividends paid on common stock....................... (224) (10,032)
--------- --------
Net cash used by financing activities................ (14,052) (23,860)
--------- --------
Net decrease in cash on deposit with Harris Trust and
Savings Bank........................................... (450) (454)
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.............................................. $ 812 $ 167
========= ========
</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 expectations, 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
THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999
The Company's net income for the third quarter of 2000 was $8.2 million
compared to $7.8 million in the third quarter of 1999.
Third quarter 2000 interest income on the Notes totaled $1.9 million and
yielded 6.40% on $118 million of average principal outstanding for the quarter
compared to $2.5 million and a 6.40% yield on $156 million
6
<PAGE> 8
average principal outstanding for third quarter 1999. The decrease in revenue is
attributable to a reduction in the Note balance because of customer payoffs in
the Securing Mortgage Loans. Interest income on securities available-for-sale
for the current quarter was $5.6 million resulting in a yield of 6.92% on an
average balance outstanding of $322 million, compared to $5.2 million with a
yield of 6.90% on an average balance outstanding of $304 million for the same
period a year ago. Gains from investment securities sales increased $257
thousand from the same period in the third quarter 1999. The average outstanding
balance of the Securing Mortgage Loans for third quarter 2000 and 1999 was $146
million and $192 million, respectively. There were no Company borrowings during
the current quarter or third quarter 1999.
Third quarter 2000 operating expenses totaled $134 thousand, a decrease of
$49 thousand or 27% from the third quarter of 1999. Loan servicing expenses
totaled $90 thousand, a decrease of $28 thousand or 24% from the prior year's
third 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 $29 thousand, a decrease of $26 thousand or 47%
over third quarter 1999. The decrease is primarily attributed to various costs,
incurred and paid in 1999, related to the filing and preparation of the initial
1998 Form 10-K.
At September 30, 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 and the payment history on the Notes represented by
the Securing Mortgage Loans.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The Company's net income for the nine months ended September 30, 2000 was
$23.8 million. This represented a $963 thousand or 4% increase from 1999
earnings of $22.8 million.
Interest income on the Notes for the nine months ended September 30, 2000
totaled $6.1 million and yielded 6.40% on $126 million of average principal
outstanding compared to $8.5 million and a 6.40% yield on $177 million for the
same period in 1999. The decrease in income was attributable to a reduction in
the Note balance because of customer payoffs in the Securing Mortgage Loans.
Interest income on securities available-for-sale for the nine months ended
September 30, 2000 was $16.6 million resulting in a yield of 6.95% on an average
balance outstanding of $318 million, compared to $14.3 million with a yield of
6.67% on an average balance outstanding of $285 million a year ago. The increase
in interest income is primarily attributable to an increase in the investment
securities portfolio and the purchase of higher yielding securities, raising the
average return. Gains from investment securities sales increased $257 thousand
from the same period in 1999. The average outstanding balance of the Securing
Mortgage Loans was $156 million for the nine months ended September 30, 2000 and
$218 million for the same period in 1999. There were no Company borrowings
during either period.
Operating expenses for the nine months ended September 30, 2000 totaled
$503 thousand, a decrease of $145 thousand from a year ago. Loan servicing
expenses for the nine months ended September 30, 2000 totaled $290 thousand, a
decrease of $112 thousand or 28% from a year ago. This decrease is attributable
to the reduction in the principal balance of the Notes. Advisory fees for the
nine months ended September 30, 2000 were $45 thousand compared to $42 thousand
a year earlier. General and administrative expenses totaled $168 thousand, a
decrease of $36 thousand or 18% over the same period in 1999. The decrease is
primarily attributed to various costs incurred and paid in 1999 related to the
filing of the initial 1998 Form 10-K.
On September 30, 2000, the Company paid a cash dividend of $0.46094 per
share on outstanding preferred shares to the stockholders of record on September
15, 2000, as declared on August 31, 2000. On September 12, 2000, the Company
paid a cash dividend of $224 thousand on the outstanding common shares to the
stockholder of record on December 30, 1999, as declared on August 31, 2000. This
dividend completes our 1999 REIT tax compliance requirements. On September 30,
1999, the Company paid a cash dividend of $0.46094 per share on outstanding
preferred shares to the stockholders of record on September 15, 1999, as
declared on September 2, 1999. 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. On September 8, 1999, the Company paid a cash
dividend of $332 thousand on the outstanding common shares to the stockholder of
7
<PAGE> 9
record on December 30, 1998, as declared on September 2, 1999. This dividend
completed our 1998 REIT tax compliance requirements. On a year-to-date basis,
the Company has declared and paid $13.8 million of dividends to holders of
preferred shares for each of the nine month periods ended September 30, 2000 and
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 under
individual mortgages. 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 through 2000, 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 in addition to $23.4 million provided from operations during
the nine months ended September 30, 2000 were $24.2 million provided by
principal payments on the Notes and $116.2 million from the maturities of
securities available-for-sale. In the prior period ended September 30, 1999, the
primary sources of funds other than from operations were $60.9 million provided
by principal payments on the Notes and $16.6 million from the maturities of
securities available-for-sale. The primary uses of funds for the nine months
ended September 30, 2000 were $144.8 million in purchases of securities
available-for-sale and $13.8 million and $224 thousand in preferred stock
dividends and common stock dividends paid, respectively. For the prior year
ended September 30, 1999 the primary uses of funds were $95.6 million in
purchases of securities available-for-sale, and $13.8 million and $10.0 million
in preferred stock dividends and common stock dividends paid, respectively.
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>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2000 1999 1999
------------- ------------ -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks............... $ 1,255,326 $ 1,423,043 $ 1,139,750
Money market assets:
Interest-bearing deposits at banks.................. 164,929 239,832 171,988
Federal funds sold and securities purchased under
agreement to resell.............................. 266,625 298,000 148,650
Trading account assets................................ 41,347 66,996 102,236
Securities available-for-sale......................... 6,607,878 6,265,013 5,773,313
Loans................................................. 11,303,774 10,063,801 9,801,973
Allowance for possible loan losses.................... (120,343) (113,702) (111,660)
----------- ----------- -----------
Net loans........................................... 11,183,431 9,950,099 9,690,313
Premises and equipment................................ 276,828 311,353 308,796
Customers' liability on acceptances................... 31,587 43,599 44,067
Bank-owned insurance investments...................... 894,330 772,579 753,239
Goodwill and other valuation intangibles.............. 222,363 241,568 245,228
Other assets.......................................... 1,022,012 425,983 520,156
----------- ----------- -----------
TOTAL ASSETS................................... $21,966,656 $20,038,065 $18,897,736
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest bearing... $ 3,460,128 $ 3,449,650 $ 2,914,893
-- interest-bearing..... 7,268,436 6,314,523 6,625,976
Deposits in foreign offices -- noninterest
bearing................. 38,521 35,537 21,682
-- interest-bearing..... 2,286,646 1,329,977 1,375,098
----------- ----------- -----------
Total deposits................................. 13,053,731 11,129,687 10,937,649
Federal funds purchased and securities sold under
agreement to repurchase............................. 4,582,830 4,739,578 3,951,114
Other short-term borrowings........................... 1,361,444 681,097 478,148
Senior notes.......................................... 882,000 1,500,000 1,500,000
Acceptances outstanding............................... 31,587 43,599 44,067
Accrued interest, taxes and other expenses............ 150,107 167,465 149,592
Other liabilities..................................... 42,475 50,545 99,550
Minority interest- preferred stock of subsidiary...... 250,000 250,000 250,000
Long-term notes....................................... 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES.............................. 20,579,174 18,786,971 17,635,120
----------- ----------- -----------
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............................................... 612,558 610,512 609,913
Retained earnings..................................... 756,164 678,275 657,705
Accumulated other comprehensive loss.................. (81,240) (137,693) (105,002)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY..................... 1,387,482 1,251,094 1,262,616
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $21,966,656 $20,038,065 $18,897,736
=========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
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HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $236,628 $173,871 $663,515 $500,710
Money market assets:
Deposits at banks......................................... 2,021 12 4,483 968
Federal funds sold and securities purchased under
agreement to resell..................................... 4,326 2,917 12,167 8,160
Trading account............................................. 775 1,112 2,262 2,961
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 107,302 83,100 307,871 238,828
State and municipal....................................... 180 425 787 1,490
Other..................................................... 360 361 1,073 1,105
-------- -------- -------- --------
Total interest income..................................... 351,592 261,798 992,158 754,222
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 126,355 87,464 347,923 259,577
Short-term borrowings....................................... 94,210 51,164 262,797 142,073
Senior notes................................................ 16,752 19,136 41,532 48,625
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,609 4,609 13,828 13,828
Long-term notes............................................. 3,963 3,558 11,628 10,701
-------- -------- -------- --------
Total interest expense.................................... 245,889 165,931 677,708 474,804
-------- -------- -------- --------
NET INTEREST INCOME......................................... 105,703 95,867 314,450 279,418
Provision for loan losses................................... 6,870 5,290 18,365 17,081
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 98,833 90,577 296,085 262,337
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 22,332 30,925 75,705 88,467
Money market and bond trading............................... 2,446 3,893 5,686 6,632
Foreign exchange............................................ 1,900 1,850 5,800 6,164
Merchant and charge card fees............................... 6,229 8,028 18,249 22,084
Service fees and charges.................................... 24,796 27,749 73,995 78,201
Securities gains............................................ 3,131 (16) 6,117 13,581
Gain on sale of corporate trust business.................... -- -- 47,193 --
Bank-owned insurance investments............................ 11,262 10,221 33,273 30,746
Foreign fees................................................ 3,983 4,388 16,427 14,303
Other....................................................... 11,668 8,446 27,840 28,369
-------- -------- -------- --------
Total noninterest income.................................. 87,747 95,484 310,285 288,547
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 68,491 72,272 209,236 214,282
Pension, profit sharing and other employee benefits......... 9,567 14,009 37,095 42,719
Net occupancy............................................... 9,234 10,792 30,657 27,161
Equipment................................................... 12,270 13,836 37,552 40,601
Marketing................................................... 8,545 7,437 20,186 19,319
Communication and delivery.................................. 5,172 5,126 15,202 16,896
Expert services............................................. 4,629 5,047 14,942 20,628
Other....................................................... 4,302 8,185 11,318 13,284
-------- -------- -------- --------
122,210 136,704 376,188 394,890
Goodwill and other valuation intangibles.................... 5,666 5,727 16,980 16,925
-------- -------- -------- --------
Total noninterest expenses................................ 127,876 142,431 393,168 411,815
-------- -------- -------- --------
Income before income taxes.................................. 58,704 43,630 213,202 139,069
Applicable income taxes..................................... 15,611 7,344 62,313 30,337
-------- -------- -------- --------
NET INCOME................................................ $ 43,093 $ 36,286 $150,889 $108,732
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net Income.................................................. $ 4.31 $ 3.63 $ 15.09 $ 10.87
======== ======== ======== ========
</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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income......................................... $43,093 $ 36,286 $150,889 $ 108,732
Other comprehensive income:
Unrealized gains/(losses) on available-for-sale
securities:
Unrealized holding gains/(losses) arising
during the period, net of tax
expense/(benefit) for the quarter of $26,165
in 2000 and ($6,592) in 1999 and net of tax
expense/(benefit) for the year-to-date
period of $39,608 in 2000 and ($84,601) in
1999........................................ 39,762 (10,007) 60,190 (128,012)
Less reclassification adjustment for realized
(gains)/losses included in income statement,
net of tax expense/(benefit) for the quarter
of $1,218 in 2000 and ($6) in 1999 and net
of tax expense for the year-to-date period
of $2,380 in 2000 and $5,283 in 1999........ (1,913) 10 (3,737) (8,298)
------- -------- -------- ---------
Other comprehensive income (loss)................ 37,849 (9,997) 56,453 (136,310)
------- -------- -------- ---------
Comprehensive income (loss)........................ $80,942 $ 26,289 $207,342 $ (27,578)
======= ======== ======== =========
</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 STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT JANUARY 1........................................ $1,251,094 $1,333,397
Net income................................................ 150,889 108,732
Contributions to capital.................................. 2,046 1,797
Dividends -- common stock................................. (73,000) (45,000)
Other comprehensive income (loss)......................... 56,453 (136,310)
---------- ----------
BALANCE AT SEPTEMBER 30..................................... $1,387,482 $1,262,616
========== ==========
</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>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 150,889 $ 108,732
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 18,365 17,081
Depreciation and amortization, including intangibles...... 52,393 50,454
Deferred tax (benefit) expense............................ (2,769) 465
Gain on sales of securities............................... (6,117) (13,581)
Gain on sale of corporate trust business.................. (47,193) --
Trading account net sales................................. 25,649 18,432
Net increase in interest receivable....................... (13,902) (9,555)
Net (decrease) increase in interest payable............... (19,135) 26,506
Net decrease in loans held for resale..................... 58,417 164,639
Other, net................................................ (42,902) 1,814
----------- -----------
Net cash provided by operating activities.............. 173,695 364,987
----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks.................................................. 74,903 (73,059)
Net decrease in Federal funds sold and securities
purchased under agreement to resell.................... 31,375 2,925
Proceeds from sales of securities available-for-sale...... 130,221 683,264
Proceeds from maturities of securities
available-for-sale..................................... 4,831,701 4,633,881
Purchases of securities available-for-sale................ (5,404,189) (6,007,573)
Net increase in loans..................................... (1,310,115) (673,705)
Purchases of premises and equipment....................... (29,760) (57,364)
Net increase in bank-owned insurance investments.......... (121,751) (27,938)
Other, net................................................ (389,144) (35,943)
----------- -----------
Net cash used by investing activities.................. (2,186,759) (1,555,512)
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 1,924,044 (240,047)
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase.......... (156,748) 309,065
Net increase in short-term borrowings..................... 680,347 311,638
Proceeds from issuance of senior notes.................... 2,232,000 3,460,500
Repayment of senior notes................................. (2,850,000) (2,900,500)
Net cash proceeds from the sale of corporate trust
business............................................... 88,704 --
Cash dividends paid on common stock....................... (73,000) (45,000)
----------- -----------
Net cash provided by financing activities.............. 1,845,347 895,656
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. (167,717) (294,869)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,423,043 1,434,619
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT SEPTEMBER
30.................................................... $ 1,255,326 $ 1,139,750
=========== ===========
</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 THE 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 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 nine months ended
September 30 totaled $599.5 million and $448.3 million in 2000 and 1999,
respectively. Cash income tax payments over the same periods totaled $54.5
million and $43.4 million, respectively.
4. RECENT ACCOUNTING DEVELOPMENTS
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 which for the Bank would be the quarter ending March 31,
2001. On June 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133." The Statement addresses a limited number of issues causing
implementation difficulties for numerous entities that are required to implement
SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
continues to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. Based on an analysis of the Bank's current derivative
activity, it is management's opinion that the impact of the adoption of SFAS No.
133 would not have a material impact on total assets, total liabilities, other
comprehensive income or net income.
4. CORPORATE TRUST SALE
In March 2000, Bankcorp sold its corporate trust business. 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 fourth quarter 2000. The Bank
recognized $47.2 million of that gain. The Bank does not believe that the sale
of the corporate trust business will have a material impact on the results of
operations for future periods.
14
<PAGE> 16
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW
THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999
SUMMARY
The Bank had third quarter 2000 net income of $43.1 million, an increase of
$6.8 million or 19 percent from third quarter 1999. Comparative results were
affected by net gains from securities sales of $3.1 million in third quarter
2000 compared to no securities gains in 1999. Excluding this effect, "core
earnings" rose 14 percent. Cash ROE was 16.55 percent in the current quarter
compared to 15.61 percent one year earlier.
Third quarter net interest income on a fully taxable equivalent basis was
$111.1 million, up $11.0 million or 11 percent from $100.1 million in 1999's
third quarter. Average earning assets rose 16 percent to $18.12 billion from
$15.69 billion in 1999, primarily attributable to an increase of $1.37 billion
in average loans and $1.07 billion in the investment securities portfolio,
somewhat offset by a decline in trading account assets of $37 million.
Commercial and consumer loans and residential mortgages contributed to the
growth in loans. Net interest margin declined to 2.44 percent from 2.53 percent
in the same quarter last year, primarily reflecting the impact of the rising
interest rate environment during the last year.
The third quarter provision for loan losses of $6.9 million was up $1.6
million from $5.3 million in the third quarter of 1999. Net charge-offs
decreased to $2.7 million compared to $4.0 million in the prior year.
Third quarter noninterest income of $87.7 million decreased $7.7 million
from the same quarter last year. Trust and investment management fees declined
$8.6 million or 28 percent reflecting reduced corporate trust revenue. Merchant
and charge card fees declined $1.8 million, while bond trading profits decreased
$1.4 million. Net gains from investment securities sales increased $3.1 million
from third quarter 1999.
Third quarter 2000 noninterest expenses of $127.9 million decreased $14.6
million or 10 percent from the year ago quarter primarily reflecting the sale of
the corporate trust business in 2000. Income tax expense increased $8.3 million,
reflecting higher pretax income.
Nonperforming assets at September 30, 2000 were $89 million or 0.79 percent
of total loans, compared to $34 million or 0.32 percent at June 30, 2000, and
$24 million or 0.24 percent a year ago. This increase is comprised of four loans
in the shared national credit portfolio ranging in size from $10 million to $17
million, to borrowers in four different industry sectors. At September 30, 2000,
the allowance for possible loan losses was $120 million, equal to 1.06 percent
of loans outstanding, compared to $112 million or 1.14 percent at the end of
third quarter 1999. As a result, the ratio of the allowance for possible loan
losses to nonperforming assets decreased from 469 percent at September 30, 1999
to 135 percent at September 30, 2000.
At September 30, 2000, Tier 1 capital of the Bank amounted to $1.50
billion, up from $1.38 billion one year earlier. The regulatory leverage capital
ratio was 7.18 percent for the third quarter of 2000 compared to 7.47 percent in
the same quarter of 1999. The Bank's capital ratio exceeds the prescribed
regulatory minimum for banks. The Bank's September 30, 2000 Tier 1 and total
risk-based capital ratios were 8.25 percent and 10.09 percent compared to
respective ratios of 8.77 percent and 10.92 percent at September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH 1999
SUMMARY
The Bank had net income for the nine months ended September 30, 2000 of
$150.9 million, an increase of $42.2 million or 39 percent from the same period
a year ago. First quarter earnings included a pretax gain of $47.2 million
resulting from the sale of the corporate trust business. In addition to the gain
from the corporate trust sale, comparative results were affected by net gains
from securities sales of $13.6 million in 1999 compared to $6.1 million in 2000.
Excluding the effects of both transactions, "core earnings" rose 19 percent.
Cash ROE, excluding the gain on the sale of the corporate trust business, was
16.84 percent in the current year compared to 15.23 percent one year earlier.
15
<PAGE> 17
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW -- (CONTINUED)
Net interest income on a fully taxable equivalent basis was $330.4 million,
up $38.6 million or 13 percent from $291.7 million in 1999's year-to-date
period. Average earning assets rose 16 percent to $17.82 billion from $15.42
billion in 1999, primarily attributable to an increase of $1.17 billion in
average loans and $1.14 billion in the investment securities portfolio, somewhat
offset by a decline in trading account assets of $29 million. Commercial lending
was the most significant contributor to the growth in loans. Net interest margin
declined slightly to 2.48 percent from 2.53 percent in 1999 primarily reflecting
the impact of the rising interest rate environment in 2000.
The year-to-date 2000 provision for loan losses of $18.4 million was up
$1.3 million from $17.1 million in 1999. Net charge-offs were $11.7 million,
down from $13.7 million a year ago.
Noninterest income of $310.3 million increased $21.7 million from the same
period last year. Excluding the $47.2 million gain on the sale of the corporate
trust business, noninterest income declined 9 percent. Most of this decline was
caused by the $7.5 million decline in net gains from securities sales and
reduced operating revenue from the corporate trust business sold in first
quarter 2000. Trust and investment management fees declined by $12.8 million
reflecting reduced corporate trust revenue. Merchant and charge card fees
declined $3.8 million while service charge income decreased $4.2 million
compared to the prior year.
Noninterest expenses of $393.2 million decreased $18.6 million or 5 percent
from the year ago period. Income tax expense increased $32.0 million, reflecting
higher pretax income, including the gain on the sale of the corporate trust
business.
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
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 14th day of November, 2000.
/s/ PIERRE O. GREFFE
--------------------------------------
Pierre O. Greffe
Chief Financial Officer
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
Chairman of the Board and President
17
