<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 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............................ 18
Signatures............................................................. 18
</TABLE>
1
<PAGE> 3
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999
------------- ----------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash on deposit with Harris Trust and Savings
Bank.............................................. $ 865 $ 1,262 $ 812
Securities purchased from Harris Trust and Savings
Bank under agreement to resell.................... 5,801 15,000 4,000
Notes receivable from Harris Trust and Savings
Bank.............................................. 120,859 136,749 162,602
Securities available-for-sale:
Mortgage-backed................................... 305,190 315,265 307,529
U.S. Treasury..................................... 44,874 -- --
Securing mortgage collections due from Harris Trust
and Savings Bank.................................. 2,907 3,125 6,608
Other assets........................................ 2,426 2,587 2,652
-------- -------- --------
Total assets.............................. $482,922 $473,988 $484,203
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses.................................... $ 57 $ 97 $ 92
-------- -------- --------
Total liabilities......................... 57 97 92
-------- -------- --------
Commitments and contingencies....................... -- -- --
STOCKHOLDERS' EQUITY
7 3/8% Noncumulative Exchangeable Preferred Stock,
Series A ($1 par value); liquidation value of
$250,000; 20,000,000 shares authorized, 10,000,000
shares issued and outstanding..................... 250,000 250,000 250,000
Common stock ($1 par value); 1,000 shares
authorized, issued and outstanding................ 1 1 1
Additional paid-in capital.......................... 240,733 240,733 240,733
Earnings in excess of distributions................. 6,703 349 6,247
Accumulated other comprehensive income -- unrealized
losses on available-for-sale securities........... (14,572) (17,192) (12,870)
-------- -------- --------
Total stockholders' equity................ 482,865 473,891 484,111
-------- -------- --------
Total liabilities and stockholders'
equity.................................. $482,922 $473,988 $484,203
======== ======== ========
</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 SIX MONTHS ENDED
JUNE 30 JUNE 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....... $ 461 $ 229 $ 774 $ 500
Notes receivable from Harris Trust and Savings
Bank......................................... 2,027 2,825 4,177 6,021
Securities available-for-sale:
Mortgage-backed.............................. 5,354 4,779 10,816 9,017
U.S. Treasury................................ 170 -- 174 --
--------- --------- --------- ---------
Total interest income................... 8,012 7,833 15,941 15,538
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and
Savings Bank................................. 97 133 200 284
Advisory fees paid to Harris Trust and Savings
Bank......................................... 15 19 30 32
General and administrative...................... 108 75 139 149
--------- --------- --------- ---------
Total operating expenses................ 220 227 369 465
--------- --------- --------- ---------
Net income........................................ 7,792 7,606 15,572 15,073
Preferred dividends............................... 4,609 4,609 9,218 9,218
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER........ $ 3,183 $ 2,997 $ 6,354 $ 5,855
========= ========= ========= =========
Basic and diluted earnings per common share....... $3,183.00 $2,997.00 $6,354.00 $5,855.00
========= ========= ========= =========
Net income........................................ $ 7,792 $ 7,606 $ 15,572 $ 15,073
Other comprehensive income -- unrealized income
(loss) on available-for-sale securities......... 3,230 (11,428) 2,620 (15,372)
--------- --------- --------- ---------
Comprehensive income (loss)....................... $ 11,022 $ (3,822) $ 18,192 $ (299)
========= ========= ========= =========
</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>
SIX MONTHS ENDED
JUNE 30
-----------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1........................................ $473,891 $493,628
Net income................................................ 15,572 15,073
Other comprehensive income (loss)......................... 2,620 (15,372)
Dividends- Series A preferred stock....................... (9,218) (9,218)
-------- --------
Balance at June 30.......................................... $482,865 $484,111
======== ========
</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>
SIX MONTHS ENDED JUNE 30
------------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 15,572 $ 15,073
Adjustments to reconcile net income to net cash provided
by operating activities:
Net decrease (increase) in other assets................ 161 (6)
Net (decrease) increase in accrued expenses............ (40) 30
-------- ---------
Net cash provided by operating activities............ 15,693 15,097
-------- ---------
INVESTING ACTIVITIES:
Net decrease in securities purchased from Harris Trust and
Savings Bank under agreement to resell................. 9,199 13,004
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 15,890 45,333
Decrease in securing mortgage collections due from Harris
Trust and Savings Bank................................. 218 7,082
Purchases of securities available-for-sale................ (44,874) (70,691)
Proceeds from maturities of securities
available-for-sale..................................... 12,695 9,284
-------- ---------
Net cash (used) provided by investing activities..... (6,872) 4,012
-------- ---------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (9,218) (9,218)
Cash dividends paid on common stock....................... -- (9,700)
-------- ---------
Net cash used by financing activities................ (9,218) (18,918)
-------- ---------
Net (decrease) increase in cash on deposit with Harris
Trust and Savings Bank................................. (397) 191
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.............................................. $ 865 $ 812
======== =========
</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
SECOND QUARTER 2000 COMPARED WITH SECOND QUARTER 1999
The Company's net income for the second quarter of 2000 was $7.8 million
compared to $7.6 million in the second quarter of 1999.
Second quarter 2000 interest income on the Notes totaled $2.0 million and
yielded 6.40% on $127 million of average principal outstanding for the quarter
compared to $2.8 million and a 6.40% yield on $177 million average principal
outstanding for second quarter 1999. The decrease is attributable to a reduction
in the Note
6
<PAGE> 8
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 6.87% on an average balance of $322
million, compared to $4.8 million with a yield of 6.61% on an average balance of
$289 million for the same period a year ago. The average outstanding balance of
the Securing Mortgage Loans for second quarter 2000 and 1999 was $157 million
and $217 million, respectively. There were no Company borrowings during the
current quarter or second quarter 1999.
Second quarter 2000 operating expenses totaled $220 thousand, a decrease of
$7 thousand or 3% from the second quarter of 1999. Loan servicing expenses
totaled $97 thousand, a decrease of $36 thousand or 27% from the prior year's
second 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 $108 thousand, an increase of $33 thousand or
44% over second quarter 1999. The increase is primarily attributed to insurance
costs not accrued for in 1999.
At June 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH JUNE 30, 1999
The Company's net income for the six months ended June 30, 2000 was $15.6
million. This represented a $500 thousand or 4% increase from 1999 earnings of
$15.1 million.
Interest income on the Notes for the six months ended June 30, 2000 totaled
$4.2 million and yielded 6.40% on $131 million of average principal outstanding
compared to $6.0 million and a 6.40% yield on $188 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 underlying collateralized mortgages.
Interest income on securities available-for-sale for the six months ended June
30, 2000 was $11.0 million resulting in a yield of 6.97% on an average balance
of $316 million, compared to $9.0 million with a yield of 6.55% on an average
balance of $275 million a year ago. The increase in interest income is primarily
attributable to an increase in the investment securities portfolio. The average
outstanding balance of the Securing Mortgage Loans was $162 million for the six
months ended June 30, 2000 and $231 million for the same period in 1999. There
were no Company borrowings during either period.
Operating expenses for the six months ended June 30, 2000 totaled $369
thousand, a decrease of $96 thousand from a year ago. Loan servicing expenses
for the six months ended June 30, 2000 totaled $200 thousand, a decrease of $84
thousand or 30% from a year ago. This decrease is attributable to the reduction
in the principal balance of the Notes. Advisory fees for the six months ended
June 30, 2000 were $30 thousand compared to $32 thousand a year ago. General and
administrative expenses totaled $139 thousand, a decrease of $10 thousand or 7%
over the same period in 1999.
On June 30, 2000, the Company paid a cash dividend of $0.46094 per share on
outstanding preferred shares to the stockholders of record on June 15, 2000, as
declared on June 1, 2000. On June 30, 1999, the Company paid a cash dividend of
$0.46094 per share on outstanding preferred shares to the stockholders of record
on June 15, 1999, as declared on June 3, 1999. On 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 a year-to-date basis, the Company
has declared and paid $9.2 million of dividends to holders of preferred shares
for each of the six month periods ended June 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.
7
<PAGE> 9
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 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, as provided for under
the Internal Revenue Code, to its common and preferred stockholders. The Company
currently expects to distribute dividends annually equal to 95% or more of its
adjusted REIT taxable income.
The Company anticipates that cash and cash equivalents on hand and the cash
flow from the Notes and mortgage-backed securities will provide adequate
liquidity for its operating, investing and financing needs.
As presented in the accompanying Statements of Cash Flows, the primary
sources of funds during the six months ended June 30, 2000 were $15.9 million
provided by principal payments on the Notes and $12.7 million from the
maturities of securities available-for-sale. In the prior period ended June 30,
1999, the primary sources of funds were $45.0 million provided by principal
payments on the Notes and $9.3 million from the maturities of securities
available-for-sale. The primary uses of funds for the six months ended June 30,
2000 were $44.9 million in purchases of securities available-for-sale and $9.2
million in preferred stock dividends. For the prior year ended June 30, 1999 the
primary uses of funds were $70.7 million in purchases of securities
available-for-sale, and $9.2 million and $9.7 million in preferred stock
dividends and common stock dividends paid, respectively.
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>
JUNE 30, DECEMBER 31, JUNE 30,
2000 1999 1999
-------- ------------ --------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks............... $ 1,188,495 $ 1,423,043 $ 1,228,175
Money market assets:
Interest-bearing deposits at banks.................. 148,209 239,832 159,159
Federal funds sold and securities purchased under
agreement to resell.............................. 353,025 298,000 193,550
Trading account assets................................ 79,305 66,996 84,881
Securities available-for-sale......................... 6,663,932 6,265,013 5,664,104
Loans................................................. 10,804,002 10,063,801 9,659,439
Allowance for possible loan losses.................... (116,138) (113,702) (110,414)
----------- ----------- -----------
Net loans........................................... 10,687,864 9,950,099 9,549,025
Premises and equipment................................ 277,908 311,353 306,760
Customers' liability on acceptances................... 32,749 43,599 45,488
Bank-owned insurance investments...................... 883,079 772,579 744,670
Goodwill and other valuation intangibles.............. 226,751 241,568 249,724
Other assets.......................................... 585,142 425,983 475,884
----------- ----------- -----------
TOTAL ASSETS................................... $21,126,459 $20,038,065 $18,701,420
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest bearing... $ 3,060,300 $ 3,449,650 $ 3,031,983
-- interest-bearing..... 6,551,700 6,314,523 6,552,992
Deposits in foreign offices -- noninterest bearing.... 27,090 35,537 25,877
-- interest-bearing........ 1,805,694 1,329,977 1,914,429
----------- ----------- -----------
Total deposits................................. 11,444,784 11,129,687 11,525,281
Federal funds purchased and securities sold under
agreement to repurchase............................. 5,713,767 4,739,578 3,592,929
Other short-term borrowings........................... 862,650 681,097 253,284
Senior notes.......................................... 1,089,500 1,500,000 1,385,500
Acceptances outstanding............................... 32,749 43,599 45,534
Accrued interest, taxes and other expenses............ 138,536 167,465 127,764
Other liabilities..................................... 48,358 50,545 45,399
Minority interest-preferred stock of subsidiary....... 250,000 250,000 250,000
Long-term notes....................................... 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES.............................. 19,805,344 18,786,971 17,450,691
----------- ----------- -----------
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............................................... 612,133 610,512 609,314
Retained earnings..................................... 728,071 678,275 636,420
Accumulated other comprehensive loss.................. (119,089) (137,693) (95,005)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY..................... 1,321,115 1,251,094 1,250,729
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $21,126,459 $20,038,065 $18,701,420
=========== =========== ===========
</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 SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....................................... $220,915 $165,746 $426,887 $326,840
Money market assets:
Deposits at banks......................................... 1,891 581 2,462 956
Federal funds sold and securities purchased under
agreement to resell..................................... 4,651 2,750 7,841 5,243
Trading account............................................. 822 909 1,487 1,848
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 102,488 80,196 200,569 155,727
State and municipal....................................... 269 461 607 1,065
Other..................................................... 357 367 713 745
-------- -------- -------- --------
Total interest income..................................... 331,393 251,010 640,566 492,424
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.................................................... 123,926 84,927 221,568 172,113
Short-term borrowings....................................... 86,837 48,377 168,586 90,910
Senior notes................................................ 8,693 16,385 24,780 29,489
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,609 4,609 9,219 9,218
Long-term notes............................................. 3,909 3,561 7,665 7,143
-------- -------- -------- --------
Total interest expense.................................... 227,974 157,859 431,818 308,873
-------- -------- -------- --------
NET INTEREST INCOME......................................... 103,419 93,151 208,748 183,551
Provision for loan losses................................... 6,351 5,906 11,496 11,791
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 97,068 87,245 197,252 171,760
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 23,559 28,726 53,373 57,542
Money market and bond trading............................... 2,975 901 3,240 2,740
Foreign exchange............................................ 2,100 1,800 3,900 4,314
Merchant and charge card fees............................... 6,691 8,062 12,020 14,056
Service fees and charges.................................... 24,538 25,700 49,199 50,452
Securities gains............................................ 2,986 5,979 2,986 13,596
Gain on sale of corporate trust business.................... -- -- 47,193 --
Bank-owned insurance investments............................ 11,238 10,699 22,012 20,525
Foreign fees................................................ 7,463 4,376 12,444 9,915
Other....................................................... 9,026 9,764 16,170 19,923
-------- -------- -------- --------
Total noninterest income.................................. 90,576 96,007 222,537 193,063
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 70,062 71,607 140,745 142,009
Pension, profit sharing and other employee benefits......... 13,840 14,796 27,528 28,710
Net occupancy............................................... 10,752 10,024 21,423 16,368
Equipment................................................... 11,912 13,772 25,282 26,766
Marketing................................................... 6,412 6,185 11,641 11,883
Communication and delivery.................................. 5,484 5,568 10,030 11,770
Expert services............................................. 4,889 8,490 10,312 15,580
Other....................................................... 3,020 1,726 7,016 5,099
-------- -------- -------- --------
126,371 132,168 253,977 258,185
Goodwill and other valuation intangibles.................... 5,629 5,658 11,314 11,198
-------- -------- -------- --------
Total noninterest expenses................................ 132,000 137,826 265,291 269,383
-------- -------- -------- --------
Income before income taxes.................................. 55,644 45,426 154,498 95,440
Applicable income taxes..................................... 14,951 10,091 46,702 22,993
-------- -------- -------- --------
NET INCOME................................................ $ 40,693 $ 35,335 $107,796 $ 72,447
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net Income.................................................. $ 4.07 $ 3.53 $ 10.78 $ 7.24
======== ======== ======== ========
</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 JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income......................................... $40,693 $ 35,335 $107,796 $ 72,447
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 $14,055
in 2000 and ($52,572) in 1999 and net of tax
expense/(benefit) for the year-to-date
period of $13,443 in 2000 and ($78,009) in
1999........................................ 21,321 (79,565) 20,428 (118,006)
Less reclassification adjustment for realized
gains included in income statement, net of
tax expense for the quarter of $1,162 in
2000 and $2,326 in 1999 and net of tax
expense for the year-to-date period of
$1,162 in 2000 and $5,289 in 1999........... (1,824) (3,653) (1,824) (8,307)
------- -------- -------- ---------
Other comprehensive income (loss)................ 19,497 (83,218) 18,604 (126,313)
------- -------- -------- ---------
Comprehensive income (loss)........................ $60,190 $(47,883) $126,400 $ (53,866)
======= ======== ======== =========
</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................................................ 107,796 72,447
Contributions to capital.................................. 1,621 1,198
Dividends -- common stock................................. (58,000) (30,000)
Other comprehensive income (loss)......................... 18,604 (126,313)
---------- ----------
BALANCE AT JUNE 30.......................................... $1,321,115 $1,250,729
========== ==========
</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>
SIX MONTHS ENDED JUNE 30
--------------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 107,796 $ 72,447
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 11,496 11,791
Depreciation and amortization, including intangibles...... 34,883 32,535
Deferred tax expense...................................... 1,898 3,720
Gain on sales of securities............................... (2,986) (13,597)
Gain on sale of corporate trust business.................. (47,193) --
Trading account net (purchases) sales..................... (12,309) 35,787
Net increase in interest receivable....................... (4,341) (1,908)
Net (decrease) increase in interest payable............... (34,928) 6,924
Net decrease in loans held for resale..................... 49,458 134,538
Other, net................................................ (32,521) (22,197)
----------- -----------
Net cash provided by operating activities.............. 71,253 260,040
----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits at
banks.................................................. 91,623 (60,230)
Net increase in Federal funds sold and securities
purchased under agreement to resell.................... (55,025) (41,975)
Proceeds from sales of securities available-for-sale...... 104,887 583,298
Proceeds from maturities of securities
available-for-sale..................................... 3,637,281 4,684,157
Purchases of securities available-for-sale................ (4,107,217) (5,832,076)
Net increase in loans..................................... (798,719) (497,027)
Purchases of premises and equipment....................... (19,026) (43,162)
Net increase in bank-owned insurance investments.......... (110,500) (19,367)
Other, net................................................ (140,148) (40,841)
----------- -----------
Net cash used by investing activities.................. (1,396,844) (1,267,223)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits.................................. 315,097 347,585
Net increase (decrease) in Federal funds purchased and
securities sold under agreement to repurchase.......... 974,189 (49,120)
Net increase in short-term borrowings..................... 181,553 86,774
Proceeds from issuance of senior notes.................... 1,050,000 3,246,000
Repayment of senior notes................................. (1,460,500) (2,800,500)
Net cash proceeds from the sale of the corporate trust
business............................................... 88,704 --
Cash dividends paid on common stock....................... (58,000) (30,000)
----------- -----------
Net cash provided by financing activities.............. 1,091,043 800,739
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. (234,548) (206,444)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,423,043 1,434,619
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT JUNE 30..... $ 1,188,495 $ 1,228,175
=========== ===========
</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 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 six months ended
June 30 totaled $369.4 million and $301.9 million in 2000 and 1999,
respectively. Cash income tax payments over the same periods totaled $34.3
million and $34.0 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 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. 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. 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
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 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
FINANCIAL REVIEW
SECOND QUARTER 2000 COMPARED WITH SECOND QUARTER 1999
SUMMARY
The Bank had second quarter 2000 net income of $40.7 million, an increase
of $5.4 million or 15 percent from second quarter 1999. Comparative results were
affected by net gains from securities sales of $6.0 million in second quarter
1999 compared to $3.0 million in 2000. Excluding this effect, "core earnings"
rose 23 percent. Cash ROE was 16.90 percent in the current quarter compared to
14.76 percent one year earlier.
Second quarter net interest income on a fully taxable equivalent basis was
$108.8 million, up $11.6 million or 12 percent from $97.2 million in 1999's
second quarter. Average earning assets rose 15 percent to $17.93 billion from
$15.62 billion in 1999, primarily attributable to an increase of $1.09 billion
in average loans and $1.07 billion in the investment securities portfolio,
somewhat offset by a decline in trading account assets of $20 million.
Commercial lending was the most significant contributor to the growth in loans.
Net interest margin declined to 2.44 percent from 2.49 percent in the same
quarter last year, primarily reflecting the impact of the rising interest rate
environment during the last year.
The second quarter provision for loan losses of $6.3 million was up $0.4
million from $5.9 million in the second quarter of 1999. Net charge-offs
decreased to $4.8 million compared to $5.5 million in the prior year.
Second quarter noninterest income of $90.6 million decreased $5.4 million
from the same quarter last year. Trust and investment management fees declined
$5.2 million or 18 percent, as a result of this year's first quarter sale of the
corporate trust business. Excluding corporate trust revenue, total trust and
investment management fees rose 30 percent in the current quarter. Merchant and
charge card fees declined $1.4 million, while bond trading profits increased
$2.1 million. Net gains from investment securities sales declined $3.0 million
from $6.0 million in second quarter 1999.
Second quarter 2000 noninterest expenses of $132.0 million decreased $5.8
million or 4 percent from the year ago quarter primarily reflecting the sale of
the corporate trust business in 2000. Income tax expense increased $4.9 million,
reflecting higher pretax income.
Nonperforming assets at June 30, 2000 were $34 million or 0.32 percent of
total loans, compared to $34 million or 0.32 percent at March 31, 2000, and $32
million or 0.34 percent a year ago. At June 30, 2000, the allowance for possible
loan losses was $116 million, equal to 1.07 percent of loans outstanding,
compared to $110 million or 1.14 percent at the end of second quarter 1999. As a
result, the ratio of the allowance for possible loan losses to nonperforming
assets decreased from 341 percent at June 30, 1999 to 339 percent at June 30,
2000.
At June 30, 2000, Tier 1 capital of the Bank amounted to $1.47 billion, up
from $1.35 billion one year earlier. The regulatory leverage capital ratio was
7.06 percent for the second quarter of 2000 compared to 7.31 percent in the same
quarter of 1999. The Bank's capital ratio exceeds the prescribed regulatory
minimum for banks. The Bank's June 30, 2000 Tier 1 and total risk-based capital
ratios were 8.50 percent and 10.41 percent compared to respective ratios of 8.71
percent and 10.88 percent at June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH 1999
SUMMARY
The Bank's earnings for the six months ended June 30, 2000 were $107.8
million, an increase of $35.4 million or 49 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 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 $13.6 million in 1999 compared to
$3.0 million in 2000. Excluding the effects of both transactions, "core
15
<PAGE> 17
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW -- (CONTINUED)
earnings" rose 22 percent. Cash ROE, excluding the gain on the sale of the
corporate trust business, was 17.00 percent in the current year compared to
15.05 percent one year earlier.
Net interest income on a fully taxable equivalent basis was $219.2 million,
up $27.6 million or 14 percent from $191.6 million in 1999's year-to-date
period. Average earning assets rose 16 percent to $17.68 billion from $15.29
billion in 1999, primarily attributable to an increase of $1.07 billion in
average loans and $1.20 billion in the investment securities portfolio, somewhat
offset by a decline in trading account assets of $24 million. Commercial lending
was the most significant contributor to the growth in loans. Net interest margin
declined slightly to 2.51 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 $11.5 million was down
$0.3 million from $11.8 million in 1999. Net charge-offs were $9.1 million, down
slightly from $9.7 million a year ago.
Noninterest income of $222.5 million increased $29.5 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 $10.6 million decline in net gains from securities sales and
reduced operating revenue from the corporate trust business sold in first
quarter 2000. Excluding corporate trust revenue, growth in trust and investment
management income was 21 percent over first half of 1999. Merchant and charge
card fees declined $2.0 million.
Noninterest expenses of $265.3 million decreased $4.1 million or 2 percent
from the year ago period. Income tax expense increased $23.7 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 August, 2000.
/s/ PIERRE O. GREFFE
--------------------------------------
Pierre O. Greffe
Chief Financial Officer
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
President
17
