Form 10-Q

 

 

United States

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, 2012

Commission file number 1-13805

 

 

Harris Preferred Capital Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   # 36-4183096

(State or other jurisdiction

of incorporation

or organization)

 

(I.R.S. Employer

Identification No.)

111 West Monroe Street,

Chicago, Illinois

  60603
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (312) 461-2121

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  

Name of each exchange on

which registered

7 3/8% Noncumulative Exchangeable

Preferred Stock, Series A, par value

$1.00 per share

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether this registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨    No  x

The number of shares of Common Stock, $1.00 par value, outstanding on August 14, 2012 was 1,180. No common equity is held by nonaffiliates.

 

 

 


Harris Preferred Capital Corporation

TABLE OF CONTENTS

 

Part I

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements:   
  Consolidated Balance Sheets      3   
  Consolidated Statements of Income and Comprehensive Income      4   
  Consolidated Statements of Changes in Stockholders’ Equity      5   
  Consolidated Statements of Cash Flows      6   
  Notes to Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      11   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      25   

Item 4T.

  Controls and Procedures      25   

Part II

  OTHER INFORMATION   

Item 6.

  Exhibits      26   

Signatures

       27   

 

 

2


Harris Preferred Capital Corporation

Consolidated Balance Sheets

 

     June 30,
2012
     December 31,
2011
    June 30,
2011
 
     (unaudited)      (audited)     (unaudited)  
     (in thousands)  

Assets

       

Cash on deposit with BMO Harris Bank N.A.

   $ 312       $ 948      $ 1,217   

Securities purchased from BMO Harris Bank N.A. under agreement to resell

     7,508         22,000        22,500   
  

 

 

    

 

 

   

 

 

 

Total cash and cash equivalents

   $ 7,820       $ 22,948      $ 23,717   

Notes receivable from BMO Harris Bank N.A.

     2,115         2,488        3,184   

Securities available-for-sale, at fair value

       

Mortgage-backed

     319,650         461,356        488,752   

U.S. Treasury Bills

     254,998         100,000        70,000   

Accrued interest receivable

     943         1,587        1,694   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 585,526       $ 588,379      $ 587,347   
  

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

       

Accrued expenses

   $ 41       $ 111      $ 49   

Accrued taxes payable and deferred tax liabilities

     2,316         1,644        1,148   
  

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 2,357       $ 1,755      $ 1,197   
  

 

 

    

 

 

   

 

 

 

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); 5,000 shares authorized; 1,180 issued and outstanding

     1         1        1   

Additional paid-in capital

     320,733         320,733        320,733   

Earnings in excess of (less than) distributions

     106         (425     1,516   

Accumulated other comprehensive income - net unrealized gains on securities available-for-sale

     12,329         16,315        13,900   
  

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

   $ 583,169       $ 586,624      $ 586,150   
  

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 585,526       $ 588,379      $ 587,347   
  

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

3


Harris Preferred Capital Corporation

Consolidated Statements of Income

and Comprehensive Income

(Unaudited)

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (in thousands except share and per share amounts)  

Interest income:

        

Securities purchased from BMO Harris Bank N.A. under agreement to resell

   $ 39      $ 10      $ 62      $ 32   

Notes receivable from BMO Harris Bank N.A.

     40        51        77        104   

Securities available-for-sale:

        

Mortgage-backed

     2,783        4,531        6,314        9,201   

U.S. Treasury Bills

     8        1        11        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   $ 2,870      $ 4,593      $ 6,464      $ 9,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Gains (losses) on sale of securities

   $ 4,618      $ (44   $ 4,618      $ 3,071   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income

   $ 7,488      $ 4,549      $ 11,082      $ 12,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Loan servicing fees paid to BMO Harris Bank N.A.

   $ 2      $ 2      $ 3      $ 5   

Advisory fees paid to BMO Harris Bank N.A.

     40        37        83        68   

General and administrative

     91        74        228        195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 133      $ 113      $ 314      $ 268   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 7,355      $ 4,436      $ 10,768      $ 12,142   

Applicable state income taxes

     698        421        1,022        1,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 6,657      $ 4,015      $ 9,746      $ 10,989   

Other comprehensive income:

        

Securities available-for-sale :

        

Unrealized holding gains (losses) arising during the period, net of deferred state taxes

     (111     5,264        196        (3,228

Less: reclassification adjustment for realized gains (losses) included in net income, net of state tax effect

     4,179        (40     4,179        2,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (4,290     5,224        (3,983     (449
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 2,367      $ 9,239      $ 5,763      $ 10,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends

     4,609        4,609        9,218        9,218   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholder

   $ 2,048      $ (594   $ 528      $ 1,771   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings (loss) per common share

   $ 1,736      $ (504   $ 447      $ 1,501   

Average number of common shares outstanding

     1,180        1,180        1,180        1,180   

The accompanying notes are an integral part of these financial statements.

 

4


Harris Preferred Capital Corporation

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

     Six Months Ended
June 30
 
     2012     2011  
     (in thousands)  

Balance at January 1

   $ 586,624      $ 584,828   

Net income

     9,746        10,989   

Other comprehensive loss

     (3,983     (449

Dividends declared on preferred stock ($.921880 per share)

     (9,218     (9,218
  

 

 

   

 

 

 

Balance at June 30

   $ 583,169      $ 586,150   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5


Harris Preferred Capital Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2012     2011  
     (in thousands)  

Operating Activities:

    

Net income

   $ 9,746      $ 10,989   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Gain on sale of securities

     (4,618     (3,071

Decrease in other assets

     644        87   

Decrease in accrued expenses

     (70     (65

Increase in accrued taxes payable and deferred taxes

     672        4   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 6,374      $ 7,944   
  

 

 

   

 

 

 

Investing Activities:

    

Repayments of notes receivable from BMO Harris Bank N.A.

   $ 373      $ 185   

Purchases of securities available-for-sale

     (392,995     (224,838

Proceeds from maturities/redemptions of securities available-for-sale

     307,267        186,171   

Proceeds from sales of securities available-for-sale

     73,071        39,448   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

   $ (12,284   $ 966   
  

 

 

   

 

 

 

Financing Activities:

    

Cash dividends paid on preferred stock

     (9,218     (9,218
  

 

 

   

 

 

 

Net cash used in financing activities

   $ (9,218   $ (9,218
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents with BMO Harris Bank N.A.

   $ (15,128   $ (308

Cash and cash equivalents with BMO Harris Bank N.A. at beginning of period

     22,948        24,025   
  

 

 

   

 

 

 

Cash and cash equivalents with BMO Harris Bank N.A. at end of period

   $ 7,820      $ 23,717   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

6


Harris Preferred Capital Corporation

NOTES TO CONSOLIDATED 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 BMO Harris Bank N.A., formerly known as Harris N.A. (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, primarily U.S. treasury securities and securities collateralized with real estate mortgages. The Company holds its assets through a Maryland real estate investment trust subsidiary, Harris Preferred Capital Trust. Harris Capital Holdings, Inc., owns 100% of the Company’s common stock. The Bank owns all common stock outstanding issued by Harris Capital Holdings, Inc.

The accompanying consolidated financial statements have been prepared by management from the books and records of the Company. 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 2011 Form 10-K. Certain reclassifications were made to conform prior years’ financial statements to the current year’s presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” in May 2011. The amendment was effective for the Company for the annual reporting period ending December 31, 2012. The amendments in this Update are the result of the work by the FASB and the IASB to develop common requirement for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The adoption of ASU 2011-04 as of January 1, 2012 did not have a material impact on the Company’s consolidated financial condition or results of operations.

The FASB issued ASU 2011-05, “Presentation of Comprehensive Income, in June 2011. The update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. It requires companies to present reclassification adjustments from other comprehensive income to net income in the statements of net income and other comprehensive income. The amendment was effective for the Company for the annual or interim reporting period ending December 31, 2012. The adoption of ASU 2011-05 as of January 1, 2012 did not have an impact on the Company’s consolidated financial condition or results of operations.

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 at June 30, 2012.

 

7


3. Securities

The amortized cost and estimated fair value of securities available-for-sale were as follows:

 

     June 30, 2012  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair Value  
     (in thousands)  

Securities available-for-sale

           

Residential mortgage-backed

   $ 306,027       $ 13,623       $ —         $ 319,650   

U.S. Treasury Bills

     254,998         —           —           254,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities

   $ 561,025       $ 13,623       $ —         $ 574,648   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair Value  
     (in thousands)  

Securities available-for-sale

           

Residential mortgage-backed

   $ 443,333       $ 18,023       $ —         $ 461,356   

U.S. Treasury Bills

     100,000         —           —           100,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities

   $ 543,333       $ 18,023       $ —         $ 561,356   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair Value  
     (in thousands)  

Securities available-for-sale

           

Residential mortgage-backed

   $ 473,394       $ 16,325       $ 967       $ 488,752   

U.S. Treasury Bills

     70,000         —           —           70,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities

   $ 543,394       $ 16,325       $ 967       $ 558,752   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company classifies all securities as available-for-sale. Securities available-for-sale are reported at fair value with unrealized gains and losses included as a separate component of stockholders’ equity. At June 30, 2012, net unrealized gains on Securities available-for-sale were $13.6 million compared to $18.0 million of net unrealized gains on December 31, 2011 and $15.4 million of net unrealized gains at June 30, 2011.

In making a determination of temporary vs. other-than-temporary impairment of an investment, a major consideration of management is whether the Company will be able to collect all amounts due according to the contractual terms of the investment. Such a determination involves estimation of the outcome of future events as well as knowledge and experience about past and current events. Factors considered include the following: whether the fair value is significantly below cost and whether the decline is attributable to specific adverse conditions in an industry or geographic area; the period of time the decline in fair value has existed; if an outside rating agency has downgraded the investment; if dividends have been reduced or eliminated; if scheduled interest payments have not been made and finally, whether the financial condition of the issuer has deteriorated. In addition, it may be necessary for the Company to demonstrate its ability and intent to hold a debt security to maturity.

 

8


As of June 30, 2012 and December 31, 2011 there were no securities that were in an unrealized loss position. At June 30, 2011 there were no securities that were in an unrealized loss position for 12 or more months. All of the unrealized losses at June 30, 2011, caused by interest rate increases on investments in mortgage-backed securities were temporary. The contractual cash flows of these securities are guaranteed directly by a U.S. government-sponsored enterprise. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value was attributable to changes in interest rates and not credit quality, and because the Company had the ability and intent to hold these investments until a market price recovery or maturity, these investments were not considered other-than-temporarily impaired.

Realized securities gains of $4.2 million and $2.8 million were reclassified from other comprehensive income to gain on sale of securities in the consolidated statements of income and comprehensive income for the year to date periods ended June 30, 2012 and June 30, 2011, respectively.

The amortized cost and estimated fair value of total Securities available-for-sale as of June 30, 2012, by contractual maturity, are shown below. Expected maturities can differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2012  
     (in thousands)  
     Amortized
Cost
     Fair
Value
 

Maturities:

     

Within 1 year

   $ 254,998       $ 254,998   

1 to 5 years

     2,115         2,163   

5 to 10 years

     10,255         10,986   

Over 10 years

     293,657         306,501   
  

 

 

    

 

 

 

Total

   $ 561,025       $ 574,648   
  

 

 

    

 

 

 

4. Fair Value Measurements

Fair value represents an estimate of the proceeds to be received, or paid in the case of a liability, in a current transaction between willing parties. ASC 820 establishes a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. Inputs are either observable or unobservable in the marketplace. Observable inputs are based on market data from independent sources and unobservable inputs reflect the Company’s assumptions about market participant assumptions used to value an asset or liability. Level 1 includes quoted prices in active markets for identical instruments. Level 2 includes quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in inactive markets; and model-derived valuations using observable market information for significant inputs. Level 3 includes valuation techniques where one or more significant inputs are unobservable. Financial instruments are classified according to the lowest level input that is significant to their valuation. A financial instrument that has a significant unobservable input along with significant observable inputs may still be classified Level 3.

The Company has investments in U.S. Treasury securities that are classified as Level 1 and has U.S. government sponsored residential mortgage-backed securities that are classified as Level 2 of the fair value hierarchy. External vendors typically use pricing models to determine fair values for the securities. Standard market inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets and additional market reference data.

 

9


The valuation of assets that are measured at fair value on a recurring basis at June 30, 2012, December 31, 2011 and June 30, 2011 are presented in the following table.

 

                                                                   
     Fair Value      Fair Value Measurements Using  
     June 30, 2012      Level 1      Level 2      Level 3  
            (in thousands)  

Securities available-for-sale

           

Residential mortgage-backed

   $ 319,650       $ —         $ 319,650       $ —     

U.S. Treasury Bills

     254,998         254,998         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 574,648       $ 254,998       $ 319,650       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value      Fair Value Measurements Using  
     December
31, 2011
     Level 1      Level 2      Level 3  
            (in thousands)  

Securities available-for-sale

           

Residential mortgage-backed

   $ 461,356       $ —         $ 461,356       $ —     

U.S. Treasury Bills

     100,000         100,000         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 561,356       $ 100,000       $ 461,356       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value      Fair Value Measurements Using  
     June 30, 2011      Level 1      Level 2      Level 3  
            (in thousands)  

Securities available-for-sale

           

Residential mortgage-backed

   $ 488,752       $ —         $ 488,752       $ —     

U.S. Treasury Bills

     70,000         70,000         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 558,752       $ 70,000       $ 488,752       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers of assets between Level 1 and Level 2 during the quarters and the six month periods ended June 30, 2012 and June 30, 2011.

5. Fair Value of Financial Instruments

FASB ASC 825, “Financial Instruments”, requires the disclosure of estimated fair values for both on and off-balance-sheet financial instruments. The Company’s fair values are based on quoted market prices when available. For financial instruments not actively traded, such as Notes receivable from BMO Harris Bank N.A., fair values have been estimated using valuation methods and assumptions. The fair value estimates presented herein are not necessarily indicative of the amounts the Company could realize in an actual transaction.

The fair value estimation methodologies employed by the Company were as follows:

Fair value was assumed to equal carrying value for cash on deposit with the Bank, securities purchased from BMO Harris Bank N.A. under agreement to resell and accrued interest receivable which is included in other assets, due to their short term nature.

The fair value of notes receivable from BMO Harris Bank N.A. was estimated using a discounted cash flow calculation utilizing current market rates offered by BMO Harris Bank N.A for similar instruments.

The fair value of securities available-for-sale and the methods used to determine fair value are provided in Notes 3 and 4 to the Consolidated Financial Statements.

 

10


The estimated fair values of the Company’s financial instruments segregated by the hierarchy level of inputs used to measure fair value, are presented in the following table.

 

     June 30, 2012      December 31, 2011      June 30, 2011  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 
     (in thousands)  

Financial assets:

                 

Level 1 inputs:

                 

Cash on deposit with BMO Harris Bank N.A.

   $ 312       $ 312       $ 948       $ 948       $ 1,217       $ 1,217   

Securities available-for-sale-US Treasury Bills

     254,998         254,998         100,000         100,000         70,000         70,000   

Level 2 inputs:

                 

Securities purchased from BMO Harris Bank N.A. under agreement to resell

     7,508         7,508         22,000         22,000         22,500         22,500   

Notes receivable from BMO Harris Bank N.A.

     2,115         4,120         2,488         4,800         3,184         4,422   

Securities available-for-sale-Residential mortgage-backed

     319,650         319,650         461,356         461,356         488,752         488,752   

Accrued interest receivable

     943         943         1,587         1,587         1,694         1,694   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total on-balance-sheet financial assets

   $ 585,526       $ 587,531       $ 588,379       $ 590,691       $ 587,347       $ 588,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

6. Operating Segment

The Company’s operations consist of monitoring and evaluating the investments in mortgage assets. Accordingly, the Company operates in only one segment. The Company has no external customers and transacts most of its business with the Bank.

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, as amended, 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, liquidity, 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 Item 1A. “Risk Factors” in the Company’s 2011 Form 10-K and 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 2012 Compared with Second Quarter 2011

The Company’s net income for the second quarter of 2012 was $6.7 million, compared to $4.0 million from the second quarter of 2011.

Interest income on securities purchased from BMO Harris Bank N.A. under agreement to resell for the second quarter of 2012 was $39 thousand, on an average balance of $136 million, with an annualized yield of 0.12%. During the same period in 2011, the interest income on securities purchased from BMO Harris Bank N.A. under agreement to resell was $10 thousand,

 

11


on an average balance of $66 million, with an annualized yield of 0.06%. The Federal Funds rate at June 30, 2012 and June 30, 2011 was .09%. Second quarter 2012 interest income on the Notes receivable from BMO Harris Bank N.A. totaled $40 thousand and yielded 7.6% on $2.1 million of average principal outstanding for the quarter compared to $51 thousand and a 6.2% yield on $3.3 million average principal outstanding for second quarter 2011. The decrease in income was attributable to a reduction in the Notes receivable from BMO Harris Bank N.A. balance because of customer payoffs in the Securing Mortgage Loans. At June 30, 2012 and 2011, there were no Securing Mortgage Loans on nonaccrual status. Interest income on securities available-for-sale for the current quarter was $2.8 million resulting in a yield of 2.64% on an average balance of $423 million, compared to $4.5 million with a yield of 3.63% on an average balance of $500 million for the same period a year ago. Virtually all income in the current quarter was attributable to the residential mortgage-backed security portfolio.

Gains from investment securities sales were $4.6 million in the quarter ended June 30, 2012 compared to a loss of $44 thousand in the quarter ended June 30, 2011.

The Company had no borrowings during second quarter 2012 or 2011.

Second quarter 2012 operating expenses totaled $133 thousand, an increase of $20 thousand or 18% from the second quarter of 2011. General and administrative expenses totaled $91 thousand, an increase of $17 thousand over the same period in 2011 primarily due to an increase in director fees due to a fee increase and an extra board meeting for a change in officers and directors. Advisory fees for the second quarter 2012 were $40 thousand compared to $37 thousand a year earlier. There was an increase in tax expense of $277 thousand for the quarter ended June 30, 2012 due to the increase in net income of $2.7 million.

On June 30, 2012, the Company paid a cash dividend of $0.46094 per share on outstanding Preferred Shares to the stockholders of record on June 15, 2012 as declared on June 5, 2012. On June 30, 2011, the Company paid a cash dividend of $0.46094 per share on outstanding Preferred Shares to the stockholders of record on June 15, 2011 as declared on May 25, 2011. The Company paid cash dividends of .921880 per share on outstanding Preferred Shares to the stockholders of record for the year to date periods ended June 30, 2012 and 2011.

The National Bank Act requires all national banks, including the Bank, to obtain prior approval from the OCC if dividends declared by the national bank (including subsidiaries of the national bank (except for dividends paid by such subsidiary to the national bank)) in any calendar year, will exceed its net income for that year, combined with its retained income (as defined in the applicable regulations) for the preceding two years. These provisions apply to a national bank and its subsidiaries on a consolidated basis, notwithstanding the earnings of any subsidiary on a stand-alone basis. Beginning in 2009, the Bank no longer had sufficient capacity to declare and pay dividends without prior regulatory approval of the OCC. As a result, the Company, as an indirect subsidiary of the Bank, became subject to the provisions relating to dividend approval, and the Bank was required to receive prior approval from the OCC before the Company declared dividends on the Preferred Shares. Prior approval from the OCC was received for dividend declarations in March 2011, May 2011 and August 2011. Because the Bank’s third quarter 2011 earnings were sufficient to eliminate the need for OCC approval of dividends on the Preferred Shares that were declared by the Company’s Board of Directors in the fourth quarter ended December 31, 2011, the Company was not required to obtain approval from the OCC for such a declaration. Further, the Company was not required to obtain approval from the OCC for dividends on the Preferred Shares declared by the Company’s Board of Directors in March 2012 or June 2012 nor will such approval be required for dividends on the Preferred Shares that the Company’s Board of Directors may declare in the third quarter of 2012. The need to request similar approvals from the OCC for subsequent quarters will be determined by the Bank’s earnings for those future periods. There is no assurance that the Bank and the Company will not be subject to the requirement to receive prior regulatory approvals for Preferred Shares dividend payments in the future or that, if required, such approvals will be obtained. At this time the Company has no reason to expect that such approvals, if required, will not be received.

 

12


Six Months Ended June 30, 2012 compared with June 30, 2011

The Company’s net income for the six months ended June 30, 2012 was $9.7 million. This represented a $1.2 million or 11.3% decrease from earnings for the six months ended June 30, 2011. Earnings decreased primarily due to a decrease in interest income due to a $169 million reduction in the securities available-for-sale and a lower rate of 3.5% on the new mortgage backed securities purchased for the Company’s portfolio compared to 4.0% on previously purchased mortgage backed securities.

Interest income on securities purchased under agreement to resell for the six months ended June 30, 2012 was $62 thousand on an average balance of $123.9 million, with a yield of 0.10%. During the same period in 2011, the interest income on securities purchased under agreements to resell for the six months ended June 30, 2011 was $32 thousand, on an average balance of $65 million, with a yield of 0.10%. The Federal Funds rate at June 30, 2012 and June 30, 2011 was .09%. Interest income on the Note receivable from BMO Harris Bank N.A. for the six months ended June 30, 2012 totaled $77 thousand, yielding 6.9% on $2.2 million of average principal outstanding compared to $104 thousand on an average balance of $3.3 million, with a yield of 6.4%. The decrease in income was attributable to a reduction in the Notes receivable from BMO Harris Bank N.A. balance resulting from customer payoffs on the Securing Mortgage Loans. Interest income on securities available-for-sale for the six months ended June 30, 2012 was $6.3 million resulting in a yield of 2.9% on an average balance of $444 million, compared to $9.2 million resulting in a yield of 3.7% on an average balance of $497 million. The decrease in interest income from securities available-for-sale is primarily attributable to maturities and sales in the portfolio of mortgaged-backed securities and the newly purchased mortgage backed securities at lower rates of 3.5% compared to 4.0% for earlier purchased securities. There were no Company borrowings during either period.

Gains from investment securities sales were $4.6 million for the six months ended June 30, 2011 compared to $3.1 million for the same period a year ago.

Operating expenses for the six months ended June 30, 2012 totaled $314 thousand, an increase of $46 thousand or 17.2% from the same period a year ago. Advisory fees for the six months ended June 30, 2012 were $83 thousand compared to $68 thousand for the same period a year ago, primarily due to an increase in internal costs of the Bank related to expenses of administering the Company’s activities. General and administrative expenses totaled $228 thousand, an increase of $33 thousand or 16.9% from the same period in 2011 primarily due to increases in external costs related to filing annual and quarterly reports and the increase in director fees due to a fee increase and an extra board meeting for a change in officers and directors.

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 asset management requirements are to maintain the current earning asset portfolio size through the acquisition of additional Notes or other qualifying assets in order 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 as a result of repayment of principal balances of individual Securing Mortgage Loans or maturities or sales of securities. The payment of dividends on the Preferred Shares is made from legally available funds, 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, mortgage-backed securities and other earning assets. 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 90% of its adjusted REIT ordinary 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 90% or more of its adjusted REIT ordinary taxable income.

The Company anticipates that cash and cash equivalents on hand and the cash flow from the Notes and mortgage-backed and U.S. treasury securities (including potential gains from sales of securities) will provide adequate liquidity for its operating, investing and financing needs including the capacity to continue preferred dividend payments on an uninterrupted basis.

As presented in the accompanying Consolidated Statements of Cash Flows, the primary sources of funds in addition to $6.4 million provided from operations during the six months ended June 30, 2012, were $380.3 million from the maturities and sales of securities available-for-sale. In the prior period ended June 30, 2011, the primary sources of funds other than $7.9

 

13


million from operations were $225.6 million from the maturities and sales of securities available-for-sale. The primary uses of funds for the six months ended June 30, 2012 were $393.0 million for purchases of securities available-for-sale and $9.2 million in preferred stock dividends paid. For the prior year’s six months ended June 30, 2011, the primary uses of funds were $224.8 million for purchases of securities available-for-sale and $9.2 million in preferred stock dividends paid.

Market Risk Management

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, 2011.

Tax Matters

As of June 30, 2012, the Company believes that it is in full compliance with the REIT federal tax rules and expects to qualify as a REIT under the provisions of the Internal Revenue Code. The Company expects to meet all REIT requirements regarding the ownership of its stock and anticipates meeting the annual distribution requirements. Beginning January 1, 2009, Illinois requires a “captive” REIT to increase its state taxable income by the amount of dividends paid. Under this law, a captive REIT includes a REIT of which 50% of the voting power or value of the beneficial interest or shares is owned by a single person. Management believes that the Company would be classified as a “captive” REIT under Illinois law, in light of the fact that (1) all of the Company’s outstanding common shares are held by Harris Capital Holdings, Inc. a wholly owned subsidiary of BMO Harris Bank N.A. and (2) the Company’s Common Stock represents more than 50% of the voting power of the Company’s equity securities and (3) the Common Stock is not listed for trading on an exchange. Management believes that the state tax expense to be incurred by the Company in future years should not have a material adverse effect upon the Company’s ability to declare and pay future dividends on the preferred shares. The current Illinois statutory tax rate is 9.5%, effective January 1, 2011. This belief is based upon the ownership interest of the Company, whereby any tax expense incurred is expected to primarily reduce the net earnings available to the holder of the Company’s Common Stock. For the second quarter of 2012, $698 thousand of Illinois income tax was recorded compared to $421 thousand in the second quarter of 2011. For the year-to-date period ended June 30, 2012 the income tax expense was $1.0 million compared to $1.2 million for the same period in 2011.

Other Events

On May 18, 2012, Paul R. Skubic retired from his positions as Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Skubic remains as a member of the Board of Directors. On May 18, 2012, the Company’s Board of Directors elected Pamela C. Piarowski, previously Chief Financial Officer and Treasurer of the Company, to succeed Mr. Skubic as President and Chief Executive Officer. The Board also elected Ms. Piarowski as a director effective May 18, 2012 for a term that expires at the 2013 annual meeting and appointed Ms. Piarowski as Chair of the Board effective such date. Lisa D. Hofstatter was elected to the positions of Chief Financial Officer and Treasurer by the Company’s Board of Directors, effective May 18, 2012.

 

14


Financial Statements of BMO Harris Bank N.A.

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.

 

15


BMO HARRIS BANK N.A. AND SUBSIDIARIES

FINANCIAL REVIEW

Second Quarter 2012 Compared with Second Quarter 2011

Summary

For the second quarter 2012, BMO Harris Bank N.A. and subsidiaries (the “Bank”) reported net income attributable to common stockholder of $175.5 million, an increase of $187.4 million from the second quarter 2011 net loss of $11.9 million, mainly due to the acquisition of M&I Marshall & Ilsley Bank and M&I Bank N.A. (collectively “M&I Bank”). Excluding costs related to M&I Bank for restructuring and integration, the Bank would have reported net income attributable to common stockholder of $236.3 million.

Net interest income was $772.3 million in the current quarter, up $567.5 million from a year ago, largely due to the additional net interest income associated with M&I Bank. Excluding this revenue, net interest income increased $13.2 million as favorable cost of funds and funding mix was partially offset by lower earnings on loans. Average earning assets increased to $82.1 billion in the second quarter of 2012 from $46.5 billion in 2011. This increase was primarily made up of the addition of $36.6 billion from M&I Bank partly offset by a reduction in investment balances of $1.8 billion. Net interest margin for the quarter was 3.78 percent, an increase of 201 basis points from 1.77 percent in the second quarter of 2011. The higher margin reflected $271.1 million related to the purchase accounting amortization on the M&I Bank acquired loan portfolio. Excluding M&I Bank, the net interest margin for the quarter was 1.93 percent compared to 1.77 percent in the same period a year ago mainly attributable to a reduction in lower spread Federal Reserve Bank balances.

Provision for loan losses for the second quarter 2012 was $78.7 million, an increase of $8.1 million from $70.6 million in the second quarter 2011, mainly attributable to $48.3 million related to the M&I Bank portfolio, partially offset by the release of $28.0 million of consumer general reserves, the release of $2.0 million of commercial general reserves, the release of $2.5 million of Diners Club general reserves, and a $5.6 million decrease of specific provisions due to lower commercial and consumer charge-offs. Net loan charge-offs during the quarter were $163.6 million compared to $83.5 million in the same period last year mainly due to higher commercial and consumer charge-offs as a result of the M&I Bank acquisition. The provision for loan losses is based on past loss experience, management’s evaluation of the loan portfolio under current economic conditions and management’s estimate of losses inherent in the portfolio.

Noninterest income for the second quarter 2012 of $235.1 million reflected the addition of $83.8 million of fees and other income from M&I Bank. Excluding this additional revenue, noninterest income decreased $6.7 million or 4.2 percent from a year ago driven by lower trading revenue ($10.7 million) and securities gains ($8.7 million) offset by gain on sale of mortgages to secondary market ($7.3 million) and increased Federal Reserve Bank dividend ($6.8 million).

Second quarter 2012 noninterest expenses were $670.2 million, which reflected the addition of $225.4 million of operating expense, $78.3 million of integration costs and restructuring charges, and $23.2 million of intangible amortization related to the M&I Bank acquisition. Excluding these costs, expenses were up $24.0 million or 7.9 percent from the second quarter 2011 driven by higher employment expenses ($9.7 million) and net charges for intercompany services ($12.0 million). In the second quarter of 2012, income tax expense was $78.4 million on pre-tax income of $258.4 million. In the second quarter of 2011, income tax benefit was $19.9 million on pre-tax loss of $27.1 million.

Nonperforming loans at June 30, 2012 totalled $1,419 million or 2.84 percent of total loans, up from $956 million or 4.34 percent of total loans at June 30, 2011, primarily attributable to the addition of M&I Bank non-performing commercial loans. Nonperforming loans as a percentage of total loans decreased from last year attributable to higher total loans in the denominator as a result of the acquisition of the M&I Bank loan portfolio while excluding M&I purchased credit impaired loans in the numerator. At June 30, 2012, the allowance for loan losses was $738.1 million, equal to 1.48 percent of loans outstanding compared to $735.4 million or 3.34 percent of loans outstanding at June 30, 2011. Coverage of nonperforming loans by the allowance for loan losses decreased from 77 percent at June 30, 2011 to 52 percent at June 30, 2012 due to the addition of M&I Bank non-performing loans. Ratios reflect the fair value adjustments recorded on the M&I Bank loan portfolio at the time of acquisition and the merger of The Harris Bank N.A. into the Bank effective July 5, 2011.

 

16


At June 30, 2012, total stockholders’ equity amounted to $14.2 billion, up $.3 billion from March 31, 2012 related to Q2 earnings and up $8.9 billion from June 30, 2011 mainly due to the M&I Bank acquisition. Return (loss) on equity was 5.13 percent in the current quarter, compared to (0.95) percent in last year’s second quarter. Return (loss) on assets was 0.76 percent compared to (0.09) percent a year ago. The Bank did not declare any dividends on common stock in either the current quarter or in the year-ago quarter.

At June 30, 2012, Tier 1 capital of the Bank amounted to $9.1 billion, up $4.8 billion from a year ago, while risk-weighted assets increased by $34.5 billion to $61.3 billion. The Bank’s June 30, 2012 Tier 1 and total risk-based capital ratios were 14.83 percent and 17.02 percent compared to respective ratios of 16.03 percent and 17.80 percent on June 30, 2011. The regulatory Tier 1 leverage capital ratio was 10.28 percent for the second quarter of 2012 compared to 8.73 percent a year ago. The Bank’s capital ratios significantly exceeded the prescribed regulatory minimum for “well-capitalized” banks.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Summary

For the six months ended June 30, 2012, the Bank reported net income attributable to common stockholder of $276.0 million, an increase of $315.0 million from a net loss of $39.0 million for the same period last year, mainly due to the additional earnings from M&I Bank, net of integration and restructuring costs. Excluding the M&I Bank related activity, the Bank would have reported net income attributable to common stockholder of $4.0 million, an increase of $31.8 million from the first six months of last year driven by lower provision for loan losses. Return (loss) on equity was 8.10 percent in the current year, compared to (1.56) percent for first six months of last year. Return (loss) on assets was 1.18 percent compared to (0.16) percent a year ago.

Net interest income was $1,501.8 million, up $1,088.2 million from a year ago due to the additional revenue associated with M&I Bank. Excluding this revenue, net interest income was up $19.7 million as favorable cost of funds and funding mix was partially offset by lower earnings on loans. Average earning assets of $83.0 billion increased $37.3 billion driven by $36.9 billion related to the M&I Bank acquisition. Net interest margin increased to 3.64 percent in 2012 from 1.82 percent in the same period in 2011. The higher margin reflected $488.2 million related to the purchase accounting amortization on the M&I Bank acquired loan portfolio. Excluding M&I Bank, the net interest margin for the year was 1.89 percent compared to 1.82 percent a year ago.

Year-to-date 2012 provision for loan losses was $269.3 million compared to $141.9 million in 2011. This was primarily attributable to the additional provisions for loan losses related to the M&I Bank portfolio. Net charge-offs increased to $293.3 million from $153.1 million in the prior year, reflecting a higher level of write-downs from the acquired portfolios offset by lower commercial and consumer charge-offs in the remaining portfolio.

Noninterest income of $497.3 million reflected the addition of $183.0 million of fees and other income from M&I Bank. Excluding this additional revenue, noninterest income increased $17.7 million or 6.0 percent from a year ago driven by higher securities gains ($28.2 million) and gain on sale of mortgages to secondary market ($7.4 million) partially offset by lower trading revenue ($12.8 million) and bank and debit card income ($11.2 million).

Noninterest expenses were $1,325.0 million, an increase of $680.1 million from the first six months of 2011. Excluding the additional $460.4 million of operating expense, $126.5 million of integration costs and restructuring charges, and $46.5 million of intangible amortization associated with the M&I Bank acquisition, expenses increased $46.7 million or 7.4% mainly due to higher employment expenses ($21.1 million) and net charges for intercompany services ($22.6 million). In the first six months of 2012, income tax expense was $119.5 million on pre-tax income of $404.8 million. In the first six months of 2011, income tax benefit was $46.4 million on pre-tax loss of $76.1 million.

 

17


BMO Harris Bank N.A. and Subsidiaries

Consolidated Statements of Condition

 

     June 30
2012
    December 31
2011
    June 30
2011
 
     (Unaudited)     (Audited)     (Unaudited)  
     (In thousands except share data)  

Assets

      

Cash and demand balances due from banks

   $ 1,226,521      $ 1,604,779      $ 746,264   

Money market assets:

      

Interest-bearing deposits at banks ($11.3 billion, $16.8 billion and $18.1 billion held at Federal Reserve Bank at June 30, 2012, December 31, 2011 and June 30, 2011, respectively)

     12,737,518        18,535,041        18,764,411   

Federal funds sold and securities purchased under agreement to resell

     1,596,414        1,687,258        1,707,300   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

   $ 15,560,453      $ 21,827,078      $ 21,217,975   

Securities available-for-sale, at fair value

     14,629,667        12,600,130        5,003,734   

Trading account assets and derivative instruments

     1,127,111        910,130        352,298   

Loans, net of unearned income

     49,989,625        51,060,062        22,040,305   

Allowance for loan losses

     (738,113     (760,851     (735,429
  

 

 

   

 

 

   

 

 

 

Net loans

   $ 49,251,512      $ 50,299,211      $ 21,304,876   

Loans held for sale

     163,237        98,888        18,328   

Premises and equipment, net

     1,008,397        966,914        550,608   

Bank-owned insurance

     2,665,934        2,633,123        1,391,171   

Goodwill and other intangible assets, net

     3,331,909        3,313,431        895,382   

Deferred tax asset, net

     2,278,904        2,370,890        318,535   

Other assets

     2,205,355        2,238,761        1,348,729   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 92,222,479      $ 97,258,556      $ 52,401,636   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits in domestic office — noninterest-bearing

   $ 23,399,122      $ 24,932,593      $ 13,162,940   

—  interest-bearing (includes $1.7 billion, $1.7 billion and $1.8  billion measured at fair value at June 30, 2012, December 31,  2011 and June 30, 2011, respectively)

     46,705,849        47,392,753        23,855,193   

Deposits in foreign offices — noninterest-bearing

     —          2,628,071        2,102,064   

— interest-bearing

     441,024        671,226        1,453,720   
  

 

 

   

 

 

   

 

 

 

Total deposits

   $ 70,545,995      $ 75,624,643      $ 40,573,917   

Federal funds purchased

     248,621        244,914        121,523   

Securities sold under agreement to repurchase

     332,499        469,443        470,535   

Trading account liabilities and derivative instruments

     401,917        527,804        238,343   

Short-term borrowings

     451,210        279,334        872,357   

Short-term senior notes

     —          80,956        —     

Accrued interest, taxes and other

     437,535        465,191        196,030   

Accrued pension and post-retirement

     58,885        46,926        30,552   

Other liabilities

     700,089        728,335        322,134   

Long-term notes - senior/ unsecured

     1,100,000        1,100,000        1,700,000   

Long-term notes - senior/ secured

     2,375,000        2,375,000        2,375,000   

Long-term notes - subordinated

     1,351,485        1,363,802        200,000   
  

 

 

   

 

 

   

 

 

 

Total liabilities

   $ 78,003,236      $ 83,306,348      $ 47,100,391   
  

 

 

   

 

 

   

 

 

 

Stockholders’ Equity

      

Common stock ($10 par value); authorized 60,430,512 shares; issued and outstanding 50,430,512 at June 30, 2012 and December 31, 2011 and 20,256,027 at June 30, 2011

   $ 504,305      $ 504,305      $ 202,560   

Surplus

     11,330,661        11,326,166        3,365,208   

Retained earnings

     2,235,317        1,959,325        1,582,944   

Accumulated other comprehensive loss

     (101,040     (98,308     (99,467
  

 

 

   

 

 

   

 

 

 

Stockholder’s equity before noncontrolling interest in subsidiaries

   $ 13,969,243      $ 13,691,488      $ 5,051,245   

Noncontrolling interest in subsidiaries

     250,000        260,720        250,000   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 14,219,243      $ 13,952,208      $ 5,301,245   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 92,222,479      $ 97,258,556      $ 52,401,636   
  

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

18


BMO HARRIS BANK N.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Quarter Ended
June 30,
    Six Months Ended June 30,  
     2012     2011     2012     2011  
     (In thousands)  

Interest Income

        

Loans

   $ 790,719      $ 240,612      $ 1,548,277      $ 486,343   

Money market assets:

        

Deposits at banks

     9,605        11,352        20,544        21,317   

Federal funds sold and securities purchased under agreements to resell

     621        186        1,052        329   

Trading account assets

     5,240        1,002        9,294        2,654   

Securities available-for-sale:

        

U.S. Treasury and federal agency

     22,800        8,738        46,116        18,962   

State and municipal

     8,844        10,708        18,008        22,440   

Other

     7,833        2,301        14,345        4,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   $ 845,662      $ 274,899      $ 1,657,636      $ 556,865   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

   $ 52,046      $ 42,329      $ 109,883      $ 84,483   

Short-term borrowings

     304        434        595        1,357   

Short-term senior notes

     —          —          47        —     

Long-term notes - senior/ unsecured

     8,567        20,906        20,126        44,268   

Long-term notes - senior/ secured

     6,547        6,117        13,252        12,547   

Long-term notes - subordinated

     5,939        331        11,947        663   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

   $
 
 
73,403
  
  
  $ 70,117      $ 155,850      $ 143,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ 772,259      $ 204,782      $ 1,501,786      $ 413,547   

Provision for loan losses

     78,667        70,618        269,264        141,924   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

   $ 693,592      $ 134,164      $ 1,232,522      $ 271,623   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Trust and investment management fees

   $ 30,507      $ 33,012      $ 58,758      $ 63,217   

Net money market and bond trading income, including derivative activity

     5,545        17,437        11,961        22,546   

Foreign exchange trading gains, net

     3,030        850        6,133        1,949   

Service charges and fees

     73,814        46,273        148,453        90,694   

Charge card income

     34,756        25,478        64,627        51,664   

Equity securities gains, net

     3,148        15,101        18,304        16,603   

Net securities gains, other than trading

     4,762        1,917        32,418        6,625   

Other-than-temporary impairment on securities

     —          (553     —          (1,062

Bank-owned insurance

     22,996        10,809        43,203        21,502   

Letter of credit fees

     11,393        5,239        23,031        10,232   

Net gains on loans held for sale

     15,833        2,595        31,698        11,189   

Other

     29,296        (165     58,697        1,940   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 235,080      $ 157,993      $ 497,283      $ 297,099   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expenses

        

Salaries and other compensation

   $ 236,844      $ 120,725      $ 460,308      $ 231,721   

Pension, profit sharing and other employee benefits

     57,830        29,060        129,918        66,959   

Net occupancy

     42,681        26,430        87,346        53,433   

Equipment

     38,290        17,431        75,626        34,839   

Marketing

     28,278        16,220        58,241        31,495   

Communication and delivery

     17,951        9,116        35,566        18,296   

Professional fees

     79,562        34,085        144,061        62,493   

Outside information processing, database and network fees

     27,211        12,578        53,839        25,402   

FDIC insurance

     16,102        8,785        39,310        20,520   

Intercompany services

     30,182        (658     53,803        (1,662

Restructuring reversal

     (1,550     —          (1,042     —     

Visa indemnification reversal

     —          —          —          (2,200

Charge card

     797        5,985        4,628        12,347   

(Reversal) provision for off-balance sheet credit losses

     (16,980     1,650        (32,179     12,445   

Other real estate

     9,754        1,495        23,882        3,884   

Amortization of intangibles

     28,027        7,072        56,666        14,517   

Other

     75,256        29,331        135,012        60,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expenses

   $ 670,235      $ 319,305      $ 1,324,985      $ 644,871   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

   $ 258,437      $ (27,148   $ 404,820      $ (76,149

Applicable income tax expense (benefit)

     78,350        (19,850     119,482        (46,397
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 180,087      $ (7,298   $ 285,338      $ (29,752

Less: noncontrolling interest in subsidiaries

     4,626        4,610        9,346        9,219   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Available for Common Stockholder

   $ 175,461      $ (11,908   $ 275,992      $ (38,971
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

19


BMO HARRIS BANK N.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  
     (In thousands)  

Net income (loss)

   $ 180,087      $ (7,298   $ 285,338      $ (29,752

Other comprehensive income (loss):

        

Cash flow hedges:

        

Net unrealized gain on derivative instruments, net of tax expense for the quarter of $4,714 in 2012 and $3,104 in 2011 and net of tax expense for the year-to-date period of $8,164 in 2012 and $8,592 in 2011

     8,756        5,765        15,163        15,957   

Reclassification adjustment for realized (gain) loss included in net income (loss), net of tax (expense) benefit for the quarter of ($142) in 2012 and $347 in 2011 and net of tax (expense) benefit for the year-to-date period of ($249) in 2012 and $893 in 2011

     (265     645        (463     1,659   

Pension and postretirement medical benefit plans:

        

Net gain (loss) and net prior service cost included in net income (loss), net of tax expense for the quarter of $22 in 2012 and $37 in 2011 and net of tax (benefit) expense for the year-to-date period of ($12) in 2012 and $143 in 2011

     42        70        (23     267   

Reclassification adjustment for amortization included in net income (loss), net of tax benefit for the quarter of $1,678 in 2012 and $1,347 in 2011 and net of tax benefit for the year-to-date period of $3,355 in 2012 and $2,694 in 2011

     3,114        2,501        6,232        5,004   

Available-for-sale securities:

        

Unrealized holding gain (loss) arising during the period, net of tax expense for the quarter of $2,927 in 2012 and $6,718 in 2011 and net of tax (benefit) expense for the year-to-date period of ($1,950) in 2012 and $9,357 in 2011

     4,390        16,812        (1,392     18,891   

Reclassification adjustment for realized gain included in net income (loss), net of tax expense for the quarter of $489 in 2012 and $623 in 2011 and net of tax expense for the year-to-date period of $10,169 in 2012 and $1,230 in 2011

     (4,273     (1,293     (22,249     (4,886
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

   $ 11,764      $ 24,500      $ (2,732   $ 36,892   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 191,851      $ 17,202      $ 282,606      $ 7,140   

Comprehensive income related to noncontrolling interest in subsidiaries

     4,626        4,610        9,346        9,219   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) available for common stockholder

   $ 187,225      $ 12,592      $ 273,260      $ (2,079
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

20


BMO Harris Bank N.A. and Subsidiaries

Consolidated Statements of Changes in Stockholder’s Equity

(Unaudited)

 

     Common
Stock
     Surplus     Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
    Total
Stockholder’s
Equity
 
     (In thousands)  

Balance at December 31, 2011

   $ 504,305       $ 11,326,166      $ 1,959,325      $ (98,308   $ 260,720      $ 13,952,208   

Stock option exercise

     —           6,688        —          —          —          6,688   

Tax benefit from stock option exercise

     —           (2,193     —          —          —          (2,193

Net income

     —           —          275,992        —          9,346        285,338   

Dividends - preferred stock of subsidiary

     —           —          —          —          (9,458     (9,458

Redemption - preferred stock of subsidiary

     —           —          —          —          (10,608     (10,608

Other comprehensive loss

     —           —          —          (2,732     —          (2,732
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 504,305       $ 11,330,661      $ 2,235,317      $ (101,040   $ 250,000      $ 14,219,243   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

   $ 202,560       $ 3,364,727      $ 1,621,915      $ (136,359   $ 250,000      $ 5,302,843   

Stock option exercise

     —           481        —          —          —          481   

Net (loss) income

     —           —          (38,971     —          9,219        (29,752

Dividends - preferred stock of subsidiary

     —           —          —          —          (9,219     (9,219

Other comprehensive income

     —           —          —          36,892        —          36,892   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ 202,560       $ 3,365,208      $ 1,582,944      $ (99,467   $ 250,000      $ 5,301,245   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

21


BMO Harris Bank N.A. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Six Months Ended June 30  
     2012     2011  
     (In thousands)  

Net cash (used in) provided by operating activities

   $ (259,665   $ 768,125   

Cash Flows from Investing Activities:

    

Proceeds from sales of securities available-for-sale

   $ 1,316,354      $ 443,255   

Proceeds from maturities of securities available-for-sale

     4,257,739        3,062,019   

Purchases of securities available-for-sale

     (7,581,102     (2,806,799

Net decrease in loans

     1,085,721        717,204   

Net proceeds from FDIC loss share agreement

     11,884        48,557   

Purchases of premises and equipment, net

     (107,163     (34,916

Net proceeds from sales of OREO

     108,334        17,979   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

   $ (908,233   $ 1,447,299   
  

 

 

   

 

 

 

Cash flows from Financing Activities:

    

Net (decrease) increase in deposits

   $ (5,041,044   $ 3,635,469   

Net decrease in Federal funds purchased and securities sold under agreement to repurchase

     (133,237     (404,111

Net increase (decrease) in other short-term borrowings

     171,876        (481,404

Repayment of short-term senior notes

     (80,416     —     

Repayment of long-term senior notes

     —          (746,500

Net proceeds from stock options exercise

     6,688        481   

Excess tax expense from stock options exercise

     (2,341     (158

Distributions on preferred stock

     (20,253     (9,219
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

   $ (5,098,727   $ 1,994,558   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (6,266,625   $ 4,209,982   

Cash and cash equivalents at January 1

     21,827,078        17,007,993   
  

 

 

   

 

 

 

Cash and cash equivalents at June 30

   $ 15,560,453      $ 21,217,975   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Cash paid (received) during the year for:

    

Interest

   $ 171,060      $ 143,737   

Income taxes

   $ (626   $ (14,219

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

22


BMO HARRIS BANK N.A. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

BMO Harris Bank N.A. (the “Bank” or “BHB”) is a wholly-owned subsidiary of BMO Financial Corp. (“BFC”), a wholly-owned U.S. subsidiary of Bank of Montreal (“BMO”). The consolidated financial statements of the Bank include the accounts of the Bank and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated.

Prior to November 30, 2011, BHB was a wholly-owned subsidiary of BMO Bankcorp, Inc. (“Bankcorp”), a wholly-owned subsidiary of BFC. Bankcorp was dissolved into BFC on November 30, 2011 and is reflected in the current and prior year consolidated financial statements. In addition, The Harris Bank N.A. (a former subsidiary of Bankcorp) merged with and into BHB in July 2011. The merger was between entities under common control. As a result, the consolidated financial statements and related notes have been recast to reflect the combined historical financial results at historical carrying values for all periods presented.

On July 5, 2011 BMO completed the acquisition of Milwaukee-based Marshall & Ilsley Corporation (“M&I”) for consideration of approximately $4.3 billion paid in BMO common shares, with fractional entitlements to BMO common shares paid in cash. Each common share of M&I was exchanged for 0.1257 of a BMO common share, resulting in the issuance of approximately 67 million common shares. The value of the common shares was arrived at using the average of BMO common share price prevailing during the day the business combination closed. BMO contributed the net assets of M&I to BFC in exchange for 105 BFC common shares. BFC then contributed cash and shares of M&I Marshall and Ilsley Bank and M&I Bank N.A. to BHB in exchange for 30.2 million BHB common shares, which increased BHB’s surplus by $5.7 billion. In addition, immediately prior to the completion of the transaction, BFC purchased M&I’s Troubled Asset Relief Program (“TARP”) preferred shares and warrants from the U.S. Treasury for approximately $1.7 billion. BFC subsequently recorded the cancellation of the TARP preferred shares and warrants.

Immediately upon acquisition, M&I merged with and into BFC, and M&I Marshall and Ilsley Bank and M&I Bank N.A merged with and into BHB. The Bank assumed approximately $46.7 billion in assets, including approximately $30.4 billion in loans, and $35.5 billion in deposits from M&I. BHB recorded goodwill of $1,996.2 million which is not deductible for tax purposes. As part of the acquisition, BHB recorded a core deposit intangible asset of $483.9 million to be amortized on an accelerated basis over a period of 10 years, a customer relationship intangible asset of $45.5 million to be amortized on an accelerated basis over a period of 15 years, and a credit card portfolio intangible asset of $24.6 million to be amortized over a period of 15 years. The results of operations for M&I Marshall and Ilsley Bank and M&I Bank N.A. have been included in BHB’s consolidated financial statements since July 5, 2011. This acquisition substantially increased BHB’s assets, geographic presence, scope of operations and customer base.

The interim 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. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.

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. Certain reclassifications have been made to conform prior year’s consolidated financial statements to the current year’s presentation.

 

23


2. Contingent Liabilities and Litigation

The Bank and certain of its subsidiaries are party to legal proceedings, including regulatory investigations, in the ordinary course of their businesses. Reserves are established for legal claims when management determines that it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. No material reserves have been recorded related to legal proceedings or regulatory investigations as of June 30, 2012 or 2011. While there is inherent difficulty in predicting the outcome of these proceedings, management believes that current legal reserves are adequate and does not expect the outcome of any of these proceedings, individually or in the aggregate, to have a material adverse effect on the Bank’s consolidated financial position or results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters may differ from management’s current assessment.

3. Visa Indemnification Charge

BHB was a member of Visa U.S.A. Inc. (“Visa U.S.A.”) and in 2007 received shares of restricted stock in Visa, Inc. (“Visa”) as a result of its participation in the global restructuring of Visa U.S.A., Visa Canada Association, and Visa International Service Association in preparation for an initial public offering by Visa. BHB and other Visa U.S.A. member banks are obligated to share in potential losses resulting from certain indemnified litigation involving Visa.

A member bank such as BHB is also required to recognize the contingent obligation to indemnify Visa under Visa’s bylaws (as those bylaws were modified at the time of the Visa restructuring on October 3, 2007) for potential losses arising from the other indemnified litigation that had not yet settled at its estimated fair value. BHB is not a direct party to this litigation and does not have access to any specific, non-public information concerning the matters that are the subject of the indemnification obligations. As of December 31, 2007, BHB recorded a liability and corresponding charge of $34.0 million (pretax) for the remaining litigation.

The initial public offering (IPO) occurred on March 25, 2008 followed by a mandatory partial redemption of BHB’s restricted stock in Visa that took place in two parts: exchange for cash and funding of the covered litigation escrow account. Visa funded the litigation escrow acount with IPO proceeds.

On July 5, 2011, as part of BMO’s acquisition of M&I, BHB assumed an additional $3.8 million in Visa litigation reserve.

BHB’s recorded litigation reserve is adjusted as the escrow account is funded. In December 2011 and March 2011, BHB recorded decreases to noninterest expense of $8.9 million and $2.2 million, respectively, as a reduction in the Visa litigation reserve to reflect Visa’s use of a portion of the Bank’s restricted Visa stock to fund the escrow account available to settle certain litigation matters. As of both June 30, 2012 and December 31, 2011, the recorded reserve relating to the Visa litigation matter included in the Consolidated Statements of Condition was zero. As of June 30, 2011, the recorded reserve relating to the Visa litigation matter included in the Consolidated Statements of Condition was $5.1 million.

On July 15, 2012, Visa, other direct parties and the plaintiffs settled the litigation. The proposed settlement provides the litigants with a cash settlement previously accrued for, as well as an eight month interchange fee concession. The Bank recognized an expense of $4.9 million in July 2012 related to the short-term reduction in interchange fees. The Bank also recognized an additional $1.4 million charge in July 2012 for the change in the conversion ratio of Visa B shares, according to the terms of the settlement.

 

24


4. Other-than-temporary impairment

No other-than-temporary impairment was recorded during the six months ended June 30, 2012. During the six months ended June 30, 2011, the Bank recorded other-than-temporary impairment of $0.5 million on auction rate securities and $0.6 million on CRA investments. The entire amount of the impairment was related to credit deterioration. Losses related to declines in the estimated fair value of the investments are recorded in the Consolidated Statements of Operations to other-than-temporary impairment of securities.

5. Recent accounting standards

The FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs,” in May 2011. The amendment will be effective for the Bank in its annual December 31, 2012 financial statements. The amendments in this Update are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments impact disclosure only and do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The adoption of this ASU will not have an impact on the Bank’s financial position or results of operations.

The FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” in June 2011. The update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. It requires companies to present reclassification adjustments form other comprehensive income to net income in the statements of net income and other comprehensive income. The amendment will be effective for the Bank in its annual December 31, 2012 financial statements.

The FASB issued ASU 2011-09, “Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan,” in September 2011. The amendments in this Update require additional disclosures about an employer’s participation in a multiemployer plan. The amendment will be effective for the Bank in its annual December 31, 2012 financial statements.

The FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” in December 2011. The amendment requires enhanced disclosures by requiring improved information about financial instruments and derivative instruments that may be offset or are subject to an enforceable master netting arrangement or similar agreement. The amendment will be effective for the Bank in its annual December 31, 2013 financial statements.

6. Subsequent events

The consolidated financial statements have been prepared by management from the books and records of the Bank. The statements reflect all adjustments and disclosures which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. Events occurring subsequent to the date of the Statement of Condition have been evaluated for potential recognition or disclosure in the consolidated financial statements through August 14, 2012, the date the consolidated financial statements were available to be issued.

Tender Offer

On July 18, 2012, BHB offered to repurchase $350.0 million aggregate principal amount of 4.85% Subordinated Notes due 2015 originally issued by M&I Bank, and $300.0 million aggregate principal amount of 5.00% Subordinated Notes due 2017 originally issued by M&I Bank. The tender offer expired on July 31, 2012 with settlement on August 1, 2012.

BHB redeemed $64.7 million of the aggregate principal of the 4.85% Subordinated Notes due 2015 at $1,091.01 and $94.7 million of aggregate principal of the 5.00% Subordinated Notes due 2017 at $1,120.61, resulting in a loss on extinguishment of debt of $2.6 million recorded in the Consolidated Statements of Operations as interest expense. This charge will be included in the Bank’s results for the period ended September 30, 2012.

 

25


Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Liquidity Risk Management” and “Market Risk Management” under Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 11.

The following table stratifies the Company’s Securities available-for-sale by maturity date (dollars in thousands):

 

`    July 1, 2012  to
Dec. 31, 2012
    Year Ending December 31,                  Fair Value  at
June 30, 2012
 
     2013     2014      2015      2016      Thereafter     Total    

Residential mortgage-backed

                   

Amortized cost

   $ —        $ 2,114      $ —         $ —         $ —         $ 303,913      $ 306,027      $ 319,650   

Average Yield

     —          4.00     —           —           —           3.80     3.80  

U.S. Treasury Bills

                   

Amortized cost

   $ 254,998      $ —        $ —         $ —         $ —         $ —        $ 254,998      $ 254,998   

Average Yield

     0.04     —          —           —           —           —          0.04  

At June 30, 2012, the Company’s investments held in mortgage-backed securities are secured by adjustable and fixed interest rate residential mortgage loans. The yield to maturity on each security depends on, among other things, the price at which each such security is purchased, the rate and timing of principal payments (including prepayment rates as well as default rates, which in turn would impact the value and yield to maturity of the Company’s mortgage-backed securities. These investments are guaranteed by the Federal National Mortgage Association, (“FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”) and none of the underlying loan collateral is represented by sub-prime mortgages.

Item 4T. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Harris Preferred Capital Corporation’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the Company’s disclosure controls and procedures as of June 30, 2012. Based on this evaluation, management has concluded that the disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports filed under the Securities Exchange Act of 1934, as amended is (i) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer , as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls over Financial Reporting

There were no changes in internal controls over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

26


Part II. OTHER INFORMATION

Items 1, 1A, 2, 3, 4 and 5 are being omitted from this Report because such items are not applicable to the reporting period.

None

Item 6. Exhibits

 

   31.1   Certification of Pamela C. Piarowski pursuant to rule 13a-14(a)
   31.2   Certification of Lisa D. Hofstatter pursuant to rule 13a-14(a)
   32.1  

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-

Oxley Act of 2002

   101.INS*   XBRL Instance Document
   101.SCH*   XBRL Taxonomy Extension Schema Document
   101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
   101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
   101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
   101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document

 

* XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

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SIGNATURES

Pursuant to the requirements 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 2012.

 

/s/ PAMELA C. PIAROWSKI

Pamela C. Piarowski
Chairman of the Board and President and CEO
(Principal Executive Officer)

 

/s/ LISA D. HOFSTATTER

Lisa D. Hofstatter

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

 

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