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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
111 WEST MONROE STREET, 60603
CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
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. 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $1.00 par value, outstanding on May
10, 2001 was 1,000.
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HARRIS PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets.............................................. 2
Statements of Operations and 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. Reports on Form 8-K......................................... 17
Signatures............................................................... 17
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31, MARCH 31,
2002 2001 2001
--------- ------------ ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash on deposit with Harris Trust and Savings Bank.......... $ 217 $ 506 $ 1,063
Securities purchased from Harris Trust and Savings Bank
under agreement to resell................................. 14,000 21,000 14,002
Notes receivable from Harris Trust and Savings Bank......... 48,372 55,962 91,611
Securities available-for-sale:
Mortgage-backed........................................... 301,978 319,644 342,163
U.S. Treasury............................................. 119,940 84,932 39,903
Securing mortgage collections due from Harris Trust and
Savings Bank.............................................. 1,695 5,353 4,042
Other assets................................................ 1,827 1,945 2,810
-------- -------- --------
TOTAL ASSETS......................................... $488,029 $489,342 $495,594
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 95 $ 100 $ 84
-------- -------- --------
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......................... 1,595 385 5,833
Accumulated other comprehensive income -- unrealized losses
on available-for-sale securities.......................... (4,395) (1,877) (1,057)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY........................... 487,934 489,242 495,510
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $488,029 $489,342 $495,594
======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED MARCH 31
--------------------------
2002 2001
---- ----
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
INTEREST INCOME:
Securities purchased from Harris Trust and Savings Bank
under agreement to resell.............................. $ 320 $ 543
Notes receivable from Harris Trust and Savings Bank....... 845 1,584
Securities available-for-sale:
Mortgage-backed........................................ 4,683 5,569
U.S. Treasury.......................................... 97 167
--------- ---------
Total interest income................................ 5,945 7,863
NON-INTEREST INCOME:
Gain on sale of securities................................ -- 2,203
--------- ---------
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and Savings
Bank................................................... 41 75
Advisory fees paid to Harris Trust and Savings Bank....... 8 12
General and administrative................................ 77 73
--------- ---------
Total operating expenses............................. 126 160
--------- ---------
Net income.................................................. 5,819 9,906
Preferred dividends......................................... 4,609 4,609
--------- ---------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER.................. $ 1,210 $ 5,297
========= =========
Basic and diluted earnings per common share................. $1,210.00 $5,297.00
========= =========
Net income.................................................. $ 5,819 $ 9,906
Other comprehensive income (loss) -- unrealized gains
(losses) on available-for-sale securities................. (2,518) 389
--------- ---------
Comprehensive income........................................ $ 3,301 $ 10,295
========= =========
The accompanying notes are an integral part of these financial statements.
3
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
QUARTER ENDED MARCH 31
-----------------------
2002 2001
---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Balance at January 1........................................ $489,242 $489,824
Net income................................................ 5,819 9,906
Other comprehensive income (loss)......................... (2,518) 389
Dividends (preferred stock $0.4609 per share)............. (4,609) (4,609)
-------- --------
Balance at March 31......................................... $487,934 $495,510
======== ========
The accompanying notes are an integral part of these financial statements.
4
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED MARCH 31
----------------------
2002 2001
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................ $ 5,819 $ 9,906
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of securities............................. -- (2,203)
Net decrease (increase) in other assets................ 118 (251)
Net decrease in accrued expenses....................... (5) (31)
--------- ---------
Net cash provided by operating activities............ 5,932 7,421
--------- ---------
INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased from
Harris Trust and Savings Bank under agreement to
resell................................................. 7,000 (11,002)
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 7,590 11,349
(Increase) decrease in securing mortgage collections due
from Harris Trust and Savings Bank..................... 3,658 (1,256)
Purchases of securities available-for-sale................ (119,909) (138,975)
Proceeds from maturities and sales of securities
available-for-sale..................................... 100,049 137,316
--------- ---------
Net cash used in investing activities................ (1,612) (2,568)
--------- ---------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (4,609) (4,609)
--------- ---------
Net (decrease) increase in cash on deposit with Harris
Trust and Savings Bank................................. (289) 244
Cash on deposit with Harris Trust and Savings Bank at
beginning of period.................................... 506 819
--------- ---------
Cash on deposit with Harris Trust and Savings Bank at end
of period.............................................. $ 217 $ 1,063
========= =========
The accompanying notes are an integral part of these financial statements.
5
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 holds its
assets through a Maryland real estate investment trust subsidiary, Harris
Preferred Capital 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 2001 Form 10-K.
Certain items from 2001 have been reclassified to conform with current 2002
presentation. 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, 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
FIRST QUARTER 2002 COMPARED WITH FIRST QUARTER 2001
The Company's net income for the first quarter of 2002 was $5.8 million.
This represented a $4.1 million or 41% decrease from 2001 earnings of $9.9
million. Earnings decreased primarily because of $2.2 million of gains realized
from the sale of investment securities in 2001 compared to no gains in 2002 and
decreases in income on investments.
6
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
First quarter 2002 interest income on the Notes totaled $845 thousand and
yielded 6.4% on $52.9 million of average principal outstanding for the quarter
compared to $1.6 million and a 6.4% yield on $98.7 million average principal
outstanding for first quarter 2001. The decrease in income was attributable to a
reduction in the Notes balance because of customer payoffs on the Securing
Mortgage Loans. The average outstanding balance of the Securing Mortgage Loans
for first quarter 2002 and 2001 was $65 million and $122 million, respectively.
Interest income on securities available-for-sale for the current quarter was
$4.8 million resulting in a yield of 5.7% on an average balance of $335 million,
compared to $5.7 million with a yield of 6.6% on an average balance of $348
million for the same period a year ago. The decrease in interest income is
primarily attributable to the reduction in yield. As securities mature or are
sold, proceeds have been invested in lower yielding securities because market
interest rates have been declining in the past twelve months. Gains from
investment securities sales were $2.2 million in first quarter 2001. No security
gains or losses were realized in 2002.
There were no Company borrowings during first quarter 2002 or 2001.
First quarter 2002 operating expenses totaled $126 thousand, a decrease of
$34 thousand or 21% from the first quarter of 2001. Loan servicing expenses
totaled $41 thousand, a decrease of $34 thousand or 45% from a year ago. This
decrease is attributable to the reduction in the principal balance of the Notes,
thereby reducing servicing fees payable to the Bank. Advisory fees for the first
quarter 2002 were $8 thousand compared to $12 thousand a year earlier. General
and administrative expenses totaled $77 thousand, an increase of $4 thousand
over first quarter 2001.
At March 31, 2002 and 2001, there were no Securing Mortgage Loans on
nonaccrual status.
The Company does not currently maintain an allowance for loan losses due to
the over-collateralization of the Notes represented by the Securing Mortgage
Loans.
On March 29, 2002, the Company paid a cash dividend of $0.46094 per share
on outstanding Preferred Shares to the stockholders of record on March 15, 2002,
as declared on March 5, 2002. On March 30, 2001, the Company paid a cash
dividend of $0.46094 per share on outstanding Preferred Shares to the
stockholders of record on March 15, 2001, as declared on March 2, 2001.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT.
The Company's principal liquidity needs are to maintain the current
portfolio size through the acquisition of additional Notes or other qualifying
assets and to pay dividends to its stockholders after satisfying obligations to
creditors. The acquisition of additional Notes or other qualifying assets is
funded with the proceeds obtained as a result of repayment of principal balances
of individual Securing Mortgage Loans or maturities of securities held for sale
on a reinvested basis. The payment of dividends on the Preferred Shares is 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 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.
7
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company anticipates that cash and cash equivalents on hand and the cash
flow from the Notes and mortgage-backed securities will provide adequate
liquidity for its operating, investing and financing needs.
As presented in the accompanying Statements of Cash Flows, the primary
sources of funds in addition to $5.9 million provided from operations during the
three months ended March 31, 2002 were $7.5 million provided by principal
payments on the Notes and $100.0 million from the maturities of securities
available-for-sale. In the prior period ended March 31, 2001, the primary
sources of funds other than $7.4 million from operations were $11.3 million
provided by principal payments on the Notes and $137.3 million from the sales
and maturities of securities available-for-sale. The primary uses of funds for
the three months ended March 31, 2002 were $119.9 million for purchases of
securities available-for-sale and $4.6 million in preferred stock dividends
paid. For the prior year's quarter ended March 31, 2001 the primary uses of
funds were $139.0 million for purchases of securities available-for-sale and
$4.6 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, 2001.
ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations." The Statement addresses financial accounting
and reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations," on July 1, 2001. The Statement addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "Business Combinations." It requires all business combinations within
the scope of the Statement to be accounted for using one method, the purchase
method. It establishes criteria for the initial recognition of intangible assets
acquired in a business combination. The provisions of the Statement apply to all
business combinations initiated after June 30, 2001 and to all business
combinations accounted for by using the purchase method for which the date of
acquisition is July 1, 2001 or later. The implementation of this Statement has
not had a material effect on the Company's financial position or results of
operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." Under this Statement, goodwill and other intangible assets
that have indefinite useful lives will not be subject to amortization while
intangible assets with finite lives will be amortized. The Statement is
effective for fiscal years beginning after December 15, 2001. However, goodwill
and intangible assets acquired after June 30, 2001 will be subject immediately
to the nonamortization and amortization provisions of the Statement. The
implementation of this Statement has not had a material effect on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs should be capitalized as part of
the carrying amount of the long-lived asset. The Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company does not expect the implementation of this Statement to have a material
effect on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
establishes a single accounting model for long-lived assets to be disposed of by
sale. It
8
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
supersedes SFAS No. 121 and the accounting and reporting provisions of APB
Opinion No. 30 for the disposal of a segment of a business. The Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
implementation of this Statement has not had a material effect on the Company's
financial position or results of operations.
OTHER MATTERS
As of March 31, 2002, the Company believes that it is in full compliance
with the REIT tax rules, and expects to qualify as a REIT under the provisions
of the Code. The Company expects to meet all REIT requirements regarding the
ownership of its stock and anticipates meeting the annual distribution
requirements.
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.
9
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
MARCH 31 DECEMBER 31 MARCH 31
2002 2001 2001
-------- ----------- --------
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
Cash and demand balances due from banks............... $ 747,152 $ 1,203,946 $ 1,081,252
Money market assets:
Interest-bearing deposits at banks.................. 201,989 195,723 174,005
Federal funds sold and securities purchased under
agreement to resell.............................. 969,150 579,750 394,925
Trading account assets................................ 19,461 90,562 39,910
Securities available-for-sale (including $2.61
billion, $3.21 billion and $3.79 billion of
securities pledged as collateral for repurchase at
March 31, 2002, December 31, 2001 and March 31,
2001, respectively)................................. 5,126,575 5,822,229 6,593,537
Loans................................................. 9,783,769 9,972,473 10,689,492
Allowance for possible loan losses.................... (219,682) (227,374) (115,761)
----------- ----------- -----------
Net loans........................................... 9,564,087 9,745,099 10,573,731
Premises and equipment................................ 288,992 287,549 284,303
Customers' liability on acceptances................... 22,500 13,365 36,334
Bank-owned insurance.................................. 963,288 952,225 916,601
Loans held for sale................................... 145,311 121,588 125,908
Goodwill and other valuation intangibles.............. 202,252 206,119 217,314
Other assets.......................................... 386,580 518,016 515,706
----------- ----------- -----------
TOTAL ASSETS................................... $18,637,337 $19,736,171 $20,953,526
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest bearing... $ 2,210,963 $ 3,170,649 $ 2,376,021
-- interest-bearing..... 7,834,926 6,311,796 7,090,977
Deposits in foreign offices -- noninterest
bearing............................................. 32,719 38,063 36,853
-- interest-bearing..... 948,075 1,670,352 2,375,965
----------- ----------- -----------
Total deposits................................. 11,026,683 11,190,860 11,879,816
Federal funds purchased and securities sold under
agreement to repurchase............................. 3,792,338 4,423,351 5,191,832
Short-term borrowings................................. 513,805 704,699 884,041
Short-term notes -- senior............................ 860,000 860,000 608,500
Acceptances outstanding............................... 22,500 13,365 36,334
Accrued interest, taxes and other expenses............ 142,294 335,931 257,354
Other liabilities..................................... 217,796 167,288 74,554
Minority interest -- preferred stock of subsidiary.... 255,000 255,000 250,000
Long-term notes -- subordinated....................... 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES.............................. 17,055,416 18,175,494 19,407,431
----------- ----------- -----------
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............................................... 622,293 620,586 616,340
Retained earnings..................................... 861,876 819,991 820,786
Accumulated other comprehensive income (loss)......... (2,248) 20,100 8,969
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY..................... 1,581,921 1,560,677 1,546,095
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $18,637,337 $19,736,171 $20,953,526
=========== =========== ===========
The accompanying notes to the financial statements are an integral part of these
statements.
10
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER ENDED
MARCH 31
--------------------
2002 2001
---- ----
(IN THOUSANDS EXCEPT
SHARE DATA)
INTEREST INCOME
Loans, including fees....................................... $131,020 $217,646
Money market assets:
Deposits at banks......................................... 181 841
Federal funds sold and securities purchased under
agreement to resell..................................... 1,817 4,380
Trading account............................................. 509 749
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 58,321 98,173
State and municipal....................................... 14 66
Other..................................................... 549 433
-------- --------
Total interest income................................ 192,411 322,288
-------- --------
INTEREST EXPENSE
Deposits.................................................... 42,861 111,573
Short-term borrowings....................................... 17,649 81,552
Senior notes................................................ 6,077 8,430
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,609 4,609
Long-term notes............................................. 2,852 3,959
-------- --------
Total interest expense............................... 74,048 210,123
-------- --------
NET INTEREST INCOME......................................... 118,363 112,165
Provision for loan losses................................... 28,557 14,458
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 89,806 97,707
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 19,591 22,390
Money market and bond trading............................... 1,684 5,661
Foreign exchange............................................ 3,148 1,675
Service fees and charges.................................... 30,082 22,128
Securities gains............................................ 15,374 12,963
Bank-owned insurance........................................ 12,814 11,599
Foreign fees................................................ 6,025 5,089
Other....................................................... 41,008 34,707
-------- --------
Total noninterest income............................. 129,726 116,212
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 76,765 68,131
Pension, profit sharing and other employee benefits......... 15,147 13,612
Net occupancy............................................... 9,343 8,656
Equipment................................................... 13,714 12,561
Marketing................................................... 7,338 6,627
Communication and delivery.................................. 5,567 4,668
Expert services............................................. 6,270 4,962
Contract programming........................................ 7,025 6,698
Other....................................................... 14,595 18,957
-------- --------
155,764 144,872
Goodwill and other valuation intangibles.................... 6,173 5,773
-------- --------
Total noninterest expenses........................... 161,937 150,645
-------- --------
Income before income taxes.................................. 57,595 63,274
Applicable income taxes..................................... 15,567 16,207
-------- --------
NET INCOME................................................ $ 42,028 $ 47,067
======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net Income.................................................. $ 4.20 $ 4.71
======== ========
The accompanying notes to the financial statements are an integral part of these
statements.
11
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED MARCH 31
----------------------
2002 2001
---- ----
(IN THOUSANDS)
Net income.................................................. $ 42,028 $47,067
Other comprehensive income:
Cash flow hedges:
Cumulative effect of accounting change................. -- (7,976)
Net unrealized gain on derivative instruments, net of
tax expense $1,189 in 2001............................ -- 2,024
Unrealized (losses) gains on available-for-sale
securities:
Unrealized holding (losses) gains arising during the
period, net of tax (benefit) expense of ($8,761) in
2002 and $22,016 in 2001.............................. (12,954) 33,502
Less reclassification adjustment for realized gains
included in income statement, net of tax expense of
$5,980 in 2002 and $5,043 in 2001..................... (9,394) (7,920)
-------- -------
Other comprehensive (loss) income......................... (22,348) 19,630
-------- -------
Comprehensive income........................................ $ 19,680 $66,697
======== =======
The accompanying notes to the financial statements are an integral part of these
statements.
12
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
2002 2001
---- ----
(IN THOUSANDS)
BALANCE AT JANUARY 1........................................ $1,560,677 $1,524,423
Net income................................................ 42,028 47,067
Contributions to capital.................................. 1,707 2,975
Dividends -- preferred stock.............................. (143) --
Dividends -- common stock................................. -- (48,000)
Other comprehensive (loss) income......................... (22,348) 19,630
---------- ----------
BALANCE AT MARCH 31......................................... $1,581,921 $1,546,095
========== ==========
The accompanying notes to the financial statements are an integral part of these
statements.
13
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED MARCH 31
----------------------------
2002 2001
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 42,028 $ 47,067
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 28,557 14,458
Depreciation and amortization, including intangibles...... 16,835 16,845
Deferred tax (benefit) expense............................ (500) 1,668
Gain on sales of securities............................... (15,374) (12,963)
Trading account net sales................................. 71,101 25,301
Net decrease in interest receivable....................... 5,107 42,093
Net increase (decrease) in interest payable............... 6,397 (12,328)
Net (increase) decrease in loans held for sale............ (23,723) 116,363
Other, net................................................ 40,862 (13,825)
----------- -----------
Net cash provided by operating activities.............. 171,290 224,679
----------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits at banks........ (6,266) (32,657)
Net (increase) decrease in Federal funds sold and
securities purchased under agreement to resell......... (389,400) 96,150
Proceeds from sales of securities available-for-sale...... 339,285 696,111
Proceeds from maturities of securities
available-for-sale..................................... 1,355,439 2,060,377
Purchases of securities available-for-sale................ (1,020,785) (2,794,344)
Net decrease in loans..................................... 152,455 61,572
Purchases of premises and equipment....................... (12,105) (11,233)
Net increase in bank-owned insurance...................... (11,063) (10,498)
Other, net................................................ (49,560) (36,302)
----------- -----------
Net cash provided by investing activities.............. 358,000 29,176
----------- -----------
FINANCING ACTIVITIES:
Net decrease in deposits.................................. (164,177) (613,561)
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase.......... (631,013) 582,953
Net decrease in short-term borrowings..................... (190,894) (605,689)
Proceeds from issuance of senior notes.................... -- 838,500
Repayment of senior notes................................. -- (619,500)
Cash dividends paid on common stock....................... -- (48,000)
----------- -----------
Net cash used by financing activities.................. (986,084) (465,297)
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. (456,794) (211,442)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,203,946 1,292,694
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT MARCH 31.... $ 747,152 $ 1,081,252
=========== ===========
The accompanying notes to the financial statements are an integral part of these
statements.
14
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 three months ended
March 31 totaled $67.7 million and $222.5 million in 2002 and 2001,
respectively. Cash income tax payments over the same periods totaled $2.8
million and $16.1 million, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," on January 1, 2002. Under this
standard, goodwill and other intangible assets that have indefinite useful lives
are not subject to amortization while intangible assets with finite lives are
amortized. The Bank has an unidentifiable intangible asset that is accounted for
in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions." The asset is excluded from the scope of SFAS No. 142
and continues to be amortized.
Upon adoption of the Statement and as of March 31, 2002, the Bank had no
goodwill.
For the quarters ended March 31, 2002 and March 31, 2001, the Bank had no
goodwill amortization expense.
As of March 31, 2002, the gross carrying amount and accumulated
amortization of the Bank's amortizable intangible assets was $335.4 million and
$133.2 million, respectively.
For the quarter ended March 31, 2002, total amortization expense for the
Bank's intangible assets was $6.2 million.
Estimated intangible asset amortization expense for the years ending
December 31, 2003, 2004, 2005, 2006 and 2007 is $24.8 million, $25.0 million,
$25.2 million, $25.3 million and $25.5 million, respectively.
15
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW
FIRST QUARTER 2002 COMPARED WITH FIRST QUARTER 2001
SUMMARY
The Bank had first quarter 2002 net income of $42.0 million, a decrease of
$5.1 million or 11 percent from first quarter 2001.
Cash ROE was 13.30 percent in the current quarter and 15.67 percent in
first quarter 2001. Excluding unrealized gains and losses on the securities
portfolio recorded directly to equity, cash ROE was 13.57 percent for the
current year's first quarter, compared to 15.67 percent a year ago. Continued
strong earnings growth in the core businesses and a more favorable interest rate
environment contributed to increased earnings from treasury activities, but this
was offset by an increased loan loss provision reflecting the recession in the
U.S. economy.
First quarter net interest income on a fully taxable equivalent basis was
$120.9 million, up $3.8 million or 3 percent from $117.1 million in 2001's first
quarter. Average earning assets decreased 11 percent to $15.97 billion from
$17.92 billion in 2001, primarily attributable to a decrease of 7 percent or
$729 million in average loans and $1.3 billion in investment securities. Net
interest margin increased to 3.06 percent from 2.39 percent in the same quarter
last year.
The first quarter 2002 provision for loan losses of $28.6 million was up
from $14.5 million in the first quarter of 2001. Net charge-offs were $36.2
million compared to $17.6 million in the prior year's quarter. Most of the
increase resulted from higher commercial loan write offs.
First quarter 2002 noninterest income of $129.7 million increased $13.5
million from the same quarter last year. Most of the increase resulted from
additional net gains from securities sales of $2.4 million and higher service
charges and fees on deposits of $8.0 million, offset by a decline in bond
trading profits, syndication fees and trust revenue.
First quarter 2002 noninterest expenses of $155.8 million increased $10.9
million or 8 percent from the year-ago quarter.
Nonperforming assets at March 31, 2002 were $206 million or 2.10 percent of
total loans, compared to $205 million or 2.05 percent at December 31, 2001, and
$109 million or 1.02 percent a year ago. At March 31, 2002, the allowance for
possible loan losses was $220 million, equal to 2.25 percent of loans
outstanding, compared to $116 million or 1.08 percent at the end of first
quarter 2001. As a result, the ratio of the allowance for possible loan losses
to nonperforming assets was 106 percent at March 31, 2001 compared to 107
percent at March 31, 2002.
At March 31, 2002, Tier 1 capital of the Bank amounted to $1.65 billion, up
from $1.58 billion one year earlier. The regulatory leverage capital ratio was
8.91 percent for the first quarter of 2002 compared to 7.65 percent in the same
quarter of 2001. The Bank's capital ratio exceeds the prescribed regulatory
minimum for banks. The Bank's March 31, 2002 Tier 1 and total risk-based capital
ratios were 10.40 percent and 12.83 percent compared to respective ratios of
9.31 percent and 11.23 percent at March 31, 2001.
16
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) 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 10th day of May, 2002.
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
Chairman of the Board and President
/s/ PAMELA PIAROWSKI
--------------------------------------
Pamela Piarowski
Chief Financial Officer
17