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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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. Yes [X] No [ ]
The number of shares of Common Stock, $1.00 par value, outstanding on
August 14, 2002 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......................................... 18
Signatures............................................................... 18
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
2002 2001 2001
-------- ------------ --------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash on deposit with Harris Trust and Savings Bank.......... $ 314 $ 506 $ 540
Securities purchased from Harris Trust and Savings Bank
under agreement to resell................................. 15,000 21,000 10,001
Notes receivable from Harris Trust and Savings Bank......... 41,375 55,962 78,922
Securities available-for-sale:
Mortgage-backed........................................... 198,125 319,644 376,831
U.S. Treasury............................................. 174,947 84,932 24,973
Securing mortgage collections due from Harris Trust and
Savings Bank.............................................. 2,243 5,353 2,765
Broker receivable -- due from securities sales.............. 63,624 -- --
Other assets................................................ 1,229 1,945 2,500
-------- -------- --------
TOTAL ASSETS......................................... $496,857 $489,342 $496,532
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 44 $ 100 $ 44
-------- -------- --------
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......................... 4,266 385 8,842
Accumulated other comprehensive income (loss) -- unrealized
gains (losses) on available-for-sale securities........... 1,813 (1,877) (3,088)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY........................... 496,813 489,242 496,488
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $496,857 $489,342 $496,532
======== ======== ========
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 JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Securities purchased from Harris Trust
and Savings Bank under agreement to
resell............................... $ 638 $ 372 $ 959 $ 915
Notes receivable from Harris Trust and
Savings Bank......................... 740 1,382 1,585 2,966
Securities available-for-sale:
Mortgage-backed...................... 3,235 5,850 7,917 11,419
U.S. Treasury........................ 73 120 170 287
--------- --------- --------- ---------
Total interest income.............. 4,686 7,724 10,631 15,587
NON-INTEREST INCOME:
Gain on sale of securities.............. 2,695 -- 2,695 2,203
--------- --------- --------- ---------
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust
and Savings Bank..................... 34 64 75 139
Advisory fees paid to Harris Trust and
Savings Bank......................... 19 8 27 20
General and administrative.............. 48 34 125 107
--------- --------- --------- ---------
Total operating expenses........... 101 106 227 266
--------- --------- --------- ---------
Net income................................ 7,280 7,618 13,099 17,524
Preferred dividends....................... 4,609 4,609 9,218 9,218
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON
STOCKHOLDER............................. $ 2,671 $ 3,009 $ 3,881 $ 8,306
========= ========= ========= =========
Basic and diluted earnings per common
share................................... $2,671.00 $3,009.00 $3,881.00 $8,306.00
========= ========= ========= =========
Net income................................ $ 7,280 $ 7,618 $ 13,099 $ 17,524
Other comprehensive income (loss) --
unrealized gains (losses) on
available-for-sale securities........... 6,208 (2,031) 3,690 (1,642)
--------- --------- --------- ---------
Comprehensive income...................... $ 13,488 $ 5,587 $ 16,789 $ 15,882
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
3
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
-----------------------
2002 2001
---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Balance at January 1........................................ $489,242 $489,824
Net income................................................ 13,099 17,524
Other comprehensive income (loss)......................... 3,690 (1,642)
Dividends (preferred stock $0.4609 per share)............. (9,218) (9,218)
-------- --------
Balance at June 30.......................................... $496,813 $496,488
======== ========
The accompanying notes are an integral part of these financial statements.
4
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
----------------------
2002 2001
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................ $ 13,099 $ 17,524
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of securities............................. (2,695) (2,203)
Net decrease in other assets........................... 716 59
Net increase in broker receivable -- due from
securities sales...................................... (63,624) --
Net decrease in accrued expenses....................... (56) (71)
--------- ---------
Net cash (used) provided by operating activities..... (52,560) 15,309
--------- ---------
INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased from
Harris Trust and Savings Bank under agreement to
resell................................................. 6,000 (7,001)
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 14,587 24,038
Decrease in securing mortgage collections due from Harris
Trust and Savings Bank................................. 3,110 21
Purchases of securities available-for-sale................ (371,585) (213,589)
Proceeds from maturities and sales of securities
available-for-sale..................................... 409,474 190,161
--------- ---------
Net cash provided (used) in investing activities..... 61,586 (6,370)
--------- ---------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (9,218) (9,218)
--------- ---------
Net decrease in cash on deposit with Harris Trust and
Savings Bank........................................... (192) (279)
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.............................................. $ 314 $ 540
========= =========
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 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.
3. 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 implementations 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. The Company does not have any
intangible assets recorded on its balance sheet.
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
6
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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
SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001
The Company's net income for the second quarter of 2002 was $7.3 million.
This represented a $.3 million or 4.4% decrease from second quarter 2001
earnings of $7.6 million. Earnings decreased primarily because of reduced
interest income on earning assets. As assets mature or are sold, proceeds have
been invested in lower yielding securities because market interest rates have
been declining in the past twelve months.
Second quarter 2002 interest income on the Notes totaled $740 thousand and
yielded 6.4% on $46.3 million of average principal outstanding for the quarter
compared to $1.4 million and a 6.4% yield on $86.3 million average principal
outstanding for second 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 second quarter 2002 and 2001 was $57 million and $106 million, respectively.
Interest income on securities available-for-sale for the current quarter was
$3.3 million resulting in a yield of 5.4% on an average balance of $245 million,
compared to $6.0 million with a yield of 6.6% on an average balance of $365
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,
7
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $2.7 million in second quarter 2002. No security gains or
losses were realized in the second quarter 2001.
There were no Company borrowings during second quarter 2002 or 2001.
Second quarter 2002 operating expenses totaled $101 thousand, a decrease of
$5 thousand or 5% from the second quarter of 2001. Loan servicing expenses
totaled $34 thousand, a decrease of $30 thousand or 47% 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
second quarter 2002 were $19 thousand compared to $8 thousand a year earlier,
primarily attributable to increased securities processing costs in the current
year. General and administrative expenses totaled $48 thousand, an increase of
$14 thousand over second quarter 2001, primarily due to increased expenses
related to financial reporting and compliance.
At June 30, 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.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH JUNE 30, 2001
The Company's net income for the six months ended June 30, 2002 was $13.1
million. This represented a $4.4 million or 25% decrease from 2001 earnings of
$17.5 million. Earnings decreased primarily because of reduced interest income
on earning assets. As assets mature or are sold, proceeds have been invested in
lower yielding securities because market interest rates have been declining in
the past twelve months.
Interest income on securities purchased under agreement to resell for the
six months ended June 30, 2002 was $959 thousand, an increase of $44 thousand
from the same period in 2001. Interest income on the Notes for the six months
ended June 30, 2002 totaled $1.6 million and yielded 6.40% on $50 million of
average principal outstanding compared to $3.0 million of income yielding 6.40%
on $93 million of average principal outstanding for the same period in 2001. The
decrease in income was attributable to a reduction in the Note balance because
of customer payoffs on the Securing Mortgage Loans. There were no Company
borrowings during either period. Interest income on securities
available-for-sale for the six months ended June 30, 2002 was $8.1 million
resulting in a yield of 5.58% on an average balance of $290 million, compared to
$11.7 million of income with a yield of 6.57% on an average balance of $356
million 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 as a result of market interest rates
declining in recent months. Gains from investment securities sales for the six
months ended June 30, 2002 were $2.7 million compared to $2.2 million a year
ago. The average outstanding balance of the Securing Mortgage Loans was $61
million for the six months ended June 30, 2002 and $114 million for the same
period in 2001.
Operating expenses for the six months ended June 30, 2002 totaled $227
thousand, a decrease of $39 thousand from a year ago. Loan servicing expenses
for the six months ended June 30, 2002 totaled $75 thousand, a decrease of $64
thousand or 46% from 2001. This decrease is attributable to the reduction in the
principal balance of the Notes because servicing costs vary directly with these
balances. Advisory fees for the six months ended June 30, 2002 were $27 thousand
compared to $20 thousand a year ago, primarily attributable to increased
securities processing costs in the current year. General and administrative
expenses totaled $125 thousand, an increase of $18 thousand or 17% over the same
period in 2001, as a result of additional reporting and compliance costs.
On June 28, 2002, the Company paid a cash dividend of $0.46094 per share on
outstanding preferred shares to the stockholders of record on June 15, 2002, as
declared on June 4, 2002. On June 30, 2001, the Company paid a cash dividend of
$0.46094 per share on outstanding preferred shares to the stockholders of
8
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
record on June 15, 2001, as declared on June 1, 2001. On a year-to-date basis,
the Company declared and paid $9.2 million of dividends to holders of preferred
shares for each of the six-month periods ended June 30, 2002 and 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 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 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 $52.6 million used by operations during the six
months ended June 30, 2002 were $14.6 million provided by principal payments on
the Notes and $409.5 million from the maturities and sales of securities
available-for-sale. In the prior period ended June 30, 2001, the primary sources
of funds other than $15.3 million from operations were $24.0 million provided by
principal payments on the Notes and $190.1 million from the maturities and sales
of securities available-for-sale. The primary uses of funds for the six months
ended June 30, 2002 were $371.6 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, 2001 the primary uses of funds were
$213.6 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, 2001.
OTHER MATTERS
As of June 30, 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)
JUNE 30 DECEMBER 31 JUNE 30
2002 2001 2001
------- ----------- -------
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
Cash and demand balances due from banks............... $ 918,094 $ 1,203,946 $ 1,040,209
Money market assets:
Interest-bearing deposits at banks.................. 405,582 195,723 182,473
Federal funds sold and securities purchased under
agreement to resell.............................. 524,650 579,750 332,825
Trading account assets................................ 35,211 90,562 62,978
Securities available-for-sale (including $2.67
billion, $3.21 billion, and $3.61 billion of
securities pledged as collateral for repurchase
agreements at June 30, 2002, December 31, 2001, and
June 30, 2001 respectively)......................... 4,902,417 5,822,229 6,486,531
Loans................................................. 9,482,692 9,972,473 10,485,823
Allowance for possible loan losses.................... (218,656) (227,374) (113,376)
----------- ----------- -----------
Net loans........................................... 9,264,036 9,745,099 10,372,447
Premises and equipment................................ 287,620 287,549 285,622
Customers' liability on acceptances................... 16,924 13,365 31,482
Bank-owned insurance investments...................... 973,982 952,225 928,323
Loans held for sale................................... 61,245 121,588 119,835
Goodwill and other valuation intangibles.............. 197,827 206,119 213,640
Other assets.......................................... 590,932 518,016 484,727
----------- ----------- -----------
TOTAL ASSETS................................... $18,178,520 $19,736,171 $20,541,092
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing... $ 1,858,251 $ 3,170,649 $ 2,287,866
-- interest-bearing..... 8,106,859 6,311,796 6,969,163
Deposits in foreign office
-- noninterest-bearing... 30,480 38,063 49,017
-- interest-bearing..... 1,074,501 1,670,352 2,628,087
----------- ----------- -----------
Total deposits................................. 11,070,091 11,190,860 11,934,133
Federal funds purchased and securities sold under
agreement to repurchase............................. 3,325,080 4,423,351 5,098,410
Short-term borrowings................................. 557,198 704,699 152,705
Short-term senior notes............................... 650,000 860,000 985,000
Acceptances outstanding............................... 16,924 13,365 31,482
Accrued interest, taxes and other expenses............ 148,539 335,931 253,241
Other liabilities..................................... 391,080 167,288 58,272
Minority interest- preferred stock of subsidiary...... 255,000 255,000 250,000
Long-term notes -- subordinated....................... 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES.............................. 16,638,912 18,175,494 18,988,243
----------- ----------- -----------
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............................................... 623,764 620,586 618,120
Retained earnings..................................... 787,922 819,991 842,576
Accumulated other comprehensive income (loss)......... 27,922 20,100 (7,847)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY..................... 1,539,608 1,560,677 1,552,849
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $18,178,520 $19,736,171 $20,541,092
=========== =========== ===========
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS EXCEPT SHARE DATA)
INTEREST INCOME
Loans, including fees................................. $129,210 $195,189 $260,230 $412,834
Money market assets:
Deposits at banks................................... 375 638 556 1,479
Federal funds sold and securities purchased under
agreement to resell............................... 2,989 3,466 4,807 7,846
Trading account....................................... 402 687 911 1,436
Securities available-for-sale:
U.S. Treasury and Federal agency.................... 47,289 92,264 105,611 190,437
State and municipal................................. 5 24 18 91
Other............................................... 553 547 1,101 980
-------- -------- -------- --------
Total interest income.......................... 180,823 292,815 373,234 615,103
-------- -------- -------- --------
INTEREST EXPENSE
Deposits.............................................. 43,031 94,071 85,892 205,644
Short-term borrowings................................. 14,112 62,198 31,760 143,749
Senior notes.......................................... 3,944 9,234 10,022 17,663
Minority interest-dividends on preferred stock of
subsidiary.......................................... 4,609 4,609 9,219 9,219
Long-term notes....................................... 2,840 3,595 5,691 7,555
-------- -------- -------- --------
Total interest expense......................... 68,536 173,707 142,584 383,830
-------- -------- -------- --------
NET INTEREST INCOME................................... 112,287 119,108 230,650 231,273
Provision for loan losses............................. 21,761 23,741 50,318 38,199
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES... 90,526 95,367 180,332 193,074
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees.................. 22,773 22,809 42,364 45,200
Money market and bond trading......................... 2,443 4,060 4,127 9,720
Foreign exchange...................................... 536 1,720 3,684 3,395
Service fees and charges.............................. 30,908 23,570 60,990 45,698
Securities gains...................................... 23,337 4,955 38,711 17,918
Bank-owned insurance investments...................... 12,468 11,725 25,283 23,324
Foreign fees.......................................... 5,828 5,259 11,853 10,348
Other................................................. 10,380 9,951 23,917 23,799
-------- -------- -------- --------
Total noninterest income....................... 108,673 84,049 210,929 179,402
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation....................... 74,387 75,000 151,152 143,131
Pension, profit sharing and other employee benefits... 15,438 13,189 30,585 26,801
Net occupancy......................................... 10,240 9,793 19,583 18,449
Equipment............................................. 11,867 12,823 25,580 25,384
Marketing............................................. 7,344 8,571 14,682 15,198
Other................................................. 7,325 1,938 13,313 16,365
-------- -------- -------- --------
126,601 121,314 254,895 245,328
Goodwill and other valuation intangibles.............. 6,311 5,860 12,484 11,633
-------- -------- -------- --------
Total noninterest expenses..................... 132,912 127,174 267,379 256,961
-------- -------- -------- --------
Income before income taxes............................ 66,287 52,242 123,882 115,515
Applicable income taxes............................... 20,089 12,452 35,656 28,658
-------- -------- -------- --------
NET INCOME.......................................... $ 46,198 $ 39,790 $ 88,226 $ 86,857
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net Income............................................ $ 4.62 $ 3.98 $ 8.82 $ 8.69
======== ======== ======== ========
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 CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
2002 2001
---- ----
(IN THOUSANDS)
BALANCE AT JANUARY 1........................................ $1,560,677 $1,524,423
Net income................................................ 88,226 86,857
Contributions to capital.................................. 3,178 4,755
Dividends -- common stock................................. (120,000) (66,000)
Dividends -- preferred stock.............................. (295) --
Other comprehensive income................................ 7,822 2,814
---------- ----------
BALANCE AT JUNE 30.......................................... $1,539,608 $1,552,849
========== ==========
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 COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
Net income........................................ $ 46,198 $ 39,790 $ 88,226 $ 86,857
Other comprehensive income:
Cash flow hedges:
Cumulative effect of accounting change....... -- -- -- (7,976)
Net unrealized gain on derivative
instruments, net of tax expense for the
quarter of $3,432 in 2001 and net of tax
expense for the year-to-date period of
$4,621 in 2001............................. -- 5,844 -- 7,868
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains (losses) arising
during the period, net of tax expense
(benefit) for the quarter of $28,978 in
2002 and ($12,584) in 2001 and net of tax
expense for the year-to-date period of
$20,218 in 2002 and $9,432 in 2001......... 44,428 (19,632) 31,475 13,870
Less reclassification adjustment for realized
gains included in income statement, net of
tax expense for the quarter of $9,078 in
2002 and $1,927 in 2001 and net of tax
expense for the year-to-date period of
$15,058 in 2002 and $6,970 in 2001......... (14,259) (3,028) (23,653) (10,948)
-------- -------- -------- --------
Other comprehensive income (loss)............... 30,169 (16,816) 7,822 2,814
-------- -------- -------- --------
Comprehensive income.............................. $ 76,367 $ 22,974 $ 96,048 $ 89,671
======== ======== ======== ========
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)
SIX MONTHS ENDED JUNE 30
--------------------------
2002 2001
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 88,226 $ 86,857
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 50,318 38,199
Depreciation and amortization, including intangibles...... 33,457 33,816
Deferred tax expense (benefit)............................ 4,271 (99)
Gain on sales of securities............................... (38,711) (17,918)
Trading account net sales................................. 55,351 2,233
Net decrease in interest receivable....................... 18,253 44,117
Net decrease in interest payable.......................... (5,549) (12,817)
Net decrease in loans held for sale....................... 60,343 122,436
Other, net................................................ 142,129 (22,496)
----------- -----------
Net cash provided by operating activities.............. 408,088 274,328
----------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits at banks........ (209,859) (41,125)
Net decrease in Federal funds sold and securities
purchased under agreement to resell.................... 55,100 158,250
Proceeds from sales of securities available-for-sale...... 2,071,179 961,230
Proceeds from maturities of securities
available-for-sale..................................... 4,421,885 3,916,785
Purchases of securities available-for-sale................ (5,521,560) (4,841,081)
Net decrease in loans..................................... 430,744 239,115
Purchases of premises and equipment....................... (21,044) (23,663)
Net increase in bank-owned insurance...................... (21,757) (22,220)
Other, net................................................ (202,087) 3,134
----------- -----------
Net cash provided by investing activities.............. 1,002,601 350,425
----------- -----------
FINANCING ACTIVITIES:
Net decrease in deposits.................................. (120,769) (559,244)
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase.......... (1,098,271) 489,531
Net decrease in short-term borrowings..................... (147,501) (1,337,025)
Proceeds from issuance of senior notes.................... 400,000 2,008,500
Repayment of senior notes................................. (610,000) (1,413,000)
Cash dividends paid on common stock....................... (120,000) (66,000)
----------- -----------
Net cash used by financing activities.................. (1,696,541) (877,238)
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. (285,852) (252,485)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,203,946 1,292,694
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT JUNE 30..... $ 918,094 $ 1,040,209
=========== ===========
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 for the six months ended June 30 totaled $148.1 million
and $396.6 million in 2002 and 2001, respectively. Cash income tax payments over
the same periods totaled $17.7 million and $41.8 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." This asset is excluded from the
scope of SFAS No. 142 and continues to be amortized.
Upon adoption of the Statement and as of June 30, 2002, the Bank had no
goodwill.
For the quarters and six months ended June 30, 2002 and June 30, 2001, the
Bank had no goodwill amortization expense.
As of June 30, 2002, the gross carrying amount and accumulated amortization
of the Bank's amortizable intangible assets were $337.9 million and $140.1
million, respectively.
Total amortization expense for the Bank's intangible assets was $6.3
million for the quarter ended June 30, 2002 and $12.5 million for the six months
ended June 30, 2002.
Estimated intangible asset amortization expense for the years ending
December 31, 2003, 2004, 2005, 2006 and 2007 is $25.1 million, $25.3 million,
$25.5 million, $25.6 million and $25.8 million, respectively.
15
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW
SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001
SUMMARY
The Bank had second quarter 2002 net income of $46.2 million, an increase
of $6.4 million or 16 percent from second quarter 2001.
Cash ROE was 14.85 percent in the current quarter compared to 13.15 percent
one year earlier.
Second quarter net interest income on a fully taxable equivalent basis was
$114.6 million, down $8.9 million or 7 percent from $123.5 million in 2001's
second quarter. Average earning assets decreased 15 percent to $15.18 billion
from $17.88 billion in 2001, primarily attributable to a decrease of $1.0
billion in average loans and $2.1 billion in the investment portfolio, somewhat
offset by an increase in money market assets of $233 million. Net interest
margin rose from 2.78 percent in the year-ago quarter to 3.03 percent currently,
reflecting the impact of the declining interest rate environment during 2001.
The second quarter provision for loan losses of $21.8 million was down $1.9
million from $23.7 million in the second quarter of 2001. Net charge-offs
decreased to $22.8 million from $26.1 million in the prior year. Most of the
decrease resulted from lower commercial loan write-offs.
Second quarter noninterest income of $108.7 million increased $24.6 million
from the same quarter last year. Growth in noninterest income resulted from a
$18.4 million increase in net gains from sales of investment securities and
higher service charges on deposits amounting to $7.3 million.
Second quarter 2002 noninterest expenses of $132.9 million increased $5.7
million or 5 percent from the year ago quarter.
Nonperforming assets at June 30, 2002 were $181 million or 1.91 percent of
total loans, down from $206 million or 2.10 percent at March 31, 2002, and $139
million or 1.32 percent a year ago. At June 30, 2002, the allowance for possible
loan losses was $219 million, equal to 2.31 percent of loans outstanding,
compared to $113 million or 1.08 percent at the end of second quarter 2001. As a
result, the ratio of the allowance for possible loan losses to nonperforming
assets increased from 82 percent at June 30, 2001 to 121 percent at June 30,
2002.
At June 30, 2002, Tier 1 capital of the Bank amounted to $1.58 billion,
down from $1.60 billion one year earlier. The regulatory leverage capital ratio
was 8.99 percent for the second quarter of 2002 compared to 7.77 percent in the
same quarter of 2001. The Bank's June 30, 2002 Tier 1 and total risk-based
capital ratios were 10.12 percent and 12.55 percent compared to respective
ratios of 9.76 percent and 11.70 percent at June 30, 2001. The Bank's capital
ratio exceeds the prescribed regulatory minimum for banks.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH 2001
SUMMARY
The Bank had net income for the six months ended June 30, 2002 of $88.2
million, an increase of $1.3 million or 2 percent from the same period a year
ago.
Cash ROE was 14.06 percent in the current year, down slightly from 14.28
percent last year.
Net interest income on a fully taxable equivalent basis was $223.5 million,
down $5.1 million or 2 percent from $240.6 million in 2001's year-to-date
period. Average earning assets decreased 13 percent to $15.57 billion from
$17.90 billion in 2001, primarily attributable to a $828 million decrease in
average loans and $1.7 billion decrease in the investment portfolio, which was
somewhat offset by an increase of $229 million in money market assets. Net
interest margin rose from 2.75 percent in 2001 to 3.04 percent currently,
primarily reflecting the impact of the declining interest rate environment in
2001.
16
The year-to-date 2002 provision for loan losses of $50.3 million was up
$12.1 million from $38.5 million in 2001. Net charge-offs were $59.0 million, an
increase of $15.3 million from last year, primarily reflecting an increase in
commercial loan write-offs.
Noninterest income of $210.9 million increased $31.5 million from the same
period last year. Most of this increase resulted from additional net gains from
securities sales of $20.8 million and higher service charges on deposits
amounting to $15.3 million.
Noninterest expenses of $267.4 million increased $10.4 million or 4 percent
from the year ago period. Income tax expense increased $7.0 million, reflecting
higher pretax income.
17
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE BEING OMITTED FROM THIS REPORT BECAUSE SUCH ITEMS ARE
NOT APPLICABLE TO THE REPORTING PERIOD.
ITEM 6. (a) REPORTS ON FORM 8-K: NONE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Harris Preferred Capital Corporation has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 14th day of August 2002.
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
Chairman of the Board and President
/s/ PAMELA PIAROWSKI
--------------------------------------
Pamela C. Piarowski
Chief Financial Officer
18