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 MARCH 31, 2004
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 Identification No.)
of incorporation or organization)
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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 is an accelerated filer (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 May
13, 2004 was 1,000.
HARRIS PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets................................. 2
Consolidated Statements of Operations and Comprehensive
Income...................................................... 3
Consolidated Statements of Changes in Stockholders'
Equity...................................................... 4
Consolidated 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
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 17
Item 4. Controls and Procedures..................................... 17
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures............................................................... 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARRIS PREFERRED CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
----------- ------------ -----------
(UNAUDITED) (AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash on deposit with Harris Trust and Savings Bank......... $ 562 $ 926 $ 246
Securities purchased from Harris Trust and Savings Bank
under agreement to resell................................ 15,000 11,500 22,000
Notes receivable from Harris Trust and Savings Bank........ 15,184 16,547 27,230
Securities available-for-sale:
Mortgage-backed.......................................... 212,427 233,857 325,834
U.S. Treasury............................................ 249,434 229,995 149,991
Securing mortgage collections due from Harris Trust and
Savings Bank............................................. 603 414 991
Other assets............................................... 962 1,079 1,587
-------- -------- --------
TOTAL ASSETS.......................................... $494,172 $494,318 $527,879
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Broker payable -- due to securities purchase............... $ -- $ -- $ 25,066
Accrued expenses........................................... 97 84 83
-------- -------- --------
TOTAL LIABILITIES..................................... 97 84 25,149
Commitments and contingencies.............................. -- -- --
STOCKHOLDERS' EQUITY
7 3/8% Noncumulative Exchangeable Preferred Stock, Series A
($1 par value); liquidation value of $250,000,000 and
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........................ 265 1,230 3,867
Accumulated other comprehensive income -- net unrealized
gains/(losses) on available-for-sale securities.......... 3,076 2,270 8,129
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY............................ 494,075 494,234 502,730
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $494,172 $494,318 $527,879
======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
HARRIS PREFERRED CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED MARCH 31
----------------------
2004 2003
--------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME:
Securities purchased from Harris Trust and Savings Bank
under agreement to resell.............................. $ 471 $ 247
Notes receivable from Harris Trust and Savings Bank....... 258 472
Securities available-for-sale:
Mortgage-backed........................................ 2,630 4,526
U.S. Treasury.......................................... 24 48
-------- ---------
Total interest income................................ 3,383 5,293
NON-INTEREST INCOME:
Gain on sale of securities................................ 398 2,463
-------- ---------
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and Savings
Bank................................................... 12 22
Advisory fees paid to Harris Trust and Savings Bank....... 29 10
General and administrative................................ 96 98
-------- ---------
Total operating expenses............................. 137 130
-------- ---------
Net income.................................................. 3,644 7,626
Preferred dividends......................................... 4,609 4,609
-------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER........... $ (965) $ 3,017
======== =========
Basic and diluted earnings (loss) per common share.......... $(965.00) $3,017.00
======== =========
Net income.................................................. $ 3,644 $ 7,626
Other comprehensive income (loss) -- net unrealized
gains/(losses) on available-for-sale securities........... 806 (2,233)
-------- ---------
Comprehensive income........................................ $ 4,450 $ 5,393
======== =========
The accompanying notes are an integral part of these financial statements.
3
HARRIS PREFERRED CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
QUARTER ENDED MARCH 31
-----------------------
2004 2003
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Balance at January 1........................................ $494,234 $501,946
Net income................................................ 3,644 7,626
Other comprehensive income (loss)......................... 806 (2,233)
Dividends (preferred stock $0.4609 per share)............. (4,609) (4,609)
-------- --------
Balance at March 31......................................... $494,075 $502,730
======== ========
The accompanying notes are an integral part of these financial statements.
4
HARRIS PREFERRED CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED MARCH 31
-----------------------
2004 2003
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................ $ 3,644 $ 7,626
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of securities............................. (398) (2,463)
Net decrease in other assets........................... 117 360
Increase (decrease) in accrued expenses................ 13 (13)
--------- ---------
Net cash provided by operating activities............ 3,376 5,510
--------- ---------
INVESTING ACTIVITIES:
Net decrease in securities purchased from Harris Trust and
Savings Bank under agreement to resell................. (3,500) (2,000)
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 1,363 3,848
(Increase) decrease in securing mortgage collections due
from Harris Trust and Savings Bank..................... (189) 1,939
Purchases of securities available-for-sale................ (250,000) (149,929)
Proceeds from maturities and sales of securities
available-for-sale..................................... 253,195 144,759
--------- ---------
Net cash provided (used) in investing activities..... 869 (1,383)
--------- ---------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (4,609) (4,609)
--------- ---------
Net decrease in cash on deposit with Harris Trust and
Savings Bank........................................... (364) (482)
Cash on deposit with Harris Trust and Savings Bank at
beginning of period.................................... 926 728
--------- ---------
Cash on deposit with Harris Trust and Savings Bank at end
of period.............................................. $ 562 $ 246
========= =========
NON CASH TRANSACTION
Unsettled security purchase............................... $ -- $ 25,066
========= =========
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, 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., a
wholly-owned subsidiary of the Bank, owns 100% of the Company's common stock.
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 2003 Form 10-K. 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.
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 2004 COMPARED WITH FIRST QUARTER 2003
The Company's net income for the first quarter of 2004 was $3.6 million.
This represented a $4.0 million or 52% decrease from first quarter 2003 earnings
of $7.6 million. Earnings decreased primarily because of a $2.5 million gain on
sale of securities in 2003 compared to a $398 thousand gain realized in 2004.
6
HARRIS PREFERRED CAPITAL CORPORATION
First quarter 2004 interest income on the Notes totaled $258 thousand and
yielded 6.4% on $16.1 million of average principal outstanding for the quarter
compared to $472 thousand and a 6.4% yield on $29.7 million average principal
outstanding for first quarter 2003. The decrease in income was attributable to a
reduction in the Notes balance because of principal paydowns by customers in the
Securing Mortgage Loans. The average outstanding balance of the Securing
Mortgage Loans for first quarter 2004 and 2003 was $20 million and $36 million,
respectively. Interest income on securities available-for-sale for the current
quarter was $2.7 million resulting in a yield of 4.4% on an average balance of
$243 million, compared to $4.6 million with a yield of 5.0% on an average
balance of $368 million for the same period a year ago. The decrease in interest
income is primarily attributable to the reduction in the investment portfolio of
mortgage-backed securities.
There were no Company borrowings during first quarter 2004 or 2003.
First quarter 2004 operating expenses totaled $137 thousand, an increase of
$7 thousand or 5% from the first quarter of 2003. Loan servicing expenses
totaled $12 thousand, a decrease of $10 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 2004 were $29 thousand compared to $10 thousand a year earlier, due to
increased costs for processing, recordkeeping and administration. General and
administrative expenses totaled $96 thousand, a decrease of $2 thousand over the
same period in 2003.
At March 31, 2004 and 2003, there were no Securing Mortgage Loans on
nonaccrual status.
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 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 $3.4 million provided from operations
during the three months ended March 31, 2004 were $1.4 million provided by
principal repayments on the Notes and $253.2 million from the maturities and
sales of securities available-for-sale. In the prior period ended March 31,
2003, the primary sources of funds other than $5.5 million from operations were
$3.8 million provided by principal repayments on the Notes and $144.8 million
from the maturities and sales of securities available-for-sale. The primary uses
of funds for the three months ended March 31, 2004 were $250 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, 2003, the primary
7
HARRIS PREFERRED CAPITAL CORPORATION
uses of funds were $149.9 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, 2003.
OTHER MATTERS
As of March 31, 2004, 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 Internal Revenue Code. The Company expects to meet all REIT requirements
regarding the ownership of its stock and anticipates meeting the annual
distribution requirements.
8
HARRIS PREFERRED CAPITAL CORPORATION
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
MARCH 31 DECEMBER 31 MARCH 31
2004 2003 2003
----------- ----------- -----------
(UNAUDITED) (AUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
Cash and demand balances due from banks............... $ 901,871 $ 823,615 $ 1,244,415
Money market assets:
Interest-bearing deposits at banks.................. 515,190 424,459 321,090
Federal funds sold.................................. 499,744 409,425 467,875
Securities available-for-sale (including $3.09
billion, $4.07 billion, and $4.39 billion of
securities pledged as collateral for repurchase
agreements at March 31, 2004, December 31, 2003 and
March 31, 2003, respectively)....................... 7,111,503 6,624,280 6,183,136
Trading account assets................................ 49,411 59,467 34,541
Loans................................................. 10,187,982 9,573,452 9,767,905
Allowance for possible loan losses.................... (242,807) (234,798) (208,281)
----------- ----------- -----------
Net loans........................................... 9,945,175 9,338,654 9,559,624
Premises and equipment................................ 301,642 302,975 298,711
Customers' liability on acceptances................... 8,048 44,234 23,125
Bank-owned insurance.................................. 1,044,956 1,035,239 1,005,261
Loans held for sale................................... 119,126 168,904 197,653
Goodwill and other valuation intangibles.............. 163,383 165,978 171,574
Other assets.......................................... 595,399 522,260 536,712
----------- ----------- -----------
TOTAL ASSETS................................... $21,255,448 $19,919,490 $20,043,717
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing... $ 4,315,799 $ 4,231,540 $ 3,521,252
-- interest-bearing...... 8,512,519 7,844,596 7,051,440
Deposits in foreign offices -- noninterest-bearing... 4,413 49,016 39,021
-- interest-bearing...... 1,055,539 616,889 906,958
----------- ----------- -----------
Total deposits................................. 13,888,270 12,742,041 11,518,671
Federal funds purchased and securities sold under
agreement to repurchase............................. 4,312,135 4,643,406 5,250,145
Short-term borrowings................................. 101,617 10,841 200,649
Short-term senior notes............................... 200,000 -- 350,000
Acceptances outstanding............................... 8,048 44,234 23,125
Accrued interest, taxes and other expenses............ 159,556 171,422 141,359
Other liabilities..................................... 492,651 230,917 495,790
Minority interest -- preferred stock of subsidiary.... 250,000 250,000 250,000
Preferred stock issued to Harris Bankcorp, Inc........ 5,000 5,000 5,000
Long-term notes -- subordinated....................... 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES.............................. 19,642,277 18,322,861 18,459,739
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); 10,000,000 shares
authorized, issued and outstanding.................. 100,000 100,000 100,000
Surplus............................................... 637,933 634,944 629,381
Retained earnings..................................... 878,364 860,674 816,552
Accumulated other comprehensive (loss) income......... (3,126) 1,011 38,045
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY..................... 1,613,171 1,596,629 1,583,978
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $21,255,448 $19,919,490 $20,043,717
=========== =========== ===========
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
---------------------
2004 2003
--------- ---------
(IN THOUSANDS EXCEPT
SHARE DATA)
INTEREST INCOME
Loans, including fees....................................... $120,479 $117,492
Money market assets:
Deposits at banks......................................... 877 993
Federal funds sold and securities purchased under
agreement to resell..................................... 1,427 695
Trading account............................................. 372 453
Securities available-for-sale:
U.S. Treasury and Federal agency.......................... 33,393 42,509
State and municipal....................................... 279 5
Other..................................................... 683 1,121
-------- --------
Total interest income................................. 157,510 163,268
-------- --------
INTEREST EXPENSE
Deposits.................................................... 34,679 30,319
Short-term borrowings....................................... 9,896 14,220
Senior notes................................................ 126 895
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,609 4,609
Long-term notes............................................. 2,578 2,677
-------- --------
Total interest expense................................ 51,888 52,720
-------- --------
NET INTEREST INCOME......................................... 105,622 110,548
Provision for loan losses................................... 17,325 17,618
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 88,297 92,930
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 23,052 19,738
Money market and bond trading............................... 2,113 3,125
Foreign exchange............................................ 1,725 976
Service fees and charges.................................... 25,058 27,724
Securities gains............................................ 11,281 2,463
Bank-owned insurance........................................ 10,388 10,796
Foreign fees................................................ 6,150 6,218
Other....................................................... 52,351 50,268
-------- --------
Total noninterest income.............................. 132,118 121,308
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 74,116 78,768
Pension, profit sharing and other employee benefits......... 20,666 18,123
Net occupancy............................................... 11,912 9,808
Equipment................................................... 13,116 13,069
Marketing................................................... 8,285 7,215
Communication and delivery.................................. 5,602 5,598
Expert services............................................. 5,596 6,214
Contract programming........................................ 8,291 6,343
Other....................................................... 21,550 20,525
-------- --------
169,134 165,663
Goodwill and other valuation intangibles.................... 2,596 2,538
-------- --------
Total noninterest expenses............................ 171,730 168,201
-------- --------
Income before income taxes.................................. 48,685 46,037
Applicable income taxes..................................... 13,887 12,615
-------- --------
NET INCOME............................................ $ 34,798 $ 33,422
======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net Income.................................................. $ 3.48 $ 3.34
======== ========
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
-----------------
2004 2003
------- -------
(IN THOUSANDS)
NET INCOME.................................................. $34,798 $33,422
OTHER COMPREHENSIVE INCOME:
Minimum pension liability adjustment net of tax benefit of
$158 in 2004 and zero in 2003.......................... (259) --
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains (losses) arising during the
period, net of tax expense (benefit) of $2,418 in 2004
and ($5,453) in 2003................................... 3,015 (8,216)
Less reclassification adjustment for realized gains
included in income statement, net of tax expense of
$4,388 in 2004 and $958 in 2003........................ (6,893) (1,505)
------- -------
Other comprehensive loss.................................. (4,137) (9,721)
------- -------
COMPREHENSIVE INCOME........................................ $30,661 $23,701
======= =======
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)
2004 2003
---- ----
(IN THOUSANDS)
BALANCE AT JANUARY 1........................................ $1,596,629 $1,577,654
Net income................................................ 34,798 33,422
Contributions to capital.................................. 2,989 2,741
Dividends -- preferred stock.............................. (108) (119)
Dividends -- common stock................................. (17,000) (20,000)
Other comprehensive loss.................................. (4,137) (9,720)
---------- ----------
BALANCE AT MARCH 31......................................... $1,613,171 $1,583,978
========== ==========
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
-------------------------
2004 2003
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income.................................................. $ 34,798 $ 33,422
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 17,325 17,617
Depreciation and amortization, including intangibles...... 16,858 16,477
Deferred tax benefit...................................... (2,416) (1,411)
Gain on sales of securities............................... (11,281) (2,463)
Increase in bank-owned insurance.......................... (10,126) (11,076)
Trading account net cash sales............................ 31,543 38,689
Net increase in interest receivable....................... (2,195) (1,057)
Net (decrease) increase in interest payable............... (4,387) 4,722
Net decrease (increase) in loans held for sale............ 49,778 (48,342)
Other, net................................................ (25,978) 10,979
----------- -----------
Net cash provided by operating activities.............. 93,919 57,557
----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks.................................................. (90,731) 96,116
Net increase in Federal funds sold and securities
purchased under agreement to resell.................... (90,319) (229,925)
Proceeds from sales of securities available-for-sale...... 799,667 44,761
Proceeds from maturities of securities
available-for-sale..................................... 927,078 1,180,838
Purchases of securities available-for-sale................ (1,990,549) (1,466,830)
Net increase in loans..................................... (628,560) (182,435)
Purchases of premises and equipment....................... (10,898) (12,624)
Other, net................................................ 409 --
----------- -----------
Net cash used by investing activities.................. (1,083,903) (570,099)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits.................................. 1,125,735 480,387
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase.......... (331,271) 189,361
Net increase (decrease) in other short-term borrowings.... 90,776 (100,045)
Proceeds from issuance of senior notes.................... 200,000 750,000
Repayment of senior notes................................. -- (600,000)
Cash dividends paid on common stock....................... (17,000) (20,000)
----------- -----------
Net cash provided by financing activities.............. 1,068,240 699,703
----------- -----------
NET INCREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. 78,256 187,161
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 823,615 1,057,254
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT MARCH 31.... $ 901,871 $ 1,244,415
=========== ===========
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 Harris
Financial Corp. (formerly known as 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 three months ended March 31 totaled $56.3 million
and $48.0 million in 2004 and 2003, respectively. Cash income tax payments over
the same periods totaled $0.5 million and $0.1 million, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Bank records goodwill and other intangible assets in connection with
the acquisition of assets from unrelated parties or the acquisition of new
subsidiaries. Goodwill and other intangible assets that have indefinite useful
lives are not subject to amortization while intangible assets with finite lives
are amortized. Goodwill is periodically assessed for impairment, at least
annually. Intangible assets with finite lives are amortized on either an
accelerated or straight-line basis depending on the character of the acquired
asset. Intangible assets with finite lives are reviewed for impairment when
events or future assessments of profitability indicate that the carrying value
may not be recoverable.
The carrying value of the Bank's goodwill as of March 31, 2004 was $89.3
million. No impairment was recorded during the quarter ended March 31, 2004.
The Bank did not have any intangible assets not subject to amortization as
of March 31, 2004.
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HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 2004, the gross carrying amount and accumulated
amortization of the Bank's amortizable intangible assets are included in the
following table.
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-------------- ------------ ------------
(IN THOUSANDS)
Branch network........................................ $145,000 $(74,917) $70,083
Other................................................. 5,724 (1,748) 3,976
-------- -------- -------
Total finite life intangibles....................... $150,724 $(76,665) $74,059
======== ======== =======
Total amortization expense for the Bank's intangible assets was $2.6
million for the quarter ended March 31, 2004.
Estimated intangible asset amortization expense for the years ending
December 31, 2004, 2005, 2006, 2007 and 2008 is $10.4 million per year.
FIRST QUARTER 2004 COMPARED WITH FIRST QUARTER 2003
SUMMARY
The Bank had first quarter 2004 net income of $34.8 million, an increase of
$1.4 million or 4 percent from first quarter 2003.
Cash ROE was 10.13 percent in the current quarter and 10.38 percent in
first quarter 2003. Excluding unrealized gains and losses on the securities
portfolio recorded directly to equity, cash ROE was 10.34 percent for the
current year's first quarter, compared to 10.71 percent a year ago.
First quarter net interest income on a fully taxable equivalent basis was
$108.0 million, down $5.6 million or 5 percent from $113.6 million in 2003's
first quarter. Average earning assets increased 9 percent to $17.23 billion from
$15.85 billion in 2003. Average securities available-for-sale increased $813
million. Net interest margin decreased to 2.52 percent from 2.90 percent in the
same quarter last year.
The first quarter 2004 provision for loan losses of $17.3 million was down
slightly from $17.6 million in the first quarter of 2003. Net charge-offs were
$9.3 million compared to $16.3 million in the prior year's quarter. The decrease
is attributable to lower charge-offs and greater recoveries in the commercial
loan portfolio.
First quarter 2004 noninterest income of $132.1 million increased $10.8
million from the same quarter last year. Most of the increase was the result of
an $8.8 million increase in net gains from securities sales compared to a year
ago quarter. Trust revenue and foreign exchange income increased from first
quarter 2003. The Bank also experienced a $7.1 million gain on the sale of
assets received in an earlier troubled debt restructuring and a gain on the
termination of a swap.
First quarter 2004 noninterest expenses of $171.7 million increased $3.5
million or 2 percent from the year-ago quarter.
Nonperforming assets at March 31, 2004 were $159 million or 1.56 percent of
total loans, compared to $172 million or 1.79 percent at December 31, 2003 and
$175 million or 1.79 percent a year ago. At March 31, 2004, the allowance for
possible loan losses was $243 million, equal to 2.38 percent of loans
outstanding, compared to $208 million or 2.13 percent at the end of first
quarter 2003. As a result, the ratio of the allowance for possible loan losses
to nonperforming assets was 152 percent at March 31, 2004 compared to 119
percent at March 31, 2003.
At March 31, 2004, Tier 1 capital of the Bank amounted to $1.68 billion, up
from $1.59 billion one year earlier. The regulatory leverage capital ratio was
8.51 percent for the first quarter of 2004 compared to 8.70 percent in the same
quarter of 2003. The Bank's capital ratio exceeds the prescribed regulatory
minimum for banks. The Bank's March 31, 2004 Tier 1 and total risk-based capital
ratios were 9.86 percent and 11.81 percent compared to respective ratios of 9.92
percent and 12.12 percent at March 31, 2003.
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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 beginning on page 6.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2004, Paul R. Skubic, the Chairman of the Board, Chief
Executive Officer and President of the Company, and Janine Mulhall, the Chief
Financial Officer of the Company, evaluated the effectiveness of the disclosure
controls and procedures of the Company and concluded that these disclosure
controls and procedures are effective to ensure that material information
required to be included in this Report has been made known to them in a timely
fashion. There was no change in the Company's internal controls over financial
reporting identified in connection with such evaluations that occurred during
the quarter ended March 31, 2004 that has materially affected or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE BEING OMITTED FROM THIS REPORT BECAUSE SUCH ITEMS ARE
NOT APPLICABLE TO THE REPORTING PERIOD.
ITEM 6. (A) EXHIBITS
31.1 CERTIFICATION OF JANINE MULHALL PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
31.2 CERTIFICATION OF PAUL R. SKUBIC PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(b) REPORTS ON FORM 8-K:
FORM 8-K WAS FILED ON JANUARY 30, 2004, REPORTING ITEM 4, "CHANGES
IN REGISTRANT'S CERTIFYING ACCOUNTANT."
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 13th day of May 2004.
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
Chairman of the Board and President
/s/ JANINE MULHALL
--------------------------------------
Janine Mulhall
Chief Financial Officer
17