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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, 2005
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, 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 this 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
12, 2005 was 1,000. No common equity is held by nonaffiliates.
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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 Consolidated 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.................................................... 17
Signatures................................................................... 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARRIS PREFERRED CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31 MARCH 31
2005 2004 2004
----------- ----------- -----------
(UNAUDITED) (AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash on deposit with Harris Trust and Savings Bank......... $ 444 $ 407 $ 562
Securities purchased from Harris Trust and Savings Bank
under agreement to resell................................ 11,000 10,500 15,000
Notes receivable from Harris Trust and Savings Bank........ 11,036 12,129 15,184
Securities available-for-sale:
Mortgage-backed....................................... 440,613 419,315 212,427
U.S. Treasury......................................... 24,990 44,993 249,434
Securing mortgage collections due from Harris Trust and
Savings Bank............................................. 106 78 603
Other assets............................................... 1,723 1,600 962
-------- -------- --------
TOTAL ASSETS........................................ $489,912 $489,022 $494,172
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Broker payable -- securities purchased..................... $ 7,331 $ -- $ --
Accrued expenses........................................... 103 134 97
-------- -------- --------
TOTAL LIABILITIES........................................ 7,434 134 97
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 (less than) distributions............ (550) (582) 265
Accumulated other comprehensive income (loss) -- net
unrealized gains/(losses) on available-for-sale
securities............................................... (7,706) (1,264) 3,076
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY.......................... 482,478 488,888 494,075
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $489,912 $489,022 $494,172
======== ======== ========
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
----------------------
2005 2004
--------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME:
Securities purchased from Harris Trust and Savings Bank
under agreement to resell.............................. $ 200 $ 471
Notes receivable from Harris Trust and Savings Bank....... 184 258
Securities available-for-sale:
Mortgage-backed........................................ 4,566 2,630
U.S. Treasury.......................................... 19 24
------- --------
Total interest income................................ 4,969 3,383
NON-INTEREST INCOME:
(Loss) gain on sale of securities......................... (194) 398
------- --------
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and Savings
Bank................................................... 8 12
Advisory fees paid to Harris Trust and Savings Bank....... 24 29
General and administrative................................ 102 96
------- --------
Total operating expenses............................. 134 137
------- --------
Net income.................................................. 4,641 3,644
Preferred dividends......................................... 4,609 4,609
------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER........... $ 32 $ (965)
======= ========
Basic and diluted earnings (loss) per common share.......... $ 32.00 $(965.00)
======= ========
Net income.................................................. $ 4,641 $ 3,644
Other comprehensive income (loss) -- net unrealized
gains/(losses) on available-for-sale securities........... (6,442) 806
------- --------
Comprehensive income (loss)................................. $(1,801) $ 4,450
======= ========
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
-----------------------
2005 2004
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Balance at January 1........................................ $488,888 $494,234
Net income................................................ 4,641 3,644
Other comprehensive income (loss)......................... (6,442) 806
Dividends (preferred stock $0.4609 per share)............. (4,609) (4,609)
-------- --------
Balance at March 31......................................... $482,478 $494,075
======== ========
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
----------------------
2005 2004
--------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................ $ 4,641 $ 3,644
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss (gain) on sale of securities...................... 194 (398)
Net (increase) decrease in other assets................ (123) 117
Net (decrease) increase in accrued expenses............ (11) 13
-------- ---------
Net cash provided by operating activities.............. 4,701 3,376
-------- ---------
INVESTING ACTIVITIES:
Net decrease in securities purchased from Harris Trust and
Savings Bank under agreement to resell................. (500) (3,500)
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 1,093 1,363
Increase in securing mortgage collections due from Harris
Trust and Savings Bank................................. (28) (189)
Purchases of securities available-for-sale................ (65,953) (250,000)
Proceeds from sales of securities available-for-sale...... -- 10,989
Proceeds from maturities of securities
available-for-sale..................................... 65,333 242,206
-------- ---------
Net cash (used) provided by investing activities....... (55) 869
-------- ---------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (4,609) (4,609)
-------- ---------
Net increase (decrease) in cash on deposit with Harris
Trust and Savings Bank................................ 37 (364)
Cash on deposit with Harris Trust and Savings Bank at
beginning of period.................................... 407 926
-------- ---------
Cash on deposit with Harris Trust and Savings Bank at end
of period.............................................. $ 444 $ 562
======== =========
NON CASH TRANSACTION
Unsettled security purchase............................... $ 7,331 $ --
======== =========
The accompanying notes are an integral part of these financial statements.
5
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Harris Preferred Capital Corporation (the "Company") is a Maryland
corporation whose principal business objective is to acquire, hold, finance and
manage qualifying real estate investment trust ("REIT") assets (the "Mortgage
Assets"), consisting of a limited recourse note or notes (the "Notes") issued by
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., owns
100% of the Company's common stock. The Bank owns all common stock outstanding
issued by Harris Capital Holdings, Inc.
The accompanying consolidated financial statements have been prepared by
management from the books and records of the Company. These statements reflect
all adjustments and disclosures which are, in the opinion of management,
necessary for a fair presentation 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 2004 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 2005 COMPARED WITH FIRST QUARTER 2004
The Company's net income for the first quarter of 2005 was $4.6 million.
This represented a $1 million or 27% increase from first quarter 2004 earnings
of $3.6 million. Earnings increased primarily because of increased interest
income on earning assets.
6
HARRIS PREFERRED CAPITAL CORPORATION
First quarter 2005 interest income on the Notes totaled $184 thousand and
yielded 6.4% on $11.5 million of average principal outstanding for the quarter
compared to $258 thousand and a 6.4% yield on $16.1 million average principal
outstanding for first quarter 2004. 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 2005 and 2004 was $14 million and $20 million,
respectively. Interest income on securities available-for-sale for the current
quarter was $4.6 million resulting in a yield of 4.2% on an average balance of
$436 million, compared to $2.7 million with a yield of 4.4% on an average
balance of $243 million for the same period a year ago. The increase in interest
income is primarily attributable to the increase in the investment portfolio of
mortgage-backed securities.
There were no Company borrowings during first quarter 2005 or 2004.
First quarter 2005 operating expenses totaled $134 thousand, a decrease of
$3 thousand or 2% from the first quarter of 2004. Loan servicing expenses
totaled $8 thousand, a decrease of $4 thousand 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
2005 were $24 thousand compared to $29 thousand a year earlier. General and
administrative expenses totaled $102 thousand, an increase of $6 thousand over
the same period in 2004 as a result of higher costs for processing,
recordkeeping and administration.
At March 31, 2005 and 2004, there were no Securing Mortgage Loans on
nonaccrual status.
On March 30, 2005, the Company paid a cash dividend of $0.46094 per share
on outstanding preferred shares to the stockholders of record on March 15, 2005
as declared on March 2, 2005. On March 31, 2004, the Company paid a cash
dividend of $0.46094 per share on outstanding preferred shares to the
stockholders of record on March 15, 2004, as declared on March 2, 2004.
At March 31, 2005, net unrealized losses on available-for-sale securities
were $7.7 million compared to $3.1 million of unrealized gains at March 31, 2004
and $1.3 million of unrealized losses at December 31, 2004. The unrealized loss
position at March 31, 2005 was attributable to changes in interest rates and not
to lowered credit quality of individual securities.
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.
7
HARRIS PREFERRED CAPITAL CORPORATION
As presented in the accompanying Consolidated Statements of Cash Flows, the
primary sources of funds in addition to $4.7 million provided from operations
during the three months ended March 31, 2005 were $1.1 million provided by
principal repayments on the Notes and $65.3 million from the maturities of
securities available-for-sale. In the prior period ended March 31, 2004, the
primary sources of funds other than $3.4 million from operations 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. The primary uses of
funds for the three months ended March 31, 2005 were $65.9 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, 2004, the primary uses of
funds were $250.0 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, 2004.
OTHER MATTERS
As of March 31, 2005, the Company believes that it is in full compliance
with the REIT tax rules, and expects to qualify as a non-taxable 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.
On June 4, 2004, Harris Bankcorp, Inc., the Bank's parent company,
announced its plan to consolidate twenty-six of its separate bank subsidiaries
in Illinois (including the Bank) into one national bank, Harris N.A. This
transaction is expected to be completed in May 2005. After that time, each
outstanding share of the Company's Series A Preferred Stock will be
automatically exchangeable for one newly issued preferred share of Harris N.A.
under the same exchange conditions currently in existence for preferred shares
of the Bank, except that the primary regulator for purposes of the exchange
conditions will be the Office of the Comptroller of the Currency, rather than
the Board of Governors of the Federal Reserve Bank. References herein to the
Bank for those times subsequent to the charter consolidation are intended to
refer to Harris N.A.
FINANCIAL STATEMENTS OF HARRIS TRUST AND SAVINGS BANK
The following unaudited financial information for the Bank is included
because the Company's preferred shares are automatically exchangeable for a new
series of preferred stock of the Bank upon the occurrence of certain events.
8
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
MARCH 31 DECEMBER 31 MARCH 31
2005 2004 2004
----------- ----------- -----------
(UNAUDITED) (AUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
Cash and demand balances due from banks..................... $ 742,127 $ 887,827 $ 904,660
Money market assets:
Interest-bearing deposits at banks...................... 735,022 662,366 515,190
Federal funds sold...................................... 544,352 541,300 524,918
Securities available-for-sale (including $3.22 billion,
$3.36 billion, and $3.09 billion of securities pledged as
collateral for repurchase agreements at March 31, 2005,
December 31, 2004 and March 31, 2004, respectively)....... 5,957,831 5,784,417 7,133,651
Trading account assets...................................... 122,605 90,130 49,411
Loans....................................................... 12,309,038 11,484,948 10,317,888
Allowance for loan losses................................... (212,261) (219,740) (244,032)
----------- ----------- -----------
Net loans............................................... 12,096,777 11,265,208 10,073,856
Premises and equipment...................................... 258,994 309,415 303,917
Bank-owned insurance........................................ 1,082,906 1,072,660 1,044,956
Loans held for sale......................................... 18,437 43,423 119,126
Goodwill and other intangible assets........................ 153,001 155,596 163,383
Other assets................................................ 497,305 412,305 604,615
----------- ----------- -----------
TOTAL ASSETS.......................................... $22,209,357 $21,224,647 $21,437,683
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing......... $ 4,253,312 $4,019,416 $ 4,316,432
-- interest-bearing............... 8,839,330 8,149,640 8,669,635
Deposits in foreign offices -- noninterest-bearing.......... -- -- 4,413
-- interest-bearing................. 1,278,247 1,677,428 1,055,539
----------- ----------- -----------
Total deposits........................................ 14,370,889 13,846,484 14,046,019
Federal funds purchased and securities sold under agreement
to repurchase............................................. 3,829,890 4,566,879 4,321,135
Short-term borrowings....................................... 636,343 88,070 101,617
Short-term senior notes..................................... 750,000 200,000 200,000
Accrued interest, taxes and other expenses.................. 165,742 165,618 160,081
Other liabilities........................................... 351,858 264,134 500,699
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............................. 200,000 200,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES..................................... 20,559,722 19,586,185 19,809,551
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); 10,100,000, 10,100,000 and
10,000,000 shares authorized, issued and outstanding at
March 31, 2005, December 31,2004 and March 31, 2004,
respectively.............................................. 101,000 101,000 100,000
Surplus..................................................... 649,929 647,365 642,534
Retained earnings........................................... 958,870 941,767 888,357
Accumulated other comprehensive loss........................ (60,164) (51,670) (2,759)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................ 1,649,635 1,638,462 1,628,132
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............ $22,209,357 $21,224,647 $21,437,683
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
9
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER ENDED
MARCH 31
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
INTEREST INCOME
Loans, including fees....................................... $153,683 $121,170
Money market assets:
Deposits at banks......................................... 2,204 877
Federal funds sold and securities purchased under
agreement to resell..................................... 4,515 1,448
Trading accounts............................................ 1,128 372
Securities available-for-sale:
U.S. Treasury and federal agency.......................... 26,834 33,436
State and municipal....................................... 368 279
Other..................................................... 3,889 686
-------- --------
Total interest income..................................... 192,621 158,268
-------- --------
INTEREST EXPENSE
Deposits.................................................... 55,194 34,875
Short-term borrowings....................................... 26,864 9,928
Senior notes................................................ 1,741 126
Minority interest-dividends on preferred stock of
subsidiary................................................ 4,609 4,609
Long-term notes............................................. 1,477 2,578
-------- --------
Total interest expense.................................... 89,885 52,116
-------- --------
NET INTEREST INCOME......................................... 102,736 106,152
Provision for loan losses................................... -- 17,325
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 102,736 88,827
-------- --------
NONINTEREST INCOME
Trust and investment management fees........................ 23,397 23,052
Money market and bond trading............................... 2,590 2,113
Foreign exchange............................................ 1,215 1,725
Service charges and fees.................................... 23,313 25,103
Net securities (losses) gains............................... (236) 11,495
Bank-owned insurance........................................ 10,246 10,388
Gains from loan restructuring............................... -- 7,131
Letter of credit fees....................................... 5,486 6,150
Other....................................................... 42,929 49,453
-------- --------
Total noninterest income.................................. 108,940 136,610
-------- --------
NONINTEREST EXPENSES
Salaries and other compensation............................. 72,801 74,299
Pension, profit sharing and other employee benefits......... 20,569 20,694
Net occupancy............................................... 12,112 11,929
Equipment................................................... 12,647 13,125
Marketing................................................... 8,034 8,292
Communication and delivery.................................. 5,648 5,615
Expert services............................................. 6,041 5,601
Contract programming........................................ 7,468 8,291
Other....................................................... 30,263 25,863
-------- --------
175,583 173,709
Amortization of intangibles................................. 2,596 2,596
-------- --------
Total noninterest expenses................................ 178,179 176,305
-------- --------
Income before income taxes.................................. 33,497 49,132
Applicable income taxes..................................... 8,349 14,057
-------- --------
NET INCOME................................................ $ 25,148 $ 35,075
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
10
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED
MARCH 31
-----------------
2005 2004
------- -------
(IN THOUSANDS)
Net income.................................................. $25,148 $35,075
Other comprehensive loss:
Cash flow hedges:
Net unrealized loss on derivative instruments, net of
tax benefit of $5,332 in 2005 and $80 in 2004......... (9,080) (137)
Minimum pension liability adjustment net of tax benefit of
zero in 2005 and $78 in 2004........................... -- (122)
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains arising during the period, net
of tax expense of $224 in 2005 and $2,504 in 2004..... 442 2,843
Less reclassification adjustment for realized losses
(gains) included in net income, net of tax (benefit)
expense of ($92) in 2005 and $4,474 in 2004........... 144 (7,021)
------- -------
Other comprehensive loss.................................. (8,494) (4,437)
------- -------
Comprehensive income........................................ $16,654 $30,638
======= =======
The accompanying notes to consolidated 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)
2005 2004
---------- ----------
(IN THOUSANDS)
BALANCE AT JANUARY 1........................................ $1,638,462 $1,596,629
Net income................................................ 25,148 35,075
Contributions to capital.................................. 2,564 2,989
Contribution of parent's banking assets................... -- 14,984
Dividends -- preferred stock.............................. (45) (108)
Dividends -- common stock................................. (8,000) (17,000)
Other comprehensive loss.................................. (8,494) (4,437)
---------- ----------
BALANCE AT MARCH 31......................................... $1,649,635 $1,628,132
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
12
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED MARCH 31
-----------------------
2005 2004
--------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................ $ 25,148 $ 35,075
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................. -- 17,325
Depreciation and amortization, including intangibles... 14,583 16,862
Deferred tax expense (benefit)......................... 2,195 (2,416)
Net loss (gain) on sales of securities................. 236 (11,281)
Increase in bank-owned insurance....................... (10,246) (10,126)
Trading account net cash (purchases) sales............. (33,157) 31,543
Net increase in interest receivable.................... (8,250) (2,195)
Net increase (decrease) in interest payable............ 3,544 (4,387)
Net decrease in loans held for sale.................... 24,986 49,778
Other, net............................................. (2,451) (25,981)
--------- -----------
Net cash provided by operating activities.............. 16,588 94,197
--------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits at banks........ (72,656) (90,731)
Net increase in Federal funds sold and securities
purchased under agreement to resell.................... (3,052) (109,371)
Proceeds from sales of securities available-for-sale...... 14,534 799,667
Proceeds from maturities of securities
available-for-sale..................................... 752,449 927,286
Purchases of securities available-for-sale................ (946,057) (1,990,549)
Net increase in loans..................................... (834,760) (625,746)
Purchases of premises and equipment....................... (15,094) (10,898)
Other, net................................................ 107,859 409
--------- -----------
Net cash used by investing activities.................. (996,777) (1,099,933)
--------- -----------
FINANCING ACTIVITIES:
Cash received in contribution of parent's banking
assets................................................. -- 3,379
Net increase in deposits.................................. 481,205 1,140,897
Net decrease in Federal funds purchased and securities
sold under agreement to repurchase..................... (736,989) (331,271)
Net increase in other short-term borrowings............... 548,273 90,776
Proceeds from issuance of senior notes.................... 750,000 200,000
Repayment of senior notes................................. (200,000) --
Cash dividends paid on common stock....................... (8,000) (17,000)
--------- -----------
Net cash provided by financing activities.............. 834,489 1,086,781
--------- -----------
NET (DECREASE) INCREASE IN CASH AND DEMAND BALANCES DUE
FROM BANKS............................................ (145,700) 81,045
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 887,827 823,615
--------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT MARCH 31.... $ 742,127 $ 904,660
========= ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
13
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 $86.3 million
and $56.4 million in 2005 and 2004, respectively. Cash income tax payments over
the same periods totaled $11.2 million and $0.5 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 was $89.3 million as of March 31,
2005 and 2004. No impairment was recorded during the quarter ended March 31,
2005.
Besides goodwill, the Bank did not have any intangible assets not subject
to amortization as of March 31, 2005 and 2004.
14
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 2005, the gross carrying amount and accumulated
amortization of the Bank's amortizable intangible assets are included in the
following table.
MARCH 31,
-------------------
MARCH 31, 2005 2005 2004
----------------------- -------- --------
GROSS NET NET
CARRYING ACCUMULATED CARRYING CARRYING
AMOUNT AMORTIZATION VALUE VALUE
-------- ------------ -------- --------
(IN THOUSANDS)
Branch network..................................... $145,000 $(84,584) $60,416 $70,083
Other.............................................. 5,724 (2,463) 3,261 3,976
-------- -------- ------- -------
Total finite life intangibles.................... $150,724 $(87,047) $63,677 $74,059
======== ======== ======= =======
Total amortization expense for the Bank's intangible assets was $2.6
million for the quarters ended March 31, 2005 and 2004.
Estimated intangible asset amortization expense is $10.4 million for each
of the years ending December 31, 2005, 2006, 2007 and 2008 and $9.9 million for
the year ending December 31, 2009.
5. BUSINESS COMBINATIONS
On June 4, 2004, Harris Bankcorp, Inc. announced its plan to consolidate
twenty-six of its existing bank charters, including the Bank, into one national
bank charter, Harris N.A. This transaction is expected to be completed in May
2005. The combination will be recorded at historical carrying value and, where
applicable, prior years' financial statements will be restated. The following
information is presented to illustrate the relative magnitude of the
combination.
ACTUAL
MARCH 31, 2005 PROFORMA
BALANCES FOR COMBINED BALANCES
HARRIS TRUST OF
AND HARRIS N.A. AT
SAVINGS BANK MARCH 31, 2005
-------------- -----------------
(IN MILLIONS)
Assets...................................................... $24,885 $35,351
Deposits.................................................... 12,914 22,134
Equity...................................................... 1,655 2,639
6. SALE OF BUILDING
On March 1, 2005, the Bank sold to a third party the land and building
located at 111 W. Monroe Street in Chicago. Upon sale, the Bank entered into a
leaseback agreement for approximately 50 percent of the building space with an
average lease term of 16 years. The leaseback agreement meets the criteria to be
recorded as an operating lease. The sale resulted in a gain of $55.8 million,
all of which will be deferred and amortized over the term of the leaseback.
15
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW
FIRST QUARTER 2005 COMPARED WITH FIRST QUARTER 2004
SUMMARY
The Bank had first quarter 2005 net income of $25.1 million, a decrease of
$9.9 million or 28 percent from first quarter 2004.
Cash ROE was 7.26 percent in the current quarter and 10.17 percent in first
quarter 2004. Excluding unrealized gains and losses on the securities portfolio
recorded directly to equity, cash ROE was 7.15 percent for the current year's
first quarter, compared to 10.38 percent a year ago.
First quarter net interest income on a fully taxable equivalent basis was
$104.8 million, down $3.8 million or 3 percent from $108.6 million in 2004's
first quarter. Average earning assets increased 10 percent to $18.97 billion
from $17.29 billion in 2004. Average loans increased $1.75 billion. Net interest
margin decreased to 2.23 percent from 2.52 percent in the same quarter last year
reflecting the impact of higher rates on deposits, the issuance of higher-cost
incremental supporting funds and little change in the yield from the securities
portfolio. These were somewhat offset by higher yields in the loan portfolio and
a higher loan base.
In the first quarter 2005, the Bank recorded no provision for loan losses.
The first quarter 2004 provision for loan losses was $17.3 million. Net
charge-offs were $7.5 million compared to $9.3 million in the prior year's
quarter. The decrease in the provision was a result of lower levels of
non-performing loans and an improvement in the credit profile of the loan
portfolio.
First quarter 2005 noninterest income of $108.9 million decreased $27.7
million from the same quarter last year. Net gains from sales of securities
decreased $11.7 million. In first quarter 2004, the Bank experienced a $7.1
million gain on the sale of assets received in an earlier troubled debt
restructuring and a $7.7 million gain on the termination of a swap.
First quarter 2005 noninterest expenses of $178.2 million increased $1.9
million or 1 percent from the year-ago quarter. The increase included higher
outsourced administrative and technology expenses. Salary expense decreased from
the prior year's first quarter.
Nonperforming assets at March 31, 2005 were $134 million or 1.09 percent of
total loans, compared to $125 million or 1.09 percent at December 31, 2004 and
$159 million or 1.56 percent a year ago. At March 31, 2005, the allowance for
loan losses was $212 million, equal to 1.72 percent of loans outstanding,
compared to $244 million or 2.45 percent at the end of first quarter 2004. As a
result, the ratio of the allowance for loan losses to nonperforming assets was
158 percent at March 31, 2005 compared to 153 percent at March 31, 2004.
At March 31, 2005, Tier 1 capital of the Bank amounted to $1.78 billion, up
from $1.68 billion one year earlier. The regulatory leverage capital ratio was
8.20 percent for the first quarter of 2005 compared to 8.51 percent in the same
quarter of 2004. The Bank's capital ratio exceeds the prescribed regulatory
minimum for banks. The Bank's March 31, 2005 Tier 1 and total risk-based capital
ratios were 9.03 percent and 11.12 percent compared to respective ratios of 9.86
percent and 11.81 percent at March 31, 2004.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity Risk Management" and "Market Risk Management" under
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 6.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2005, 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 recorded, processed, summarized
and made known to them in a timely fashion, as appropriate to allow timely
discussion regarding disclosures. 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, 2005 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. 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
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Harris
Preferred Capital Corporation has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 12th day of May
2005.
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
Chairman of the Board and President
/s/ JANINE MULHALL
--------------------------------------
Janine Mulhall
Chief Financial Officer
18
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
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
19