Attached files
| file | filename |
|---|---|
| EX-31.2 - EX-31.2 - HARRIS PREFERRED CAPITAL CORP | c59656exv31w2.htm |
| EX-31.1 - EX-31.1 - HARRIS PREFERRED CAPITAL CORP | c59656exv31w1.htm |
| EX-32.1 - EX-32.1 - HARRIS PREFERRED CAPITAL CORP | c59656exv32w1.htm |
Table of Contents
United States
Securities and Exchange
Commission
Washington, D.C.
20549
Form 10-Q
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended June 30, 2010
Commission file number
1-13805
Harris Preferred Capital
Corporation
(Exact name of registrant as specified in its charter)
|
Maryland
(State or other jurisdiction of incorporation or organization) |
#36-4183096 (I.R.S. Employer Identification No.) |
|
|
111 West Monroe Street, Chicago, Illinois (Address of principal executive offices) |
60603 (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 on |
||
|
Title of each class
|
which registered | |
|
73/8%
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T(232.405
of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit
and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
( as defined in
Rule 12b-2
of the Act).
Yes o No þ
The number of shares of Common Stock, $1.00 par value,
outstanding on August 12, 2010 was 1,180. No common equity
is held by nonaffiliates.
HARRIS
PREFERRED CAPITAL CORPORATION
TABLE OF
CONTENTS
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
|
June 30 |
December 31 |
June 30 |
||||||||||
| 2010 | 2009 | 2009 | ||||||||||
| (unaudited) | (audited) | (unaudited) | ||||||||||
| (in thousands, except share data) | ||||||||||||
|
Assets
|
||||||||||||
|
Cash on deposit with Harris N.A.
|
$ | 829 | $ | 916 | $ | 729 | ||||||
|
Securities purchased from Harris N.A. under agreement to resell
|
12,500 | 22,000 | 10,672 | |||||||||
|
Total cash and cash equivalents
|
$ | 13,329 | $ | 22,916 | $ | 11,401 | ||||||
|
Notes receivable from Harris N.A.
|
3,459 | 3,584 | 3,896 | |||||||||
|
Securities available for sale, at fair value
|
||||||||||||
|
Mortgage-backed
|
515,492 | 515,190 | 566,047 | |||||||||
|
U.S. Treasury Bills
|
59,998 | 39,999 | — | |||||||||
|
Other assets
|
1,808 | 1,885 | 2,094 | |||||||||
|
Total assets
|
$ | 594,086 | $ | 583,574 | $ | 583,438 | ||||||
|
Liabilities and Stockholders’ Equity
|
||||||||||||
|
Accrued expenses
|
$ | 111 | $ | 111 | $ | 869 | ||||||
|
Deferred state tax liabilities
|
1,720 | 973 | 846 | |||||||||
|
Total liabilities
|
$ | 1,831 | $ | 1,084 | $ | 1,715 | ||||||
|
Stockholders’ Equity
|
||||||||||||
|
73/8%
Noncumulative Exchangeable Preferred Stock, Series A
($1 par value); liquidation value of $250,000;
20,000,000 shares authorized; 10,000,000 shares issued
and outstanding
|
$ | 250,000 | $ | 250,000 | $ | 250,000 | ||||||
|
Common stock ($1 par value); 5,000 shares authorized;
1,180 issued and outstanding
|
1 | 1 | 1 | |||||||||
|
Additional paid-in capital
|
320,733 | 320,733 | 320,733 | |||||||||
|
Earnings in excess of (less than) distributions
|
(320 | ) | (601 | ) | 250 | |||||||
|
Accumulated other comprehensive income — net
unrealized gains on
available-for-sale
securities, net of tax
|
21,841 | 12,357 | 10,739 | |||||||||
|
Total stockholders’ equity
|
$ | 592,255 | $ | 582,490 | $ | 581,723 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 594,086 | $ | 583,574 | $ | 583,438 | ||||||
The accompanying notes are an integral part of these
financial statements.
2
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
AND
COMPREHENSIVE INCOME
|
Quarter Ended |
Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in thousands, except share date) | ||||||||||||||||
|
Interest income:
|
||||||||||||||||
|
Securities purchased from Harris N.A. under agreement to resell
|
$ | 27 | $ | 8 | $ | 38 | $ | 17 | ||||||||
|
Notes receivable from Harris N.A.
|
56 | 62 | 113 | 127 | ||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
Mortgage-backed
|
5,126 | 5,612 | 10,407 | 10,994 | ||||||||||||
|
U.S. Treasury Bills
|
2 | 1 | 3 | 1 | ||||||||||||
|
Total interest income
|
$ | 5,211 | $ | 5,683 | $ | 10,561 | $ | 11,139 | ||||||||
|
Operating expenses:
|
||||||||||||||||
|
Loan servicing fees paid to Harris N.A.
|
$ | 3 | $ | 3 | $ | 6 | $ | 6 | ||||||||
|
Advisory fees paid to Harris N.A.
|
39 | 41 | 102 | 97 | ||||||||||||
|
General and administrative
|
77 | 74 | 207 | 194 | ||||||||||||
|
Total operating expenses
|
$ | 119 | $ | 118 | $ | 315 | $ | 297 | ||||||||
|
Income before income taxes
|
$ | 5,092 | $ | 5,565 | $ | 10,246 | $ | 10,842 | ||||||||
|
Applicable state income taxes
|
371 | 406 | 747 | 791 | ||||||||||||
|
Net Income
|
$ | 4,721 | $ | 5,159 | $ | 9,499 | $ | 10,051 | ||||||||
|
Preferred stock dividends
|
4,609 | 4,609 | 9,218 | 9,218 | ||||||||||||
|
Net income available to common stockholder
|
$ | 112 | $ | 550 | $ | 281 | $ | 833 | ||||||||
|
Basic and diluted earnings per common share
|
$ | 94 | $ | 466 | $ | 237 | $ | 746 | ||||||||
|
Net income
|
$ | 4,721 | $ | 5,159 | $ | 9,499 | $ | 10,051 | ||||||||
|
Other comprehensive income:
|
||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||
|
Unrealized holding gains (losses) arising during the period, net
of deferred state taxes
|
6,289 | (2,728 | ) | 9,484 | 907 | |||||||||||
|
Less reclassification adjustment for realized (gains) losses
included in net income
|
— | — | — | — | ||||||||||||
|
Comprehensive income
|
$ | 11,010 | $ | 2,431 | $ | 18,983 | $ | 10,958 | ||||||||
The accompanying notes are an integral part of these
financial statements.
3
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
|
Six Months Ended |
||||||||
| June 30 | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Balance at January 1
|
$ | 582,490 | $ | 500,244 | ||||
|
Net income
|
9,499 | 10,051 | ||||||
|
Other comprehensive income
|
9,484 | 907 | ||||||
|
Capital contribution and issuance of common stock
|
— | 80,000 | ||||||
|
Dividends on common stock
|
— | (261 | ) | |||||
|
Dividends on preferred stock ($0.4609 per share)
|
(9,218 | ) | (9,218 | ) | ||||
|
Balance at June 30
|
$ | 592,255 | $ | 581,723 | ||||
The accompanying notes are an integral part of these
financial statements.
4
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
|
Six Months Ended |
||||||||
| June 30, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Operating Activities:
|
||||||||
|
Net income
|
$ | 9,499 | $ | 10,051 | ||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
|
Net decrease (increase) in other assets
|
75 | (209 | ) | |||||
|
Net increase in accrued expenses
|
— | 756 | ||||||
|
Net cash provided by operating activities
|
$ | 9,574 | $ | 10,598 | ||||
|
Investing Activities:
|
||||||||
|
Repayments of notes receivable from Harris N.A.
|
$ | 125 | $ | 388 | ||||
|
Purchases of securities available for sale
|
(189,499 | ) | (261,617 | ) | ||||
|
Proceeds from maturities/redemptions of securities
available-for-sale
|
179,431 | 184,832 | ||||||
|
Net cash used in investing activities
|
$ | (9,943 | ) | $ | (76,397 | ) | ||
|
Financing Activities:
|
||||||||
|
Cash dividends paid on preferred stock
|
$ | (9,218 | ) | $ | (9,218 | ) | ||
|
Cash dividends paid on common stock
|
— | (261 | ) | |||||
|
Capital contribution and issuance of common stock
|
— | 80,000 | ||||||
|
Net cash (used in) provided by financing activities
|
$ | (9,218 | ) | $ | 70,521 | |||
|
Net (decrease) increase in cash and cash equivalents with Harris
N.A.
|
$ | (9,587 | ) | $ | 4,722 | |||
|
Cash and cash equivalents with Harris N.A. at beginning of period
|
22,916 | 6,679 | ||||||
|
Cash and cash equivalents with Harris N.A. at end of period
|
$ | 13,329 | $ | 11,401 | ||||
The accompanying notes are an integral part of these
financial statements.
5
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
| 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 N.A. (the
“Bank”) secured by real estate mortgage assets (the
“Securing Mortgage Loans”) and other obligations
secured by real property, as well as certain other qualifying
REIT assets, primarily U.S. treasury securities and
securities collateralized with real estate mortgages. The
Company holds its assets through a Maryland real estate
investment trust subsidiary, Harris Preferred Capital Trust.
Harris Capital Holdings, Inc., owns 100% of the Company’s
common stock. The Bank owns all common stock outstanding issued
by Harris Capital Holdings, Inc.
The accompanying consolidated financial statements have been
prepared by management from the books and records of the
Company. These statements reflect all adjustments and
disclosures which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods
presented and should be read in conjunction with the notes to
financial statements included in the Company’s 2009
Form 10-K.
Certain reclassifications were made to conform prior years’
financial statements to the current year’s presentation.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
| 2. | Commitments and Contingencies |
Legal proceedings in which the Company is a defendant may arise
in the normal course of business. There is no pending litigation
against the Company at June 30, 2010.
| 3. | Securities |
The amortized cost and estimated fair value of securities
available for sale were as follows:
| June 30, 2010 | ||||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||||||
|
Residential mortgage-backed
|
$ | 491,931 | $ | 23,561 | $ | — | $ | 515,492 | ||||||||
|
U.S. Treasury Bills
|
59,998 | — | — | 59,998 | ||||||||||||
|
Total Securities
|
$ | 551,929 | $ | 23,561 | $ | — | $ | 575,490 | ||||||||
6
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
| December 31, 2009 | ||||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||||||
|
Residential mortgage-backed
|
$ | 501,861 | $ | 14,214 | $ | 885 | $ | 515,190 | ||||||||
|
U.S. Treasury Bills
|
40,000 | — | 1 | 39,999 | ||||||||||||
|
Total Securities
|
$ | 541,861 | $ | 14,214 | $ | 886 | $ | 555,189 | ||||||||
| June 30, 2009 | ||||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||||||
|
Residential mortgage-backed
|
$ | 554,463 | $ | 13,207 | $ | 1,623 | $ | 566,047 | ||||||||
The Company classifies all securities as available for sale. The
Company has no intent to sell specific securities and the
Company has the ability to hold all securities to maturity.
Available-for-sale
securities are reported at fair value with unrealized gains and
losses included as a separate component of stockholders’
equity. At June 30, 2010, net unrealized gains on
available-for-sale
securities were $23.6 million compared to
$13.3 million of net unrealized gains on December 31,
2009 and $11.6 million of net unrealized gains at
June 30, 2009.
In making a determination of temporary vs.
other-than-temporary
impairment of an investment, a major consideration of management
is whether the Company will be able to collect all amounts due
according to the contractual terms of the investment. Such a
determination involves estimation of the outcome of future
events as well as knowledge and experience about past and
current events. Factors considered include the following:
whether the fair value is significantly below cost and the
decline is attributable to specific adverse conditions in an
industry or geographic area; the period of time the decline in
fair value has existed; if an outside rating agency has
downgraded the investment; if dividends have been reduced or
eliminated; if scheduled interest payments have not been made
and finally, whether the financial condition of the issuer has
deteriorated. In addition, it may be necessary for the Company
to demonstrate its ability and intent to hold a debt security to
maturity.
The following tables summarize residential mortgage-backed and
U.S. Treasuries securities with unrealized losses, the
amount of the unrealized loss and the related fair value of the
securities with unrealized losses. The unrealized losses have
been further segregated by mortgage-backed and
U.S. Treasury securities that have been in a continuous
unrealized loss position for less than 12 months and those
that have been in a continuous unrealized loss position. As of
June 30, 2010 and 2009, there were no securities that were
in a loss position for 12 or more months. Management believes
that all of the unrealized losses, caused by interest rate
increases on investments in mortgage-backed securities and
U.S. Treasuries, are temporary. The contractual cash flows
of these securities are guaranteed directly by a
U.S. government-sponsored enterprise. It is expected that
the securities would not be settled at a price less than the
amortized cost of the investment. Because the decline in fair
value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and
intent to hold these investments and does not anticipate being
required to sell these investments until a market price recovery
or maturity, these investments are not considered
other-than-temporarily
impaired. There were no reclassification adjustments for
security sales
7
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
during the periods ended June 30, 2010 and June 30,
2009. There were no unrealized losses on securities as of
June 30, 2010.
| December 31, 2009 | ||||||||||||||||||||||||
| Length of Continuous Unrealized Loss Position | ||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
|
Unrealized |
Unrealized |
Unrealized |
||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Residential mortgage-backed
|
$ | 104,988 | $ | 885 | $ | — | $ | — | $ | 104,988 | $ | 885 | ||||||||||||
|
U.S. Treasury Bills
|
39,999 | 1 | — | — | 39,999 | 1 | ||||||||||||||||||
| $ | 144,987 | $ | 886 | $ | — | $ | — | $ | 144,987 | $ | 886 | |||||||||||||
| June 30, 2009 | ||||||||||||||||||||||||
| Length of Continuous Unrealized Loss Position | ||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
|
Unrealized |
Unrealized |
Unrealized |
||||||||||||||||||||||
| Fair Value | Loss | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Residential mortgage-backed
|
$ | 146,066 | $ | 1,623 | $ | — | $ | — | $ | 146,066 | $ | 1,623 | ||||||||||||
The amortized cost and estimated fair value of total
available-for-sale
securities as of June 30, 2010, by contractual maturity,
are shown below. Expected maturities can differ from contractual
maturities since borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
| June 30, 2010 | ||||||||
|
Amortized |
Fair |
|||||||
| Cost | Value | |||||||
| (in thousands) | ||||||||
|
Maturities:
|
||||||||
|
Within 1 year
|
$ | 75,827 | $ | 76,014 | ||||
|
1 to 5 years
|
17,563 | 17,968 | ||||||
|
5 to 10 years
|
140,906 | 150,518 | ||||||
|
Over 10 years
|
317,633 | 330,990 | ||||||
|
Total
|
$ | 551,929 | $ | 575,490 | ||||
| 4. | Fair Value Measurements |
The Company uses a fair value hierarchy to categorize the inputs
used in valuation techniques to measure fair value. Level 1
relies on the use of quoted market prices. Level 2 relies
on valuation models using observable market information as
inputs and Level 3 relies on internal models without
observable market information. The Company has investments in
U.S. Treasuries that are classified in Level 1 of the
fair value hierarchy. The Company has investments in
U.S. government sponsored mortgage-backed securities that
are classified in Level 2 of the fair value hierarchy.
External vendors typically use pricing models to determine fair
values for the securities. Standard market inputs include
benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, two-sided markets and additional market reference data.
8
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
Assets that are measured at fair value on a recurring basis at
June 30, 2010, December 31, 2009 and June 30,
2009 are presented in the following table:
|
Fair Value |
Fair Value Measurements Using | |||||||||||||||
| June 30, 2010 | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||
|
Residential mortgage-backed
|
$ | 515,492 | $ | — | $ | 515,492 | $ | — | ||||||||
|
U.S. Treasury
|
59,998 | 59,998 | — | — | ||||||||||||
| $ | 575,490 | $ | 59,998 | $ | 515,492 | $ | — | |||||||||
|
Fair Value |
Fair Value Measurements Using | |||||||||||||||
| December 31, 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||
|
Residential mortgage-backed
|
$ | 515,190 | $ | — | $ | 515,190 | $ | — | ||||||||
|
U.S. Treasury
|
39,999 | 39,999 | — | — | ||||||||||||
| $ | 555,189 | $ | 39,999 | $ | 515,190 | $ | — | |||||||||
|
Fair Value |
Fair Value Measurements Using | |||||||||||||||
| June 30, 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||
|
Residential mortgage-backed
|
$ | 566,047 | $ | — | $ | 566,047 | $ | — | ||||||||
| 5. | Fair Value of Financial Instruments |
Generally accepted accounting principles require the disclosure
of estimated fair values for both on and off-balance-sheet
financial instruments. The Company’s fair values are based
on quoted market prices when available. For financial
instruments not actively traded, fair values have been estimated
using various valuation methods and assumptions. Although
management used its best judgment in estimating these values,
there are inherent limitations in any estimation methodology. In
addition, accounting pronouncements require that fair values be
estimated on an
item-by-item
basis, thereby ignoring the impact a large sale would have on a
thin market and intangible values imbedded in established lines
of business. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amounts the Company
could realize in an actual transaction. The fair value
estimation methodologies employed by the Company were as follows:
The carrying amounts for cash and demand balances due from banks
along with short-term money market assets (including securities
purchased under agreement to resell) and accrued interest
receivable reported on the Company’s Consolidated Balance
Sheets were considered to be the best estimates of fair value
for these financial instruments due to their short term nature.
The fair value of notes receivable from Harris N.A. was
estimated using a discounted cash flow calculation utilizing
current market rates offered by Harris N.A. as the discount
rates.
The fair value of securities available for sale and the methods
used to determine fair value are provided in Notes 3 and 4
to the Consolidated Financial Statements.
9
Table of Contents
HARRIS
PREFERRED CAPITAL CORPORATION
The estimated fair values of the Company’s financial
instruments at June 30, 2010 are presented in the following
table.
| June 30, 2010 | ||||||||
|
Carrying |
Fair |
|||||||
| Value | Value | |||||||
| (in thousands) | ||||||||
|
Assets
|
||||||||
|
Cash on deposit with Harris N.A.
|
$ | 829 | $ | 829 | ||||
|
Securities purchased from Harris N.A. under agreement to resell
|
12,500 | 12,500 | ||||||
|
Notes receivable from Harris N.A.
|
3,459 | 5,317 | ||||||
|
Securities available for sale
|
575,490 | 575,490 | ||||||
|
Accrued interest receivable
|
1,808 | 1,808 | ||||||
|
Total on-balance-sheet financial assets
|
$ | 594,086 | $ | 595,944 | ||||
| 6. | Operating Segment |
The Company’s operations consist of monitoring and
evaluating the investments in mortgage assets. Accordingly, the
Company operates in only one segment. The Company has no
external customers and transacts most of its business with the
Bank.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking
Information
The statements contained in this Report on
Form 10-Q
that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of
1934, as amended, including statements regarding the
Company’s expectation, intentions, beliefs or strategies
regarding the future. Forward-looking statements include the
Company’s statements regarding tax treatment as a real
estate investment trust, liquidity, 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 Item 1A. “Risk Factors” in the Company’s
2009
Form 10-K
and in the “Risk Factors” section included in the
Company’s Registration Statement on
Form S-11
(File
No. 333-40257),
with respect to the Preferred Shares declared effective by the
Securities and Exchange Commission on February 5, 1998. The
Company assumes no obligation to update any such forward-looking
statement.
Results
of Operations
Second
Quarter 2010 Compared with Second Quarter 2009
The Company’s net income for the second quarter of 2010 was
$4.7 million, compared to $5.2 million from the second
quarter 2009.
Interest income on securities purchased under agreement to
resell for the second quarter of 2010 was $27 thousand, on an
average balance of $72 million, with an annualized yield of
0.15%. During the same period in 2009, the interest income on
securities purchased under agreement to resell was $8 thousand,
on an average balance of $31 million, with an annualized
yield of 0.10%. The Federal Funds rate at June 30, 2010 was
0.18%. Second quarter 2010 interest income on the Notes totaled
$56 thousand and yielded 6.4% on $3.5 million of average
principal
10
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HARRIS
PREFERRED CAPITAL CORPORATION
outstanding for the quarter compared to $62 thousand and a 6.4%
yield on $3.9 million average principal outstanding for
second quarter 2009. The decrease in interest income was
attributable to a reduction in the Notes balance resulting from
customer payoffs in the Securing Mortgage Loans. At
June 30, 2010 and 2009, there were no Securing Mortgage
Loans on nonaccrual status. Interest income on securities
available for sale for the current quarter was $5.1 million
resulting in a yield of 4.17% on an average balance of
$492 million, compared to $5.6 million with a yield of
4.16% on an average balance of $539 million for the same
period a year ago. Virtually all income in the current quarter
was attributable to the residential mortgage-backed security
portfolio.
There were no Company borrowings during second quarter 2010 or
2009.
Second quarter 2010 operating expenses totaled $119 thousand, an
increase of 1% from the second quarter of 2009. General and
administrative expenses totaled $77 thousand, an increase of $3
thousand over the same period in 2009, primarily due to
increases in processing costs. Advisory fees for the second
quarter 2010 were $39 thousand compared to $41 thousand a year
earlier.
On June 30, 2010, the Company paid a cash dividend of
$0.46094 per share on outstanding Preferred Shares to the
stockholders of record on June 15, 2010 as declared on
May 26, 2010. On June 30, 2009, the Company paid a
cash dividend of $0.46094 per share on outstanding Preferred
Shares to the stockholders of record on June 15, 2009 as
declared on May 28, 2009. On June 22, 2009 the Company
paid a cash dividend in the amount of $261,477 to the common
stockholder of record on June 15, 2009.
The National Bank Act requires all national banks, including the
Bank, to obtain prior approval from the OCC if dividends
declared by the national bank (including subsidiaries of the
national bank (except for dividends paid by such subsidiary to
the national bank)) in any calendar year, will exceed its net
income for that year, combined with its retained income (as
defined in the applicable regulations) for the preceding two
years. These provisions apply to a national bank and its
subsidiaries on a consolidated basis, notwithstanding the
earnings of any subsidiary on a stand-alone basis. Beginning in
2009, the Bank no longer had sufficient capacity to declare and
pay dividends without prior regulatory approval of the OCC. As a
result, the Company, as an indirect subsidiary of the Bank,
became subject to the provisions relating to dividend approval,
and the Bank must receive prior approval from the OCC before the
Company declares dividends on the Preferred Shares. Prior
approval from the OCC was received for the most recent dividend
declaration in June 2010. With respect to any dividends on the
Preferred Shares that may be declared by the Company’s
Board of Directors in the third quarter ended September 30,
2010, the Company has sought and received permission from the
OCC for such a declaration, subject to the Company’s
determination that such dividends are appropriate. The Company
anticipates the need to request similar approvals from the OCC
for subsequent quarters of 2010. At this time, the Company has
no reason to expect that such approvals will not be received.
There is no assurance that the Bank and the Company will not be
subject to the requirement to receive prior regulatory approvals
for Preferred Shares dividend payments in the future or that, if
required, such approvals will be obtained.
Six
Months Ended June 30, 2010 compared with June 30,
2009
The Company’s net income for the six months ended
June 30, 2010 was $9.5 million. This represented a
$553 thousand or 5.5% decrease from earnings for the six months
ended June 30, 2009. Earnings decreased primarily because
of lower interest yields on lower average balances of earning
assets in 2010 compared to 2009.
Interest income on securities purchased under agreement to
resell for the six months ended June 30, 2010 was $38
thousand, on an average balance of $66 million, with a
yield of 0.12%. During the same period in 2009, the interest
income on securities purchased under agreement to resell was $17
thousand on an average balance of $32 million, with a yield
of 0.10%. Interest income on the Notes for the six months ended
June 30, 2010 totaled $113 thousand, yielding 6.4% on
$3.6 million of average principal outstanding compared to
$127 thousand of income yielding 6.4% on $4.0 million of
average principal outstanding for the same period in 2009. The
decrease in income was attributable to a reduction in the Notes
balance resulting from customer payoffs on the Securing Mortgage
Loans. Interest income on securities
available-for-sale
for the six months ended June 30, 2010 was
$10.4 million resulting in a yield of 4.2% on an average
balance of $495 million, compared to $11.0 million
11
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HARRIS
PREFERRED CAPITAL CORPORATION
resulting in a yield of 4.3% on an average balance of
$508 million for the same period a year ago. The decrease
in interest income from
available-for-sale
securities is primarily attributable to maturities in the
portfolio of mortgage-backed securities with reinvestment in
similar securities at a lower yield. There were no Company
borrowings during either period.
Operating expense for the six months ended June 30, 2010
totaled $315 thousand, an increase of $18 thousand from the same
period a year ago. Advisory fees for the six months ended
June 30, 2010 were $102 thousand compared to $97 thousand
for the same period a year ago. General and administrative
expenses totaled $207 thousand, an increase of $13 thousand or
7% from the same period in 2009 as a result of increased costs
for director fees and also due to a change in assessing certain
affiliate services. Loan servicing expenses for the six months
ended June 30, 2010 and 2009 totaled $6 thousand.
Liquidity
Risk Management
The objective of liquidity management is to ensure the
availability of sufficient cash flows to meet all of the
Company’s financial commitments. In managing liquidity, the
Company takes into account various legal limitations placed on a
REIT.
The Company’s principal asset management requirements are
to maintain the current earning asset portfolio size through the
acquisition of additional Notes or other qualifying assets in
order to pay dividends to its stockholders after satisfying
obligations to creditors. The acquisition of additional Notes or
other qualifying assets is funded with the proceeds obtained as
a result of repayment of principal balances of individual
Securing Mortgage Loans or maturities or sales of securities.
The payment of dividends on the Preferred Shares is made from
legally available funds, arising from operating activities of
the Company. The Company’s cash flows from operating
activities principally consist of the collection of interest on
the Notes, mortgage-backed securities and other earning assets.
The Company does not have and does not anticipate having any
material capital expenditures.
In order to remain qualified as a REIT, the Company must
distribute annually at least 90% of its adjusted REIT ordinary
taxable income, as provided for under the Internal Revenue Code,
to its common and preferred stockholders. The Company currently
expects to distribute dividends annually equal to 90% or more of
its adjusted REIT ordinary taxable income.
The Company anticipates that cash and cash equivalents on hand
and the cash flow from the Notes and mortgage-backed and
U.S. treasury securities 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
$9.6 million provided from operations during the six months
ended June 30, 2010, were $179.4 million from the
maturities of securities
available-for-sale.
In the prior period ended June 30, 2009, the primary
sources of funds other than $10.6 million from operations
were $184.8 million from the maturities of securities
available-for-sale
and the $80 million capital contribution received by the
Company from the sale of its common stock. The primary uses of
funds for the six months ended June 30, 2010 were
$189.5 million for purchases of securities
available-for-sale
and $9.2 million in preferred stock dividends paid. For the
prior year’s period ended June 30, 2009, the primary
uses of funds were $261.6 million for purchases of
securities
available-for-sale
and $9.2 million in preferred stock dividends paid. Net
cash used in financing activities were $9.2 million of cash
compared to $70.5 million of cash provided in the prior
period ended June 30, 2009. The primary reason was the
issuance of stock and capital contribution from the
Company’s parent totaling $80 million in 2009.
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, 2009.
12
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HARRIS
PREFERRED CAPITAL CORPORATION
Tax
Matters
As of June 30, 2010, the Company believes that it is in
full compliance with the REIT federal tax rules, and expects to
qualify as a REIT under the provisions of the Internal Revenue
Code. The Company expects to meet all REIT requirements
regarding the ownership of its stock and anticipates meeting the
annual distribution requirements. Beginning January 1,
2009, Illinois requires a “captive” REIT to increase
its state taxable income by the amount of dividends paid. Under
this law, a captive REIT includes a REIT of which 50% of the
voting power or value of the beneficial interest or shares is
owned by a single person. Management believes that the Company
would be classified as a “captive” REIT under Illinois
law, in light of the fact that (1) all of the
Company’s outstanding common shares are held by Harris
Capital Holdings, Inc. a wholly owned subsidiary of Harris N.A.
and (2) the Company’s Common Stock represent more than
50% of the voting power of the Company’s equity securities
and (3) the Common Stock is not listed for trading on an
exchange. Management believes that the state tax expense to be
incurred by the Company in future years should not have a
material adverse effect upon the Company’s ability to
declare and pay future dividends on the preferred shares. The
current Illinois statutory tax rate is 7.3%. This belief is
based upon the ownership interest of the Company, whereby any
tax expense incurred is expected to primarily reduce the net
earnings available to the holder of the Company’s Common
Stock. For the second quarter and first six months of 2010,
$371,000 and $747,000 of Illinois income tax expense was
recorded compared to $406,000 in the second quarter 2009 and
$791,000 in the first six months of 2009.
Financial
Statements of Harris N.A.
The following unaudited financial information for the Bank is
included because the Company’s Preferred Shares are
automatically exchangeable for a new series of preferred stock
of the Bank upon the occurrence of certain events.
13
Table of Contents
HARRIS
N.A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CONDITION
|
June 30 |
December 31 |
June 30 |
||||||||||
| 2010 | 2009 | 2009 | ||||||||||
| (unaudited) | (audited) | (unaudited) | ||||||||||
| (in thousands except share data) | ||||||||||||
|
ASSETS
|
||||||||||||
|
Cash and demand balances due from banks
|
$ | 686,350 | $ | 904,865 | $ | 1,102,486 | ||||||
|
Money market assets:
|
||||||||||||
|
Interest-bearing deposits at banks ($10.2 billion,
$8.4 billion, and $3.0 billion held at Federal Reserve
Bank at June 30, 2010, December 31, 2009, and
June 30, 2009 respectively)
|
10,788,872 | 9,231,581 | 4,311,466 | |||||||||
|
Federal funds sold and securities purchased under agreement to
resell
|
141,050 | 174,979 | 78,538 | |||||||||
|
Total cash and cash equivalents
|
$ | 11,616,272 | $ | 10,311,425 | $ | 5,492,490 | ||||||
|
Securities
available-for-sale
at fair value
|
5,496,483 | 5,898,831 | 7,616,642 | |||||||||
|
Trading account assets and derivative instruments
|
1,207,521 | 1,353,509 | 1,336,124 | |||||||||
|
Loans, net of unearned income
|
22,735,050 | 23,175,717 | 24,250,612 | |||||||||
|
Allowance for loan losses
|
(701,490 | ) | (680,782 | ) | (646,184 | ) | ||||||
|
Net loans
|
$ | 22,033,560 | $ | 22,494,935 | $ | 23,604,428 | ||||||
|
Loans held for sale
|
21,755 | 29,974 | 92,775 | |||||||||
|
Premises and equipment
|
524,664 | 526,623 | 527,451 | |||||||||
|
Bank-owned insurance
|
1,358,149 | 1,339,657 | 1,320,877 | |||||||||
|
Goodwill and other intangible assets
|
908,379 | 817,507 | 766,582 | |||||||||
|
Other assets
|
1,775,740 | 1,199,166 | 815,350 | |||||||||
|
Total assets
|
$ | 44,942,523 | $ | 43,971,627 | $ | 41,572,719 | ||||||
|
LIABILITIES
|
||||||||||||
|
Deposits in domestic offices — noninterest-bearing
|
$ | 8,274,901 | $ | 9,704,773 | $ | 7,494,673 | ||||||
|
— interest-bearing (includes $1.1 billion, $707.4 million and $187.4 million measured at fair value at June 30, 2010, December 31, 2009 and June 30, 2009, respectively)
|
21,724,858 | 18,968,058 | 19,130,311 | |||||||||
|
Deposits in foreign offices —
interest-bearing
|
1,511,593 | 1,622,410 | 2,351,579 | |||||||||
|
Total deposits
|
$ | 31,511,352 | $ | 30,295,241 | $ | 28,976,563 | ||||||
|
Federal funds purchased
|
247,270 | 236,099 | 328,963 | |||||||||
|
Securities sold under agreement to repurchase
|
1,347,299 | 2,512,490 | 661,927 | |||||||||
|
Short-term borrowings
|
642,454 | 717,050 | 992,516 | |||||||||
|
Short-term senior notes
|
— | — | 400,000 | |||||||||
|
Accrued interest, taxes and other expenses
|
180,803 | 172,618 | 194,813 | |||||||||
|
Accrued pension and post-retirement
|
22,898 | 58,393 | 109,725 | |||||||||
|
Other liabilities
|
757,754 | 643,289 | 450,415 | |||||||||
|
Long-term notes — senior/unsecured
|
2,396,500 | 2,396,500 | 2,646,500 | |||||||||
|
Long-term notes — senior/secured
|
2,375,000 | 2,375,000 | 2,375,000 | |||||||||
|
Long-term notes — subordinated
|
200,000 | 292,750 | 292,750 | |||||||||
|
Total liabilities
|
$ | 39,681,330 | $ | 39,699,430 | $ | 37,429,172 | ||||||
|
STOCKHOLDER’S EQUITY
|
||||||||||||
|
Common stock ($10 par value); authorized
40,000,000 shares; issued and outstanding
19,989,512 shares at June 30, 2010,
17,534,512 shares at December 31, 2009, and
17,149,512 shares at June 30, 2009
|
$ | 199,895 | $ | 175,345 | $ | 171,495 | ||||||
|
Surplus
|
3,291,667 | 2,322,917 | 2,173,757 | |||||||||
|
Retained earnings
|
1,637,817 | 1,621,719 | 1,693,581 | |||||||||
|
Accumulated other comprehensive loss
|
(118,241 | ) | (97,784 | ) | (145,286 | ) | ||||||
|
Stockholder’s equity before noncontrolling
interest — preferred stock of subsidiary
|
$ | 5,011,138 | $ | 4,022,197 | $ | 3,893,547 | ||||||
|
Noncontrolling interest — preferred stock of subsidiary
|
250,055 | 250,000 | 250,000 | |||||||||
|
Total stockholder’s equity
|
$ | 5,261,193 | $ | 4,272,197 | $ | 4,143,547 | ||||||
|
Total liabilities and stockholder’s equity
|
$ | 44,942,523 | $ | 43,971,627 | $ | 41,572,719 | ||||||
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
Table of Contents
HARRIS
N.A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Interest Income
|
||||||||||||||||
|
Loans
|
$ | 277,188 | $ | 273,201 | $ | 532,246 | $ | 561,179 | ||||||||
|
Money market assets:
|
||||||||||||||||
|
Deposits at banks
|
6,629 | 3,693 | 12,412 | 10,079 | ||||||||||||
|
Federal funds sold and securities purchased under agreements to
resell
|
21 | (310 | ) | 84 | 145 | |||||||||||
|
Trading account assets
|
2,797 | 2,559 | 5,747 | 5,097 | ||||||||||||
|
Securities
available-for-sale:
|
||||||||||||||||
|
U.S. Treasury and federal agency
|
12,187 | 25,233 | 28,184 | 59,502 | ||||||||||||
|
State and municipal
|
12,067 | 13,552 | 24,488 | 27,405 | ||||||||||||
|
Other
|
4,399 | 5,607 | 5,868 | 9,716 | ||||||||||||
|
Total interest income
|
$ | 315,288 | $ | 323,535 | $ | 609,029 | $ | 673,123 | ||||||||
|
Interest Expense
|
||||||||||||||||
|
Deposits
|
$ | 45,891 | $ | 80,850 | $ | 88,659 | $ | 192,830 | ||||||||
|
Short-term borrowings
|
1,910 | 2,413 | 3,663 | 4,310 | ||||||||||||
|
Short-term senior notes
|
— | 1,313 | — | 1,319 | ||||||||||||
|
Long-term notes — senior/unsecured
|
22,782 | 8,162 | 45,261 | 18,479 | ||||||||||||
|
Long-term notes — senior/secured
|
8,371 | 2,495 | 20,611 | 5,328 | ||||||||||||
|
Long-term notes — subordinated
|
365 | 1,081 | 832 | 2,731 | ||||||||||||
|
Total interest expense
|
$ | 79,319 | $ | 96,314 | $ | 159,026 | $ | 224,997 | ||||||||
|
Net Interest Income
|
$ | 235,969 | $ | 227,221 | $ | 450,003 | $ | 448,126 | ||||||||
|
Provision for loan losses
|
92,019 | 147,142 | 183,746 | 240,236 | ||||||||||||
|
Net Interest Income after Provision for Loan Losses
|
$ | 143,950 | $ | 80,079 | $ | 266,257 | $ | 207,890 | ||||||||
|
Noninterest Income
|
||||||||||||||||
|
Trust and investment management fees
|
$ | 23,433 | $ | 19,856 | $ | 43,995 | $ | 38,638 | ||||||||
|
Net money market and bond trading income, including derivative
activity
|
11,283 | 4,776 | 25,140 | 9,209 | ||||||||||||
|
Foreign exchange trading gains, net
|
1,303 | 2,775 | 4,216 | 5,400 | ||||||||||||
|
Service charges and fees
|
53,331 | 51,815 | 100,241 | 99,462 | ||||||||||||
|
Charge card income
|
29,454 | 277 | 58,748 | 333 | ||||||||||||
|
Equity securities gains, net
|
1,913 | 2,835 | 4,088 | 3,937 | ||||||||||||
|
Net securities gains, other than trading
|
642 | 500 | 2,316 | 30,019 | ||||||||||||
|
Other-than-temporary
impairment on securities
|
(110 | ) | (850 | ) | (131 | ) | (1,033 | ) | ||||||||
|
Bank-owned insurance
|
11,238 | 11,423 | 23,138 | 22,526 | ||||||||||||
|
Letter of credit fees
|
6,207 | 5,268 | 11,593 | 10,362 | ||||||||||||
|
Net gains on loans held for sale
|
3,573 | 9,400 | 7,668 | 11,618 | ||||||||||||
|
Other
|
9,494 | 9,902 | 20,194 | 18,418 | ||||||||||||
|
Total noninterest income
|
$ | 151,761 | $ | 117,977 | $ | 301,206 | $ | 248,889 | ||||||||
|
Noninterest Expenses
|
||||||||||||||||
|
Salaries and other compensation
|
$ | 111,750 | $ | 105,238 | $ | 205,761 | $ | 198,117 | ||||||||
|
Pension, profit sharing and other employee benefits
|
24,666 | 23,575 | 54,405 | 54,306 | ||||||||||||
|
Net occupancy
|
24,051 | 24,035 | 49,020 | 51,019 | ||||||||||||
|
Equipment
|
18,484 | 17,079 | 38,532 | 34,581 | ||||||||||||
|
Marketing
|
14,752 | 9,792 | 26,643 | 18,617 | ||||||||||||
|
Communication and delivery
|
8,131 | 7,249 | 15,503 | 14,896 | ||||||||||||
|
Professional fees
|
27,673 | 21,160 | 48,799 | 49,378 | ||||||||||||
|
Outside information processing, database and network fees
|
7,351 | 8,702 | 15,856 | 17,681 | ||||||||||||
|
FDIC Insurance
|
12,137 | 28,670 | 23,371 | 43,704 | ||||||||||||
|
Intercompany services, net
|
(2,314 | ) | (198 | ) | (5,262 | ) | (382 | ) | ||||||||
|
Visa indemnification reversal
|
(2,800 | ) | — | (2,800 | ) | — | ||||||||||
|
Charge card expense
|
6,997 | — | 14,302 | — | ||||||||||||
|
Amortization of intangibles
|
6,554 | 7,080 | 12,242 | 14,186 | ||||||||||||
|
Other
|
34,839 | 22,789 | 58,592 | 41,032 | ||||||||||||
|
Total noninterest expenses
|
$ | 292,271 | $ | 275,171 | $ | 554,964 | $ | 537,135 | ||||||||
|
Income (loss) before income tax benefit
|
$ | 3,440 | $ | (77,115 | ) | $ | 12,499 | $ | (80,356 | ) | ||||||
|
Applicable income tax benefit
|
(8,658 | ) | (37,349 | ) | (12,818 | ) | (48,684 | ) | ||||||||
|
Net income (loss)
|
$ | 12,098 | $ | (39,766 | ) | $ | 25,317 | $ | (31,672 | ) | ||||||
|
Less: noncontrolling interest — dividends on preferred
stock of subsidiary
|
4,610 | 4,609 | 9,219 | 9,219 | ||||||||||||
|
Net Income (Loss) Available for Common Stockholder
|
$ | 7,488 | $ | (44,375 | ) | $ | 16,098 | $ | (40,891 | ) | ||||||
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
Table of Contents
HARRIS
N.A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
Quarter Ended |
||||||||||||||||
| June 30, | Six Months Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Net income (loss) available for common stockholder
|
$ | 12,098 | $ | (39,766 | ) | $ | 25,317 | $ | (31,672 | ) | ||||||
|
Other comprehensive (loss) income:
|
||||||||||||||||
|
Cash flow hedges:
|
||||||||||||||||
|
Net unrealized (loss) gain on derivative instruments, net of tax
(benefit) expense for the quarter of ($6,966) in 2010 and
$20,770 in 2009 and net of tax (benefit) expense for the
year-to-date
period of ($17,179) in 2010 and $29,918 in 2009
|
(12,939 | ) | 38,573 | (31,905 | ) | 55,560 | ||||||||||
|
Reclassification adjustment for realized loss included in net
income (loss), net of tax benefit for the quarter of $548 in
2010 and $401 in 2009 and net of tax benefit for the
year-to-date
period of $938 in 2010 and $2,081 in 2009
|
1,020 | 744 | 1,743 | 3,866 | ||||||||||||
|
Pension and postretirement medical benefit plans:
|
||||||||||||||||
|
Net (loss) gain and net prior service cost included in net
income (loss), net of tax benefit for the quarter of $0 in 2010
and 2009 and net of tax expense for the
year-to-date
period of $1,318 in 2010 and $3,531 in 2009
|
(319 | ) | — | 4,574 | 6,556 | |||||||||||
|
Reclassification adjustment for amortization included in net
income (loss), net of tax benefit for the quarter of $663 in
2010 and $367 in 2009 and net of tax benefit for the
year-to-date
period of $1,326 in 2010 and $733 in 2009
|
1,231 | 681 | 2,462 | 1,362 | ||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||
|
Unrealized holding gain arising during the period, net of tax
expense for the quarter of $2,749 in 2010 and $6,148 in 2009 and
net of tax (benefit) expense for the
year-to-date
period of ($2,155) in 2010 and $6,947 in 2009
|
10,536 | 11,426 | 4,174 | 12,921 | ||||||||||||
|
Reclassification adjustment for realized gain included in net
income (loss), net of tax expense for the quarter of $225 in
2010 and $473 in 2009 and net of tax expense for the
year-to-date
period of $811 in 2010 and $10,507 in 2009
|
(417 | ) | (877 | ) | (1,505 | ) | (19,512 | ) | ||||||||
|
Other comprehensive (loss) income
|
$ | (888 | ) | $ | 50,547 | $ | (20,457 | ) | $ | 60,753 | ||||||
|
Comprehensive income
|
$ | 11,210 | $ | 10,781 | $ | 4,860 | $ | 29,081 | ||||||||
|
Comprehensive income related to noncontrolling interest
|
4,610 | 4,609 | 9,219 | 9,219 | ||||||||||||
|
Comprehensive income (loss) available for common
stockholder
|
$ | 6,600 | $ | 6,172 | $ | (4,359 | ) | $ | 19,862 | |||||||
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
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HARRIS
N.A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
(Unaudited)
|
Accumulated |
Noncontrolling |
|||||||||||||||||||||||
|
Other |
Interest — |
Total |
||||||||||||||||||||||
|
Common |
Retained |
Comprehensive |
Preferred Stock |
Stockholder’s |
||||||||||||||||||||
| Stock | Surplus | Earnings | Loss | of Subsidiary | Equity | |||||||||||||||||||
| (in thousands except per share data) | ||||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 175,345 | $ | 2,322,917 | $ | 1,621,719 | $ | (97,784 | ) | $ | 250,000 | $ | 4,272,197 | |||||||||||
|
Stock option exercise
|
— | 300 | — | — | — | 300 | ||||||||||||||||||
|
Net income
|
— | — | 16,098 | — | 9,219 | 25,317 | ||||||||||||||||||
|
Dividends — preferred stock of subsidiary
|
— | — | — | — | (9,219 | ) | (9,219 | ) | ||||||||||||||||
|
Change in noncontrolling interest ownership
|
— | — | — | — | 55 | 55 | ||||||||||||||||||
|
Other comprehensive loss
|
— | — | — | (20,457 | ) | — | (20,457 | ) | ||||||||||||||||
|
Issuance of common stock and contribution to capital surplus
|
24,550 | 968,450 | — | — | — | 993,000 | ||||||||||||||||||
|
Balance at June 30, 2010
|
$ | 199,895 | $ | 3,291,667 | $ | 1,637,817 | $ | (118,241 | ) | $ | 250,055 | $ | 5,261,193 | |||||||||||
|
Balance at December 31, 2008
|
$ | 171,495 | $ | 2,172,030 | $ | 1,734,471 | $ | (206,039 | ) | $ | 250,000 | $ | 4,121,957 | |||||||||||
|
Stock option exercise
|
— | 494 | — | — | — | 494 | ||||||||||||||||||
|
Tax benefit from stock option exercise
|
— | 1,234 | — | — | — | 1,234 | ||||||||||||||||||
|
Net income
|
— | — | (40,891 | ) | — | 9,219 | (31,672 | ) | ||||||||||||||||
|
Dividends — preferred stock of subsidiary
|
— | — | — | — | (9,219 | ) | (9,219 | ) | ||||||||||||||||
|
Other comprehensive income
|
— | — | — | 60,753 | — | 60,753 | ||||||||||||||||||
|
Balance at June 30, 2009
|
$ | 171,495 | $ | 2,173,758 | $ | 1,693,580 | $ | (145,286 | ) | $ | 250,000 | $ | 4,143,547 | |||||||||||
The accompanying notes to consolidated financial statements
are an integral part of these statements.
17
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HARRIS
N.A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended June 30 | ||||||||
| 2010 | 2009 | |||||||
|
Cash Flows from Operating Activities:
|
||||||||
|
Net income (loss)
|
$ | 25,317 | $ | (31,672 | ) | |||
|
Less: noncontrolling interest — dividends on preferred
stock of subsidiary
|
9,219 | 9,219 | ||||||
|
Net income (loss) available for common stockholder
|
$ | 16,098 | $ | (40,891 | ) | |||
|
Adjustments to determine net cash flows provided by operating
activities:
|
||||||||
|
Provision for loan losses
|
183,746 | 240,236 | ||||||
|
Depreciation and amortization, including intangibles
|
53,063 | 56,316 | ||||||
|
Deferred tax expense (benefit)
|
62,536 | (20,758 | ) | |||||
|
Excess tax expense from stock options exercise
|
119 | 1,234 | ||||||
|
Other-than-temporary
impairment on securities
|
131 | 1,033 | ||||||
|
Net gains on securities, other than trading
|
(2,316 | ) | (30,019 | ) | ||||
|
Net equity investment gains
|
(4,088 | ) | (3,937 | ) | ||||
|
Increase in bank-owned insurance
|
(18,492 | ) | (16,562 | ) | ||||
|
Net decrease in trading securities
|
237,391 | 31,672 | ||||||
|
Decrease in accrued interest receivable
|
16,058 | 33,547 | ||||||
|
(Increase) decrease in prepaid expenses
|
(85,788 | ) | 5,507 | |||||
|
Decrease in accrued interest payable
|
(706 | ) | (49,683 | ) | ||||
|
Net (increase) decrease in accrued tax payable
|
(65,930 | ) | 15,362 | |||||
|
Net (decrease) increase in other accrued expenses
|
(42,285 | ) | 72,734 | |||||
|
Net increase in pension and post retirement benefits
|
(25,815 | ) | (51,492 | ) | ||||
|
Origination of loans held for sale
|
(372,086 | ) | (688,859 | ) | ||||
|
Proceeds from sale of loans held for sale
|
387,973 | 637,246 | ||||||
|
Net gains on loans held for sale
|
(7,668 | ) | (11,618 | ) | ||||
|
Net gains on sale of premises and equipment
|
(803 | ) | (1,477 | ) | ||||
|
Recoveries on charged-off loans
|
38,369 | 33,124 | ||||||
|
Net increase in settlement clearing account
|
(1 | ) | (13,875 | ) | ||||
|
Net increase (decrease) in trading hedging derivatives
|
27,635 | (88,238 | ) | |||||
|
Visa indemnification reversal
|
(2,800 | ) | — | |||||
|
Other, net
|
17,266 | (49,037 | ) | |||||
|
Net cash provided by operating activities
|
$ | 411,607 | $ | 61,565 | ||||
|
Cash Flows from Investing Activities:
|
||||||||
|
Proceeds from sales of securities
available-for-sale
|
$ | 463,525 | $ | 2,830,608 | ||||
|
Proceeds from maturities of securities
available-for-sale
|
2,330,121 | 2,245,203 | ||||||
|
Purchases of securities
available-for-sale
|
(2,393,605 | ) | (3,372,114 | ) | ||||
|
Net decrease in loans
|
1,493,028 | 1,944,369 | ||||||
|
Proceeds from loans sold to affiliates
|
273,522 | — | ||||||
|
Purchases of premises and equipment
|
(51,815 | ) | (49,662 | ) | ||||
|
Sales of premises and equipment
|
18,045 | 17,867 | ||||||
|
Acquisitions, net of cash received
|
191,663 | (3,423 | ) | |||||
|
Net cash provided by investing activities
|
$ | 2,324,484 | $ | 3,612,848 | ||||
|
Cash flows from Financing Activities:
|
||||||||
|
Net decrease in deposits
|
$ | (1,326,658 | ) | $ | (24,487,001 | ) | ||
|
Net increase in deposits measured at fair value
|
370,227 | 109,720 | ||||||
|
Net decrease in Federal funds purchased and securities
|
||||||||
|
sold under agreement to repurchase
|
(1,154,020 | ) | (2,589,393 | ) | ||||
|
Net (decrease) increase in other short-term borrowings
|
(74,596 | ) | 633,040 | |||||
|
Net increase in short-term senior notes
|
— | 325,000 | ||||||
|
Proceeds from issuance long-term notes — senior
|
— | 550,000 | ||||||
|
Repayment of long-term notes — senior/secured
|
(137,409 | ) | — | |||||
|
Repayment of long-term notes — subordinated
|
(92,750 | ) | — | |||||
|
Net proceeds from stock options exercise
|
300 | 494 | ||||||
|
Excess tax expense from stock options exercise
|
(119 | ) | (173 | ) | ||||
|
Capital contributions
|
993,000 | — | ||||||
|
Cash dividends paid on preferred stock
|
(9,219 | ) | (9,219 | ) | ||||
|
Net cash used in financing activities
|
$ | (1,431,244 | ) | $ | (25,467,532 | ) | ||
|
Net increase (decrease) in cash and cash equivalents
|
$ | 1,304,847 | $ | (21,793,119 | ) | |||
|
Cash and cash equivalents at January 1
|
10,311,425 | 27,285,609 | ||||||
|
Cash and cash equivalents at June 30
|
$ | 11,616,272 | $ | 5,492,490 | ||||
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
Table of Contents
HARRIS
N.A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Basis of Presentation |
Harris N.A. (the “Bank”) is a wholly-owned subsidiary
of Harris Bankcorp, Inc. (“Bankcorp”), a wholly-owned
subsidiary of Harris Financial Corp. (“HFC”), a
wholly-owned U.S. subsidiary of Bank of Montreal. The
consolidated financial statements of the Bank include the
accounts of the Bank and its wholly-owned subsidiaries.
Significant inter-company accounts and transactions have been
eliminated. Certain reclassifications were made to conform prior
year’s financial statements to the current year’s
presentation.
On April 23, 2010, the Bank acquired certain assets and
liabilities of Rockford, Illinois-based, AMCORE Bank N.A.
(“AMCORE”) from the FDIC for $221.5 million. The
Bank assumed approximately $2.5 billion in assets,
including approximately $2.1 billion in loans, and
$2.2 billion in deposits. The Bank recorded a core deposit
intangible of $22.1 million to be amortized over
10 years on an accelerated basis and a customer
relationship intangible of $1.3 million to be amortized
over 13 years on an accelerated basis. The acquisition
includes a loss share agreement with the FDIC and the related
indemnification asset was estimated at $427.5 million. The
Bank recorded goodwill of $84.3 million which is expected
to be deductible for tax purposes. Acquisition costs of
$4.4 million were recorded to noninterest expense during
the quarter ended June 30, 2010. The acquisition provides
the Bank the opportunity to expand its branch network into
communities in northern Illinois and southern Wisconsin. The
results of AMCORE’s operations have been included in the
Bank’s consolidated financial statements since
April 23, 2010.
On December 31, 2009, BMO and the Bank acquired the net
cardholder receivables and other assets and obligations of the
Diners Club North American franchise from Citigroup for initial
cash consideration of $678 million, subject to a
post-closing adjustment based on all parties’ final
agreement of the net asset value transferred. The acquisition of
the net cardholder receivables of Diners Club gives the Bank the
right to issue Diners Club cards to corporate and professional
clients in the United States and will accelerate the Bank’s
initiative to expand in the
travel-and-entertainment
card sector. As part of this acquisition, the Bank recorded a
purchased credit card relationship intangible asset estimated at
$44.3 million which will be amortized on an accelerated
basis over 15 years. The Bank recorded goodwill of
$17.8 million which is expected to be deductible for tax
purposes. The gross contractual amount of receivables was
$743.2 million and the fair value was $704.6 million.
Acquisition-related costs of $0.6 million for the year
ended December 31, 2009 were recorded to noninterest
expense. The results of the operations have been included in the
Bank’s consolidated financial statements since
January 1, 2010. As of March 31, 2010 a preliminary
contractual true up of $48.4 million was received from
Citigroup mainly due to the overestimation of initial credit
card loan balances of $56.7 million. As a result, goodwill
was decreased by $6.3 million and the credit card
relationship intangible asset was increased by
$3.4 million. During the quarter ended June 30, 2010 a
$15.2 million fair value adjustment to credit card
receivables was recorded as an increase to interest income.
On February 13, 2009, the Bank completed the acquisition of
selected assets of Pierce, Givens & Associates, LLC
(“Pierce Givens”) for cash consideration of
$3.4 million. The Bank acquired a customer relationship
intangible asset estimated at $3.0 million with an expected
life of 5 years. No goodwill was recorded in the
transaction. Acquisition-related costs of $0.4 million for
the year-ended December 31, 2009 were recorded to
noninterest expense. The acquisition provides the Bank with the
opportunity to expand its tax planning and compliance
capabilities in the ultra
high-net-worth
market. The results of Pierce Givens’ operations have been
included in the Bank’s consolidated financial statements
since February 14, 2009.
The interim consolidated financial statements have been prepared
by management from the books and records of the Bank, without
audit by independent certified public accountants. However,
these statements reflect all adjustments and disclosures which
are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
Events occurring subsequent to the date of the balance sheet
have been evaluated for potential recognition or disclosure in
the consolidated financial statements.
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HARRIS
N.A. AND SUBSIDIARIES
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. | Contingent Liabilities and Litigation |
Harris N.A. and certain of its subsidiaries are party to legal
proceedings in the ordinary course of their businesses. While
there is inherent difficulty in predicting the outcome of these
proceedings, management does not expect the outcome of any of
these proceedings, individually or in the aggregate, to have a
material adverse effect on the Bank’s consolidated
financial position or results of operations.
| 3. | Cash Flows |
In the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and demand balances due from banks,
interest-bearing deposits at banks and federal funds sold and
securities purchased under agreement to resell. Cash interest
payments for the six months ended June 30 totaled
$156.8 million and $274.7 million in 2010 and 2009,
respectively. Cash income tax refunds received for the six
months ended June 30, 2010 and 2009 totaled
$12.7 million and $59.7 million, respectively.
| 4. | Visa Indemnification Charge |
HNA was a member of Visa U.S.A. Inc. (“Visa U.S.A.”)
and in 2007 received shares of restricted stock in Visa, Inc.
(“Visa”) as a result of its participation in the
global restructuring of Visa U.S.A., Visa Canada Association,
and Visa International Service Association in preparation for an
initial public offering by Visa. HNA and other Visa U.S.A.
member banks are obligated to share in potential losses
resulting from certain indemnified litigation involving Visa
that has been settled.
A member bank such as HNA is also required to recognize the
contingent obligation to indemnify Visa under Visa’s bylaws
(as those bylaws were modified at the time of the Visa
restructuring on October 3, 2007) for potential losses
arising from the other indemnified litigation that has not yet
settled at its estimated fair value. HNA is not a direct party
to this litigation and does not have access to any specific,
non-public information concerning the matters that are the
subject of the indemnification obligations. While the estimation
of any potential losses is highly judgmental, as of
December 31, 2007, HNA recorded a liability and
corresponding charge of $34 million (pretax) for the
remaining litigation.
The initial public offering (IPO) occurred on March 25,
2008 followed by a mandatory partial redemption of Harris’
restricted stock in Visa that took place in two parts: exchange
for cash and funding of the covered litigation escrow account.
During the first quarter of 2008, HNA received
$37.8 million in cash in conjunction with the mandatory
partial redemption which was recognized as an equity security
gain in the Consolidated Statements of Operations since there
was no basis in the stock. In addition, Visa funded the
U.S. litigation escrow account with IPO proceeds.
Harris’ share of the U.S. litigation escrow account
funding was $17 million which was recognized as a reversal
to the litigation reserve and as a decrease to non-interest
expense.
In June 2010, July 2009 and December 2008, HNA recorded
decreases to non-interest expense of $2.8 million,
$3.0 million and $6.3 million, respectively, as a
reduction in the Visa litigation reserve to reflect Visa’s
use of a portion of the Bank’s restricted Visa stock to
fund the escrow account available to settle certain litigation
matters. Visa’s funding of amounts required beyond the
current escrow, if any, will be obtained via additional
mandatory redemptions of restricted shares. As of June 30,
2010, December 31, 2009 and June 30, 2009, the
recorded reserve relating to the Visa litigation matter included
in the Consolidated Statements of Condition was
$12.0 million, $14.8 million and $17.8 million,
respectively.
| 5. | Auction Rate Securities Purchase Program |
Auction-rate securities (ARS) are typically short-term notes
issued in the United States to fund long-term, fixed rate debt
instruments (corporate or municipal bonds primarily issued by
municipalities, student loan
20
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HARRIS
N.A. AND SUBSIDIARIES
authorities and other sponsors). The interest rate on ARS is
regularly reset every 7 to 35 days through auctions managed
by financial institutions. A disruption in the market for ARS
occurred in the early part of 2008. Certain customer-managed
portfolios held these securities, which were no longer liquid.
Certain of the Bank’s affiliates voluntarily offered to
purchase such securities from customers, at par value.
In addition, in 2008 a settlement with the Financial Industry
Regulatory Authority (“FINRA”) required Harris
Investor Services, Inc. (“HIS”), an affiliate of the
Bank, to purchase specific holdings of ARS from certain client
accounts at par value plus accrued interest. In addition to the
required terms of the FINRA settlement, management of certain
other legal entities within HFC offered to purchase certain
other customer ARS holdings under similar terms. For the ARS
holdings purchased by the Bank, the gross par value of ARS
holdings purchased was $93.1 million plus accrued interest.
A discounted cash flow valuation methodology was applied to
estimate the fair value of the securities. The methodology
included management assumptions about future cash flows,
discount rates, market liquidity and credit spreads.
Remaining ARS were purchased during 2009 and had a gross par
value of $8.6 million. A minimal pre-tax charge was
recorded for the year ended December 31, 2009 for the
difference between the estimated fair values and the par values
paid by the Bank. The charge was recorded in noninterest expense
in the Consolidated Statements of Operations. During the six
months ended June 30, 2010 ARS with a gross par value of
$16.5 million were called and a gain of $3.6 million
was recorded to net securities gains, other than trading in the
Consolidated Statements of Operations. The fair value of ARS was
$51.8 million as of June 30, 2010, $73.6 million
as of December 31, 2009 and $76.8 million as of
June 30, 2009. The ARS purchased are classified as
available-for-sale.
| 6. | Health Care Legislation |
In March 2010, new health care legislation (The Patient
Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act) was enacted that changed the tax
treatment of the subsidy associated with postretirement medical
benefits. The legislation reduced the tax deductions for the
cost of providing postretirement prescription drug coverage by
the amount of subsidies received. With enactment of the
legislation, the Bank was required to write off any deferred tax
asset as a tax expense through the income statement, even if a
portion of such asset had initially been established through
OCI. As a result of this legislation, the Bank recorded tax
expense of $5.5 million during the quarter ended
March 31, 2010. Nothing material was recorded during the
quarter ended June 30, 2010.
| 7. | Noncontrolling Interests |
The Bank adopted Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 160, “Noncontrolling Interests
in Consolidated Financial Statements-An Amendment of ARB
51,” (subsequently codified in Accounting Standards
Codification (“ASC”) Topic
810-10-65)
on January 1, 2009. The standard requires noncontrolling
interests held by parties other than the parent to be reported
as equity in the consolidated financial statements. The Bank has
two subsidiaries that are less than wholly-owned and the
noncontrolling interest in the preferred stock of the
subsidiaries is held by third parties. The noncontrolling
interest in the preferred stock of the subsidiaries is presented
as a component of stockholder’s equity in the Consolidated
Statements of Condition. Net income attributable to the
noncontrolling interest is separately presented in the
Consolidated Statements of Operations, outside of net income
(loss).
| 8. | FDIC Special Assessment |
On December 30, 2009 the FDIC required insured depository
institutions to prepay their estimated quarterly risk-based
assessments for all of 2010, 2011, and 2012. The Bank made a
payment of $114 million which was recorded as prepaid
expense within other assets. As the Bank is charged monthly for
FDIC insurance, the Bank will decrease the prepaid expense and
charge FDIC insurance expense until the prepaid amount is
exhausted. Any prepaid amounts unused at June 30, 2013 will
be returned to the Bank. Starting in 2010, fees increased from
10 basis points on an annual basis, to 15 basis points.
21
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HARRIS
N.A. AND SUBSIDIARIES
| 9. | Recent accounting standards |
The FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 166, “Accounting for Transfers
of Financial Assets — an amendment of FASB Statement
No. 140,” (subsequently codified in FASB
ASC 860) in June 2009. The standard removes the
concept of a qualifying special-purpose entity
(“QSPE”). It also creates more stringent conditions
for reporting a transfer of a portion of a financial asset as a
sale. The standard is effective January 1, 2010. The
adoption of the standard did not impact the Bank’s
financial position or results of operations.
The FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R),” (subsequently codified in
FASB ASC 810) in June 2009. The standard changes the
criteria by which an enterprise determines whether it must
consolidate a variable interest entity (“VIE”). It
amends the existing guidance to require an enterprise to
consolidate a VIE if it has both the power to direct the
activities that most significantly impact the VIE’s
economic performance and the obligation to absorb losses or the
right to receive benefits from the VIE. Existing guidance
requires an enterprise to consolidate a VIE if it absorbs a
majority of the expected losses or residual returns, or both. A
continuous assessment of which party must consolidate a VIE will
be required, rather than an assessment only when certain trigger
events occur. In addition, the new standard requires an
enterprise to assess if VIEs that were previously QSPEs must be
consolidated by the enterprise. The standard is effective
January 1, 2010. The adoption of this standard did not
impact the Bank’s financial position or results of
operations.
The FASB issued Accounting Standards Update (“ASU”)
2010-20,
Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses, in July 2010. The
standard requires companies to significantly increase
disclosures about the credit quality of financing receivables
and the credit reserves held against them. The additional
disclosures include aging of past due receivables, credit
quality information such as credit risk scores or external
credit agency ratings and the modification of financing
receivables. Further disaggregation of information by certain
classification of the total portfolio will be required. The FASB
also amended
ASC 310-10-50,
Receivables — Overall — Disclosure,
in order to expand the requirements for separate reporting and
disclosure of allowances for credit losses and the policies for
managing credit exposures. The disclosures will be effective for
the Bank for the annual reporting period ending
December 31, 2011. The Bank does not expect the adoption of
this standard to impact it’s financial position or results
of operations.
22
Table of Contents
HARRIS
N.A. AND SUBSIDIARIES
FINANCIAL
REVIEW
Second
Quarter 2010 Compared with Second Quarter 2009
Summary
For the second quarter 2010, Harris N.A. and subsidiaries
(“Bank”) reported net income of $7.5 million, an
increase of $51.9 million from the second quarter of 2009,
reflecting a significant reduction in the provision for loan
losses as well as earnings associated with the Diners Club North
American franchise purchased from Citigroup, which closed at the
end of December 2009. The results also include the acquisition
of certain assets and liabilities of Rockford, IL based AMCORE
Bank, N.A. (AMCORE) from the Federal Deposit Insurance
Corporation (FDIC) in April, 2010 (Note 1).
Net interest income was $236.0 million, up
$8.7 million or 3.8 percent from a year ago, largely
due to lower cost of deposits and the additional net interest
income associated with the acquisition of AMCORE. Average
earning assets increased to $40.1 billion in the second
quarter of 2010 from $39.2 billion in 2009. This primarily
reflects an increase in interest bearing deposits placed at the
Federal Reserve Bank ($5.3 billion) largely offset by
decreases in loan balances ($1.7 billion) and the
available-for-sale securities portfolio ($2.1 billion). The
higher average earning asset level was partially offset by a
2 basis point decrease in the net interest margin to
2.42 percent from 2.44 percent in the second quarter
of 2009. The lower margin reflects a lower rate of return on
securities available-for-sale plus an increase in the level of
low-yield interest bearing deposits placed at the Federal
Reserve Bank largely offset by reduced interest costs on
deposits and improved loan yields.
Provision for loan losses for the second quarter 2010 was
$92.0 million, a decrease of $55.1 million or
37.5 percent from second quarter 2009 mainly attributable
to a decrease in reserves for specific commercial credits
partially offset by $21.3 million of provision associated
with the Diners Club portfolio. Net loan charge-offs during the
quarter were $83.6 million compared to $108.5 million
in the same period last year primarily due to decreases in both
commercial and consumer loan charge-offs. The provision for loan
losses is based on past loss experience, management’s
evaluation of the loan portfolio under current economic
conditions and management’s estimate of losses inherent in
the portfolio.
Noninterest income for the second quarter 2010 was
$151.8 million, an increase of $33.8 million or
28.6 percent. This increase largely reflects
$29.2 million of additional charge card income due to the
Diners Club acquisition. Additionally, higher trading revenues
($6.5 million) and trust fees ($3.6 million) were
partially offset by a year over year decrease in net gains on
loans held for sale ($5.8 million).
Second quarter 2010 noninterest expenses were
$292.3 million, up $17.1 million or 6.2 percent
from second quarter 2009. Higher costs associated with the
Diners Club credit card portfolio ($11.0 million) and the
acquisition of AMCORE ($22.8 million) were partially offset
by a $16.8 million reduction in FDIC insurance expense,
which reflects a $19.0 million FDIC special assessment in
2009 (Note 8). Additionally, a $5.4 million increase
in mortgage servicing rights impairment was partially offset by
the Bank’s reversal of $2.8 million of reserves in
conjunction with the Visa litigation escrow account funding and
lower intangible amortization expense ($1.9 million). The
income tax benefit decreased $28.7 million from the second
quarter of 2009 primarily due to the increase in pre-tax income
between periods. A tax benefit was recorded this quarter despite
positive pre-tax earnings due to the benefit of certain tax
exempt loans and investments as well as bank owned life
insurance.
Nonperforming loans at June 30, 2010 totaled
$686.1 million or 3.02 percent of total loans, up from
$486.0 million or 2.10 percent of total loans at
December 31, 2009 and $549.5 million or
2.27 percent a year earlier, primarily attributable to
higher commercial non-performing loans. At June 30, 2010,
the allowance for loan losses was $701.5 million, equal to
3.09 percent of loans outstanding compared to
$680.8 million or 2.94 percent of loans outstanding
and $646.2 million or 2.66 percent of loans
outstanding at December 31, 2009 and June 30, 2009,
respectively. Coverage of nonperforming loans by the allowance
for loan losses decreased from 118 percent at June 30,
2009 to 101 percent at June 30, 2010, largely due to
higher non-performing loan levels. At December 31, 2009,
the ratio was 140 percent. Ratios reflect the sale of loans
to psps Holdings, LLC, a subsidiary of Harris
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Financial Corp., in the amount of $502.7 million during the
full year 2009 and $273.5 million in the second quarter
2010.
At June 30, 2010 consolidated stockholder’s equity of
the Bank amounted to $5.3 billion, up $1.0 billion
from December 31, 2009, mainly due to a capital
contribution from Harris Bankcorp, Inc. during the year. Return
(loss) on equity was 0.72 percent in the current quarter,
compared to (4.57) percent in last year’s second quarter.
Return (loss) on assets was 0.07 percent compared to (0.41)
percent a year ago. The Bank did not declare any dividends on
common stock in either the current quarter or in the year-ago
quarter.
At June 30, 2010 Tier 1 capital of the Bank amounted
to $4.5 billion, up $1.1 billion from a year ago,
while risk-weighted assets declined by $3.0 billion to
$28.5 billion. The Bank’s June 30, 2010
Tier 1 and total risk-based capital ratios were
15.73 percent and 17.60 percent compared to respective
ratios of 11.46 percent and 13.55 percent at
December 31, 2009 and 10.68 percent and
12.73 percent at June 30, 2009. The regulatory
leverage capital ratio was 10.35 percent for the second
quarter of 2010 compared to 8.82 percent at year-end 2009
and 7.95 percent a year ago. The Bank’s capital ratios
significantly exceed the prescribed regulatory minimum for
“well-capitalized” banks.
Six
Months Ended June 30, 2010 Compared with Six Months Ended
June 30, 2009
Summary
For the six months ended June 30, 2010, the Bank reported
net income of $16.1 million, an increase of
$57.0 million from the net loss of $40.9 million for
the same period last year, mainly due to higher charge card fees
resulting from the purchase of the Diners Club North American
franchise from Citigroup, which closed at the end of December
2009, as well as a reduction in the provision for loan losses.
The results also include the acquisition of certain assets and
liabilities of Rockford, IL based AMCORE Bank, N.A. (AMCORE)
from the Federal Deposit Insurance Corporation (FDIC) in April
(Note 1). Return (loss) on equity was 0.80 percent in
the current year, compared to (2.14) percent for first six
months of last year. Return (loss) on assets was
0.08 percent compared to (0.17) percent a year ago.
Net interest income was $450.0 million, up slightly from
the $448.1 million reported a year ago as reduced loan
income and interest on securities available for sale were offset
by reduced interest costs on deposits. Net interest margin
increased to 2.37 percent in 2010 from 2.15 percent in
the same period in 2009, reflecting lower costs of deposits and
improved yield on loans. Average earning assets of
$39.3 billion decreased $3.9 billion with a
$2.4 billion decline in loans and a decrease of
$2.2 billion in available-for-sale securities due to
maturities partially offset by a $1.1 billion increase in
Federal Reserve Bank deposits.
Year-to-date 2010 provision for loan losses was
$183.7 million compared to $240.2 million in 2009.
This is primarily attributable to a decrease in reserves for
specific commercial credits partially offset by
$29.7 million provision associated with the Diners Club
portfolio acquired in December of 2009. Net charge-offs
decreased to $163.2 million from $166.8 million in the
prior year, reflecting a lower level of commercial charge-offs.
Noninterest income was $301.2 million, up
$52.7 million or 21.0 percent from a year ago. This
reflects $58.4 million of charge card income due to the
Diners Club acquisition plus higher trading revenues
($15.9 million) and trust fees ($5.4 million)
partially offset by a decrease in net gains on loans held for
sale ($27.7 million).
Noninterest expenses were $555.0 million, an increase of
$17.8 million or 3.3 percent. Several items affect the
year over year comparison including higher costs associated with
the Diners Club credit card portfolio ($22.6 million) and
the acquisition of AMCORE ($23.0 million, including
integration expense of $6.5 million). These additional
costs were partially offset by a $20.3 million reduction in
FDIC Insurance expense, which reflects a $19.0 million FDIC
special assessment in 2009 (Note 8). Excluding the impact
of these items, expenses were down $7.4 million or
1.5 percent with lower professional fees
($6.3 million), inter-company service charges
($5.9 million), employee costs ($5.6 million),
amortization of intangibles ($3.7 million) and the
Bank’s reversal of $2.8 million of reserves in
conjunction with the Visa litigation escrow account funding
being partially offset by higher marketing expense
($7.5 million), mortgage servicing rights impairment
($5.4 million) and other credit related costs
($5.5 million). The income tax benefit decreased
$35.9 million from the first six months of 2009 primarily
due to the increase in pre-tax income between periods. Results
reflect a tax benefit despite positive pre-tax earnings due to
the benefit of certain tax exempt loans and investments as well
as bank owned life insurance.
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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 on page 10.
The following table stratifies the Company’s
available-for-sale
securities by maturity date (dollars in thousands):
|
July 1, 2010 to |
Year Ending December 31, |
Fair Value at |
||||||||||||||||||||||||||||||
| Dec. 31, 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | June 30, 2010 | |||||||||||||||||||||||||
|
Residential mortgage-backed
|
||||||||||||||||||||||||||||||||
|
Amortized cost
|
$ | 4,242 | $ | 11,587 | $ | — | $ | 9,720 | $ | 5,738 | $ | 460,644 | $ | 491,931 | $ | 515,492 | ||||||||||||||||
|
Average Yield
|
4.00% | 4.00% | — | 4.00% | 4.00% | 4.42% | 4.40% | |||||||||||||||||||||||||
|
U.S. Treasury Bills
|
||||||||||||||||||||||||||||||||
|
Amortized cost
|
$ | 59,998 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 59,998 | $ | 59,998 | ||||||||||||||||
|
Average Yield
|
0.070% | — | — | — | — | — | 0.070% | |||||||||||||||||||||||||
At June 30, 2010, December 31, 2009 and June 30,
2009, the Company’s investments held in mortgage-backed
securities are secured by adjustable and fixed interest rate
residential mortgage loans. The yield to maturity on each
security depends on, among other things, the price at which each
such security is purchased, the rate and timing of principal
payments (including prepayment rates as well as default rates,
which in turn would impact the value and yield to maturity of
the Company’s mortgage-backed securities. These investments
are guaranteed by the Federal National Mortgage Association,
(“FNMA”) or Federal Home Loan Mortgage Corporation
(“Freddie Mac”) and none of the underlying loan
collateral is represented by
sub-prime
mortgages.
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| Item 4T. | Controls and Procedures |
| (a) | Evaluation of Disclosure Controls and Procedures |
Harris Preferred Capital Corporation’s management, with the
participation of the Chief Executive Officer and Chief Financial
Officer, has evaluated the Company’s disclosure controls
and procedures as of June 30, 2010. Based on this
evaluation, management has concluded that the disclosure
controls and procedures are effective to provide reasonable
assurance that the information required to be disclosed by the
Company in the reports filed under the Securities Exchange Act
of 1934, as amended is (i) recorded, processed, summarized
and reported within the time period specified in the Securities
and Exchange Commission’s rules and forms, and
(ii) accumulated and communicated to management, including
the Chief Executive Officer and the Chief Financial Officer , as
appropriate to allow timely decisions regarding required
disclosure.
| (b) | Changes in Internal Control over Financial Reporting |
There were no changes in our internal control over financial
reporting that occurred during the quarter ended June 30,
2010 that has materially affected, or is reasonably likely to
materially affect, internal control over financial reporting.
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Part II.
OTHER INFORMATION
Items 1,
1A, 2, 3, 4 and 5 are being omitted from this Report because
such items are not applicable to the reporting period.
None
| Item 6. | Exhibits |
31.1 Certification of Pamela C. Piarowski pursuant
to
rule 13a-14(a)
31.2 Certification of Paul R. Skubic pursuant to
rule 13a-14(a)
32.1 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, Harris Preferred Capital Corporation has duly caused this
Report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 12th day of August 2010.
/s/ Paul
R. Skubic
Paul R. Skubic
Chairman of the Board and President
/s/ Pamela
C. Piarowski
Pamela C. Piarowski
Chief Financial Officer
28