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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 1-13805
HARRIS PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND # 36-4183096
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
111 WEST MONROE STREET, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(312) 461-2121
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, $1.00 par value, outstanding on
November 13, 2002 was 1,000.
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HARRIS PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets.............................................. 2
Statements of Operations and Comprehensive Income........... 3
Statements of Changes in Stockholders' Equity............... 4
Statements of Cash Flows.................................... 5
Notes to Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 7
Item 4. Controls and Procedures..................................... 20
The above financial statements, financial review and
controls and procedures discussion, included in the
Corporation's 2002 Third Quarter Report, are filed as
Exhibit A and incorporated herein by reference.
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 20
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
Signatures............................................................... 20
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002................................................. 21
HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2002 2001 2001
------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Cash on deposit with Harris Trust and Savings Bank...... $ 501 $ 506 $ 1,070
Securities purchased from Harris Trust and Savings Bank
under agreement to resell............................. 17,500 21,000 21,001
Notes receivable from Harris Trust and Savings Bank..... 36,749 55,962 68,659
Securities available-for-sale:
Mortgage-backed....................................... 273,339 319,644 213,775
U.S. Treasury......................................... 219,913 84,932 199,724
Securing mortgage collections due from Harris Trust and
Savings Bank.......................................... 2,270 5,353 2,403
Other assets............................................ 1,189 1,945 1,520
-------- -------- --------
TOTAL ASSETS..................................... $551,461 $489,342 $508,152
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Broker payable -- due to securities purchase............ $ 50,397 $ -- $ --
Accrued expenses........................................ 20 100 21
-------- -------- --------
TOTAL LIABILITIES................................ 50,417 100 21
Commitments and contingencies........................... -- -- --
STOCKHOLDERS' EQUITY
7 3/8% Noncumulative Exchangeable Preferred Stock,
Series A ($1 par value); liquidation value of
$250,000; 20,000,000 shares authorized, 10,000,000
shares issued and outstanding......................... 250,000 250,000 250,000
Common stock ($1 par value); 1,000 shares authorized,
issued and outstanding................................ 1 1 1
Additional paid-in capital.............................. 240,733 240,733 240,733
Earnings in excess of distributions..................... 3,882 385 13,833
Accumulated other comprehensive income
(loss) -- unrealized gains (losses) on
available-for-sale securities......................... 6,428 (1,877) 3,564
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY....................... 501,044 489,242 508,131
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $551,461 $489,342 $508,152
======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Securities purchased from Harris Trust
and Savings Bank under agreement to
resell................................ $ 676 $ 365 $ 1,635 $ 1,280
Notes receivable from Harris Trust and
Savings Bank.......................... 641 1,198 2,226 4,164
Securities available-for-sale:
Mortgage-backed....................... 3,028 5,832 10,945 17,251
U.S. Treasury......................... 114 73 284 360
--------- --------- --------- ----------
Total interest income............... 4,459 7,468 15,090 23,055
NON-INTEREST INCOME:
Gain (loss) on sale of securities........ (17) 2,593 2,678 4,796
--------- --------- --------- ----------
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust
and Savings Bank...................... 31 56 106 195
Advisory fees paid to Harris Trust and
Savings Bank.......................... 8 8 35 28
General and administrative............... 47 50 172 157
--------- --------- --------- ----------
Total operating expenses............ 86 114 313 380
--------- --------- --------- ----------
Net income................................. 4,356 9,947 17,455 27,471
Preferred dividends........................ 4,609 4,609 13,828 13,828
--------- --------- --------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDER.............................. $ (253) $ 5,338 $ 3,627 $ 13,643
========= ========= ========= ==========
Basic and diluted earnings (losses) per
common share............................. $ (253.00) $5,338.00 $3,627.00 $13,643.00
========= ========= ========= ==========
Net income................................. $ 4,356 $ 9,947 $ 17,455 $ 27,471
Other comprehensive income -- unrealized
gains on available-for-sale securities... 4,615 6,652 8,305 5,010
--------- --------- --------- ----------
Comprehensive income....................... $ 8,971 $ 16,599 $ 25,760 $ 32,481
========= ========= ========= ==========
The accompanying notes are an integral part of these financial statements.
3
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
2002 2001
---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
BALANCE AT JANUARY 1........................................ $489,242 $489,824
Net income................................................ 17,455 27,471
Other comprehensive income................................ 8,305 5,010
Dividends -- common stock................................. (130) (346)
Dividends (preferred stock $0.4609 per share)............. (13,828) (13,828)
-------- --------
BALANCE AT SEPTEMBER 30..................................... $501,044 $508,131
======== ========
The accompanying notes are an integral part of these financial statements.
4
HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2002 2001
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................ $ 17,455 $ 27,471
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of securities............................. (2,678) (4,796)
Net decrease in other assets........................... 756 1,039
Net increase in broker payable-due to securities
purchases............................................. 50,397 --
Net decrease in accrued expenses....................... (80) (94)
--------- ---------
Net cash provided by operating activities............ 65,850 23,620
--------- ---------
INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased from
Harris Trust and Savings Bank under agreement to
resell................................................. 3,500 (18,001)
Repayments of notes receivable from Harris Trust and
Savings Bank........................................... 19,213 34,301
Decrease in securing mortgage collections due from Harris
Trust and Savings Bank................................. 3,083 383
Purchases of securities available-for-sale................ (667,075) (413,304)
Proceeds from maturities and sales of securities
available-for-sale..................................... 589,382 387,426
--------- ---------
Net cash used by investing activities................ (51,897) (9,195)
--------- ---------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock.................... (13,828) (13,828)
Cash dividends paid on common stock....................... (130) (346)
--------- ---------
Net cash used by financing activities................ (13,958) (14,174)
Net (decrease) increase in cash on deposit with Harris
Trust and Savings Bank................................. (5) 251
Cash on deposit with Harris Trust and Savings Bank at
beginning of period.................................... 506 819
--------- ---------
Cash on deposit with Harris Trust and Savings Bank at end
of period.............................................. $ 501 $ 1,070
========= =========
The accompanying notes are an integral part of these financial statements.
5
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Harris Preferred Capital Corporation (the "Company") is a Maryland
corporation whose principal business objective is to acquire, hold, finance and
manage qualifying real estate investment trust ("REIT") assets (the "Mortgage
Assets"), consisting of a limited recourse note or notes (the "Notes") issued by
Harris Trust and Savings Bank (the "Bank") secured by real estate mortgage
assets (the "Securing Mortgage Loans") and other obligations secured by real
property, as well as certain other qualifying REIT assets. The Company holds its
assets through a Maryland real estate investment trust subsidiary, Harris
Preferred Capital Trust. Harris Capital Holdings, Inc., a wholly-owned
subsidiary of the Bank, owns 100% of the Company's common stock.
The accompanying financial statements have been prepared by management from
the books and records of the Company, without audit by independent certified
public accountants. These statements reflect all adjustments and disclosures
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented and should be read in conjunction with
the notes to financial statements included in the Company's 2001 Form 10-K.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
2. COMMITMENTS AND CONTINGENCIES
Legal proceedings in which the Company is a defendant may arise in the
normal course of business. There is no pending litigation against the Company.
3. ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations." The Statement addresses financial accounting
and reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations." It requires all business combinations within the scope
of the Statement to be accounted for using one method, the purchase method. It
establishes criteria for the initial recognition of intangible assets acquired
in a business combination. The provisions of the Statement apply to all business
combinations initiated after June 30, 2001 and to all business combinations
accounted for by using the purchase method for which the date of acquisition is
July 1, 2001 or later. The implementation of this Statement has not had a
material effect on the Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets." The Statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets." Under this
Statement, goodwill and other intangible assets that have indefinite useful
lives will not be subject to amortization while intangible assets with finite
lives will be amortized. The Statement is effective for fiscal years beginning
after December 15, 2001. However, goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the nonamortization and
amortization provisions of the Statement. The implementation of this Statement
has not had a material effect on the Company's financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs should be capitalized as part of
the carrying amount of the long-lived asset. The Statement is effective for
financial statements issued for fiscal
6
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years beginning after June 15, 2002. The Company does not expect the
implementation of this Statement to have a material effect on its financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
establishes a single accounting model for long-lived assets to be disposed of by
sale. It supersedes SFAS No. 121 and the accounting and reporting provisions of
APB Opinion No. 30 for the disposal of a segment of a business. The Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
implementation of this Statement has not had a material effect on the Company's
financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectation, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
the Company's statements regarding tax treatment as a real estate investment
trust, liquidity, provision for loan losses, capital resources and investment
activities. In addition, in those and other portions of this document, the words
"anticipate," "believe," "estimate," "expect," "intend" and other similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. It is important to note that the
Company's actual results could differ materially from those described herein as
anticipated, believed, estimated or expected. Among the factors that could cause
the results to differ materially are the risks discussed in the "Risk Factors"
section included in the Company's Registration Statement on Form S-11 (File No.
333-40257), with respect to the Preferred Shares declared effective by the
Securities and Exchange Commission on February 5, 1998. The Company assumes no
obligation to update any such forward-looking statement.
RESULTS OF OPERATIONS
THIRD QUARTER 2002 COMPARED WITH THIRD QUARTER 2001
The Company's net income for the third quarter of 2002 was $4.4 million.
This represented a $5.5 million or 56% decrease from third quarter 2001 earnings
of $9.9 million. Earnings decreased primarily because of reduced interest income
on earning assets and a $2.6 million gain on sale of securities in 2001 compared
to a small loss in the current year. As assets mature or are sold, proceeds have
been invested in lower yielding securities because market interest rates have
been declining in the last twelve months.
Third quarter 2002 interest income on the Notes totaled $641 thousand and
yielded 6.4% on $40.1 million of average principal outstanding for the quarter
compared to $1.2 million and a 6.4% yield on $75.1 million average principal
outstanding for third quarter 2001. The decrease in income was attributable to a
reduction in the Notes balance because of customer payoffs on the Securing
Mortgage Loans. The average outstanding balance of the Securing Mortgage Loans
for third quarter 2002 and 2001 was $49 million and $91 million, respectively.
Interest income on securities available-for-sale for the current quarter was
$3.1 million resulting in a yield of 4.6% on an average balance of $276 million,
compared to $5.9 million with a yield of 6.3% on an average balance of $374
million for the same period a year ago. The decrease in interest income is
primarily attributable to the reduction in yield. As securities mature or are
sold, proceeds have been invested in lower yielding securities because market
interest rates have been declining in the past twelve months.
7
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no Company borrowings during third quarter 2002 or 2001.
Third quarter 2002 operating expenses totaled $86 thousand, a decrease of
$28 thousand or 25% from the third quarter of 2001. Loan servicing expenses
totaled $31 thousand, a decrease of $25 thousand or 45% from a year ago. This
decrease is attributable to the reduction in the principal balance of the Notes,
thereby reducing servicing fees payable to the Bank. Advisory fees for both the
third quarter 2002 and 2001 were $8 thousand. General and administrative
expenses totaled $47 thousand, a decrease of $3 thousand over third quarter
2001.
At September 30, 2002 and 2001, there were no Securing Mortgage Loans on
nonaccrual status.
The Company does not currently maintain an allowance for loan losses due to
the over-collateralization of the Notes represented by the Securing Mortgage
Loans.
For the current quarter, the Company had a $253,000 loss after dividends on
its preferred stock. The Company anticipates that it has sufficient liquidity
and earnings capacity to continue preferred dividend payments on an
uninterrupted basis.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH SEPTEMBER 30, 2001
The Company's net income for the nine months ended September 30, 2002 was
$17.5 million. This represented a $10.1 million or 36% decrease from 2001
earnings of $27.5 million. Earnings decreased primarily because of reduced
interest income on earning assets. As assets mature or are sold, proceeds have
been invested in lower yielding securities because market interest rates have
been declining in the past twelve months. In addition, gains on security sales
declined from $4.8 million in last year's nine month period to $2.7 million in
the current 2002 period.
Interest income on securities purchased under agreement to resell for the
nine months ended September 30, 2002 was $1.6 million, an increase of $355
thousand from the same period in 2001. Interest income on the Notes for the nine
months ended September 30, 2002 totaled $2.2 million and yielded 6.40% on $46
million of average principal outstanding compared to $4.2 million of income
yielding 6.40% on $87 million of average principal outstanding for the same
period in 2001. The decrease in income was attributable to a reduction in the
Notes balance because of customer payoffs on the Securing Mortgage Loans. There
were no Company borrowings during either period. Interest income on securities
available-for-sale for the nine months ended September 30, 2002 was $11.2
million resulting in a yield of 5.25% on an average balance of $285 million,
compared to $17.6 million of income with a yield of 6.48% on an average balance
of $363 million a year ago. The decrease in interest income is primarily
attributable to the reduction in yield. As securities mature or are sold,
proceeds have been invested in lower yielding securities as a result of market
interest rates declining in recent months. Gains from investment securities
sales for the nine months ended September 30, 2002 were $2.7 million compared to
$4.8 million a year ago. The average outstanding balance of the Securing
Mortgage Loans was $40 million for the nine months ended September 30, 2002 and
$106 million for the same period in 2001.
Operating expenses for the nine months ended September 30, 2002 totaled
$313 thousand, a decrease of $67 thousand from a year ago. Loan servicing
expenses for the nine months ended September 30, 2002 totaled $106 thousand, a
decrease of $89 thousand or 46% from 2001. This decrease is attributable to the
reduction in the principal balance of the Notes because servicing costs vary
directly with these balances. Advisory fees for the nine months ended September
30, 2002 were $35 thousand compared to $28 thousand a year ago, primarily
attributable to increased securities processing costs in the current year.
General and administrative expenses totaled $172 thousand, an increase of $15
thousand or 10% over the same period in 2001, as a result of additional
reporting and compliance costs.
On September 30, 2002, the Company paid a cash dividend of $0.46094 per
share on outstanding preferred shares to the stockholders of record on September
15, 2002, as declared on September 6, 2002. On
8
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 12, 2002, the Company paid a cash dividend of $130 thousand on the
outstanding common shares to the stockholder of record on September 4, 2002, as
declared on September 4, 2002. This dividend completed the 2001 REIT tax
compliance requirements. On September 30, 2001, the Company paid a cash dividend
of $0.46094 per share on outstanding preferred shares to the stockholders of
record on September 15, 2001, as declared on August 30, 2001. On a year-to-date
basis, the Company declared and paid $13.8 million of dividends to holders of
preferred shares for each of the nine-month periods ended September 30, 2002 and
2001.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT.
The Company's principal asset management requirements are to maintain the
current earning asset portfolio size through the acquisition of additional Notes
or other qualifying assets in order to pay dividends to its stockholders after
satisfying obligations to creditors. The acquisition of additional Notes or
other qualifying assets is funded with the proceeds obtained as a result of
repayment of principal balances of individual Securing Mortgage Loans or
maturities or sales of securities. The payment of dividends on the Preferred
Shares is made from legally available funds, arising from operating activities
of the Company. The Company's cash flows from operating activities principally
consist of the collection of interest on the Notes, mortgage-backed securities
and other earning assets. The Company does not have and does not anticipate
having any material capital expenditures.
In order to remain qualified as a REIT, the Company must distribute
annually at least 90% of its adjusted REIT ordinary taxable income, as provided
for under the Internal Revenue Code, to its common and preferred stockholders.
The Company currently expects to distribute dividends annually equal to 90% or
more of its adjusted REIT ordinary taxable income.
The Company anticipates that cash and cash equivalents on hand and the cash
flow from the Notes and mortgage-backed securities will provide adequate
liquidity for its operating, investing and financing needs.
As presented in the accompanying Statements of Cash Flows, the primary
sources of funds in addition to $65.9 million provided from operations during
the nine months ended September 30, 2002 were $19.2 million provided by
principal payments on the Notes and $589.4 million from the maturities and sales
of securities available-for-sale. In the prior period ended September 30, 2001,
the primary sources of funds other than $23.6 million from operations were $34.3
million provided by principal payments on the Notes and $387.4 million from the
maturities and sales of securities available-for-sale. The primary uses of funds
for the nine months ended September 30, 2002 were $667.1 million for purchases
of securities available-for-sale and $13.8 million in preferred stock dividends
paid. For the prior year's quarter ended September 30, 2001, the primary uses of
funds were $413.3 million for purchases of securities available-for-sale and
$13.8 million in preferred stock dividends paid.
MARKET RISK MANAGEMENT
The Company's market risk is composed primarily of interest rate risk.
There have been no material changes in market risk or the manner in which the
Company manages market risk since December 31, 2001.
9
HARRIS PREFERRED CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER MATTERS
As of September 30, 2002, the Company believes that it is in full
compliance with the REIT tax rules, and expects to qualify as a REIT under the
provisions of the Code. The Company expects to meet all REIT requirements
regarding the ownership of its stock and anticipates meeting the annual
distribution requirements.
FINANCIAL STATEMENTS OF HARRIS TRUST AND SAVINGS BANK
The following unaudited financial information for the Bank is included
because the Company's preferred shares are automatically exchangeable for a new
series of preferred stock of the Bank upon the occurrence of certain events.
10
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2002 2001 2001
------------ ----------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and demand balances due from banks.......................... $ 998,220 $ 1,203,946 $ 968,638
Money market assets:
Interest-bearing deposits at banks............................. 402,794 195,723 258,001
Federal funds sold and securities purchased under agreement to
resell...................................................... 1,412,150 579,750 165,700
Trading account assets........................................... 100,986 90,562 60,522
Securities available-for-sale (including $4.12 billion, $3.21
billion, and $2.99 billion of securities pledged as collateral
for repurchase agreements at September 30, 2002, December 31,
2001, and September 30, 2001, respectively).................... 6,133,908 5,822,229 6,372,401
Loans, net of unearned income.................................... 9,431,250 9,972,473 10,464,900
Allowance for possible loan losses............................... (209,146) (227,374) (231,308)
----------- ----------- -----------
Net loans...................................................... 9,222,104 9,745,099 10,233,592
Premises and equipment........................................... 291,502 287,549 295,563
Customers' liability on acceptances.............................. 14,226 13,365 20,306
Bank-owned insurance............................................. 984,635 952,225 940,182
Loans held for sale.............................................. 107,088 121,588 139,219
Goodwill and other valuation intangibles......................... 191,855 206,119 210,394
Other assets..................................................... 445,682 518,016 552,013
----------- ----------- -----------
TOTAL ASSETS.............................................. $20,305,150 $19,736,171 $20,216,531
=========== =========== ===========
LIABILITIES
Deposits in domestic offices -- noninterest-bearing.............. $ 2,330,302 $ 3,170,649 $ 2,864,594
-- interest-bearing................. 8,847,853 6,311,796 6,736,662
Deposits in foreign offices -- noninterest-bearing.............. 34,160 38,063 34,782
-- interest-bearing................. 822,173 1,670,352 1,915,640
----------- ----------- -----------
Total deposits............................................ 12,034,488 11,190,860 11,551,678
Federal funds purchased and securities sold under agreement to
repurchase..................................................... 4,845,517 4,423,351 4,373,258
Short-term borrowings............................................ 595,412 704,699 453,046
Short-term senior notes.......................................... 100,000 860,000 910,000
Acceptances outstanding.......................................... 14,226 13,365 20,306
Accrued interest, taxes and other expenses....................... 227,137 335,931 314,503
Other liabilities................................................ 428,793 167,288 558,346
Minority interest -- preferred stock of subsidiary............... 255,000 255,000 250,000
Long-term notes -- subordinated.................................. 225,000 225,000 225,000
----------- ----------- -----------
TOTAL LIABILITIES......................................... 18,725,573 18,175,494 18,656,137
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized 10,000,000 shares;
issued and outstanding 10,000,000 shares....................... 100,000 100,000 100,000
Surplus.......................................................... 625,212 620,586 619,463
Retained earnings................................................ 786,420 819,991 779,783
Accumulated other comprehensive income........................... 67,945 20,100 61,148
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY................................ 1,579,577 1,560,677 1,560,394
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................ $20,305,150 $19,736,171 $20,216,531
=========== =========== ===========
The accompanying notes to the financial statements are an integral part of these
statements.
11
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
INTEREST INCOME
Loans, including fees............................... $128,809 $170,175 $389,037 $583,009
Money market assets:
Deposits at banks................................. 694 1,535 1,251 3,014
Federal funds sold and securities purchased under
agreement to resell............................ 1,673 3,948 6,479 11,794
Trading account..................................... 487 829 1,399 2,265
Securities available-for-sale:
U.S. Treasury and Federal agency.................. 45,382 81,119 150,992 271,556
State and municipal............................... 3 4 22 95
Other............................................. 554 587 1,656 1,567
-------- -------- -------- --------
Total interest income........................ 177,602 258,197 550,836 873,300
-------- -------- -------- --------
INTEREST EXPENSE
Deposits............................................ 41,063 78,133 126,955 283,777
Short-term borrowings............................... 15,862 42,876 47,622 186,625
Senior notes........................................ 1,528 9,581 11,550 27,244
Minority interest-dividends on preferred stock of
subsidiary........................................ 4,609 4,609 13,828 13,828
Long-term notes..................................... 2,831 3,357 8,522 10,913
-------- -------- -------- --------
Total interest expense....................... 65,893 138,556 208,477 522,387
-------- -------- -------- --------
NET INTEREST INCOME................................. 111,709 119,641 342,359 350,913
Provision for loan losses........................... 8,075 146,118 58,393 184,316
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 103,634 (26,477) 283,966 166,597
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees................ 20,527 21,850 62,891 67,049
Money market and bond trading....................... 4,133 4,950 8,260 14,671
Foreign exchange.................................... (69) 1,885 3,615 5,280
Service fees and charges............................ 29,213 25,442 90,203 71,140
Securities gains.................................... 22,562 7,557 61,273 25,475
Bank-owned insurance................................ 13,693 11,859 38,976 35,183
Foreign fees........................................ 6,307 5,168 18,160 15,517
Other............................................... 12,680 13,267 36,597 37,065
-------- -------- -------- --------
Total noninterest income..................... 109,046 91,978 319,975 271,380
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation..................... 84,077 77,632 235,229 220,763
Pension, profit sharing and other employee
benefits.......................................... 15,413 12,907 45,998 39,708
Net occupancy....................................... 11,477 9,336 31,060 27,785
Equipment........................................... 13,546 12,623 39,127 38,007
Marketing........................................... 7,024 9,884 21,706 25,082
Other............................................... 6,178 14,683 19,492 31,047
-------- -------- -------- --------
137,715 137,065 392,612 382,392
Goodwill and other valuation intangibles............ 6,399 5,994 18,882 17,627
-------- -------- -------- --------
Total noninterest expenses................... 144,114 143,059 411,494 400,019
-------- -------- -------- --------
Income (loss) before income taxes................... 68,566 (77,558) 192,447 37,958
Applicable income taxes............................. 19,925 (32,765) 55,580 (4,106)
-------- -------- -------- --------
NET INCOME (LOSS)............................ $ 48,641 $(44,793) $136,867 $ 42,064
======== ======== ======== ========
EARNINGS PER COMMON SHARE (based on 10,000,000
average shares outstanding)
Net Income (Loss)................................... $ 4.86 $ (4.48) $ 13.69 $ 4.21
======== ======== ======== ========
The accompanying notes to the financial statements are an integral part of these
statements.
12
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
2002 2001
---- ----
(IN THOUSANDS)
BALANCE AT JANUARY 1........................................ $1,560,677 $1,524,423
Net income................................................ 136,867 42,064
Contributions to capital.................................. 4,626 6,098
Dividends -- common stock................................. (170,000) (84,000)
Dividends -- preferred stock.............................. (438) --
Other comprehensive income................................ 47,845 71,809
---------- ----------
BALANCE AT SEPTEMBER 30..................................... $1,579,577 $1,560,394
========== ==========
The accompanying notes to the financial statements are an integral part of these
statements.
13
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
NET INCOME (LOSS)................................... $ 48,641 $(44,793) $136,867 $ 42,064
OTHER COMPREHENSIVE INCOME:
Cash flow hedges:
Cumulative effect of accounting change......... -- -- -- (7,976)
Net unrealized gain on derivative instruments,
net of tax expense for the quarter of $63 in
2001 and net of tax expense for the
year-to-date period of $4,684 in 2001........ -- 108 -- 7,976
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the
period, net of tax expense for the quarter of
$35,177 in 2002 and $48,431 in 2001 and net
of tax expense for the
year-to-date period of $55,395 in 2002 and
$57,862 in 2001.............................. 53,809 73,505 85,284 87,374
Less reclassification adjustment for realized
gains included in income statement, net of
tax expense for the quarter of $8,777 in 2002
and $2,940 in 2001 and net of tax expense for
the year-to-date period of $23,835 in 2002
and $9,910 in 2001........................... (13,785) (4,617) (37,439) (15,565)
-------- -------- -------- --------
Other comprehensive income........................ 40,024 68,996 47,845 71,809
-------- -------- -------- --------
COMPREHENSIVE INCOME................................ $ 88,665 $ 24,203 $184,712 $113,873
======== ======== ======== ========
The accompanying notes to the financial statements are an integral part of these
statements.
14
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2002 2001
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 136,867 $ 42,064
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................. 58,393 184,316
Depreciation and amortization, including intangibles...... 52,302 51,257
Deferred tax expense...................................... 3,343 26,582
Gain on sales of securities............................... (61,273) (25,475)
Trading account net (purchases) sales..................... (10,424) 4,689
Net decrease in interest receivable....................... 15,119 58,497
Net decrease in interest payable.......................... (1,377) (7,651)
Net decrease in loans held for sale....................... 14,500 103,052
Other, net................................................ 333,101 (96,373)
----------- -----------
Net cash provided by operating activities.............. 540,551 340,958
----------- -----------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits at banks........ (207,071) (116,653)
Net (increase) decrease in Federal funds sold and
securities purchased under agreement to resell......... (832,400) 325,375
Proceeds from sales of securities available-for-sale...... 2,653,662 1,417,046
Proceeds from maturities of securities
available-for-sale..................................... 5,901,150 6,026,533
Purchases of securities available-for-sale................ (8,725,813) (7,170,579)
Net decrease in loans..................................... 464,601 231,853
Purchases of premises and equipment....................... (37,373) (45,051)
Net increase in bank-owned insurance...................... (32,409) (34,079)
Other, net................................................ (157,131) 478,045
----------- -----------
Net cash (used) provided by investing activities....... (972,784) 1,112,490
----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 843,628 (941,699)
Net increase (decrease) in Federal funds purchased and
securities sold under agreement to repurchase.......... 422,166 (235,621)
Net decrease in short-term borrowings..................... (109,287) (1,036,684)
Proceeds from issuance of senior notes.................... 400,000 2,308,500
Repayment of senior notes................................. (1,160,000) (1,788,000)
Cash dividends paid on common stock....................... (170,000) (84,000)
----------- -----------
Net cash provided (used) by financing activities....... 226,507 (1,777,504)
----------- -----------
NET DECREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS................................................. (205,726) (324,056)
CASH AND DEMAND BALANCES DUE FROM BANKS AT JANUARY 1... 1,203,946 1,292,694
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT SEPTEMBER
30.................................................... $ 998,220 $ 968,638
=========== ===========
The accompanying notes to the financial statements are an integral part of these
statements.
15
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Harris Trust and Savings Bank (the "Bank") is a wholly-owned subsidiary of
Harris Bankcorp, Inc. ("Bankcorp"), a wholly-owned subsidiary of Bankmont
Financial Corp. (a wholly-owned subsidiary of Bank of Montreal). The
consolidated financial statements of the Bank include the accounts of the Bank
and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Certain reclassifications were made to
conform prior year's financial statements to the current year's presentation.
The consolidated financial statements have been prepared by management from
the books and records of the Bank, without audit by independent certified public
accountants. However, these statements reflect all adjustments and disclosures
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented.
Because the results of operations are so closely related to and responsive
to changes in economic conditions, the results for any interim period are not
necessarily indicative of the results that can be expected for the entire year.
2. LEGAL PROCEEDINGS
The Bank and certain of its subsidiaries are defendants in various legal
proceedings arising in the normal course of business. In the opinion of
management, based on the advice of legal counsel, the ultimate resolution of
these matters will not have a material adverse effect on the Bank's consolidated
financial position.
3. CASH FLOWS
For purposes of the Bank's Consolidated Statements of Cash Flows, cash and
cash equivalents is defined to include cash and demand balances due from banks.
Cash interest payments (net of amounts capitalized) for the nine months ended
September 30 totaled $209.9 million and $530.0 million in 2002 and 2001,
respectively. Cash income tax payments over the same periods totaled $26.9
million and $62.0 million, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," on January 1, 2002. Under this
standard, goodwill and other intangible assets that have indefinite useful lives
are not subject to amortization while intangible assets with finite lives are
amortized. The Bank has an unidentifiable intangible asset that is accounted for
in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions." This asset is excluded from the scope of SFAS No. 142
and continues to be amortized, including amortization of $2.35 million in third
quarter 2002. Effective October 1, 2002, a new accounting standard, SFAS No.
147, "Acquisitions of Certain Financial Institutions," will require that this
unidentifiable intangible asset be reclassified to goodwill and no longer be
amortized starting in fourth quarter 2002. Under the transitional requirements
of SFAS No. 147, the first three quarters of 2002 will be restated to reflect
the reversal of previously amortized goodwill in those quarters. The impact for
each of these three quarters will be $2.35 million ($1.4 million after tax). The
goodwill will be subject to the ongoing impairment testing required by current
accounting standards.
Upon adoption of SFAS No. 142 and as of September 30, 2002, the Bank had no
goodwill.
For the quarters and nine months ended September 30, 2002 and September 30,
2001, the Bank had no goodwill amortization expense.
As of September 30, 2002, the gross carrying amount and accumulated
amortization of the Bank's amortizable intangible assets were $339.9 million and
$148.1 million, respectively.
16
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total amortization expense for the Bank's intangible assets was $6.4
million for the quarter ended September 30, 2002 and $18.9 million for the nine
months ended September 30, 2002.
Estimated intangible asset amortization expense for the years ending
December 31, 2003, 2004, 2005, 2006 and 2007 is $15.9 million, $16.1 million,
$16.3 million, $16.5 million and $16.7 million, respectively. The estimates
exclude amortization expense associated with the unidentifiable intangible asset
currently accounted for in accordance with SFAS No. 72, which will be accounted
for under SFAS No. 147 as of October 1, 2002.
17
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW
THIRD QUARTER 2002 COMPARED WITH THIRD QUARTER 2001
SUMMARY
The Bank had third quarter 2002 net income of $48.6 million. Third quarter
2001 results were impacted by a special provision for loan losses of $121
million pre-tax. Including the effect of this special provision, the Bank had a
net loss of $44.8 million in third quarter 2001. Excluding the impact of the
$121 million special provision for loan losses, earnings increased $15.4 million
from third quarter 2001.
Cash ROE was 15.52 percent in the current quarter compared to 10.62 percent
one year earlier, excluding the special loan loss provision. Excluding the
unrealized gains and losses on the securities portfolio recorded directly to
equity and the special loan loss provision, cash ROE was 16.04 percent compared
to 10.76 percent last year. Cash ROA was 1.18 percent compared to 0.73 a year
ago, excluding the special provision.
Third quarter net interest income on a fully taxable equivalent basis was
$114.5 million, down $8.9 million or 7 percent from $123.4 million in 2001's
third quarter. Average earning assets decreased 12 percent to $15.28 billion
from $17.30 billion in 2001, primarily attributable to a decrease of $859
million in average loans and $1.2 billion in the investment portfolio. Net
interest margin rose from 2.84 percent in the year-ago quarter to 2.98 percent
currently, reflecting the impact of the declining interest rate environment
during 2001 and relatively higher levels of retail loans and deposits compared
to wholesale positions.
The third quarter provision for loan losses was $8.1 million compared to
$146.1 million, including the $121 million special provision, in the third
quarter of 2001. Net charge-offs decreased to $17.6 million from $28.2 million
in the prior year. Most of the decrease resulted from lower commercial loan
write-offs.
Third quarter noninterest income of $109.0 million increased $17.1 million
from the same quarter last year. Growth in noninterest income resulted from a
$15.0 million increase in net gains from sales of investment securities and
higher service charges on deposits amounting to $3.8 million.
Third quarter 2002 noninterest expenses of $144.1 million increased $1.1
million or 1 percent from the year ago quarter.
Nonperforming assets at September 30, 2002 were $171 million or 1.82
percent of total loans, down from $181 million or 1.91 percent at June 30, 2002,
and $193 million or 1.84 percent a year ago. At September 30, 2002, the
allowance for possible loan losses was $209 million, equal to 2.22 percent of
loans outstanding, compared to $231 million or 2.21 percent at the end of third
quarter 2001. As a result, the ratio of the allowance for possible loan losses
to nonperforming assets increased from 120 percent at September 30, 2001 to 122
percent at September 30, 2002.
At September 30, 2002, Tier 1 capital of the Bank amounted to $1.58
billion, up from $1.55 billion one year earlier. The regulatory leverage capital
ratio was 8.98 percent for the third quarter of 2002 compared to 7.78 percent in
the same quarter of 2001. The Bank's capital ratio exceeds the prescribed
regulatory minimum for banks. The Bank's September 30, 2002 Tier 1 and total
risk-based capital ratios were 10.06 percent and 12.49 percent compared to
respective ratios of 9.25 percent and 11.72 percent at September 30, 2001. The
Bank's capital ratios exceed the prescribed regulatory minimum for banks.
18
HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES
FINANCIAL REVIEW -- (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH 2001
SUMMARY
The Bank had net income for the nine months ended September 30, 2002 of
$136.9 million. Year-to-year comparative results were affected by a special loan
loss provision of $121 million in third quarter 2001. Excluding the impact of
the special provision, earnings grew 14 percent for the first nine months of
2002.
Cash ROE was 14.55 percent in the current year, up from 13.09 percent last
year, excluding the special loan loss provision. Excluding the unrealized gains
and losses on the securities portfolio recorded directly to equity and the
special provision, cash ROE increased 171 basis points from last year. Cash ROA
was 1.11 percent compared to 0.86 a year ago, excluding the special provision.
Net interest income on a fully taxable equivalent basis was $350.0 million,
down $14.0 million or 4 percent from $364.0 million in 2001's year-to-date
period. Average earning assets decreased 12 percent to $15.47 billion from
$17.66 billion in 2001, primarily attributable to a $838 million decrease in
average loans and $1.5 billion decrease in the investment portfolio, which was
somewhat offset by an increase of $192 million in money market assets. Net
interest margin rose from 2.75 percent in 2001 to 3.02 percent currently,
primarily reflecting the impact of the declining interest rate environment in
2001.
The year-to-date 2002 provision for loan losses of $58.4 million was down
from $184.3 million a year ago, which included the $121 million special
provision. Net charge-offs were $76.6 million, an increase of $4.7 million from
last year, primarily reflecting an increase in commercial loan write-offs.
Noninterest income of $320.0 million increased $48.6 million from the same
period last year. Most of this increase resulted from additional net gains from
securities sales of $35.8 million and higher service charges on deposits
amounting to $19.1 million.
Noninterest expenses of $411.5 million increased $11.5 million or 3 percent
from the year ago period. Income tax expense increased $59.7 million, reflecting
substantially higher pretax income.
19
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this Report, Paul R. Skubic, the
Chairman of the Board, Chief Executive Officer and President of the Company, and
Pamela C. Piarowski, 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 that material information required to be included in this Report has been
made known to them in a timely fashion. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these internal controls subsequent to the date of their evaluation, including
any corrective action with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE BEING OMITTED FROM THIS REPORT BECAUSE SUCH ITEMS ARE
NOT APPLICABLE TO THE REPORTING PERIOD.
ITEM 6. (a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, As adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Harris Preferred Capital Corporation has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 13th day of November 2002.
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
Chairman of the Board and President
/s/ PAMELA C. PIAROWSKI
--------------------------------------
Pamela C. Piarowski
Chief Financial Officer
20
CERTIFICATIONS HARRIS PREFERRED CAPITAL CORPORATION
- --------------------------------------------------------------------------------
I, Pamela C. Piarowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harris Preferred
Capital Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Harris Preferred Capital Corporation as of, and for, the
periods presented in this quarterly report;
4. Harris Preferred Capital Corporation's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
Harris Preferred Capital Corporation and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Harris Preferred Capital
Corporation, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of Harris Preferred Capital Corporation's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Harris Preferred Capital Corporation's other certifying officer and I
have disclosed, based on our most recent evaluation, to Harris Preferred
Capital Corporation's auditors and the audit committee of Harris
Preferred Capital Corporation's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Harris Preferred Capital
Corporation's ability to record, process, summarize and report
financial data and have identified for Harris Preferred Capital
Corporation's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Harris Preferred Capital
Corporation's internal controls; and
6. Harris Preferred Capital Corporation's other certifying officer and I
have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ PAMELA C. PIAROWSKI
--------------------------------------
Pamela C. Piarowski
Chief Financial Officer
Date:
21
CERTIFICATIONS HARRIS PREFERRED CAPITAL CORPORATION
- --------------------------------------------------------------------------------
I, Paul R. Skubic, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harris Preferred
Capital Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Harris Preferred Capital Corporation as of, and for, the
periods presented in this quarterly report;
4. Harris Preferred Capital Corporation's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
Harris Preferred Capital Corporation and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Harris Preferred Capital
Corporation, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of Harris Preferred Capital Corporation's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Harris Preferred Capital Corporation's other certifying officer and I
have disclosed, based on our most recent evaluation, to Harris Preferred
Capital Corporation's auditors and the audit committee of Harris
Preferred Capital Corporation's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Harris Preferred Capital
Corporation's ability to record, process, summarize and report
financial data and have identified for Harris Preferred Capital
Corporation's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Harris Preferred Capital
Corporation's internal controls; and
6. Harris Preferred Capital Corporation's other certifying officer and I
have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ PAUL R. SKUBIC
--------------------------------------
Paul R. Skubic
Chairman of the Board and President
Date:
22