Edgar Filing: HARRIS PREFERRED CAPITAL CORP

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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2001
FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER 1-13805

HARRIS PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

MARYLAND # 36-4183096
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

111 WEST MONROE STREET, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(312) 461-2121

SECURITIES REGISTERED PURSUANT TO
SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------

7 3/8% Noncumulative Exchangeable Preferred Stock, Series New York Stock Exchange
A, par value $1.00 per share

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

The number of shares of Common Stock, $1.00 par value, outstanding on March
22, 2002 was 1,000.

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HARRIS PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 7

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 12
Item 8. Financial Statements and Supplementary Data................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 13

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 13
Item 11. Executive Compensation...................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 15
Item 13. Certain Relationships and Related Transactions.............. 15

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 16
Signatures ............................................................ 17

PART I

Forward-Looking Information

Forward-looking statements contained in this Annual Report on Form 10-K
("Report") of Harris Preferred Capital Corporation (the "Company") may include
certain forward-looking information, within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including (without limitation) statements with respect
to the Company's expectations, 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 statements.

ITEM 1. BUSINESS

General

Harris Preferred Capital Corporation is a Maryland Corporation incorporated
on September 24, 1997, pursuant to the Maryland General Corporation Law. The
Company's 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's assets are held in a
Maryland real estate investment trust subsidiary, Harris Preferred Capital
Trust. The Company has elected to be treated as a REIT under the Internal
Revenue Code of 1986 (the "Code"), and will generally not be subject to federal
income tax if it distributes 90% (95% for years prior to January 1, 2001) of its
adjusted REIT ordinary taxable income and meets all of the qualifications
necessary to be a REIT. All of the shares of the Company's common stock, par
value $1.00 per share (the "Common Stock"), are owned by Harris Capital
Holdings, Inc. ("HCH"), a wholly-owned subsidiary of the Bank. The Company was
formed by the Bank to provide investors with the opportunity to invest in
residential mortgages and other real estate assets and to provide the Bank with
a cost-effective means of raising capital for federal regulatory purposes.

On February 11, 1998, the Company through a public offering (the
"Offering") issued 10,000,000 shares of its 7 3/8% Noncumulative Exchangeable
Preferred Stock, Series A (the "Preferred Shares"), $1.00 par value. The
Offering raised $250 million less $7.9 million of underwriting fees. The
Preferred Shares are traded on the New York Stock Exchange under the symbol "HBC
Pr A". Holders of Preferred Shares are entitled to receive, if declared by the
Company's Board of Directors, noncumulative dividends at a rate of 7 3/8% per
annum of the $25 per share liquidation preference (an amount equivalent to
$1.8438 per share per annum). Dividends on the Preferred Shares, if authorized
and declared, are payable quarterly in arrears on March 30, June 30, September
30 and December 30 of each year. Except upon the occurrence of certain events,
the Preferred Shares are not redeemable by the Company prior to March 30, 2003.
On or after such date, the Preferred Shares may be redeemed for cash at the
option of the Company, in whole or in part, at any time and from time to time,
at the principal amount thereof, plus the quarterly accrued and unpaid
dividends, if any, thereon. The Company may not redeem the Preferred Shares
without prior approval from the Board of Governors of the Federal Reserve System
or the appropriate successor federal regulatory agency.

Each Preferred Share will be automatically exchanged for one newly issued
Bank Preferred Share in the event (i) the Bank becomes less than "adequately
capitalized" under regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, as amended, (ii) the Bank is
placed into conservatorship or receivership, (iii) the Board of Governors
directs such exchange in writing because, in its sole discretion and even if the
Bank is not less than "adequately capitalized," the Board of Governors
anticipates that the Bank may become less than adequately capitalized in the
near term, or (iv) the Board of Governors in its sole discretion directs in
writing an exchange in the event that the Bank has a Tier 1 risk-based capital
ratio of less than 5%. In the event of an exchange, the Bank Preferred Shares
would constitute a new series of preferred shares of the Bank, would have the
same dividend rights, liquidation preference, redemption options and other
attributes as the Preferred Shares, except that the Bank Preferred Shares would
not be listed on the New York Stock Exchange and would rank pari passu in terms
of cash dividend payments and liquidation preference with any outstanding shares
of preferred stock of the Bank.

Concurrent with the issuance of the Preferred Shares, the Bank contributed
additional capital of $241 million, net of acquisition costs, to the Company.
The Company and the Bank undertook the Offering for two principal reasons: (i)
the qualification of the Preferred Shares as Tier 1 capital of the Bank for U.S.
banking regulatory purposes under relevant regulatory capital guidelines, as a
result of the treatment of the Preferred Shares as a minority interest in a
consolidated subsidiary of the Bank, and (ii) lack of federal income tax on the
Company's earnings used to pay the dividends on the Preferred Shares, as a
result of the Company's qualification as a REIT. On December 30, 1998, the Bank
contributed the common stock of the Company to HCH, a newly-formed and
wholly-owned subsidiary of the Bank. The Bank is required to maintain direct or
indirect ownership of at least 80% of the outstanding Common Stock of the
Company for as long as any Preferred Shares are outstanding.

The Company used the Offering proceeds and the additional capital
contributed by the Bank to purchase $356 million of notes (the "Notes") from the
Bank and $135 million of mortgage-backed securities at their estimated fair
value. The Notes are obligations issued by the Bank that are recourse only to
the underlying mortgage loans (the "Securing Mortgage Loans") and were acquired
pursuant to the terms of a loan agreement with the Bank. The principal amount of
the Notes equals approximately 80% of the principal amounts of the Securing
Mortgage Loans.

Business

The Company was formed for the purpose of raising capital for the Bank. One
of the Company's principal business objectives is to acquire, hold, finance and
manage Mortgage Assets. These Mortgage Assets generate interest income for
distribution to stockholders. A portion of the Mortgage Assets of the Company
consists of Notes issued by the Bank that are recourse only to Securing Mortgage
Loans that are secured by real property. The Notes mature on October 1, 2027 and
pay interest at 6.4% per annum. Payments of interest are made to the Company
from payments made on the Securing Mortgage Loans. Pursuant to an agreement
between the Company and the Bank, the Company, through the Bank as agent,
receives all scheduled payments made on the Securing Mortgage Loans, retains a
portion of any such payments equal to the amount due on the Notes and remits the
balance, if any, to the Bank. The Company also retains approximately 80% of any
prepayments of principal in respect of the Securing Mortgage Loans and applies
such amounts as a prepayment on the Notes. The Company has a security interest
in the real property securing the Securing Mortgage Loans and will be entitled
to enforce payment on the loans in its own name if a mortgagor should default.
In the event of such default, the Company would have the same rights as the
original mortgagee to foreclose the mortgaged property and satisfy the
obligations of the Bank out of the proceeds.

The Company may from time to time acquire fixed-rate or variable-rate
mortgage-backed securities representing interests in pools of mortgage loans.
The Bank may have originated a portion of any such mortgage-backed securities by
exchanging pools of mortgage loans for the mortgage-backed securities. The
mortgage loans underlying the mortgage-backed securities will be secured by
single-family residential properties located throughout the United States. The
Company intends to acquire only investment grade mortgage-backed securities
issued by agencies of the federal government or government sponsored agencies,
such as the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage
3

Association ("Fannie Mae") and the Government National Mortgage Association
("GNMA"). The Company does not intend to acquire any interest-only,
principal-only or similar speculative mortgage-backed securities.

The Bank may from time to time acquire or originate both conforming and
nonconforming residential mortgage loans. Conventional conforming residential
mortgage loans comply with the requirements for inclusion in a loan guarantee
program sponsored by either FHLMC or Fannie Mae. Nonconforming residential
mortgage loans are residential mortgage loans that do not qualify in one or more
respects for purchase by Fannie Mae or FHLMC under their standard programs. The
nonconforming residential mortgage loans that the Company purchases will be
nonconforming because they have original principal balances which exceed the
limits for FHLMC or Fannie Mae under their standard programs. The Company
believes that all residential mortgage loans will meet the requirements for sale
to national private mortgage conduit programs or other investors in the
secondary mortgage market. As of December 31, 2001 and 2000 and for each of the
years then ended, the Company did not directly hold any residential mortgage
loans.

The Company may from time to time acquire commercial mortgage loans secured
by industrial and warehouse properties, recreational facilities, office
buildings, retail space and shopping malls, hotels and motels, hospitals,
nursing homes or senior living centers. The Company's current policy is not to
acquire any interest in a commercial mortgage loan if commercial mortgage loans
would constitute more than 5% of the Company's Mortgage Assets at the time of
its acquisition. Unlike residential mortgage loans, commercial mortgage loans
generally lack standardized terms. Commercial real estate properties themselves
tend to be unique and are more difficult to value than residential real estate
properties. Commercial mortgage loans may also not be fully amortizing, meaning
that they may have a significant principal balance or "balloon" payment due on
maturity. Moreover, commercial properties, particularly industrial and warehouse
properties, are generally subject to relatively greater environmental risks than
non-commercial properties, generally giving rise to increased costs of
compliance with environmental laws and regulations. There is no requirement
regarding the percentage of any commercial real estate property that must be
leased at the time the Bank acquires a commercial mortgage loan secured by such
commercial real estate property, and there is no requirement that commercial
mortgage loans have third party guarantees. The credit quality of a commercial
mortgage loan may depend on, among other factors, the existence and structure of
underlying leases, the physical condition of the property (including whether any
maintenance has been deferred), the creditworthiness of tenants, the historical
and anticipated level of vacancies and rents on the property and on other
comparable properties located in the same region, potential or existing
environmental risks, the availability of credit to refinance the commercial
mortgage loan at or prior to maturity and the local and regional economic
climate in general. Foreclosures of defaulted commercial mortgage loans are
generally subject to a number of complicated factors, including environmental
considerations, which are generally not present in foreclosures of residential
mortgage loans. As of December 31, 2001 and 2000 and for each of the years then
ended, the Company did not hold any commercial mortgage loans.

The Company may invest in assets eligible to be held by REITs other than
those described above. In addition to commercial mortgage loans and mortgage
loans secured by multi-family properties, such assets could include cash, cash
equivalents and securities, including shares or interests in other REITs and
partnership interests. At December 31, 2001 the Company held $21 million of
short-term money market assets and $85 million of U.S. Treasury securities. At
December 31, 2000 the Company held $3 million of short-term money market assets
and $25 million of U.S. Treasury securities.

The Company intends to continue to acquire Mortgage Assets from the Bank
and/or affiliates of the Bank on terms that are comparable to those that could
be obtained by the Company if such Mortgage Assets were purchased from unrelated
third parties. The Company may also from time to time acquire Mortgage Assets
from unrelated third parties.

The Company intends to maintain a substantial portion of its portfolio in
Bank-secured obligations and mortgage-backed securities. The Company may,
however, invest in other assets eligible to be held by a REIT. The Company's
current policy and the Servicing Agreement (defined below) prohibit the
acquisition of any Mortgage Asset constituting an interest in a mortgage loan
(other than an interest resulting from the

acquisition of mortgage-backed securities), which mortgage loan (i) is
delinquent (more than 30 days past due) in the payment of principal or interest
at the time of proposed acquisition; (ii) is or was at any time during the
preceding 12 months (a) on nonaccrual status or (b) renegotiated due to
financial deterioration of the borrower; or (iii) has been, more than once
during the preceding 12 months, more than 30 days past due in payment of
principal or interest. Loans that are on "nonaccrual status" are generally loans
that are past due 90 days or more in principal or interest. The Company
maintains a policy of disposing of any mortgage loan which (i) falls into
nonaccrual status, (ii) has to be renegotiated due to the financial
deterioration of the borrower, or (iii) is more than 30 days past due in the
payment of principal or interest more than once in any 12 month period. The
Company may choose, at any time subsequent to its acquisition of any Mortgage
Assets, to require the Bank (as part of the Servicing Agreement) to dispose of
the mortgage loans for any of these reasons or for any other reason.

The Bank services the Securing Mortgage Loans and the other mortgage loans
purchased by the Company on behalf of, and as agent for, the Company and is
entitled to receive fees in connection with the servicing thereof pursuant to
the servicing agreement (the "Servicing Agreement"). The Bank receives a fee
equal to 0.25% per annum on the principal balances of the loans serviced.
Payment of such fees is subordinate to payments of dividends on the Preferred
Shares. The Servicing Agreement requires the Bank to service the loans in a
manner generally consistent with accepted secondary market practices, with any
servicing guidelines promulgated by the Company and, in the case of residential
mortgage loans, with Fannie Mae and FHLMC guidelines and procedures. The
Servicing Agreement requires the Bank to service the loans solely with a view
toward the interest of the Company and without regard to the interest of the
Bank or any of its affiliates. The Bank will collect and remit principal and
interest payments, administer mortgage escrow accounts, submit and pursue
insurance claims and initiate and supervise foreclosure proceedings on the loans
it services. The Bank may, with the approval of a majority of the Company's
Board of Directors, as well as a majority of the Company's Independent
Directors, subcontract all or a portion of its obligations under the Servicing
Agreement to unrelated third parties. An "Independent Director" is a director
who is not a current officer or employee of the Company or a current director,
officer or employee of the Bank or of its affiliates. The Bank will not, in
connection with the subcontracting of any of its obligations under the Servicing
Agreement, be discharged or relieved in any respect from its obligations under
the Servicing Agreement. The Company may terminate the Servicing Agreement upon
the occurrence of such events as they relate to the Bank's proper and timely
performance of its duties and obligations under the Servicing Agreement. As long
as any Preferred Shares remain outstanding, the Company may not terminate, or
elect to renew, the Servicing Agreement without the approval of a majority of
the Company's Independent Directors.

The Company entered into an advisory agreement with the Bank (the "Advisory
Agreement") pursuant to which the Bank administers the day-to-day operations of
the Company. The Bank is responsible for (i) monitoring the credit quality of
Mortgage Assets held by the Company, (ii) advising the Company with respect to
the reinvestment of income from and payments on, and with respect to the
acquisition, management, financing and disposition of the Mortgage Assets held
by the Company, and (iii) monitoring the Company's compliance with the
requirements necessary to qualify as a REIT, and other financial and tax-
related matters. The Bank may from time to time subcontract all or a portion of
its obligations under the Advisory Agreement to one or more of its affiliates.
The Bank may, with the approval of a majority of the Company's Board of
Directors, as well as a majority of the Company's Independent Directors,
subcontract all or a portion of its obligations under the Advisory Agreement to
unrelated third parties. The Bank will not, in connection with the
subcontracting of any of its obligations under the Advisory Agreement, be
discharged or relieved in any respect from its obligations under the Advisory
Agreement. The Advisory Agreement is renewed annually. The Company may terminate
the Advisory Agreement at any time upon 60 days' prior written notice. As long
as any Preferred Shares remain outstanding, any decision by the Company either
to renew the Advisory Agreement or to terminate the Advisory Agreement must be
approved by a majority of the Board of Directors, as well as by a majority of
the Company's Independent Directors.

The Advisory Agreements in effect in 2001, 2000 and 1999 entitled the Bank
to receive advisory fees of $35,000, $57,000, and $50,000 respectively. In 2002,
advisory fees of $60,000 have been approved.

The Company may from time to time purchase additional Mortgage Assets out
of proceeds received in connection with the repayment or disposition of Mortgage
Assets, the issuance of additional shares of Preferred Stock or additional
capital contributions with respect to the Common Stock. The Company may also
issue additional series of Preferred Stock. However, the Company may not issue
additional shares of Preferred Stock senior to the Series A Preferred Shares
either in the payment of dividends or in the distribution of assets on
liquidation without the consent of holders of at least 67% of the outstanding
shares of Preferred Stock at that time or without approval of a majority of the
Company's Independent Directors. The Company does not currently intend to issue
any additional shares of Preferred Stock unless it simultaneously receives
additional capital contributions from HCH or other affiliates sufficient to
support the issuance of such additional shares of Preferred Stock.

Although the Company does not currently intend to incur any indebtedness in
connection with the acquisition and holding of Mortgage Assets, the Company may
do so at any time (although indebtedness in excess of 25% of the Company's total
stockholders' equity may not be incurred without the approval of a majority of
the Company's Independent Directors). To the extent the Company were to change
its policy with respect to the incurrence of indebtedness, the Company would be
subject to risks associated with leverage, including, without limitation,
changes in interest rates and prepayment risk.

Employees

As of December 31, 2001, the Company had no paid employees.

Environmental Matters

In the event that the Company is forced to foreclose on a defaulted
Securing Mortgage Loan to recover its investment in such loan, the Company may
be subject to environmental liabilities in connection with the underlying real
property, which could exceed the value of the real property. Although the
Company intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the
Company has acquired through foreclosure or otherwise, the Company may be
required to remove those substances and clean up the property. There can be no
assurance that in such a case the Company would not incur full recourse
liability for the entire costs of any removal and clean-up, that the cost of
such removal and clean-up would not exceed the value of the property or that the
Company could recoup any of such costs from any third party. The Company may
also be liable to tenants and other users of neighboring properties. In
addition, the Company may find it difficult or impossible to sell the property
prior to or following any such clean-up. The Company has not foreclosed on any
Securing Mortgage Loans.

Qualification as a REIT

The Company elected to be taxed as a REIT commencing with its taxable year
ended December 31, 1998 and intends to comply with the provisions of the Code
with respect thereto. The Company will not be subject to Federal income tax to
the extent it distributes 90% (95% for years prior to January 1, 2001) of its
adjusted REIT ordinary taxable income to stockholders and as long as certain
assets, income and stock ownership tests are met. For 2001 as well as 2000 the
Company met all Code requirements for a REIT, including the asset, income, stock
ownership and distribution tests. Cash distributions in the amount of $1.8438
cents per Preferred Share were paid in 2001 and 2000. A cash dividend on common
stock of $14.3 million was declared on December 4, 2001 to the stockholder of
record on December 15, 2001 and paid on December 31, 2001. A cash dividend on
common stock of $13 million was declared on December 4, 2000 to the stockholder
of record on December 15, 2000 and paid on December 30, 2000. In addition, on
September 12, 2001 and 2000 the Company paid a cash dividend of $346 thousand
and $224 thousand, respectively, on the outstanding common shares to the
stockholder of record on September 4, 2001 and 2000, respectively. These
dividends were paid on the Company's 2000 and 1999 REIT ordinary taxable income.

ITEM 2. PROPERTIES

None as of December 31, 2001.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently involved in any material litigation nor, to
the Company's knowledge is any material litigation currently threatened against
the Company, the Bank or any affiliate of the Bank other than routine litigation
arising in the ordinary course of business. See Note 8 to Financial Statements
on page 28.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS

HCH presently owns all 1,000 shares of the common stock of the Company,
which are not listed or traded on any securities exchange. On December 4, 2001,
the Company declared $14.3 million in cash dividends on common stock, which were
paid in December 2001. On December 4, 2000, the Company declared $13.0 million
in cash dividends on common stock, which were paid in December 2000. In
addition, on September 12, 2001 and 2000, the Company paid a cash dividend of
$346 thousand and $224 thousand, respectively, on the outstanding common shares
to the stockholder of record on September 4, 2001, and September 4, 2000,
respectively. These dividends were paid on the Company's 2000 and 1999 REIT
ordinary taxable income.

The Preferred Shares are traded on the New York Stock Exchange under the
symbol "HBC Pr A". During 2001 and 2000, the Company declared and paid cash
dividends to preferred stockholders of approximately $18.4 million in each year.
Although the Company declared cash dividends on the Preferred Shares for 2001
and 2000, no assurances can be made as to the declaration of, or if declared,
the amount of, future distributions since such distributions are subject to the
Company's financial condition and capital needs; the impact of legislation and
regulations as then in effect or as may be proposed; economic conditions; and
such other factors as the Board of Directors may deem relevant. Notwithstanding
the foregoing, to remain qualified as a REIT, the Company must distribute
annually at least 90% (95% for years prior to January 1, 2001) of its ordinary
taxable income to preferred and /or common stockholders.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the Company and
should be read in conjunction with the Financial Statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in this Report.

FOR THE YEARS ENDED DECEMBER 31 FROM JANUARY 2, 1998
--------------------------------- (INCEPTION) THROUGH
2001 2000 1999 DECEMBER 31, 1998
--------- --------- --------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Statement of Operations Data:
Interest income................................ $ 28,715 $ 32,312 $ 31,588 $ 27,467
Noninterest income............................. 4,796 257 -- --
Operating expenses:
Loan servicing fees.......................... 243 373 511 756
Advisory fees................................ 35 57 50 43
General and administrative................... 300 290 300 187
-------- -------- -------- ---------
Total operating expenses.................. 578 720 861 986
-------- -------- -------- ---------
Net income..................................... 32,933 31,849 30,727 26,481
Preferred stock dividends...................... 18,438 18,438 18,438 16,389
-------- -------- -------- ---------
Net income available to common stockholder..... $ 14,495 $ 13,411 $ 12,289 $ 10,092
======== ======== ======== =========
Basic and diluted net income per common
share........................................ $ 14,495 $ 13,411 $ 12,289 $ 10,092
======== ======== ======== =========
Distributions per preferred share.............. $ 1.8438 $ 1.8438 $ 1.8438 $ 1.6389
======== ======== ======== =========
Balance Sheet Data (end of period):
Total assets................................... $489,342 $489,939 $473,988 $ 503,390
======== ======== ======== =========
Total liabilities.............................. $ 100 $ 115 $ 97 $ 9,762
======== ======== ======== =========
Total stockholders' equity..................... $489,242 $489,824 $473,891 $ 493,628
======== ======== ======== =========
Cash Flows Data:
Operating activities........................... $ 28,736 $ 31,638 $ 30,821 $ 23,897
======== ======== ======== =========
Investing activities........................... $ 4,035 $ (419) $ 10,290 $(497,621)
======== ======== ======== =========
Financing activities........................... $(33,084) $(31,662) $(40,470) $ 474,345
======== ======== ======== =========

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the Financial
Statements and notes thereto appearing later in this Report.

SUMMARY

YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000

The Company's net income for 2001 was $32.9 million. This represented a
$1.1 million or 3.4% increase from 2000 net income of $31.8 million.

Interest income on the Notes for 2001 totaled $5.2 million and yielded 6.4%
on $81 million of average principal outstanding compared to $7.8 million and a
6.4% yield on $122 million average principal outstanding for 2000. The decrease
in income was attributable to a reduction in the Note balance because of
customer payoffs in the Securing Mortgage Loans. The average outstanding balance
of the Securing Mortgage Loans

was $99 million for 2001 and $151 million for 2000. Interest income on
securities available-for-sale for 2001 was $21.9 million, resulting in a yield
of 6.1% on an average balance of $363 million compared to $22.6 million with a
yield of 6.9% on an average balance of $328 million for 2000. The decrease in
interest income on securities available-for-sale was primarily attributable to a
reduction in yield, partially offset by growth in the investment portfolio. As
securities matured or were sold, proceeds were invested in lower yielding
securities as market interest rates declined in recent months. Gains from
investment securities sales were $4.8 million in 2001 and $257 thousand in 2000.
There were no Company borrowings during either year.

Operating expenses for the year ended December 31, 2001 totaled $578
thousand; a decrease of $142 thousand from the year ended December 31, 2000.
Loan servicing expenses for 2001 totaled $243 thousand, a decrease of $130
thousand or 35% from 2000. This decrease was attributed to the reduction in the
principal balance of the Notes. Advisory fees for the year ended December 31,
2001 were $35 thousand compared to $57 thousand for the same period a year ago.
General and administrative expenses for the same period totaled $300 thousand,
an increase of $10 thousand or 3.4% from 2000.

On December 30, 2001, the Company paid a cash dividend of $0.46094 cents
per share on the outstanding Preferred Shares to the stockholders of record on
December 15, 2001 as declared on December 4, 2001. On December 30, 2000, the
Company paid a cash dividend of $0.46094 cents per share on the outstanding
Preferred Shares to the stockholders of record on December 15, 2000 as declared
on December 4, 2000. On a year-to-date basis, the Company declared and paid
$18.4 million of dividends to holders of Preferred Shares for 2001 and 2000,
respectively. A cash dividend on common stock of $14.3 million was declared on
December 4, 2001 to the stockholder of record on December 15, 2001 and paid on
December 31, 2001. A cash dividend on common stock of $13 million was declared
on December 4, 2000 to the stockholder of record on December 15, 2000 and paid
on December 30, 2000. In addition, on September 12, 2001 and September 12, 2000
the Company paid a cash dividend of $346 thousand and $224 thousand,
respectively, on the outstanding common shares to the stockholder of record on
September 4, 2001 and December 30, 1999, respectively. These dividends completed
the Company's 2000 and 1999 REIT tax compliance requirements. At December 31,
2001 and 2000, there were no Securing Mortgage Loans on nonaccrual status and
there was no allowance for loan losses.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999

The Company's net income for 2000 was $31.8 million. This represented a
$1.1 million or 3.6% increase from 1999 net income of $30.7 million.

Interest income on the Notes for 2000 totaled $7.8 million and yielded 6.4%
on $122 million of average principal outstanding compared to $10.8 million and a
6.4% yield on $169 million average principal outstanding for 1999. The decrease
in income was attributable to a reduction in the Note balance because of
customer payoffs in the Securing Mortgage Loans. The average outstanding balance
of the Securing Mortgage Loans was $151 million for 2000 and $208 million for
1999. Interest income on securities available-for-sale for 2000 was $22.6
million, resulting in a yield of 6.9% on an average balance of $328 million
compared to $19.8 million with a yield of 6.7% on an average balance of $294
million for 1999. The increase in interest income on securities
available-for-sale is primarily attributable to an increase in the investment
securities portfolio and the purchase of higher yielding securities, raising the
average return. Gains from investment securities sales were $257 thousand in
2000. There were no investment securities sales in 1999. There were no Company
borrowings during either year.

Operating expenses for the year ended December 31, 2000 totaled $720
thousand, a decrease of $141 thousand from the year ended December 31, 1999.
Loan servicing expenses for 2000 totaled $373 thousand, a decrease of $138
thousand or 27% from 1999. This decrease was attributable to the reduction in
the principal balance of the Notes. Advisory fees for the year ended December
31, 2000 were $57 thousand compared to $50 thousand for the same period a year
ago. General and administrative expenses for the same period totaled $290
thousand, a decrease of $10 thousand or 3.3% from 1999.

QUARTER ENDED DECEMBER 31, 2001 COMPARED TO QUARTER ENDED DECEMBER 31, 2000

The Company's net income for the fourth quarter of 2001 was $5.4 million
compared to $8.0 million in the fourth quarter of 2000.

Fourth quarter 2001 interest income on the Notes totaled $1.0 million and
yielded 6.4% on $65 million of average principal outstanding compared to
interest income of $1.7 million and a 6.4% yield on $109 million average
principal outstanding for the fourth quarter 2000. The decrease in income was
attributable to a reduction in the Note balance because of customer payoffs in
the Securing Mortgage Loans. The average outstanding balance of the Securing
Mortgage Loans for the fourth quarter 2001 and 2000 was $79 million and $121
million, respectively. Interest income on securities available-for-sale for the
current quarter was $4.3 million resulting in a yield of 4.8% on an average
balance of $363 million, compared to interest income of $6.0 million with a
yield of 6.7% on an average balance of $359 million for the same period a year
ago. There were no Company borrowings during the quarter.

Fourth quarter 2001 operating expenses totaled $198 thousand, a decrease of
$19 thousand from the fourth quarter of 2000. Loan servicing expenses totaled
$48 thousand, a decrease of $35 thousand or 42% from the prior year's fourth
quarter, attributed to the reduction in the principal balance of the Notes,
thereby reducing servicing fees payable to the Bank. Advisory fees for 2001 were
$8 thousand, a decrease of $4 thousand from the prior year's fourth quarter.
General and administrative expenses totaled $142 thousand, an increase of $20
thousand over fourth quarter 2000. The higher general and administrative expense
in 2001 is primarily attributed to additional costs associated with ongoing
regulatory filings.

ALLOWANCE FOR LOAN LOSSES

The Company does not currently maintain an allowance for loan losses due to
the over-collateralization of the Securing Mortgage Loans and the prior and
expected credit performance of the collateral pool.

CONCENTRATIONS OF CREDIT RISK

A majority of the collateral underlying the Securing Mortgage Loans is
located in Illinois and Arizona. The financial viability of customers in these
states is, in part, dependent on the states' economies. The collateral may be
subject to a greater risk of default than other comparable loans in the event of
adverse economic, political or business developments or natural hazards that may
affect such region and the ability of property owners in such region to make
payments of principal and interest on the underlying mortgages. The Company's
maximum risk of accounting loss, should all customers in Illinois and Arizona
fail to perform according to contract terms and all collateral prove to be
worthless, was approximately $46 million and $12 million, respectively at
December 31, 2001 and $79 million and $18 million, respectively, at December 31,
2000.

INTEREST RATE RISK

The Company's income consists primarily of interest payments on the
Mortgage Assets it holds. If there is a decline in interest rates during a
period of time when the Company must reinvest payments of interest and principal
with respect to its Mortgage Assets, the Company may find it difficult to
purchase additional Mortgage Assets that generate sufficient income to support
payment of dividends on the Preferred Shares. Because the rate at which
dividends, if, when and as authorized and declared, are payable on the Preferred
Shares is fixed, there can be no assurance that an interest rate environment in
which there is a decline in interest rates would not adversely affect the
Company's ability to pay dividends on the Preferred Shares.

COMPETITION

The Company does not engage in the business of originating mortgage loans.
While the Company will acquire additional Mortgage Assets, it anticipates that
such Mortgage Assets will be acquired from the Bank and affiliates of the Bank.
Accordingly, the Company does not expect to compete with mortgage conduit

programs, investment banking firms, savings and loan associations, banks, thrift
and loan associations, finance companies, mortgage bankers or insurance
companies in acquiring its Mortgage Assets.

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 liquidity needs are to maintain the current
portfolio size through the acquisition of additional Notes or other qualifying
assets and 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 from repayment of principal balances by
individual mortgages or maturities of securities held for sale on a reinvested
basis. The payment of dividends on the Preferred Shares will be made from
legally available funds, principally 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 and mortgage-backed securities. 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% (95% for years prior to January 1, 2001) of its adjusted
REIT ordinary taxable income through 2001, as provided for under the 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 Statement of Cash Flows, the primary
sources of funds in addition to $28.7 million provided from operations during
2001 were $47.0 million provided by principal payments on the Notes and $874.9
million from the maturities and sales of securities available-for-sale. In 2000,
the primary sources of funds other than from operations of $31.6 million were
$33.8 million provided by principal payments on the Notes and $123.1 million
from the maturities of securities available-for-sale. The primary uses of funds
for 2001 were $897.2 million in purchases of securities available-for-sale and
$18.4 and $14.6 million in preferred stock dividends and common stock dividends
paid, respectively. In 2000 the primary uses of funds were $169.7 million in
purchases of securities available-for-sale and $18.4 and $13.2 million in
preferred stock dividends and common stock dividends paid, respectively.

ACCOUNTING PRONOUNCEMENTS

The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations," on July 1, 2001. The Statement addresses
financial accounting and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations." It requires all business combinations
within the scope of the Statement to be accounted for using one method, the
purchase method. It establishes criteria for the initial recognition of
intangible assets acquired in a business combination. The provisions of the
Statement apply to all business combinations initiated after June 30, 2001 and
to all business combinations accounted for by using the purchase method for
which the date of acquisition is July 1, 2001 or later.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." Under this Standard, 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 Company does not anticipate that
there will be a material impact of adopting the Statement on its 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 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 Company
does not expect the implementation of this Statement to have a material effect
on its financial position or results of operations.

OTHER MATTERS

As of December 31, 2001, 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As of December 31, 2001, the Company had $56 million invested in Notes, a
decrease of $47 million from December 31, 2000, attributable to customer payoffs
in the Securing Mortgage Loans. At December 31, 2001, the Company holds $320
million in mortgage-backed securities compared to $353 million at December 31,
2000. At December 31, 2001 the Company holds $85 million in U.S. Treasuries
compared to $25 million at December 31, 2000. At December 31, 2001, the Company
holds an investment of $21 million in securities purchased from the Bank under
agreement to resell compared to $3 million at December 31, 2000. The Company is
subject to exposure for fluctuations in interest rates. Adverse changes in
interest rates could impact negatively the value of mortgage-backed securities,
as well as the levels of interest income to be derived from these assets.

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 prepayments, repurchases, defaults and liquidations), the
pass-through rate and interest rate fluctuations. Changes in interest rates
could impact 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.

The Company currently has no outstanding borrowings.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Refer to the Index to Financial Statements on page 18 for the required
information.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in or disagreements with accountants on any
matter of accounting principles, practices or financial statement disclosure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The Company's Board of Directors consists of five members. The Company does
not anticipate that it will require any additional employees because it has
retained the Bank to perform certain functions pursuant to the Advisory
Agreement described above. Each officer of the Company currently is also an
officer of the Bank and/or affiliates of the Bank. The Company maintains
corporate records and audited financial statements that are separate from those
of the Bank or any of the Bank's affiliates. None of the officers, directors or
employees of the Company will have a direct or indirect pecuniary interest in
any Mortgage Asset to be acquired or disposed of by the Company or in any
transaction in which the Company has an interest or will engage in acquiring,
holding and managing Mortgage Assets.

Pursuant to terms of the Preferred Shares, the Company's Independent
Directors will consider the interests of the holders of both the Preferred
Shares and the Common Stock in determining whether any proposed action requiring
their approval is in the best interests of the Company.

The persons who are directors and executive officers of the Company are as
follows:

NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------

Paul R. Skubic.......................................... 53 Chairman of the Board, President
Pamela C. Piarowski..................................... 42 Chief Financial Officer
Frank M. Novosel........................................ 55 Treasurer, Director
Teresa L. Patton........................................ 54 Vice President of Operations
Margaret M. Sulkin...................................... 43 Assistant Treasurer
Delbert J. Wacker....................................... 70 Director
David J. Blockowicz..................................... 59 Director
Forrest M. Schneider.................................... 54 Director

The following is a summary of the experience of the executive officers and
directors of the Company:

Mr. Skubic has been Vice President and Controller of the Bank and Chief
Accounting Officer for Harris Bankcorp, Inc., and the Bank since 1990. Prior to
joining Harris Bankcorp, Inc., Mr. Skubic was employed by Arthur Andersen & Co.
He is a certified public accountant.

Ms. Piarowski has been Senior Vice President and Chief Financial Officer of
Harris Bankcorp, Inc. since June 2001. From June 1995 to that time she held
several positions in the Bank's finance group, including Vice President and
Corporate Controller. From 1989 to 1995, Ms. Piarowski was with the Chicago
Branch of Bank of Montreal. Before joining Bank of Montreal, Ms. Piarowski was
employed by Coopers & Lybrand. She is a certified public accountant.

Mr. Novosel has been a Vice President in the Treasury Group of the Bank
since 1995. Previously, he served as Treasurer of Harris Bankcorp, Inc.,
managing financial planning. Mr. Novosel is a Chartered Financial Analyst and a
member of the Investment Analysts' Society of Chicago.

Ms. Patton has been a Vice President in Residential Mortgages at the Bank
for 15 years and is currently the Director of Secondary Marketing. Prior to this
position she was the Manager of Sales and Delivery for the Residential Mortgage
Division. She currently serves on the Bank's Asset/Liability Committee, and has
been employed by the Bank for over 25 years holding positions in Consumer and
Commercial Banking.

Ms. Sulkin has been a Vice President in the Taxation Department of the Bank
since 1992. Ms. Sulkin has been employed by the Bank since 1984. Prior to
joining the Bank, she was employed by KPMG Peat Marwick LLP. She is a certified
public accountant.

Mr. Wacker retired as a partner from Arthur Andersen & Co. in 1987 after 34
years. From July 1988 to November 1990, he was Vice President -Treasurer,
Parkside Medical Services, a subsidiary of Lutheran General Health System. From
November 1990 to September 1993, he completed various financial consulting
projects for Lutheran General.

Mr. Blockowicz is a certified public accountant and is a partner with
Blockowicz & Del Guidicie LLC. Prior to forming his firm, Mr. Blockowicz was a
partner with Arthur Andersen & Co. through 1990.

Mr. Schneider is President and Chief Executive Officer of Lane Industries,
Inc. Mr. Schneider is a director of Lane Industries and director of General
Binding Corporation. He has been employed by Lane Industries since 1976. He is a
graduate of the University of Illinois where he received his B.S. and masters
degree in finance.

INDEPENDENT DIRECTORS

The terms of the Preferred Shares require that, as long as any Preferred
Shares are outstanding, certain actions by the Company be approved by a majority
of the Company's Independent Directors. Delbert J. Wacker, David J. Blockowicz
and Forrest M. Schneider are the Company's Independent Directors.

If at any time the Company fails to declare and pay a quarterly dividend
payment on the Preferred Shares, the number of directors then constituting the
Board of Directors of the Company will be increased by two at the Company's next
annual meeting and the holders of Preferred Shares, voting together with the
holders of any other outstanding series of Preferred Stock as a single class,
will be entitled to elect two additional directors to serve on the Company's
Board of Directors. Any member of the Board of Directors elected by holders of
the Company's Preferred Shares will be deemed to be an Independent Director for
purposes of the actions requiring the approval of a majority of the Independent
Directors.

AUDIT COMMITTEE

The Board of Directors of the Company has established an audit committee
which will review the engagement of independent accountants and review their
independence. The audit committee will also review the adequacy of the Company's
internal accounting controls. The audit committee is comprised of Delbert J.
Wacker, David J. Blockowicz and Forrest M. Schneider.

COMPENSATION OF DIRECTORS AND OFFICERS

The Company pays the Independent Directors of the Company fees for their
services as directors. The Independent Directors receive annual compensation of
$10,000 plus a fee of $750 for attendance (in person or by telephone) at each
meeting of the Board of Directors.

ITEM 11. EXECUTIVE COMPENSATION

The Company will not pay any compensation to its officers or employees or
to directors who are not Independent Directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

No person owns of record or is known by the Company to own beneficially
more than 5% of the outstanding 7 3/8% Noncumulative Exchangeable Preferred
Stock, Series A.

(B) SECURITY OWNERSHIP OF MANAGEMENT

The following table shows the ownership of 7 3/8% Noncumulative
Exchangeable Preferred Stock, Series A, by the only officer or director who
owns any such shares.

NAME OF AMOUNT OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
-------------- ---------------- -------------------- --------

Preferred Stock...................................... Paul R. Skubic 300 Shares .003%

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS

The Bank, through its wholly-owned subsidiary, HCH, indirectly owns
100% of the common stock of the Company.

As described on page 4 of this Report, a substantial portion of the
assets of the Company initially consisted of Notes issued by the Bank. The
Notes mature on October 1, 2027 and pay interest at 6.4% per annum. During
2001, the Company received repayments on the Notes of $47 million compared
to 2000 repayments of $34 million. In years ended December 31, 2001 and
2000, the Bank paid interest on the Notes in the amount of $5.2 million and
$7.8 million, respectively, to the Company.

The Company purchases U.S. Treasury and Federal agency securities from
the Bank under agreements to resell identical securities. At December 31,
2001, the Company held $21 million of such assets and had earned $1.6
million of interest from the Bank during 2001. At December 31, 2000, the
Company held $3 million of such assets and earned $1.9 million of interest
for 2000. The Company receives rates on these assets comparable to the
rates that the Bank offers to unrelated counterparties under similar
circumstances.

During 2001 and 2000, the Company acquired $273 million and $145
million, respectively, of GNMA securities at fair value from the Bank.
During 2001 and 2000, the Company acquired $624 million and $25 million of
U.S. Treasury securities at fair value from the Bank.

The Bank and the Company have entered into a Servicing Agreement and
an Advisory Agreement, the terms of which are described in further detail
on page 5 of this Report. In 2001, the Bank received payments of $243
thousand and $35 thousand, respectively, compared to $373 thousand and $57
thousand for 2000, under the terms of these agreements.

For the six-month period ended June 30, 2000, the Company had an
agreement with the Bank to act as Transfer Agent and Registrar for the
Preferred Shares. The total payment to the Bank for the six months ended
June 30, 2000 was $10 thousand. As of July 1, 2000, the Company entered
into an agreement with an independent company to act as Transfer Agent and
Registrar for the Preferred Shares.

(B) CERTAIN BUSINESS RELATIONSHIPS

Paul R. Skubic, Chairman of the Board of the Company, and all of its
executive officers, Pamela C. Piarowski, Frank M. Novosel, Teresa L. Patton
and Margaret M. Sulkin, are also officers of the Bank.

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed with Report:

(1) Financial Statements (See page 18 for a listing of all financial
statements included in Item 8)

(2) Financial Statement Schedules

All schedules normally required by Form 10-K are omitted since they are
either not applicable or because the required information is shown in the
financial statements or notes thereto.

(3) Exhibits:

*3(a)(I) Articles of Incorporation of the Company
*3(a)(ii) Form of Articles of Amendment and Restatement of the Company
establishing the Series A Preferred Shares
*3(b) Bylaws of the Company
*4 Specimen of certificate representing Series A Preferred
Shares
*10(a) Form of Servicing Agreement between the Company and the Bank
*10(b) Form of Advisory Agreement between the Company and the Bank
*10(c) Form of Bank Loan Agreement between the Company and the Bank
*10(d) Form of Mortgage Loan Assignment Agreement between the
Company and the Bank
24 Power of attorney

---------------
* Incorporated by reference to the exhibit of the same number filed with the
Company's Registration Statement on Form S-11 (Securities and Exchange
Commission file number 333-40257)

(b) No reports on Form 8-K were filed.

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 22nd day of March 2002.

/s/ PAUL R. SKUBIC
----------------------------------------
Paul R. Skubic
Chairman of the Board and President
/s/ PAMELA C. PIAROWSKI
----------------------------------------
Pamela C. Piarowski
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by Paul R. Skubic, Chairman of the Board and President of
the Company, as attorney-in-fact for the following Directors on behalf of Harris
Preferred Capital Corporation of the 22nd day of March 2002.

David J. Blockowicz Forrest M. Schneider
Frank M. Novosel Delbert J. Wacker

Paul R. Skubic
Attorney-In-Fact
Supplemental Information

No proxy statement will be sent to security holders in 2002.

INDEX TO FINANCIAL STATEMENTS

The following financial statements are included in Item 8 of this Annual
Report on Form 10-K:

HARRIS PREFERRED CAPITAL CORPORATION

Financial Statements

Report of Independent Accountants

Balance Sheets

Statements of Operations and Comprehensive Income

Statements of Changes in Stockholders' Equity

Statements of Cash Flows

Notes to Financial Statements

HARRIS TRUST AND SAVINGS BANK

Financial Review

Financial Statements

Joint Independent Auditors

Report of Independent Accountants

Consolidated Statements of Condition

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Stockholders' Equity

Consolidated Statements of Cash Flows

Notes to Financial Statements

All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements and notes hereof.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
of Harris Preferred Capital Corporation

In our opinion, the accompanying balance sheets and the related statements of
operations and comprehensive income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Harris Preferred Capital Corporation (the "Company") at December 31, 2001 and
2000, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

January 16, 2002
Chicago, Illinois

HARRIS PREFERRED CAPITAL CORPORATION
BALANCE SHEETS

DECEMBER 31
---------------------
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)

ASSETS
Cash on deposit with Harris Trust and Savings Bank.......... $ 506 $ 819
Securities purchased from Harris Trust and Savings Bank
under agreement to resell................................. 21,000 3,000
Notes receivable from Harris Trust and Savings Bank......... 55,962 102,960
Securities available-for-sale:
Mortgage-backed........................................... 319,644 352,965
U.S. Treasury............................................. 84,932 24,850
Securing mortgage collections due from Harris Trust and
Savings Bank.............................................. 5,353 2,786
Other assets................................................ 1,945 2,559
-------- --------
TOTAL ASSETS.............................................. $489,342 $489,939
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 100 $ 115
-------- --------
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
Common stock ($1 par value); 1,000 shares authorized, issued
and outstanding........................................... 1 1
Additional paid-in capital.................................. 240,733 240,733
Earnings in excess of distributions......................... 385 536
Accumulated other comprehensive income -- net unrealized
losses on
available-for-sale securities............................. (1,877) (1,446)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................ 489,242 489,824
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $489,342 $489,939
======== ========

The accompanying notes are an integral part of these financial statements.

HARRIS PREFERRED CAPITAL CORPORATION

STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)

INTEREST INCOME:
Securities purchased from Harris Trust and Savings Bank
under agreement to resell........................... $ 1,566 $ 1,907 $ 984
Notes receivable from Harris Trust and Savings Bank.... 5,208 7,807 10,808
Securities available-for-sale:
Mortgage-backed..................................... 20,828 22,287 19,796
U.S. Treasury....................................... 1,113 311 --
---------- ---------- ----------
Total interest income............................. 28,715 32,312 31,588
NON-INTEREST INCOME:
Gain on sale of securities............................. 4,796 257 --
---------- ---------- ----------
4,796 257 --
OPERATING EXPENSES:
Loan servicing fees paid to Harris Trust and Savings
Bank................................................ 243 373 511
Advisory fees paid to Harris Trust and Savings Bank.... 35 57 50
General and administrative............................. 300 290 300
---------- ---------- ----------
Total operating expenses.......................... 578 720 861
---------- ---------- ----------
Net income............................................... 32,933 31,849 30,727
Preferred dividends...................................... 18,438 18,438 18,438
---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER............... $ 14,495 $ 13,411 $ 12,289
========== ========== ==========
Basic and diluted earnings per common share.............. $14,495.00 $13,411.00 $12,289.00
========== ========== ==========
Net income............................................... $ 32,933 $ 31,849 $ 30,727
Other comprehensive income/(loss) -- net unrealized
gains/(losses) on available-for-sale securities........ (5,441) 15,746 (19,694)
---------- ---------- ----------
Comprehensive income..................................... $ 27,492 $ 47,595 $ 11,033
========== ========== ==========

The accompanying notes are an integral part of these financial statements.

HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

ACCUMULATED
ADDITIONAL EARNINGS IN OTHER TOTAL
PREFERRED COMMON PAID-IN EXCESS OF COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL DISTRIBUTIONS INCOME (LOSS) EQUITY
--------- ------ ---------- ------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)

BALANCE AT DECEMBER 31, 1998........ $250,000 $ 1 $240,733 $ 392 $ 2,502 $493,628
Net income........................ -- -- -- 30,727 -- 30,727
Other comprehensive loss.......... -- -- -- -- (19,694) (19,694)
Dividends declared on common stock
($12,332.00 per share).......... -- -- -- (12,332) -- (12,332)
Dividends declared on preferred
stock ($1.8438 per share)....... -- -- -- (18,438) -- (18,438)
-------- --- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999........ $250,000 $ 1 $240,733 $ 349 $(17,192) $473,891
Net income........................ -- -- -- 31,849 -- 31,849
Other comprehensive income........ -- -- -- -- 15,746 15,746
Dividends declared on common stock
($13,224.00 per share).......... -- -- -- (13,224) -- (13,224)
Dividends declared on preferred
stock ($1.8438 per share)....... -- -- -- (18,438) -- (18,438)
-------- --- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000........ $250,000 $ 1 $240,733 $ 536 $ (1,446) $489,824
======== === ======== ======== ======== ========
Net income........................ -- -- -- 32,933 -- 32,933
Other comprehensive loss.......... -- -- -- -- (431) (431)
Dividends declared on common stock
($14,646.00 per share).......... -- -- -- (14,646) -- (14,646)
Dividends declared on preferred
stock ($1.8438 per share)....... -- -- -- (18,438) -- (18,438)
-------- --- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2001........ $250,000 $ 1 $240,733 $ 385 $ (1,877) $489,242
======== === ======== ======== ======== ========

The accompanying notes are an integral part of these financial statements.

HARRIS PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31
-------------------------------
2001 2000 1999
--------- --------- --------
(IN THOUSANDS)

OPERATING ACTIVITIES:
Net income............................................... $ 32,933 $ 31,849 $ 30,727
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of securities.......................... (4,796) (257) --
Net decrease in other assets........................ 614 28 59
Net (decrease) increase in accrued expenses......... (15) 18 35
--------- --------- --------
Net cash provided by operating activities........ 28,736 31,638 30,821
--------- --------- --------
INVESTING ACTIVITIES:
Net (increase) decrease in securities purchased from
Harris Trust and Savings Bank under agreement to
resell................................................ (18,000) 12,000 2,004
Repayments of notes receivable from Harris Trust and
Savings Bank.......................................... 46,998 33,789 71,186
(Increase) decrease in securing mortgage collections due
from Harris Trust and Savings Bank.................... (2,567) 339 10,565
Purchases of securities available-for-sale............... (897,270) (169,678) (95,628)
Proceeds from maturities and sales of securities
available-for-sale.................................... 874,874 123,131 22,163
--------- --------- --------
Net cash provided by/(used in) investing
activities..................................... 4,035 (419) 10,290
--------- --------- --------
FINANCING ACTIVITIES:
Cash dividends paid on preferred stock................... (18,438) (18,438) (18,438)
Cash dividends paid on common stock...................... (14,646) (13,224) (22,032)
--------- --------- --------
Net cash used by financing activities............ (33,084) (31,662) (40,470)
--------- --------- --------
Net increase (decrease) in cash on deposit with Harris
Trust and Savings Bank................................ (313) (443) 641
Cash on deposit with Harris Trust and Savings Bank at
beginning of period................................... 819 1,262 621
--------- --------- --------
Cash on deposit with Harris Trust and Savings Bank at end
of period............................................. $ 506 $ 819 $ 1,262
========= ========= ========

The accompanying notes are an integral part of these financial statements.

HARRIS PREFERRED CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND 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. The Company has elected to be a REIT under sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
will generally not be subject to Federal income tax to the extent that it meets
all of the REIT requirements in the Internal Revenue Code Sections 856-860. All
of the 1,000 shares of the Company's common stock, par value $1.00 per share
(the "Common Stock"), are owned by Harris Capital Holdings, Inc. ("HCH"), a
wholly-owned subsidiary of the Bank. On December 30, 1998, the Bank transferred
its ownership of the common stock of the Company to HCH. The Bank is required to
maintain direct or indirect ownership of at least 80% of the outstanding Common
Stock of the Company for as long as any 7 3/8% Noncumulative Exchangeable
Preferred Stock, Series A (the "Preferred Shares"), $1.00 par value, is
outstanding. The Company was formed by the Bank to provide investors with the
opportunity to invest in residential mortgages and other real estate assets and
to provide the Bank with a cost-effective means of raising capital for federal
regulatory purposes.

On February 11, 1998, the Company completed an initial public offering (the
"Offering") of 10,000,000 shares of the Company's Preferred Shares, receiving
proceeds of $242,125,000, net of underwriting fees. The Preferred Shares are
traded on the New York Stock Exchange. Concurrent with the issuance of the
Preferred Shares, the Bank contributed additional capital of $250 million to the
Company.

The Company used the proceeds raised from the initial public offering of
the Preferred Shares and the additional capital contributed by the Bank to
purchase $356 million of Notes from the Bank and $135 million of mortgage-backed
securities at their estimated fair value.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on deposit with the Bank.

ALLOWANCE FOR POSSIBLE LOAN LOSSES

The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs. Known
losses of principal on impaired loans are charged off. The provision for loan
losses is based on past loss experience, management's evaluation of the loan
portfolio securing the Mortgage Assets under current economic conditions and
management's estimate of anticipated, but as yet not specifically identified,
loan losses. Such estimates are reviewed periodically and adjustments, if
necessary, are recorded during the periods in which they become known. At
December 31, 2001 and 2000, no allowance for possible loan losses was recorded
under this policy.

INCOME TAXES

The Company has elected to be taxed as a REIT commencing with its taxable
year ended December 31, 1998 and intends to comply with the provisions of the
Code with respect thereto. The Company does not expect to be subject to Federal
income tax because assets, income distribution and stock ownership tests in
Internal Revenue Code Sections 856-860 are met. Accordingly, no provision for
income taxes is included in the accompanying financial statements.

The REIT Modernization Act, which took effect on January 1, 2001, modified
certain provisions of the Internal Revenue Code of 1986, as amended, with
respect to the taxation of REITs. A key provision of this tax law change reduced
the required level of distributions by a REIT from 95% to 90% of ordinary
taxable income starting in calendar year 2001.

SECURITIES

The Company classifies all securities as available-for-sale, even if the
Company has no current plans to divest. Available-for-sale securities are
reported at fair value with unrealized gains and losses included as a separate
component of stockholders' equity.

Interest income on securities, including amortization of discount or
premium, is included in earnings. Realized gains and losses, as a result of
securities sales, are included in securities gains, with the cost of securities
sold determined on the specific identification basis.

The Company purchases U.S. Treasury and Federal agency securities from the
Bank under agreements to resell identical securities. The amounts advanced under
these agreements represent short-term loans and are reflected as receivables in
the Balance Sheet. Securities purchased under agreement to resell totaled $21
million at December 31, 2001 compared to $3 million at December 31, 2000. The
securities underlying the agreements are book-entry securities. Securities are
transferred by appropriate entry into the Company's account with the Bank under
a written custodial agreement with the Bank that explicitly recognizes the
Company's interest in these securities.

The Company's investment securities are exposed to various risks such as
interest rate, market and credit. Due to the level of risk associated with
certain investment securities and the level of uncertainty related to changes in
the value of investment securities, it is at least reasonably possible that
changes in risks in the near term would materially affect the carrying value of
investments in securities available-for-sale currently reported in the balance
sheets.

NEW ACCOUNTING PRONOUNCEMENTS

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.

MANAGEMENT'S ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3. NOTES RECEIVABLE FROM THE BANK

On February 11, 1998, proceeds received from the Offering were used in part
to purchase $356 million of Notes at a rate of 6.4%. The Notes are secured by
mortgage loans originated by the Bank. The principal amount of the Notes equals
approximately 80% of the aggregate outstanding principal amount of the Mortgage
Loans.

The Notes are recourse only to the Securing Mortgage Loans that are secured
by real property. The Notes mature on October 1, 2027. Payments of principal and
interest on the Notes are recorded monthly from payments received on the
Securing Mortgage Loans. The Company has a security interest in the real
property securing the underlying mortgage loans and is entitled to enforce
payment on the Securing Mortgage Loans in its own name if a mortgagor should
default. In the event of default, the Company has the same rights as the
original mortgagee to foreclose the mortgaged property and satisfy the
obligations of the Bank out of the proceeds. The Securing Mortgage Loans are
serviced by the Bank, as agent of the Company.

The Company intends that each mortgage loan securing the Notes will
represent a first lien position and will be originated in the ordinary course of
the Bank's real estate lending activities based on the underwriting standards
generally applied (at the time of origination) for the Bank's own account. The
Company also intends that all Mortgage Assets held by the Company will meet
market standards, and servicing guidelines promulgated by the Company, and
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("FHLMC") guidelines and procedures.

The balance of Securing Mortgage Loans at December 31, 2001 and 2000 was
$70 million and $129 million, respectively. The weighted average interest rate
on those loans at December 31, 2001 and 2000 was 7.611% and 7.858%,
respectively.

None of the Securing Mortgage Loans collateralizing the Notes were on
nonaccrual status at December 31, 2001 or 2000.

A majority of the collateral securing the underlying mortgage loans is
located in Illinois and Arizona. The financial viability of customers in these
states is, in part, dependent on those states' economies. The Company's maximum
risk of accounting loss, should all customers in Illinois and Arizona fail to
perform according to contract terms and all collateral prove to be worthless,
was approximately $46 million and $12 million, respectively, at December 31,
2001 and $79 million and $18 million, respectively, as of December 31, 2000.

4. SECURITIES

DECEMBER 31, 2001 DECEMBER 31, 2000
---------------------------------------------- ----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(IN THOUSANDS)

AVAILABLE-FOR-SALE
SECURITIES
Mortgage-backed...... $321,516 $334 $2,206 $319,644 $354,407 $1,531 $2,973 $352,965
U.S. Treasury........ $ 84,937 $ -- $ 5 $ 84,932 $ 24,854 $ -- $ 4 $ 24,850
-------- ---- ------ -------- -------- ------ ------ --------
Total Securities..... $406,453 $334 $2,211 $404,576 $379,261 $1,531 $2,977 $377,815
======== ==== ====== ======== ======== ====== ====== ========

Mortgage-backed securities include ("GNMA") Government National Mortgage
Association Platinum Certificates. The contractual maturities of the
mortgage-backed securities exceed ten years. 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. The U.S. Treasury
Bills held at December 31, 2001 mature within the next twelve months.

5. COMMON AND PREFERRED STOCK

On February 11, 1998, the Company issued 10,000,000 Preferred Shares,
Series A, at a price of $25 per share pursuant to its Registration Statement on
Form S-11. Proceeds from this issuance, net of underwriting fees, totaled
$242,125,000. The liquidation value of each Preferred Share is $25 plus any
authorized, declared and unpaid dividends. Except upon the occurrence of certain
events, the Preferred Shares are not redeemable by the Company prior to March
30, 2003. On or after such date, the Preferred Shares will be redeemable at the
option of the Company, in whole or in part, at the liquidation preference
thereof, plus the quarterly accrued and unpaid dividends, if any, to the date of
redemption. The Company may not redeem the Preferred Shares without prior
approval from the Board of Governors of the Federal Reserve System or the
appropriate successor federal regulatory agency. Except under certain limited
circumstances, as defined, the holders of the Preferred Shares have no voting
rights. The Preferred Shares are automatically exchangeable for a new series of
preferred stock of the Bank upon the occurrence of certain events.

Holders of Preferred Shares are entitled to receive, if declared by the
Board of Directors of the Company, noncumulative dividends at a rate of 7 3/8%
per annum of the $25 per share liquidation preference (an amount equivalent to
$1.84375 per share per annum). Dividends on the Preferred Shares, if authorized
and declared, are payable quarterly in arrears on March 30, June 30, September
30, and December 30 each year. Dividends paid to the holders of the Preferred
Shares for the years ended December 31, 2001 and 2000 were $18,438,000 in both
years. The allocations of the distributions declared and paid for income tax
purposes for December 31, 2001 and 2000 were 88.4% of ordinary income and 11.6%
of capital gain and 99.2% of ordinary income and .8% of short term capital gain,
respectively.

On December 30, 1998, the Bank contributed the Common Stock of the Company
to HCH. The Bank is required to maintain direct or indirect ownership of at
least 80% of the outstanding Common Stock of the Company for as long as any
Preferred Shares are outstanding. Dividends on Common Stock are paid if and when
authorized and declared by the Board of Directors out of funds legally available
after all preferred dividends have been paid. A Common Stock dividend of $14,300
per common share was declared on December 4, 2001, to the stockholder of record
on December 15, 2001 and paid on December 31, 2001. The allocations of the
distribution declared and paid for income tax purposes were 88.4% of ordinary
income and 11.6% of capital gain. A Common Stock dividend of $13,000 per common
share was declared on December 4, 2000, to the stockholder of record on December
15, 2000 and paid on December 30, 2000. The allocations of the distribution
declared and paid for income tax purposes were 99.2% of ordinary income and .8%
of capital gain. In addition, on September 12, 2001 and September 12, 2000, the
Company paid a cash dividend of $346 thousand and $224 thousand, respectively,
on the outstanding common shares to the stockholder of record on September 4,
2001 and September 4, 2000, respectively. These dividends were paid on the
Company's 2000 and 1999 REIT ordinary taxable income.

6. TRANSACTIONS WITH AFFILIATES

The Company entered into an advisory agreement (the "Advisory Agreement")
with the Bank pursuant to which the Bank administers the day-to-day operations
of the Company. The Bank is responsible for (i) monitoring the credit quality of
Mortgage Assets held by the Company; (ii) advising the Company with respect to
the reinvestment of income from and payments on, and with respect to the
acquisition, management, financing, and disposition of the Mortgage Assets held
by the Company; and (iii) monitoring the Company's compliance with the
requirements necessary to qualify as a REIT.

The Advisory Agreement in effect in 2001 and 2000 entitled the Bank to
receive advisory fees of $35,000 and $57,000, respectively. For 2002, advisory
fees of $60,000 have been approved by the Board of Directors.

The Securing Mortgage Loans are serviced by the Bank pursuant to the terms
of a servicing agreement (the "Servicing Agreement"). The Bank receives a fee
equal to 0.25% per annum on the principal balances of the loans serviced. The
Servicing Agreement requires the Bank to service the mortgage loans in a manner
generally consistent with accepted secondary market practices, and servicing
guidelines promulgated by the Company and with Fannie Mae and FHLMC guidelines
and procedures. In 2001 and 2000 the Bank received payments of $243 thousand and
$373 thousand, respectively.

The Company purchases U.S. Treasury and Federal agency securities from the
Bank under agreements to resell identical securities. At December 31, 2001, the
Company held $21 million of such assets and had earned $1.6 million of interest
from the Bank during 2001. At December 31, 2000 the Company held $3 million of
such assets and earned $1.9 million of interest for 2000. The Company receives
rates on these assets comparable to the rates that the Bank offers to unrelated
counterparties under similar circumstances.

During 2001 and 2000, the Company acquired $273 million and $145 million,
respectively, of GNMA securities at fair value from the Bank. During 2001 and
2000, the Company acquired $624 million and $25 million of U.S. Treasury
securities at fair value from the Bank.

For the six-month period ended June 30, 2000 the Company had an agreement
with the Bank to act as Transfer Agent and Registrar for the Preferred Shares.
The total payment to the Bank for the six months ended June 30, 2000 was $10
thousand. As of July 1, 2000 the Company entered into an agreement with an
independent company to act as Transfer Agent and Registrar for the Preferred
Shares.

7. 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.

8. COMMITMENTS AND CONTINGENCIES

Legal proceedings in which the Company is a defendant may arise in the
normal course of business. At December 31, 2001 and 2000, there was no pending
litigation against the Company.

9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth selected quarterly financial data for the
Company:

YEAR ENDED DECEMBER 31, 2001 YEAR ENDED DECEMBER 31, 2000
------------------------------------------- ---------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)

Total interest
income............... $ 7,863 $ 7,724 $ 7,468 $ 5,660 $ 7,929 $ 8,012 $ 8,106 $ 8,265
Total noninterest
income............... 2,203 -- 2,593 -- -- -- 257 --
Total operating
expenses............. 160 106 114 198 149 220 134 217
--------- --------- --------- ------- --------- --------- --------- ---------
Net income............. 9,906 7,618 9,947 5,462 7,780 7,792 8,229 8,048
Preferred dividends.... 4,609 4,609 4,609 4,611 4,609 4,609 4,609 4,611
--------- --------- --------- ------- --------- --------- --------- ---------
Net income available to
common stockholder... 5,297 3,009 5,338 851 3,171 3,183 3,620 3,437
========= ========= ========= ======= ========= ========= ========= =========
Basic and diluted
income per common
share................ $5,297.00 $3,008.00 $5,338.00 $851.00 $3,171.00 $3,183.00 $3,620.00 $3,437.00
========= ========= ========= ======= ========= ========= ========= =========

FINANCIAL STATEMENTS OF HARRIS TRUST AND SAVINGS BANK

The following unaudited financial information and audited financial
statements for Harris Trust and Savings Bank are included because the Preferred
Shares are automatically exchangeable for a new series of preferred stock of the
Bank upon the occurrence of certain events.

HARRIS TRUST AND SAVINGS BANK

CERTAIN INFORMATION REGARDING HARRIS TRUST AND SAVINGS BANK

Harris Trust and Savings Bank ("the Bank") is an Illinois banking operation
located at 111 West Monroe Street, Chicago, Illinois 60603. The Bank is a
wholly-owned subsidiary of Harris Bankcorp, Inc., a multibank holding company
incorporated under the laws of the State of Delaware and headquartered in
Chicago and registered under the Bank Holding Company Act of 1956, as amended.
Harris Bankcorp, Inc. is a wholly-owned subsidiary of Bankmont Financial Corp.
("Bankmont"). Harris Bankcorp, Inc. also owns 27 other banks, 26 in the counties
surrounding Chicago and one in Arizona. On July 1, 2000, Bankmont contributed
100 percent of the common stock of its wholly-owned subsidiary, Harris Bankmont,
Inc., a Chicago metropolitan area multibank holding company, to Harris Bankcorp,
Inc. Immediately thereafter, Harris Bankmont, Inc. was liquidated and dissolved
into Harris Bankcorp, Inc. under the corporation law of Delaware. Harris
Bankcorp, Inc. was the surviving corporation. The assets of Harris Bankmont,
Inc. consisted primarily of the stock of its thirteen community banks. This
combination was accounted for at historical cost, similar to a pooling of
interests. Bankmont is a wholly-owned subsidiary of Bank of Montreal. At
December 31, 2001, Harris Bankcorp's assets amounted to $29.05 billion, with the
Bank representing approximately 68 percent of that total.

The Bank, an Illinois state-chartered bank has its principal office, 52
domestic branch offices and 101 automated teller machines ("ATMs") located in
the Chicago area. The Bank also has offices in Atlanta, Detroit, Los Angeles and
San Francisco; a foreign branch office in Nassau; and an Edge Act subsidiary,
Harris Bank International Corporation ("HBIC"), engaged in international banking
and finance in New York. At December 31, 2001, the Bank had total assets of
$19.74 billion, total deposits of $11.19 billion, total loans of $9.97 billion
and equity capital of $1.57 billion.

The Bank provides a broad range of banking and financial services to
individuals and corporations domestically and abroad, including corporate
banking, personal financial services, personal trust services and investment
services. The Bank also offers (i) demand and time deposit accounts; (ii)
various types of loans (including term, real estate, revolving credit facilities
and lines of credit); (iii) sales and purchases of foreign currencies; (iv)
interest rate management products (including swaps, forward rate agreements and
interest rate guarantees); (v) cash management services; (vi) underwriting of
municipal bonds; (vii) financial consulting; and (viii) a wide variety of
personal trust and trust-related services.

Competitors of the Bank include commercial banks, savings and loan
associations, consumer and commercial finance companies, credit unions and other
financial services companies. Based on legislation passed in 1986 that allows
Illinois banks to be acquired by banks or holding companies in states with a
reciprocal law in effect together with the Federal Interstate Banking Efficiency
Act of 1994, that allows for both interstate banking and interstate branching in
certain circumstances, the Bank believes that the level of competition will
increase in the future.

The Bank is subject to regulation by the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation. As a
state-chartered bank, it is also regulated by the Illinois Office of Banks and
Real Estate. These regulatory bodies examine the Bank and supervise numerous
aspects of its business. The Federal Reserve System regulates money and credit
conditions and interest rates in order to influence general economic conditions,
primarily through open market operations in U.S. Government securities, varying
the discount rate on bank borrowings, setting reserve requirements against
financial institution deposits and prescribing minimum capital requirements for
member banks. These policies have a significant influence on overall growth and
distribution of bank loans, investments and deposits, and affect interest rates
charged on loans and earned on investments or paid for time, savings and other
deposits. Board of Governors monetary policies have had a significant effect on
the operating results of commercial banks in the past and this is expected to
continue.

Although primarily focusing on U.S. domestic customers, identifiable
foreign assets accounted for 1.16 percent of the Bank's total consolidated
assets at December 31, 2001 and foreign net income was approximately 21.54
percent of the Bank's consolidated net income for the year then ended. Foreign
net
31

income is generated from three primary sources: (i) lending to foreign banks and
other financial institutions; (ii) time deposits held in foreign banks; and
(iii) foreign exchange trading profits of approximately $8.8 million.

Corporate Trust Sale

In March 2000, Bankcorp sold its corporate trust business. In separate and
unrelated transactions, the indenture trust business was sold to a subsidiary of
The Bank of New York Company, Inc., and the shareholder services business to
Computershare Limited. The combined sales resulted in a pre-tax gain to Bankcorp
of $47.0 million. The Bank recognized $45.6 million of that gain. The Bank does
not believe that the sale of the corporate trust business will have a material
impact on the results of operations for future periods.

Merchant Card Sale

In December 2000, the Bank sold its merchant card business to a credit card
processing joint venture (Moneris) formed between Bank of Montreal and Royal
Bank of Canada. The sale resulted in a pretax gain to the Bank of $60.2 million,
which was eliminated in the consolidation of the Bank's results with Bank of
Montreal. The Bank does not believe that the sale of the merchant card business
will have a material impact on the results of operations for future periods.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

2001 COMPARED TO 2000

SUMMARY

The Bank's 2001 net income was $82.3 million, down $144.2 million, or 64
percent from 2000. Earnings comparability for 2001 and 2000 was affected by both
the sale of the Bank's corporate trust business in first quarter 2000 and the
sale of its merchant card business in December 2000. Excluding the effect of the
$45.6 million pretax gain on sale of the corporate trust business and related
charges, and the $60.2 million pretax gain from the sale of the merchant card
business and related operating results, year 2000 earnings were $159.2 million.
In addition, the Bank had special charges for the current year, a third quarter
special provision for loan losses of $121 million and a special pretax charge of
$3.2 million in the fourth quarter relating to impairments in the value of
certain equity investments. Excluding the effect of these special charges and
the impact of divested businesses, earnings were $167.1 million, representing an
increase of 5 percent over last year. This increase was attributable to
continued strong business growth in consumer, mortgage and small business loans
and retail deposits, and a more favorable interest rate environment that
contributed to greater earnings from treasury and trading activities. These were
largely offset by an increased loan loss provision associated with the impact of
a weakened economy primarily on the Bank's corporate loan portfolio, and by
expenses related to business growth and expansion. Excluding the special
charges, gains and related operating results for businesses sold in 2000, return
on average common equity ("ROE") for 2001 and 2000 was 10.72 percent and 12.04
percent, respectively. Excluding the special charges described above and gains
and related operating results for businesses sold in 2000, return on average
assets ("ROA") was 0.82 percent and 0.76 percent, respectively.

Excluding the special charges described above and gains and related
operating results for businesses sold in 2000, earnings before amortization of
goodwill and other valuation intangibles ("cash earnings") were $181.3 million
in 2001, a 5 percent increase compared to 2000. Cash return on average common
stockholder's equity ("cash ROE") represents net income applicable to common
stock plus after-tax amortization expense of goodwill and other valuation
intangibles, divided by average common stockholder's equity less average
intangible assets. Excluding the special charges described above and gains and
related operating results for businesses sold in 2000, cash ROE was 13.49
percent in 2001 compared to 15.78 percent in 2000.

For 2001, net interest income on a fully taxable equivalent basis of $487.5
million was up 10 percent from 2000. Net interest margin rose from 2.47 percent
to 2.80 percent in 2001, reflecting the impact of a declining rate environment
during the past year. Average earning assets declined $580 million or 3 percent
to $17.43 billion in the current year, attributable to a decrease of 2 percent
or $186 million in average loans and $532 million in investment securities.

Noninterest income decreased $60.9 million to $457.2 million for 2001.
Excluding the effect of the special items, gains and operating results from the
corporate trust and merchant card businesses sold in 2000, noninterest income
increased 20 percent from 2000. Net gains from portfolio securities increased
$20.6 million, trading profits increased $8.0 million and service charges on
deposits increased $2.4 million. Inter-corporate service charges increased $32.4
million. Trust and investment management fees decreased $9.4 million and
merchant and charge card fees declined $21.0 million, both declines resulting
from the divestiture of businesses in the prior year.

Total noninterest expenses were $632.2 million, up $44.4 million or 8
percent from 2000. Excluding the expenses associated with businesses sold in
2000, noninterest expenses increased 13 percent, reflecting expansion
initiatives in our retail, private client and corporate and investment banking
businesses. Income taxes were $10.2 million, down $87.1 million from 2000,
reflecting substantially lower pretax income in 2001.

The provision for loan losses was $203.5 million in 2001, including the
$121 million special provision for loan losses in the third quarter 2001,
compared to $29.7 million in 2000. Net loan charge-offs during the

current year were $95.1 million compared to $24.4 million in 2000 reflecting
higher write-offs in the commercial loan portfolio.

Nonperforming assets at December 31, 2001 totaled $205 million, or 2.05
percent of total loans compared to $101 million or 0.94 percent a year earlier.
Most of the increase from December 31, 2000 is comprised of loans to corporate
borrowers in different industry sectors experiencing the effects of a weakened
economy. At December 31, 2001, the allowance for possible loan losses was $227
million or 2.28 percent of total loans outstanding compared to $119 million or
1.10 percent of loans at the end of 2000. As a result, the ratio of the
allowance for possible loan losses to nonperforming assets declined slightly
from a multiple of 1.2 at December 31, 2000 to 1.1 at December 31, 2001.

At December 31, 2001, the Bank's equity capital amounted to $1.57 billion,
up from $1.52 billion at December 31, 2000. Unrealized securities
gains/(losses), net of tax, were $20.1 million at December 31, 2001 compared to
($11) million at December 31, 2000.

The Bank's regulatory capital leverage ratio was 8.23 percent compared to
7.40 percent one year earlier. Regulators require most banking institutions to
maintain capital leverage ratios of not less than 4.0 percent. At December 31,
2001, the Bank's Tier 1 and total risk-based capital ratios were 9.80 percent
and 12.26 percent, respectively, compared to respective ratios of 9.06 percent
and 10.98 percent at December 31, 2000. The 2001 year-end risk-based capital
ratios substantially exceeded minimum required regulatory ratios of 4.0 percent
and 8.0 percent, respectively.

2000 COMPARED TO 1999

SUMMARY

The Bank's 2000 net income was $226.4 million, up $82.1 million, or 57
percent from 1999. Earnings comparability for 2000 was affected by both the sale
of the Bank's corporate trust business in first quarter 2000 and the sale of its
merchant card business in December 2000. Excluding the effect of the $45.6
million pretax gain on sale of the corporate trust business and related charges,
and the $60.2 million pretax gain from the sale of the merchant card business
and related operating results, year 2000 earnings were $159.2 million,
representing a 10 percent increase over last year. The merchant card business
was sold to the credit card processing joint venture (Moneris) formed between
Bank of Montreal and Royal Bank of Canada, and the resulting gain was eliminated
in the consolidation of the Bank's results with Bank of Montreal. 2000 earnings
reflected strong earnings growth in the Bank's core businesses, partially offset
by the impact of higher interest rates during the year on securities portfolio
earnings and the increased provision for loan losses associated with a slowing
economy. Excluding the gains and operating results of the corporate trust and
merchant card businesses, return on average common equity ("ROE") for 2000 was
12.04 percent and return on average assets ("ROA") was 0.76 percent. For 1999,
ROE was 11.21 percent and ROA was 0.77 percent.

Cash earnings were $172.8 million in 2000, excluding the gains and
operating results of the corporate trust and merchant card businesses, a 9
percent increase compared to 1999. For the year ended December 31, 2000, cash
ROE, excluding the gains and operating results on the corporate trust and
merchant card businesses, was 15.78 percent compared to cash ROE of 15.23
percent in 1999.

For 2000, net interest income on a fully taxable equivalent basis of $444.6
million was up 11 percent from 1999. Net interest margin fell from 2.54 percent
to 2.47 percent in 2000, reflecting the impact of a rising rate environment
during the past year. Average earning assets rose $2.22 billion or 14 percent to
$18.00 billion in 2000, attributable to an increase of 12 percent or $1.13
billion in average loans and $1.01 billion in investment securities. Commercial
and consumer loans and residential mortgages were the strong contributors to the
loan growth.

Noninterest income increased $70.0 million to $518.1 million for 2000.
Excluding the effect of gains from the corporate trust and merchant card
businesses sold in 2000, noninterest income decreased 15 percent from 1999. The
decline was primarily caused by year-to-year reductions in operating revenues
from the corporate trust business sold in first quarter 2000. Trust and
investment management fees declined $20.9 million, while service charges on
deposits decreased $8.2 million. Merchant and charge card fees declined $9.0
million.

Income from bank-owned insurance increased $3.7 million or 9 percent from 1999
due to increased investment balances. Gains from sales of securities were
slightly higher compared to 1999, $14.8 million compared to $13.6 million in
1999. Trading profits were up slightly compared to 1999.

Total noninterest expenses were $587.8 million, down $38.5 million or 6
percent from 1999, primarily reflecting a decline from last year's operating
expense for the corporate trust business sold in first quarter 2000, and
one-time systems expenditures related to Y2K made in 1999.

Income taxes were $97.3 million, up $58.1 million from 1999, reflecting
substantially higher pretax income in 2000.

The 2000 provision for loan losses of $29.7 million was up $8.0 million
from 1999. Net loan charge-offs during 2000 were $24.4 million compared to $16.3
million in 1999 reflecting higher write-offs in the commercial loan portfolio.

Nonperforming assets at December 31, 2000 totaled $101 million, or 0.94
percent of total loans compared to $24 million or 0.24 percent at December 31,
1999. Most of the increase from December 31, 1999 was comprised of five loans in
the shared national credit portfolio ranging in size from $8 million to $17
million, to borrowers in five different industry sectors. At December 31, 2000,
the allowance for possible loan losses was $119 million or 1.10 percent of total
loans outstanding compared to $114 million or 1.13 percent of loans at the end
of 1999. As a result, the ratio of the allowance for possible loan losses to
nonperforming assets declined from a multiple of 4.7 at December 31, 1999 to 1.2
at December 31, 2000.

At December 31, 2000, the Bank's equity capital amounted to $1.52 billion,
up from $1.25 billion at December 31, 1999. Unrealized securities losses, net of
tax, were $11 million at December 31, 2000 compared to $138 million at December
31, 1999. In February 1998, Harris Preferred Capital Corporation, a subsidiary
of the Bank, issued $250 million of noncumulative preferred stock in a public
offering (see Note 15 to Financial Statements). The preferred stock qualifies as
Tier 1 capital for U.S. banking regulatory purposes.

The Bank's regulatory capital leverage ratio was 7.40 percent compared to
7.29 percent one year earlier. Regulators require most banking institutions to
maintain capital leverage ratios of not less than 4.0 percent. At December 31,
2000, the Bank's Tier 1 and total risk-based capital ratios were 9.06 percent
and 10.98 percent, respectively, compared to respective ratios of 8.68 percent
and 10.77 percent at December 31, 1999. The 2000 year-end risk-based capital
ratios substantially exceeded minimum required regulatory ratios of 4.0 percent
and 8.0 percent, respectively.

JOINT INDEPENDENT AUDITORS

The Board of Directors of Harris Trust and Savings Bank engaged the firms
of KPMG LLP and PricewaterhouseCoopers LLP to serve as joint auditors for each
of the years in the three year period ended December 31, 2001.

The Bank's ultimate parent company, Bank of Montreal ("BMO"), has elected
to appoint two firms of independent public accountants to be auditors of BMO and
all significant subsidiaries. The Bank's independent public accountants are
identical to the appointments made by BMO.

INDEPENDENT AUDITORS' REPORT

To the Stockholder and Board
of Directors of Harris Trust and Savings Bank:

We have audited the accompanying consolidated statements of condition of
Harris Trust and Savings Bank and Subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, comprehensive income, changes
in stockholder's equity and cash flows for each of the years in the three year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of Harris Trust and Savings Bank's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harris Trust
and Savings Bank and Subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.

/s/ PricewaterhouseCoopers LLP
/s/ KPMG LLP PricewaterhouseCoopers LLP
KPMG LLP
Chicago, Illinois
January 16, 2002

FINANCIAL STATEMENTS

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

DECEMBER 31
--------------------------------
2001 2000
------------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)

ASSETS
Cash and demand balances due from banks..................... $ 1,203,946 $ 1,292,694
Money market assets:
Interest-bearing deposits at banks........................ 195,723 141,348
Federal funds sold and securities purchased under
agreement to resell.................................... 579,750 491,075
Securities available-for-sale (including $3.21 billion and
$3.30 billion of securities pledged as collateral for
repurchase agreements at December 31, 2001 and December
31, 2000, respectively)................................... 5,822,229 6,500,164
Trading account assets...................................... 90,562 65,211
Loans....................................................... 9,972,473 10,768,712
Allowance for possible loan losses.......................... (227,374) (118,951)
----------- -----------
Net loans................................................. 9,745,099 10,649,761
Premises and equipment...................................... 287,549 284,142
Customers' liability on acceptances......................... 13,365 34,100
Bank-owned insurance........................................ 952,225 906,103
Loans held for sale......................................... 121,588 242,271
Goodwill and other valuation intangibles.................... 206,119 221,326
Other assets................................................ 518,016 461,420
----------- -----------
TOTAL ASSETS.............................................. $19,736,171 $21,289,615
=========== ===========
LIABILITIES
Deposits in domestic offices--noninterest-bearing........... $ 3,170,649 $ 3,067,296
--interest-bearing............. 6,311,796 7,065,300
Deposits in foreign offices--noninterest-bearing............ 38,063 34,780
--interest-bearing............... 1,670,352 2,326,001
----------- -----------
Total deposits............................................ 11,190,860 12,493,377
Federal funds purchased..................................... 857,049 1,041,824
Securities sold under agreement to repurchase............... 3,566,302 3,567,055
Short-term borrowings....................................... 704,699 1,489,730
Short-term notes -- senior.................................. 860,000 389,500
Acceptances outstanding..................................... 13,365 34,100
Accrued interest, taxes and other expenses.................. 335,931 213,794
Other liabilities........................................... 167,288 60,812
Minority interest -- preferred stock of subsidiary.......... 255,000 250,000
Long-term notes -- subordinated............................. 225,000 225,000
----------- -----------
TOTAL LIABILITIES......................................... 18,175,494 19,765,192
----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); 10,000,000 shares authorized,
issued and outstanding.................................... 100,000 100,000
Surplus..................................................... 620,586 613,365
Retained earnings........................................... 819,991 821,719
Accumulated other comprehensive income (loss)............... 20,100 (10,661)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY................................ 1,560,677 1,524,423
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................ $19,736,171 $21,289,615
=========== ===========

The accompanying notes to the financial statements are an integral part of these
statements.

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS EXCEPT SHARE DATA)

INTEREST INCOME
Loans, including fees....................................... $ 726,403 $ 905,942 $ 695,194
Money market assets:
Deposits at banks......................................... 3,537 5,580 1,483
Federal funds sold and securities purchased under
agreement to resell..................................... 13,672 17,534 10,894
Trading account............................................. 3,277 3,214 3,973
Securities available-for-sale:
U.S. Treasury and federal agency.......................... 340,398 417,577 330,214
State and municipal....................................... 99 949 1,906
Other..................................................... 2,128 1,472 1,511
---------- ---------- ----------
Total interest income..................................... 1,089,514 1,352,268 1,045,175
---------- ---------- ----------
INTEREST EXPENSE
Deposits.................................................... 339,445 480,551 351,384
Short-term borrowings....................................... 212,635 362,132 208,453
Senior notes................................................ 33,997 52,309 69,027
Minority interest -- dividends on preferred stock of
subsidiary................................................ 18,438 18,437 18,437
Long-term notes............................................. 13,929 15,615 14,405
---------- ---------- ----------
Total interest expense.................................... 618,444 929,044 661,706
---------- ---------- ----------
NET INTEREST INCOME......................................... 471,070 423,224 383,469
Provision for loan losses................................... 203,508 29,689 21,732
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 267,562 393,535 361,737
---------- ---------- ----------
NONINTEREST INCOME
Trust and investment management fees........................ 88,846 98,226 119,133
Money market and bond trading............................... 17,016 9,066 8,484
Foreign exchange............................................ 8,833 7,225 8,314
Merchant and charge card fees............................... 66 21,025 30,029
Service fees and charges.................................... 98,823 96,410 104,586
Securities gains............................................ 35,397 14,780 13,582
Gain on sale of corporate trust business.................... -- 45,615 --
Gain on sale of merchant card business...................... -- 60,162 --
Bank-owned insurance........................................ 47,226 45,076 41,414
Foreign fees................................................ 21,305 20,998 18,674
Syndication fees............................................ 6,584 8,667 11,531
Other....................................................... 133,089 90,800 92,284
---------- ---------- ----------
Total noninterest income.................................. 457,185 518,050 448,031
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and other compensation............................. 293,247 272,130 288,140
Pension, profit sharing and other employee benefits......... 51,328 49,833 56,318
Net occupancy............................................... 34,473 40,281 37,114
Equipment................................................... 53,329 50,515 55,567
Marketing................................................... 34,310 28,392 28,283
Communication and delivery.................................. 19,992 21,232 23,080
Expert services............................................. 25,600 21,378 26,359
Contract programming........................................ 31,479 17,589 12,195
Other....................................................... 64,731 63,774 76,516
---------- ---------- ----------
608,489 565,124 603,572
Goodwill and other valuation intangibles.................... 23,752 22,683 22,691
---------- ---------- ----------
Total noninterest expenses................................ 632,241 587,807 626,263
---------- ---------- ----------
Income before income taxes.................................. 92,506 323,778 183,505
Applicable income taxes..................................... 10,234 97,334 39,203
---------- ---------- ----------
NET INCOME.................................................. $ 82,272 $ 226,444 $ 144,302
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE (based on 10,000,000 average
shares outstanding)
Net income.................................................. $ 8.23 $ 22.64 $ 14.43
========== ========== ==========

The accompanying notes to the financial statements are an integral part of these
statements.

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31
---------------------------------
2001 2000 1999
-------- -------- ---------
(IN THOUSANDS)

NET INCOME.................................................. $ 82,272 $226,444 $ 144,302
Other comprehensive income:
Cash flow hedges:
Cumulative effect of accounting change................. (7,976) -- --
Net unrealized gain on derivative instruments, net of
tax expense of $4,684 in 2001 and zero in 2000....... 7,976 -- --
Unrealized gains/(losses) on available-for-sale
securities:
Unrealized holding gains/(losses) arising during
period, net of tax expense (benefit) of $34,589 in
2001, $89,016 in 2000 and ($106,170) in 1999......... 52,388 136,063 (160,703)
Less reclassification adjustment for gains included in
net income, net of tax expense of $13,769 in 2001,
$5,749 in 2000 and $5,284 in 1999.................... (21,627) (9,031) (8,298)
-------- -------- ---------
Other comprehensive income (loss)......................... 30,761 127,032 (169,001)
-------- -------- ---------
Comprehensive income (loss)................................. $113,033 $353,476 $ (24,699)
======== ======== =========

The accompanying notes to the financial statements are an integral part of these
statements.

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK SURPLUS EARNINGS INCOME (LOSS) EQUITY
-------- -------- -------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)

BALANCE AT DECEMBER 31, 1998............ $100,000 $608,116 $593,973 $ 31,308 $1,333,397
Contribution to capital surplus....... -- 2,396 -- -- 2,396
Net income............................ -- -- 144,302 -- 144,302
Dividends -- ($6.00 per common
share)............................. -- -- (60,000) -- (60,000)
Other comprehensive loss.............. -- -- (169,001) (169,001)
-------- -------- -------- --------- ----------
BALANCE AT DECEMBER 31, 1999............ 100,000 610,512 678,275 (137,693) 1,251,094
Contribution to capital surplus....... -- 2,853 -- -- 2,853
Net income............................ -- -- 226,444 -- 226,444
Dividends -- ($8.30 per common
share)............................. -- -- (83,000) -- 83,000
Other comprehensive income............ -- -- -- 127,032 127,032
-------- -------- -------- --------- ----------
BALANCE AT DECEMBER 31, 2000............ 100,000 613,365 821,719 (10,661) 1,524,423
Contribution to capital surplus....... -- 7,221 -- -- 7,221
Net income............................ -- -- 82,272 -- 82,272
Dividends -- ($8.40 per common
share)............................. -- -- (84,000) -- (84,000)
Other comprehensive income............ -- -- -- 30,761 30,761
-------- -------- -------- --------- ----------
BALANCE AT DECEMBER 31, 2001............ $100,000 $620,586 $819,991 $ 20,100 $1,560,677
======== ======== ======== ========= ==========

The accompanying notes to the financial statements are an integral part of these
statements.

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)

OPERATING ACTIVITIES:
Net Income................................................ $ 82,272 $ 226,444 $ 144,302
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses............................... 203,508 29,689 21,732
Depreciation and amortization, including intangibles.... 71,054 70,283 69,014
Deferred tax (benefit) expense.......................... (24,783) 1,891 (4,254)
Gain on sales of securities............................. (35,397) (14,780) (13,582)
Gain on sale of corporate trust business................ -- (45,615) --
Gain on sale of merchant card business.................. -- (60,162) --
Trading account net cash (purchases) sales.............. (25,351) 1,785 53,672
Decrease (increase) in interest receivable.............. 70,082 (18,417) (37,595)
(Decrease) increase in interest payable................. (18,506) (18,255) 32,881
Decrease (increase) in loans held for sale.............. 120,683 (242,271) 152,521
Other, net.............................................. 71,794 (23,534) 15,955
----------- ----------- -----------
Net cash provided (used) by operating activities........ 515,356 (92,942) 434,646
----------- ----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits at
banks................................................. (54,375) 98,484 (140,903)
Net increase in Federal funds sold and securities
purchased under agreement to resell................... (88,675) (193,075) (146,425)
Proceeds from sales of securities available-for-sale.... 1,898,048 662,171 693,264
Proceeds from maturities of securities
available-for-sale.................................... 7,707,315 7,017,854 6,058,660
Purchases of securities available-for-sale.............. (8,840,451) (7,690,097) (7,988,312)
Net decrease (increase) in loans........................ 701,154 (729,351) (926,025)
Proceeds from sale of bank premises..................... 32,276 -- --
Purchases of premises and equipment..................... (63,106) (50,965) (72,714)
Net increase in bank-owned insurance.................... (46,122) (133,524) (47,277)
Other, net.............................................. 31,408 (19,835) 59,403
----------- ----------- -----------
Net cash provided (used) by investing activities........ 1,277,472 (1,038,338) (2,510,329)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits..................... (1,302,517) 1,363,690 (48,009)
Net (decrease) increase in Federal funds purchased and
securities sold under agreement to repurchase......... (185,528) (130,699) 1,097,529
Net (decrease) increase in other short-term
borrowings............................................ (785,031) 808,633 514,587
Proceeds from issuance of senior notes.................. 2,308,500 3,186,500 3,460,500
Repayment of senior notes............................... (1,838,000) (4,297,000) (2,900,500)
Net cash proceeds from sale of corporate trust
business.............................................. -- 88,704 --
Proceeds from sale of merchant card business............ -- 64,103 --
Proceeds from the issuance of preferred stock of
subsidiary............................................ 5,000 -- --
Cash dividends paid on common stock..................... (84,000) (83,000) (60,000)
----------- ----------- -----------
Net cash (used) provided by financing activities...... (1,881,576) 1,000,931 2,064,107
----------- ----------- -----------
Net decrease in cash and demand balances due from
banks................................................. (88,748) (130,349) (11,576)
Cash and demand balances due from banks at January 1.... 1,292,694 1,423,043 1,434,619
----------- ----------- -----------
Cash and demand balances due from banks at December
31.................................................... $ 1,203,946 $ 1,292,694 $ 1,423,043
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)............... $ 636,949 $ 947,299 $ 628,825
Income taxes....................................... $ 69,310 $ 76,925 $ 45,107

The accompanying notes to the financial statements are an integral part of these
statements.

NOTES TO THE FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS

Harris Trust and Savings Bank is a wholly-owned subsidiary of Harris
Bankcorp, Inc. ("Bankcorp"), a Delaware corporation which is a wholly-owned
subsidiary of Bankmont Financial Corp. ("Bankmont"), a Delaware corporation
which is a wholly-owned subsidiary of Bank of Montreal ("BMO"). Throughout these
Notes to Financial Statements, the term "Bank" refers to Harris Trust and
Savings Bank and subsidiaries.

The consolidated financial statements 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 years' financial statements to the current year's presentation.
See Note 19 to the Financial Statements for additional information on business
combinations and Note 20 for additional information on related party
transactions.

The Bank provides banking, trust and other services domestically and
internationally through the main banking facility, 5 active nonbank subsidiaries
and an Edge Act subsidiary, Harris Bank International Corporation ("HBIC"), in
New York. The Bank provides a variety of financial services to commercial and
industrial companies, financial institutions, governmental units, not-for-profit
organizations and individuals throughout the U.S., primarily the Midwest, and
abroad. Services rendered and products sold to customers include demand and time
deposit accounts and certificates; various types of loans; sales and purchases
of foreign currencies; interest rate management products; cash management
services; underwriting of municipal bonds; and financial consulting.

BASIS OF ACCOUNTING

The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to practices within the banking industry.

FOREIGN CURRENCY AND FOREIGN EXCHANGE CONTRACTS

Assets and liabilities denominated in foreign currencies have been
translated into United States dollars at respective year-end rates of exchange.
Monthly translation gains or losses are computed at rates prevailing at
month-end. There were no material translation gains or losses during any of the
years presented. Foreign exchange trading positions including spot, forward,
futures, option contracts and swaps are revalued monthly using prevailing market
rates. Exchange adjustments are included with foreign exchange income in the
Consolidated Statements of Income.

DERIVATIVE FINANCIAL INSTRUMENTS

The Bank uses various interest rate, foreign exchange and equity derivative
contracts in the management of its risk strategy or as part of its dealer and
trading activities. Interest rate contracts may include futures, forwards,
forward rate agreements, option contracts, guarantees (caps, floors and collars)
and swaps. Foreign exchange contracts may include spot, futures, forwards,
option contracts and swaps. Equity contracts may include option contracts and
swaps.

All derivative instruments are recognized at fair value in the Consolidated
Statements of Condition. All derivative instruments are designated either as
hedges or as held for trading or non-hedging purposes.

Derivative instruments that are used in the management of the Bank's risk
strategy may qualify for hedge accounting if the derivatives are designated as
hedges and applicable hedge criteria are met. On the date that the Bank enters
into a derivative contract, it designates the derivative as a hedge of the fair
value of a recognized asset or liability or an unrecognized firm commitment, a
hedge of a forecasted transaction or the variability of cash flows that are to
be received or paid in connection with a recognized asset or liability, a

foreign currency fair value or cash flow hedge, or a hedge of a net investment
in a foreign operation. Changes in the fair value of a derivative that is highly
effective (as defined) and qualifies as a fair value hedge, along with changes
in the fair value of the underlying hedged item, are recorded in current period
earnings. Changes in the fair value of a derivative that is highly effective (as
defined) and qualifies as a cash flow hedge, to the extent that the hedge is
effective, are recorded in other comprehensive income only until earnings are
recognized from the underlying hedged item. Net gains or losses resulting from
hedge ineffectiveness are recorded in current period earnings. Changes in the
fair value of a derivative that is highly effective (as defined) and qualifies
as a foreign currency hedge are recorded in either current period earnings or
other comprehensive income depending on whether the hedging relationship meets
the criteria for a fair value or cash flow hedge. For a derivative used as a
hedge of a net investment in a foreign operation, changes in the derivative's
fair value, to the extent that the hedge is effective, are recorded in the
cumulative translation adjustment account within other comprehensive income.

The Bank formally documents all hedging relationships at inception of hedge
transactions. The process includes documenting the risk management objective and
strategy for undertaking the hedge transaction and identifying the specific
derivative instrument and the specific underlying asset, liability, firm
commitment or forecasted transaction. The Bank formally assesses, both at
inception and on an ongoing quarterly basis, whether the derivative hedging
instruments have been highly effective in offsetting changes in the fair value
or cash flows of the hedged items and whether the derivatives are expected to
remain highly effective in future periods.

Hedge accounting is discontinued prospectively when the Bank determines
that the hedge is no longer highly effective, the derivative instrument expires
or is sold, terminated or exercised, it is no longer probable that the
forecasted transaction will occur, the hedged firm commitment no longer meets
the definition of a firm commitment, or the designation of the derivative as a
hedging instrument is no longer appropriate.

When hedge accounting is discontinued because a fair value hedge is no
longer highly effective, the derivative instrument will continue to be recorded
on the balance sheet at fair value but the underlying hedged item will no longer
be adjusted for changes in fair value. When hedge accounting is discontinued
because the hedged item in a fair value hedge no longer meets the definition of
a firm commitment, the derivative instrument will continue to be recorded on the
balance sheet at fair value and any asset or liability that was recorded to
recognize the firm commitment will be removed from the balance sheet and
recognized as a gain or loss in current period earnings. When hedge accounting
is discontinued because it is no longer probable that the forecasted transaction
in a cash flow hedge will occur, the gain or loss on the derivative that was in
accumulated other comprehensive income will be recognized immediately in
earnings and the derivative instrument will be marked to market through
earnings. When hedge accounting is discontinued and the derivative remains
outstanding, the derivative may be redesignated as a hedging instrument as long
as the applicable hedge criteria are met under the terms of the new contract.

Derivative instruments that are entered into for risk management purposes
and do not otherwise qualify for hedge accounting are marked to market and the
resulting unrealized gains and losses are recognized in noninterest income in
the period of change.

Derivative instruments that are used as part of the Bank's dealer and
trading activities are marked to market and the resulting unrealized gains and
losses are recognized in noninterest income in the period of change. Realized
and unrealized gains and losses on interest rate contracts and foreign exchange
contracts are recorded in trading accounting income and foreign exchange income,
respectively.

IMPACT OF NEW ACCOUNTING STANDARDS

The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," on July 1, 2001. The Statement addresses financial
accounting and reporting for business combinations and supersedes Accounting
Principles Board (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
43

and to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001 or later.

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
standard, 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 Bank adopted SFAS No. 142 on January 1, 2002.
The adoption of this Statement did not have a material effect on its financial
position or results of operations. Goodwill will be assessed periodically for
impairment. 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." The asset is excluded from the scope of SFAS
No. 142 and will continue to be amortized.

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 years beginning after June 15, 2002. The
Bank 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 Bank does
not expect the implementation of this Statement to have a material effect on its
financial position or results of operations.

SECURITIES

The Bank classifies securities as either trading account assets or
available-for-sale. Trading account assets include securities acquired as part
of trading activities and are typically purchased with the expectation of
near-term profit. These assets consist primarily of municipal bonds and U.S.
government securities. All other securities are classified as
available-for-sale, even if the Bank has no current plans to divest.

Trading account assets are reported at fair value with unrealized gains and
losses included in trading account income, which also includes realized gains
and losses from closing such positions. Available-for-sale securities are
reported at fair value with unrealized gains and losses included, on an
after-tax basis, in a separate component of stockholder's equity. Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Realized gains and losses, as a result
of securities sales, are included in securities gains, with the cost of
securities sold determined on the specific identification basis.

LOANS, LOAN FEES AND COMMITMENT FEES

Loans not held for sale are recorded at the principal amount outstanding,
net of unearned income, deferred fees and origination costs. For fair value
hedges that are highly effective, loans designated as the underlying hedged
items are recorded net of changes in fair value attributable to the hedged
risks. Origination fees collected on commercial loans, loan commitments,
mortgage loans and standby letters of credit, that are not held for sale, are
generally deferred and amortized over the life of the related facility. Other
loan-related fees that are not the equivalent of yield adjustments are
recognized as income when received or earned. The
44

Bank's Consolidated Statements of Condition included approximately $18 million
of deferred loan-related fees net of deferred origination costs at both December
31, 2001 and 2000.

In conjunction with its mortgage and commercial banking activities, the
Bank will originate loans with the intention of selling them in the secondary
market. These loans are classified as available-for-sale and are included in
"Other Assets" on the Bank's Consolidated Statements of Condition. The loans are
carried at the lower of allocated cost or current market value, on a portfolio
basis. Deferred origination fees and costs associated with these loans are not
amortized and are included as part of the basis of the loan at time of sale.
Realized gains and unrealized losses are included with other noninterest income.

The Bank engages in the servicing of mortgage loans and acquires mortgage
servicing rights by purchasing or originating mortgage loans and then selling
those loans with servicing rights retained. The rights to service mortgage loans
for others are recognized as separate assets by allocating the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. The capitalized
mortgage servicing rights are amortized in proportion to and over the period of
estimated net servicing income. The capitalized mortgage servicing rights are
periodically evaluated for impairment based on the fair value of those rights.
Fair values are estimated using discounted cash flow analyses. The risk
characteristics of the underlying loans used to stratify capitalized mortgage
servicing rights for purposes of measuring impairment are interest rates, loan
type and repricing interval.

Commercial and real estate loans are placed on nonaccrual status when the
collection of interest is doubtful or when principal or interest is 90 days past
due, unless the credit is adequately collateralized and the loan is in process
of collection. When a loan is placed on nonaccrual status, all interest accrued
but not yet collected which is deemed uncollectible is charged against interest
income in the current year. Interest on nonaccrual loans is recognized as income
only when cash is received and the Bank expects to collect the entire principal
balance of the loan. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured. Interest income on restructured loans is accrued
according to the most recently agreed upon contractual terms.

Commercial and real estate loans are charged off when, in management's
opinion, the loan is deemed uncollectible. Consumer installment loans are
charged off when 180 days past due. Accrued interest on these loans is charged
to interest income. Such loans are not normally placed on nonaccrual status.

Commercial loan commitments and letters of credit are executory contracts
and are not reflected on the Bank's Consolidated Statements of Condition. Fees
collected are generally deferred and recognized over the life of the facility.

Impaired loans (primarily commercial credits) are measured based on the
present value of expected future cash flows (discounted at the loan's effective
interest rate) or, alternatively, at the loan's observable market price or the
fair value of supporting collateral. Impaired loans are defined as those where
it is probable that amounts due for principal or interest according to
contractual terms, will not be collected. Both nonaccrual and certain
restructured loans meet this definition. Large groups of smaller-balance,
homogeneous loans, primarily residential real estate and consumer installment
loans, are excluded from this definition of impairment. The Bank determines loan
impairment when assessing the adequacy of the allowance for possible loan
losses.

ALLOWANCE FOR POSSIBLE LOAN LOSSES

The allowance for possible loan losses is maintained at a level considered
adequate to provide for estimated loan losses. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs. Known
losses of principal on impaired loans are charged off. 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. Such estimates are reviewed periodically and
adjustments, if necessary, are recorded during the periods in which they become
known.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation and
amortization. Interest costs associated with long-term construction projects are
capitalized and then amortized over the life of the related asset after the
project is completed. For financial reporting purposes, the provision for
depreciation and amortization is computed on the straight-line basis over the
estimated useful lives of the assets.

BANK-OWNED INSURANCE

The Bank has purchased life insurance coverage for certain officers. The
one-time premiums paid for the policies, which coincide with the initial cash
surrender value, are recorded as assets on the Consolidated Statements of
Condition. Increases or decreases in cash surrender value (other than proceeds
from death benefits) are recorded as other income or other expense. Proceeds
from death benefits first reduce the cash surrender value attributable to the
individual policy and any additional proceeds are recorded as other income.

GOODWILL AND OTHER VALUATION INTANGIBLES

The Bank records specifically identifiable and unidentifiable (goodwill)
intangibles in connection with the acquisition of assets from unrelated parties
or the acquisition of new subsidiaries. Original lives range from 3 to 15 years.
Goodwill originated prior to July 1, 2001 is amortized on the straight-line
basis; goodwill arising subsequent to July 1, 2001 was not amortized.
Identifiable intangibles are amortized on either an accelerated or straight-line
basis depending on the character of the acquired asset. Goodwill and other
valuation intangibles are reviewed for impairment when events or future
assessments of profitability indicate that the carrying value may not be
recoverable. When assessing recoverability, goodwill and other valuation
intangibles are included as part of the group of assets that were acquired in
the transaction that gave rise to the intangibles.

OTHER ASSETS

Property or other assets received in satisfaction of debt are included in
"Other Assets" on the Bank's Consolidated Statements of Condition and are
recorded at the lower of remaining cost or fair value. Fair values for other
real estate owned generally are reduced by estimated costs to sell. Losses
arising from subsequent write-downs to fair value are charged directly to
expense.

Loans intended to be sold in the secondary market are classified as
available-for-sale and are included in "Other Assets" on the Consolidated
Statements of Condition. The loans are carried at lower of allocated cost or
current market value, on a portfolio basis.

RETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS

The Bank has noncontributory defined benefit pension plans covering
virtually all its employees. For its primary plan, the policy of the Bank is to,
at a minimum, fund annually an amount necessary to satisfy the requirements
under the Employee Retirement Income Security Act ("ERISA"), without regard to
prior years' contributions in excess of the minimum.

Postemployment benefits provided to former or inactive employees after
employment but before retirement are accrued if they meet the conditions for
accrual of compensated absences. Otherwise, postemployment benefits are recorded
when expenses are incurred.

INCOME TAXES

Deferred tax assets and liabilities, as determined by the temporary
differences between financial reporting and tax bases of assets and liabilities,
are computed using enacted tax rates and laws. The effect on deferred tax assets
and liabilities of a change in tax rates or law is recognized as income or
expense in the period including the enactment date.

The Bank is included in the consolidated Federal income tax return of
Bankmont. Income tax return liabilities or benefits for all the consolidated
entities are not materially different than they would have been if computed on a
separate return basis.

MANAGEMENT'S ESTIMATES

The preparation of 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The areas requiring significant management judgment include provision
and allowance for possible loan losses, income taxes, pension cost,
postemployment benefits, valuation of intangible assets, fair values and
temporary vs. other-than-temporary impairment.

RECLASSIFICATIONS

Certain reclassifications were made to conform prior years' financial
statements to the current year's presentation.

2. SECURITIES

The amortized cost and estimated fair value of securities
available-for-sale were as follows:

DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------------------------------- -------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)

U.S. Treasury............. $1,390,397 $32,654 $ 5 $1,423,046 $1,377,910 $ 9,651 $ 4,095 $1,383,466
Federal agency............ 2,543,823 3,719 944 2,546,598 2,425,794 2,703 1,562 2,426,935
Mortgage-backed........... 1,825,389 165 2,389 1,823,165 2,682,823 21 25,134 2,657,710
State and municipal....... 3,600 -- -- 3,600 5,491 30 -- 5,521
Other..................... 25,663 157 -- 25,820 26,369 163 -- 26,532
---------- ------- ------ ---------- ---------- ------- ------- ----------
Total securities.... $5,788,872 $36,695 $3,338 $5,822,229 $6,518,387 $12,568 $30,791 $6,500,164
========== ======= ====== ========== ========== ======= ======= ==========

At December 31, 2001 and 2000, available-for-sale and trading account
securities having a carrying amount of $3.75 billion and $3.57 billion,
respectively, were pledged as collateral for certain liabilities, securities
sold under agreement to repurchase, public and trust deposits, trading account
activities and for other purposes where permitted or required by law.

The amortized cost and estimated fair value of available-for-sale
securities at December 31, 2001, 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.

DECEMBER 31, 2001
--------------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)

Maturities:
Within 1 year............................................. $1,329,278 $1,331,940
1 to 5 years.............................................. 2,321,451 2,352,799
5 to 10 years............................................. 621,916 621,623
Over 10 years............................................. 1,490,564 1,490,047
Other securities without stated maturity.................... 25,663 25,820
---------- ----------
Total securities..................................... $5,788,872 $5,822,229
========== ==========

In 2001, 2000 and 1999, proceeds from the sale of securities
available-for-sale amounted to $1.90 billion, $662 million and $693 million,
respectively. Gross gains of $35.4 million and no gross losses were realized on
these sales in 2001, gross gains of $14.8 million and no gross losses were
realized on these sales in 2000, and gross gains of $13.6 million and no gross
losses were realized on these sales in 1999. Net unrealized holding gains on
trading securities included in earnings during 2001 increased by $0.1 million
from an unrealized gain of $1.0 million at December 31, 2000 to an unrealized
gain of $1.1 million at December 31, 2001.

3. LOANS

The following table summarizes loan balances by category:

DECEMBER 31
-------------------------
2001 2000
---------- -----------
(IN THOUSANDS)

Domestic loans:
Commercial, financial, agricultural, brokers and
dealers................................................ $6,750,654 $ 7,832,276
Real estate construction.................................. 188,187 88,227
Real estate mortgages..................................... 2,459,369 2,242,647
Installment............................................... 549,451 581,349
Foreign loans:
Governments and official institutions..................... -- --
Banks and other financial institutions.................... 10,039 12,913
Other, primarily commercial and industrial................ 14,773 11,300
---------- -----------
Total loans.......................................... 9,972,473 10,768,712
Less allowance for possible loan losses..................... 227,374 118,951
---------- -----------
Loans, net of allowance for possible loan losses..... $9,745,099 $10,649,761
========== ===========

Nonaccrual loans, restructured loans and other nonperforming assets are
summarized below:

YEARS ENDED DECEMBER 31
-------------------------------
2001 2000 1999
-------- -------- -------
(IN THOUSANDS)

Nonaccrual loans............................................ $202,320 $ 95,850 $21,117
Restructured loans.......................................... 2,309 2,349 2,372
-------- -------- -------
Total nonperforming loans............................ 204,629 98,199 23,489
Other assets received in satisfaction of debt............... 140 3,125 690
-------- -------- -------
Total nonperforming assets........................... $204,769 $101,324 $24,179
======== ======== =======
Gross amount of interest income that would have been
recorded if year-end nonperforming loans had been accruing
interest at their original terms.......................... $ 14,306 $ 5,789 $ 1,097
Interest income actually recognized......................... -- -- --
-------- -------- -------
Interest shortfall........................................ $ 14,306 $ 5,789 $ 1,097
======== ======== =======

At December 31, 2001 and 2000, the Corporation had no aggregate public and
private sector outstandings to any single country experiencing a liquidity
problem which exceeded one percent of the Corporation's consolidated assets. At
December 31, 2001 and 2000 commercial loans with a carrying value of $4.16
billion and $5.02 billion, respectively, were pledged to secure potential
borrowings with the Federal Reserve.

MORTGAGE SERVICING RIGHTS

The carrying amount of mortgage servicing rights was $21.6 million and
$17.2 million at December 31, 2001 and 2000, respectively. The fair value of
those rights equaled or exceeded the carrying amount at both December 31, 2001
and December 31, 2000. Mortgage servicing rights, included in other assets, of
$8.5

million and $3.9 million were capitalized during 2001 and 2000, respectively.
Amortization expense associated with the mortgage servicing rights was $4.2
million and $3.5 million in 2001 and 2000, respectively. There were no direct
write-downs in 2001 or 2000.

4. ALLOWANCE FOR POSSIBLE LOAN LOSSES

The changes in the allowance for possible loan losses are as follows:

YEARS ENDED DECEMBER 31
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Balance, beginning of year.................................. $118,951 $113,702 $108,280
-------- -------- --------
Charge-offs................................................. (98,814) (30,128) (21,164)
Recoveries.................................................. 3,729 5,688 4,854
-------- -------- --------
Net charge-offs........................................... (95,085) (24,440) (16,310)
Provisions charged to operations............................ 203,508 29,689 21,732
-------- -------- --------
Balance, end of year........................................ $227,374 $118,951 $113,702
======== ======== ========

Details on impaired loans and related allowance are as follows:

IMPAIRED LOANS IMPAIRED LOANS
FOR WHICH THERE FOR WHICH THERE TOTAL
IS A RELATED IS NO RELATED IMPAIRED
ALLOWANCE ALLOWANCE LOANS
--------------- --------------- --------
(IN THOUSANDS)

December 31, 2001
Balance.............................................. $159,817 $44,812 $204,629
Related allowance.................................... 72,620 -- 72,620
-------- ------- --------
Balance, net of allowance............................ $ 87,197 $44,812 $132,009
======== ======= ========
December 31, 2000
Balance.............................................. $ 77,289 $20,910 $ 98,199
Related allowance.................................... 35,379 -- 35,379
-------- ------- --------
Balance, net of allowance............................ $ 41,910 $20,910 $ 62,820
======== ======= ========

YEARS ENDED DECEMBER 31
------------------------------
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)

Average impaired loans...................................... $153,920 $55,434 $29,283
======== ======= =======
Total interest income on impaired loans recorded on a cash
basis..................................................... $ -- $ -- $ --
======== ======= =======

5. PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation and
amortization. A summary of these accounts is set forth below:

DECEMBER 31
----------------------
2001 2000
-------- --------
(IN THOUSANDS)

Land........................................................ $ 23,183 $ 24,153
Premises.................................................... 195,790 260,395
Equipment................................................... 340,427 309,892
Leasehold improvements...................................... 35,627 28,008
-------- --------
Total.................................................. 595,027 622,448
Accumulated depreciation and amortization................... 307,478 338,306
-------- --------
Premises and equipment................................. $287,549 $284,142
======== ========

Depreciation and amortization expense was $48.3 million in 2001, $46.7
million in 2000 and $46.3 million in 1999.

On December 17, 2001, the Bank sold to a third party its fifteen-story
operations center containing approximately 415,000 gross square feet located at
311 West Monroe Street, Chicago, Illinois, and leased back approximately 259,000
rentable square feet. The lease ends on December 31, 2011. The Bank has rights
of first offering to lease additional space and options to extend to December
31, 2026. The remainder of the building will be occupied by third-party tenants.
The sale resulted in a realized gain of $1 million and a deferred gain of $17
million as of December 31, 2001.

In addition, the Bank owns or leases premises at other locations to conduct
branch banking activities which are part of the Chicagoland Banking group.

6. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL AND SECURITIES SOLD UNDER
AGREEMENT TO REPURCHASE

The Bank enters into purchases of U.S. Treasury and Federal agency
securities under agreements to resell identical securities. The amounts advanced
under these agreements represent short-term loans and are reflected as
receivables in the Consolidated Statements of Condition. There were no
securities purchased under agreement to resell outstanding at December 31, 2001
and December 31, 2000. The securities underlying the agreements are book-entry
securities. Securities are transferred by appropriate entry into the Bank's
account with Bank of New York at the Federal Reserve Bank of New York under a
written custodial agreement with Bank of New York that explicitly recognizes the
Bank's interest in these securities.

The Bank also enters into sales of U.S. Treasury and Federal agency
securities under agreements to repurchase identical securities. The amounts
received under these agreements represent short-term borrowings and are
reflected as liabilities in the Consolidated Statements of Condition. Securities
sold under agreement to repurchase totaled $3.57 billion at December 31, 2001
and 2000. Securities sold under agreement to repurchase are transferred via
book-entry to the counterparty, if transacted with a financial institution or a
broker-dealer, or are delivered to customer safekeeping accounts. The Bank
monitors the market value of these securities and adjusts the level of
collateral for repurchase agreements, as appropriate.

Securities purchased under agreement to resell

2001 2000
----- ------
(IN THOUSANDS)

Amount outstanding at end of year........................... $ -- $ --
Highest amount outstanding as of any month-end during the
year...................................................... $ -- $ --
Daily average amount outstanding during the year............ $ 293 $4,224
Daily average annualized rate of interest................... 2.60% 6.43%
Average rate of interest on amount outstanding at end of
year...................................................... -- --

Securities sold under agreement to repurchase

2001 2000
---------- ----------
(IN THOUSANDS)

Amount outstanding at end of year........................... $3,566,303 $3,567,055
Highest amount outstanding as of any month-end during the
year...................................................... $4,085,612 $3,878,202
Daily average amount outstanding during the year............ $3,595,769 $3,745,810
Daily average annualized rate of interest................... 3.90% 6.18%
Average rate of interest on amount outstanding at end of
year...................................................... 1.71% 6.37%

7. SENIOR NOTES AND LONG-TERM NOTES

The following table summarizes the Bank's long-term notes:

DECEMBER 31
--------------------
2001 2000
-------- --------
(IN THOUSANDS)

Floating rate subordinated note to Bankcorp due March 31,
2005...................................................... 50,000 50,000
Floating rate subordinated note to Bankcorp due December 1,
2006...................................................... 50,000 50,000
Fixed rate 6 1/2% subordinated note to Bankcorp due December
27, 2007.................................................. 60,000 60,000
Fixed rate 7 5/8% subordinated note to Bankcorp due June 27,
2008...................................................... 15,000 15,000
Fixed rate 7 1/8% subordinated note to Bankcorp due June 30,
2009...................................................... 50,000 50,000
-------- --------
Total................................................ $225,000 $225,000
======== ========

All of the Bank notes are unsecured obligations, ranking on a parity with
all unsecured and subordinated indebtedness of the Bank and are not subject to
redemption prior to maturity at the election of the debtholders. The interest
rate on the floating rate notes reprices semiannually and floats at 50 basis
points above 180 day LIBOR. At year-end 2001, 180 day LIBOR was 1.98 percent.

The Bank offers to institutional investors from time to time, unsecured
short-term and medium-term bank notes in an aggregate principal amount of up to
$1.5 billion outstanding at any time. The term of each note could range from
fourteen days to fifteen years. The notes are subordinated to deposits and rank
pari passu with all other unsecured senior indebtedness of the Bank. As of
December 31, 2001, $860 million of senior short-term notes were outstanding with
original maturities ranging from 365 to 392 days (remaining maturities ranging
from 98 to 206 days) and stated interest rates ranging from 1.78 percent to 4.41
percent. As of December 31, 2000, $390 million of senior short-term notes were
outstanding with original maturities ranging from 28 to 365 days (remaining
maturities ranging from 23 to 163 days) and stated interest rates ranging from
6.52 percent to 6.66 percent.

8. 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 Bank's fair values are based on quoted market prices when available. For
financial instruments not actively traded, such as certain loans, deposits,
off-balance-sheet transactions and long term borrowings, 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 Bank could realize in an actual transaction. The fair value estimation
methodologies employed by the Bank were as follows:

The carrying amounts for cash and demand balances due from banks along with
short-term money market assets and liabilities reported on the Bank's
Consolidated Statements of Condition were considered to be the best estimates of
fair value for these financial instruments. Fair values of trading account
assets and available-for-sale securities were based on quoted market prices.

A variety of methods were used to estimate the fair value of loans. Changes
in estimated fair value of loans reflect changes in credit risk and general
interest rates which have occurred since the loans were originated. Fair values
of floating rate loans, including commercial, broker dealer, financial
institution, construction, charge card, consumer and home equity, were assumed
to be the same as carrying value since the loans' interest rates automatically
reprice to market. Fair values of residential mortgages were based on current
prices for securities backed by similar loans. For long-term fixed rate loans,
including consumer installment and commercial mortgage loans, fair values were
estimated based on the present value of future cash flows with current market
rates as discount rates. Additionally, management considered appraisal values of
collateral when nonperforming loans were secured by real estate.

The fair values of customers' liability on acceptances and acceptances
outstanding approximate carrying value due to the short-term nature of these
assets and liabilities and the generally negligible credit losses associated
with them.

The fair values of accrued interest receivable and payable approximate
carrying values due to the short-term nature of these assets and liabilities.

The fair values of bank-owned insurance investments approximate carrying
value, because upon liquidation of these investments the Bank would receive the
cash surrender value which equals carrying value.

The fair values of demand deposits, savings accounts, interest checking
deposits, and money market accounts were the amounts payable on demand at the
reporting date, or the carrying amounts. The fair value of time deposits was
estimated using a discounted cash flow calculation with current market rates
offered by the Bank as discount rates.

The fair value of senior notes approximates carrying value because the
average maturity is less than one year.

The fair value of minority interest -- preferred stock of subsidiary
("Harris Preferred Capital Corporation") approximates carrying value as the
preferred stock has a liquidation preference that equals book value.

The fair value of long-term notes was determined using a discounted cash
flow calculation with current rates available to the Bank for similar debt as
discount rates.

The fair value of credit facilities are presented as an obligation in order
to represent the approximate cost the Bank would incur to induce third parties
to assume these commitments.

The estimated fair values of the Bank's financial instruments at December
31, 2001 and 2000 are presented in the following table. See Note 9 for
additional information regarding fair values of off-balance-sheet financial
instruments.

DECEMBER 31
--------------------------------------------------------
2001 2000
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)

ASSETS
Cash and demand balances due from banks... $ 1,203,946 $ 1,203,946 $ 1,292,694 $ 1,292,694
Money market assets:
Interest-bearing deposits at banks...... 195,723 195,723 141,348 141,348
Federal funds sold and securities
purchased under agreement to
resell............................... 579,750 579,750 491,075 491,075
Securities available-for-sale............. 5,822,229 5,822,229 6,500,164 6,500,164
Trading account assets.................... 90,562 90,562 65,211 65,211
Loans, net of unearned income and
allowance for possible loan losses...... 9,745,099 9,769,519 10,649,761 10,656,867
Customers' liability on acceptances....... 13,365 13,365 34,100 34,100
Accrued interest receivable............... 96,460 96,460 166,542 166,542
Loans held for sale....................... 121,588 121,588 242,271 242,271
Bank-owned insurance investments.......... 952,225 952,225 906,103 906,103
----------- ----------- ----------- -----------
Total on-balance-sheet financial
assets.......................... $18,820,947 $18,845,367 $20,489,269 $20,496,375
=========== =========== =========== ===========
LIABILITIES
Deposits:
Demand deposits......................... $ 6,670,214 $ 6,670,214 $ 6,695,470 $ 6,695,470
Time deposits........................... 4,520,646 4,548,598 5,797,907 5,823,901
Federal funds purchased................... 857,049 857,049 1,041,824 1,041,824
Securities sold under agreement to
repurchase.............................. 3,566,302 3,566,302 3,567,055 3,567,055
Other short-term borrowings............... 704,699 704,699 1,489,730 1,489,730
Acceptances outstanding................... 13,365 13,365 34,100 34,100
Accrued interest payable.................. 38,075 38,075 56,581 56,581
Short-term notes -- senior................ 860,000 860,000 389,500 389,500
Minority interest -- preferred stock of
subsidiary.............................. 255,000 255,000 250,000 250,000
Long-term notes -- subordinated........... 225,000 230,135 225,000 223,359
----------- ----------- ----------- -----------
Total on-balance-sheet financial
liabilities..................... $17,710,350 $17,743,437 $19,547,167 $19,571,520
=========== =========== =========== ===========
OFF-BALANCE-SHEET CREDIT FACILITIES
(POSITIVE POSITIONS/(OBLIGATIONS))
Loan commitments.......................... $ (17,641) $ (17,641) $ (17,541) $ (17,541)
Standby letters of credit................. (695) (695) (381) (381)
Commercial letters of credit.............. (48) (48) (65) (65)
----------- ----------- ----------- -----------
Total off-balance-sheet credit
facilities...................... $ (18,384) $ (18,384) $ (17,987) $ (17,987)
=========== =========== =========== ===========

9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Bank utilizes various financial instruments with off-balance-sheet risk
in the normal course of business to a) meet its customers' financing and risk
management needs, b) reduce its own risk exposure, and c) produce fee income and
trading profits. The Bank's major categories of financial instruments with off-
balance-sheet risk include credit facilities, derivative financial instruments,
and various securities-related activities. Fair values of off-balance-sheet
instruments are based on fees currently charged to enter into similar

agreements, market prices of comparable instruments, pricing models using
year-end rates and counterparty credit ratings.

Credit facilities

Credit facilities with off-balance-sheet risk include commitments to extend
credit, standby letters of credit and commercial letters of credit.

Commitments to extend credit are contractual agreements to lend to a
customer as long as contract terms have been met. They generally require payment
of a fee and have fixed expiration dates. The Bank's commitments serve both
business and individual customer needs, and include commercial loan commitments,
home equity lines, commercial real estate loan commitments and mortgage loan
commitments. The Bank's maximum risk of accounting loss is represented by the
total contractual amount of commitments which was $7.6 billion and $7.4 billion
at December 31, 2001 and 2000, respectively. Since only a portion of commitments
will ultimately be drawn down, the Bank does not expect to provide funds for the
total contractual amount. Risks associated with certain commitments are reduced
by participations to third parties, which at December 31, 2001, totaled $632
million and at December 31, 2000, totaled $501 million.

Standby letters of credit are unconditional commitments which guarantee the
obligation of a customer to a third party should that customer default. They are
issued to support financial and performance-related obligations including
brokers' margin maintenance, industrial revenue bond repayment, debt repayment,
construction contract performance and trade agreement performance. The Bank's
maximum risk of accounting loss for these items is represented by the total
commitments outstanding of $2.30 billion at December 31, 2001 and $2.34 billion
at December 31, 2000. Risks associated with standby letters of credit are
reduced by participations to third parties which totaled $664 million at
December 31, 2001 and $603 million at December 31, 2000.

Commercial letters of credit are commitments to make payments on behalf of
customers when letter of credit terms have been met. Maximum risk of accounting
loss is represented by total commercial letters of credit outstanding of $36
million at December 31, 2001 and $58 million at December 31, 2000.

Credit risks associated with all of these facilities are mitigated by
reviewing customers' creditworthiness on a case-by-case basis, obtaining
collateral, limiting loans to individual borrowers, setting restrictions on
long-duration maturities and establishing stringent covenant terms outlining
performance expectations which, if not met, may cause the Bank to terminate the
contract. Credit risks are further mitigated by monitoring and maintaining
portfolios that are well-diversified.

Collateral is required to support certain of these credit facilities when
they are drawn down and may include equity and debt securities, commodities,
inventories, receivables, certificates of deposit, savings instruments, fixed
assets, real estate, life insurance policies and seats on national or regional
exchanges. Requirements are based upon the risk inherent in the credit and are
more stringent for firms and individuals with greater default risks. The Bank
monitors collateral values and appropriately perfects its security interest.
Periodic evaluations of collateral adequacy are performed by Bank personnel.

The fair value of credit facilities (i.e. deferred income) is approximately
equal to their carrying value of $18.4 million at December 31, 2001 and $17.9
million at December 31, 2000.

Derivative financial instruments

The Bank adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001. Under this standard, all derivative
instruments are recognized at fair value in the Consolidated Statements of
Condition. In prior years, if hedge criteria were met, then unrealized gains and
losses on derivative financial instruments other than interest rate swaps were
generally recognized in the same period and in the same manner in which gains
and losses from the hedged item were recognized. For interest rate swaps
designated as hedges, contractual payments were accrued in the Consolidated
Statements of Income as a component of interest income or expense and there was
no recognition of unrealized gains and losses in the Consolidated Statements of
Condition.
54

SFAS No. 133 supersedes SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." Disclosure for
2001 derivative activity is in accordance with SFAS No. 133 and disclosure for
year derivative activity is in accordance with SFAS No. 119. Although not
required, selected information for current year derivative activity is also
presented in accordance with SFAS No. 119 for comparative purposes.

The Bank uses various interest rate, foreign exchange and equity derivative
contracts as part of its dealer and trading activities or in the management of
its risk strategy. Interest rate contracts include futures, forwards, forward
rate agreements, option contracts, guarantees (caps, floors and collars) and
swaps. Foreign exchange contracts include spot, futures, forwards, option
contracts and swaps. Equity contracts include options and swaps.

Dealer and trading activity

Interest rate contracts

As dealer, the Bank serves customers seeking to manage interest rate risk
by entering into contracts as counterparty to their (customer) transactions. In
its trading activities, the Bank uses interest rate contracts to profit from
expected future market movements.

These contracts may create exposure to both credit and market risk.
Replacement risk, the primary component of credit risk, is the risk of loss
should a counterparty default following unfavorable market movements and is
measured as the Bank's cost of replacing contracts at current market rates. The
Bank manages credit risk by establishing credit limits for customers and
products through an independent corporate-wide credit review process and by
continually monitoring exposure against those limits to ensure they are not
exceeded. Credit risk is, in many cases, further mitigated by the existence of
netting agreements that provide for netting of contractual receivables and
payables in the event of default or bankruptcy. Netting agreements apply to
situations where the Bank is engaged in more than one outstanding derivative
transaction with the same counterparty and also has a legally enforceable master
netting agreement with that counterparty.

Market risk is the potential for loss arising from potential adverse
changes in underlying market factors, including interest and foreign exchange
rates. The Bank manages market risk through the imposition of integrated
value-at-risk limits and an active, independent monitoring process.

Value at risk methodology is used for measuring the market risk of the
Bank's trading positions. This statistical methodology uses recent market
volatility to estimate the maximum daily trading loss that the Bank would expect
to incur, on average, 99 percent of the time. The model also measures the effect
of correlation among the various trading instruments to determine how much risk
is eliminated by offsetting positions.

Futures and forward contracts are agreements in which the Bank is obligated
to make or take delivery, at a specified future date, of a specified instrument,
at a specified price or yield. Futures contracts are exchange traded and,
because of exchange requirements that gains and losses be settled daily, create
negligible exposure to credit risk.

Forward rate agreements are arrangements between two parties to exchange
amounts, at a specified future date, based on the difference between an agreed
upon interest rate and reference rate applied to a notional principal amount.
These agreements enable purchasers and sellers to fix interest costs and
returns.

Options are contracts that provide the buyer the right (but not the
obligation) to purchase or sell a financial instrument, at a specified price,
either within a specified period of time or on a certain date. Interest rate
guarantees (caps, floors and collars) are agreements between two parties that,
in general, establish for the purchaser a maximum level of interest expense or a
minimum level of interest revenue based on a notional principal amount for a
specified term. Options and guarantees written create exposure to market risk.
As a writer of interest rate options and guarantees, the Bank receives a premium
at the outset of the agreement and bears the risk of an unfavorable change in
the price of the financial instrument underlying the option or

guarantee. Options and guarantees purchased create exposure to credit risk and,
to the extent of the premium paid or unrealized gain recognized, market risk.

Interest rate swaps are contracts involving the exchange of interest
payments based on a notional amount for a specified period. Most of the Bank's
activity in swaps is as intermediary in the exchange of interest payments
between customers, although the Bank also uses swaps to manage its own interest
rate exposure (see discussion of risk management activity).

Foreign exchange contracts

The Bank is a dealer in foreign exchange (FX) contracts. Foreign exchange
contracts may create exposure to market and credit risk, including replacement
risk and settlement risk. Credit risk is managed by establishing limits for
customers through an independent corporate-wide credit approval process and
continually monitoring exposure against those limits. In addition, both
settlement and replacement risk are reduced through netting by novation,
agreements with counterparties to offset certain related obligations. Market
risk is managed through establishing exposure limits by currency and monitoring
actual exposure against those limits, entering into offsetting positions, and
closely monitoring price behavior.

The Bank and BMO combine their U.S. FX contracts revenue. Under this
arrangement, FX net profit is shared by the Bank and BMO in accordance with a
specific formula set forth in the agreement. This agreement expires in April
2002 but may be extended at that time. Either party may terminate the
arrangement at its option. FX revenues are reported net of expenses. Net gains
(losses) from dealer/trading foreign exchange contracts, for the year ended
December 31, 2001 totaled $8.8 million of net profit under the aforementioned
agreement with BMO.

At December 31, 2001, approximately 98 percent of the Bank's gross notional
positions in foreign currency contracts are represented by eight currencies:
Eurodollar, Canadian dollars, British pounds, Australian dollar, Swiss francs,
Swedish krona, Japanese yen and the Mexican peso.

Foreign exchange contracts include spot, future, forward, option and swap
contracts that enable customers to manage their foreign exchange risk. Spot,
future and forward contracts are agreements to exchange currencies at a future
date, at a specified rate of exchange. Foreign exchange option contracts give
the buyer the right and the seller an obligation (if the buyer asserts his
right) to exchange currencies during a specified period (or on a certain date in
the case of "European" options) at a specified exchange rate. Cross currency
swap contracts are agreements to exchange principal denominated in two different
currencies at the spot rate and to repay the principal at a specified future
date and exchange rate.

Equity contracts

The Bank enters into equity contracts that enable customers to manage the
risk associated with equity price fluctuations. Equity contracts include options
and swaps.

At December 31, 2001 the Bank recorded, for dealer and trading activities
and for risk management activities that do not otherwise qualify for hedge
accounting, the fair value of derivative instrument assets of $117.3 million in
other assets and derivative instrument liabilities of $121.5 million in other
liabilities. These amounts reflect the netting of certain derivative instrument
assets and liabilities when the conditions in FASB Interpretation ("FIN") No.
39, "Offsetting of Amounts Related to Certain Contracts," have been met.

At December 31, 2001, derivative contracts with BMO represent $14.8 million
and $95.3 million of unrealized gains and unrealized losses, respectively.

Risk management activity

In addition to its dealer and trading activities, the Bank uses interest
rate contracts, primarily swaps, and foreign exchange contracts to reduce the
level of financial risk inherent in mismatches between the interest rate
sensitivities and foreign currency exchange rate fluctuations of certain assets
and liabilities. For non-trading risks, market risk is controlled by actively
managing the asset and liability mix, either directly through

the balance sheet or with off-balance sheet derivative instruments. Measures
also focus on interest rate exposure gaps and sensitivity to rate changes.

The Bank has an interest rate risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations
in earnings that may be caused by interest rate volatility. The Bank manages
interest rate sensitivity by modifying the repricing or maturity characteristics
of certain fixed rate assets so that net interest margin is not adversely
affected, on a material basis, by movements in interest rates. As a result of
interest rate fluctuations, fixed rate assets will appreciate or depreciate in
market value. The effect of the unrealized appreciation or depreciation will
generally be offset by the gains or losses on the derivative instruments.

The Bank has a foreign currency risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned fluctuations
in earnings that may be caused by foreign currency exchange rate fluctuations.
Certain assets and liabilities are denominated in foreign currency, creating
exposure to changes in exchange rates. The Bank uses cross currency interest
rate swaps and foreign exchange forward contracts to hedge the risk.

Risk management activities include the following derivative transactions
that qualify for hedge accounting.

Fair value hedges

The Bank uses interest rate swaps to alter the character of revenue earned
on certain long-term, fixed rate loans. Interest rate swaps convert the fixed
rate loans into variable rate loans. Interest rate swap contracts generally
involve the exchange of fixed and variable rate interest payments between two
parties, based on a common notional amount and maturity date.

For fair value hedges, as of December 31, 2001 the Bank recorded the fair
value of derivative instrument liabilities of $8.2 million in other liabilities.
Net losses recorded for the year-to-date period ended December 31, 2001
representing the ineffective portion of the fair value hedges were not material
to the consolidated financial statements of the Bank. Gains or losses resulting
from hedge ineffectiveness are recorded in noninterest income.

Cash flow hedges

The Bank had used a total return swap to reduce the variability associated
with the cash flows from an equity security. The total return swap converted the
cash flows received on an available-for-sale equity security from variable to
fixed. Changes in the fair value of the swap were recorded in other
comprehensive income. The unrealized holding gain (loss) on the
available-for-sale equity security was recorded in other comprehensive income.
Prior to September 30, 2001 the Bank dedesignated the hedge due to the
expectation of diminished cash flows from the equity security. The unrealized
loss in accumulated other comprehensive income related to the total return swap
was not material to the consolidated financial statements of the Bank. As of
September 30, 2001 the swap, designated a nonhedging derivative, was marked to
market and the resulting unrealized gain was recorded in noninterest income.

Risk management activities also include the following derivative
transactions that do not otherwise qualify for hedge accounting.

Foreign exchange contracts are used to stabilize any currency exchange rate
fluctuation for certain senior notes and certain loans. The derivative
instruments, primarily cross currency interest rate swaps and to a lesser extent
forward contracts, do not qualify for hedge accounting and are accounted for at
fair value.

The Bank has qualifying mortgage loan commitments that are intended to be
sold in the secondary market. These loan commitments are derivatives and are
accounted for at fair value, but since they are not firm commitments they do not
qualify for hedge accounting. The Bank enters into forward sales of mortgage-
backed securities to minimize its exposure to interest rate volatility. These
forward sales of mortgage-backed securities are also derivatives and are
accounted for at fair value.

Disclosure Under SFAS No. 119

The following information summarizes the Bank's dealer and trading activity
and risk management activity for prior years. Although not required, the Bank's
dealer and trading activity for the current year is also presented for
comparative purposes. The following information is presented in accordance with
SFAS No. 119.

The following table summarizes the Bank's dealer/trading interest rate
contracts and their related contractual or notional amounts and maximum
replacement costs. Contractual or notional amount gives an indication of the
volume of activity in the contract. Maximum replacement cost reflects the
potential loss resulting from customer defaults and is computed as the cost of
replacing, at current market rates, all outstanding contracts with unrealized
gains.

DECEMBER 31 DECEMBER 31
---------------------------------- ----------------------------------
CONTRACTUAL OR MAXIMUM CONTRACTUAL OR MAXIMUM
NOTIONAL AMOUNT REPLACEMENT COST NOTIONAL AMOUNT REPLACEMENT COST
--------------- ---------------- --------------- ----------------
2001 2001 2000 2000
--------------- ---------------- --------------- ----------------
(IN THOUSANDS)

Interest Rate Contracts:
Futures and forwards............. $ 61,310 $ 181 $ 50,825 $ 121
Forward rate agreements.......... -- -- -- --
Options written.................. 17,500 -- 8,500 17
Options purchased................ 17,500 25 5,000 17
Guarantees written............... 979,555 452 835,739 441
Guarantees purchased............. 986,005 12,306 838,739 3,947
Swaps............................ 5,759,535 82,678 3,970,187 33,202

The following table summarizes average and end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 2001 and
2000:

2001 2000
----------------------------- -----------------------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)

Interest Rate Contracts:
Futures and forwards
Unrealized gains.......................... $ 181 $ -- $ 121 $ 101
Unrealized losses......................... -- -- (18) (101)
Forward rate agreements
Unrealized gains.......................... -- -- -- --
Unrealized losses......................... -- -- -- --
Options
Purchased................................. 24 -- 17 --
Written................................... (24) -- 14 --
Guarantees
Purchased................................. 11,854 600 3,506 714
Written................................... (11,854) (600) (3,506) (700)
Swaps
Unrealized gains.......................... 82,678 50,570 33,202 1,288
Unrealized losses......................... (82,742) (50,548) (32,757) (1,244)
-------- -------- -------- -------
Total Interest Rate Contracts........... $ 117 $ 22 $ 579 $ 58
======== ======== ======== =======

Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31, 2001,
2000 and 1999 are summarized below:

YEARS ENDED DECEMBER 31
------------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Interest Rate Contracts:
Futures and forwards...................................... $ -- $ (52) $ 542
Forward rate agreements................................... -- -- 2
Options................................................... 23 (6) (36)
Guarantees................................................ -- 53 (57)
Swaps..................................................... 282 (316) 439
Debt Instruments............................................ 16,711 9,386 7,594
------- ------ ------
Total Trading Revenue................................ $17,016 $9,065 $8,484
======= ====== ======

The following table summarizes the Bank's dealer/trading foreign exchange
contracts and their related contractual or notional amounts and maximum
replacement costs.

DECEMBER 31
------------------------------------------------
CONTRACTUAL OR NOTIONAL MAXIMUM REPLACEMENT
AMOUNT COST
------------------------ --------------------
2001 2000 2001 2000
---------- ---------- -------- --------
(IN THOUSANDS)

Foreign Exchange Contracts:
Spot, futures and forwards................. $1,260,109 $2,634,243 $11,239 $39,232
Options written............................ 7,294 22,450 -- --
Options purchased.......................... 7,294 22,450 52 668
Cross currency swaps....................... 22,867 63,289 583 3,751

The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the years ended December 31, 2001
and 2000:

2001 2000
------------------------------ ------------------------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)

Foreign Exchange Contracts:
Spot, futures and forwards
Unrealized gains..................... $ 11,239 $ 23,831 $ 39,232 $ 19,525
Unrealized losses.................... (11,239) (23,831) (39,232) (19,525)
Options
Purchased............................ 52 1,052 668 4,120
Written.............................. 52 (1,032) (668) (4,120)
Cross currency swaps
Unrealized gains..................... 583 22 3,751 1,716
Unrealized losses.................... (583) (23) (3,751) (1,848)
-------- -------- -------- --------
Total Foreign Exchange.......... $ -- $ 19 $ -- $ (132)
======== ======== ======== ========

Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 2001, 2000 and 1999 totaled $8.8 million, $7.2 million
and $8.3 million, respectively, of net profit under the aforementioned agreement
with BMO.

The following table summarizes the Bank's dealer/trading equities contracts
and their related contractual or notional amounts and maximum replacement costs.

DECEMBER 31
--------------------------------------
CONTRACTUAL OR MAXIMUM
NOTIONAL AMOUNT REPLACEMENT COST
------------------ ----------------
2001 2000 2001 2000
------- ------- ------ ------
(IN THOUSANDS)

Equities Contracts:
Options written..................................... $27,877 $27,877 $ -- $ --
Options purchased................................... 27,877 27,877 1,836 4,065
Swaps............................................... 45,408 -- 2,373 --

The following table summarizes average and end of period fair values of
dealer/trading equities contracts for the years ended December 31, 2001 and
2000:

Equities Contracts:
Options
Purchased......................... $ 1,836 $ 288 $ 4,065 $ 289
Written........................... (1,836) (288) (4,065) (289)
------- ----- ------- -----
Swaps
Unrealized gains.................. 2,373 43 -- --
Unrealized losses................. (2,373) (43) -- --
------- ----- ------- -----
Total Equities Contracts........ $ -- $ -- $ -- $ --
======= ===== ======= =====

There were no net gains (losses) from dealer/trading activity in equities
contracts for the year ended December 31, 2001 and 2000.

During 2000 interest rate swaps were primarily used to alter the character
of revenue earned on certain fixed rate loans and foreign exchange contracts
were used to stabilize any currency exchange rate fluctuations for certain
senior notes. The Bank had $349 million notional amount of swap contracts, used
for risk management purposes, outstanding at December 31, 2000 with a loss in
fair value of $3.2 million. Gross unrealized gains and losses, representing the
difference between fair value and carrying value (i.e. accrued interest payable
or receivable) on these contracts, totaled $0.9 million and $1.4 million,
respectively, at December 31, 2000. Risk management activity, including the
related cash positions, had no material effect on the Bank's net income for the
year ended December 31, 2000. There were no deferred gains or losses on
terminated contracts at December 31, 2000.

The following table summarizes swap and forward activity for risk
management purposes:

NOTIONAL
AMOUNT
--------------
(IN THOUSANDS)

Amount, December 31, 1999................................... $256,375
Additions................................................... 181,714
Maturities.................................................. (89,316)
Terminations................................................ --
--------
Amount, December 31, 2000................................... 348,773

Securities activities

The Bank's securities activities that have off-balance-sheet risk include
municipal bond underwriting and short selling of securities.

Through its municipal bond underwriting activities, the Bank commits to buy
and offer for resale newly issued bonds. The Bank is exposed to market risk
because it may be unable to resell its inventory of bonds profitably as a result
of unfavorable market conditions. In syndicate arrangements, the Bank is
obligated to fulfill syndicate members' commitments should they default. The
syndicates of which the Bank was a member had underwriting commitments totaling
$51 million at December 31, 2001 and $53 million at December 31, 2000.

Security short selling, defined as selling of securities not yet owned,
exposes the Bank to off-balance-sheet market risk because the Bank may be
required to buy securities at higher prevailing market prices to cover its short
positions. The Bank had no short position at December 31, 2001 or 2000.

10. CONCENTRATIONS OF CREDIT RISK IN FINANCIAL INSTRUMENTS

The Bank had one major concentration of credit risk arising from financial
instruments at December 31, 2001 and 2000. This concentration was the Midwest
geographic area. This concentration exceeded 10 percent of the Bank's total
credit exposure, which is the total potential accounting loss should all
customers fail to perform according to contract terms and all collateral prove
to be worthless.

Midwestern geographic area

A majority of the Bank's customers are located in the Midwestern region of
the United States, defined here to include Illinois, Indiana, Iowa, Michigan,
Minnesota, Missouri, Ohio and Wisconsin. The Bank provides credit to these
customers through a broad array of banking and trade financing products
including commercial loans, commercial loan commitments, commercial real estate
loans, consumer installment loans, mortgage loans, home equity loans and lines,
standby and commercial letters of credit and banker's acceptances. The financial
viability of customers in the Midwest is, in part, dependent on the region's
economy. Corporate customers headquartered in the region and serving a national
or international market are not included in this concentration because their
business is broad-based and not dependent on the region's economy. The Bank's
maximum risk of accounting loss, should all customers making up the Midwestern
concentration fail to perform according to contract terms and all collateral
prove to be worthless, was approximately $14.0 billion or 51 percent of the
Bank's total credit exposure at December 31, 2001 and $13.8 billion or 48
percent of the Bank's total credit exposure at December 31, 2000.

The Bank manages this exposure by continually reviewing local market
conditions and customers, adjusting individual and industry exposure limits
within the region and by obtaining or closely monitoring collateral values. See
Note 9 for information on collateral supporting credit facilities.

11. EMPLOYEE BENEFIT PLANS

The Bank has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 2001. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 2001. The benefit formula
for this plan is based upon length of service and an employee's highest
qualifying compensation during 60 consecutive months of active employment. The
plan is a multiple-employer plan covering the Bank's employees as well as
persons employed by certain affiliated entities.

The policy for this plan is to have the participating entities, at a
minimum, fund annually an amount necessary to satisfy the requirements under
ERISA, without regard to prior years' contributions in excess of the minimum.
For 2001, 2000 and 1999, cumulative contributions were greater than the amounts
recorded as pension expense for financial reporting purposes. The total
consolidated pension expense of the Bank, including the supplemental plan
(excluding settlement losses and curtailment gains), for 2001, 2000 and 1999 was
$7.1 million, $8.2 million and $10.9 million, respectively.

In addition to pension benefits, the Bank provides medical care benefits
for retirees (and their dependents) who have attained age 55 and have at least
10 years of service. The Bank also provides medical care benefits for disabled
employees and widows of former employees (and their dependents). The Bank

provides these medical care benefits through a self-insured plan. Under the
terms of the plan, the Bank contributes to the cost of coverage based on
employees length of service. Cost sharing with plan participants is accomplished
through deductibles, coinsurance and out-of-pocket limits. Funding for the plan
largely comes from the general assets of the Bank, supplemented by contributions
to a trust fund created under Internal Revenue Code Section 401(h).

Curtailment gains amounting to $7.3 million and $2.3 million for pension
plan and postretirement medical plan, respectively, were recognized in 2000 due
to the sale of corporate trust, the sale of merchant card businesses and the
outsourcing arrangement with Alltel. Of those totals, $2.2 million and $0.5
million, respectively, were recognized as a direct reduction of benefit expense.
Settlement losses amounting to $0.1 million and $1.3 million for the
supplemental plan were recognized in 2000 and 1999, respectively.

The following tables set forth the change in benefit obligation and plan
assets for the pension and postretirement medical care benefit plans for the
Bank:

PENSION BENEFITS POSTRETIREMENT MEDICAL BENEFITS
------------------------------ ---------------------------------
2001*** 2000*** 1999*** 2001*** 2000*** 1999***
-------- -------- -------- --------- --------- ---------
(IN THOUSANDS)

CHANGE IN BENEFIT OBLIGATION*
Benefit obligation at beginning of year.......... $224,002 $227,701 $242,661 $ 32,933 $ 35,238 $ 34,829
Service cost..................................... 8,812 9,373 10,197 1,280 1,346 1,730
Interest cost.................................... 16,419 16,643 16,714 2,471 2,453 2,509
Plan Amendments.................................. 4,033 -- -- -- -- --
Acquisitions/transfers........................... 94 -- -- -- -- --
Curtailment (gain) or loss....................... -- (7,348) -- -- (2,276) --
Benefits paid (net of participant
contributions)................................. (13,035) (19,595) (22,851) (2,003) (3,322) (2,467)
Actuarial (gain) or loss......................... 8,052 (2,772) (19,020) 3,708 (506) (1,363)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year................ $248,377 $224,002 $227,701 $ 38,389 $ 32,933 $ 35,238
======== ======== ======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year... $246,912 $226,449 $215,721 $ 25,209 $ 21,022 $ 16,732
Actual return on plan assets..................... (1,361) 27,559 25,539 (1,463) 2,614 1,913
Acquisitions/transfers........................... 1,192 -- -- -- -- --
Employer contribution............................ 3,248 12,499 8,040 2,216 1,573 2,377
Benefits paid.................................... (13,035) (19,595) (22,851) -- -- --
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end of year**....... $236,956 $246,912 $226,449 $ 25,962 $ 25,209 $ 21,022
======== ======== ======== ======== ======== ========
Funded Status.................................... $(11,421) $ 22,910 $ (1,252) $(12,427) $ (7,724) $(14,216)
Contributions made between measurement date
(September 30) and end of year................. -- -- -- -- -- --
Unrecognized actuarial (gain) or loss............ 29,580 1,097 11,767 (5,589) (13,780) (12,468)
Unrecognized transition (asset) or obligation.... (85) (397) (710) 19,143 20,893 23,142
Unrecognized prior service cost.................. 691 (4,072) (4,814) 1,354 1,523 1,799
-------- -------- -------- -------- -------- --------
Prepaid (accrued) benefit cost................... $ 18,765 $ 19,538 $ 4,991 $ 2,481 $ 912 $ (1,743)
======== ======== ======== ======== ======== ========
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost..................................... $ 8,812 $ 9,373 $ 10,197 $ 1,280 $ 1,346 $ 1,730
Interest cost.................................... 16,419 16,643 16,714 2,471 2,453 2,509
Expected return on plan assets................... (20,066) (19,527) (20,393) (2,017) (1,686) (1,405)
Amortization of prior service cost............... (745) (743) (737) 169 169 176
Amortization of transition (asset) or
obligation..................................... (313) (312) (312) 1,751 1,751 1,780
Recognized actuarial (gain) or loss.............. (75) (62) 831 (548) (489) (269)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost........................ $ 4,032 $ 5,372 $ 6,300 $ 3,106 $ 3,544 $ 4,521
======== ======== ======== ======== ======== ========
Additional (gain) or loss recognized due to:
Curtailment.................................. $ -- $ (2,223) $ -- $ -- $ (524) $ --

---------------
* Benefit obligation is projected for the pension benefits and accumulated for
the postretirement medical benefits.

** Plan assets consist primarily of participation units in collective trust
funds or mutual funds administered by HTSB.

*** Plan assets and obligation measured as of September 30.

POSTRETIREMENT MEDICAL
PENSION BENEFITS BENEFITS
-------------------- -----------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ----- ----- -----

WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate*................................... 7.50% 7.75% 7.50% 7.50% 7.75% 7.50%
Expected return on plan assets................... 9.00% 9.00% 9.00% 8.00% 8.00% 8.00%
Rate of compensation increase.................... 5.50% 5.50% 5.50% 4.00% 4.00% 4.00%

---------------
* Discount rates are used to determine service costs for the subsequent year.

For measurement purposes, a 6.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 6.0 percent in 2001 and remain level
thereafter.

For the postretirement medical care benefit plan, assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. A one-percentage-point change in assumed health care cost trend
rates would have the following effects:

1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)

Effect on total of service and interest cost components..... $ 612 $ (485)
Effect on postretirement benefit obligation................. $5,545 $(4,503)

Certain employees participating in the primary plan are also covered by a
supplemental unfunded retirement plan. The purpose of this plan is to extend
full retirement benefits to individuals without regard to statutory limitations
for qualified funded plans. The following table sets forth the status of this
supplemental plan:

SUPPLEMENTAL UNFUNDED RETIREMENT BENEFITS
------------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.................. $ 19,258 $ 13,727 $ 21,752
Service cost............................................. 1,320 1,361 2,244
Interest cost............................................ 1,049 819 1,312
Plan amendments.......................................... (3,990) -- --
Benefits paid (net of participant contributions)......... (385) (1,957) (5,094)
Actuarial (gain) or loss................................. 6,498 5,308 (6,487)
-------- -------- --------
Benefit obligation at end of year........................ $ 23,750 $ 19,258 $ 13,727
======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year........... $ -- $ -- $ --
Actual return on plan assets............................. -- -- --
Employer contribution.................................... 385 1,957 5,094
Benefits paid............................................ (385) (1,957) (5,094)
-------- -------- --------
Fair value of plan assets at end of year................. $ -- $ -- $ --
======== ======== ========
Funded Status............................................ $(23,750) $(19,258) $(13,727)
Contributions made between measurement date (September
30) and end of year.................................... 45 45 45
Unrecognized actuarial (gain) or loss.................... 10,274 4,259 (867)
Unrecognized transition (asset) or obligation............ 25 124 238
Unrecognized prior service cost.......................... (2,711) 1,694 2,194
-------- -------- --------
Prepaid (accrued) benefit cost........................... $(16,117) $(13,136) $(12,117)
======== ======== ========
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................................. $ 1,320 $ 1,361 $ 2,244
Interest cost............................................ 1,049 819 1,312
Expected return on plan assets........................... -- -- --
Amortization of prior service cost....................... 415 500 500
Amortization of transition (asset) or obligation......... 99 114 114
Recognized actuarial (gain) or loss...................... 208 -- 478
-------- -------- --------
Net periodic benefit cost................................ $ 3,091 $ 2,794 $ 4,648
======== ======== ========
Additional (gain) or loss recognized due to:
Settlement.......................................... $ -- $ 92 $ 1,314

WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate............................................ 6.00% 6.00% 6.00%
Rate of compensation increase............................ 5.70% 5.70% 5.70%

The Bank has a defined contribution profit sharing plan covering virtually
all its employees. The plan includes a matching contribution and a profit
sharing contribution. The matching contribution is based on the amount of
eligible employee contributions. The profit sharing contribution is based on the
annual financial performance of the Bank relative to predefined targets. The
Bank's total expense for this plan was $7.8 million, $9.7 million and $9.5
million in 2001, 2000 and 1999, respectively.

12. STOCK OPTIONS

The Bank has two remaining primary stock-based compensation plans, an
options program and a performance incentive plan. A stock appreciation rights
plan was fully paid out early in 2000. The option plans are accounted for under
the fair value based method of accounting and they are described below.

Harris Bankcorp Stock Option Program

The Harris Bankcorp Stock Option Program was established under the Bank of
Montreal Stock Option Plan for certain designated executives and other employees
of the Bank and affiliated companies in order to provide incentive to attain
long-term strategic goals and to attract and retain services of key employees.

The Bank has two types of option plans. The Fixed Stock Option Plan consist
of standard stock options with a ten-year term which are exercisable only during
the second five years of their term, assuming cumulative performance goals are
met. The Performance Based Option Plan consists of standard and performance
conditioned stock options with a ten-year term and a four-year vesting period,
which are exercisable twenty-five percent per annum. The standard options may be
exercised at any time once vested. The performance-conditioned options may be
exercised provided the Bank of Montreal shares trade at fifty percent over the
price of the stock at date of grant for twenty consecutive days, after the
vesting date. The stock options are exercisable for Bank of Montreal common
stock equal to the market price on the date of grant. The compensation expense
related to this program totaled $4.5 million, $2.9 million and $2.4 million in
2001, 2000 and 1999, respectively.

The following table summarizes the stock option activity for 2001, 2000 and
1999 and provides details of stock options outstanding at December 31, 2001:

2001 2000 1999
--------------------------- --------------------------- ---------------------------
WTD. AVG. WTD. AVG. WTD. AVG.
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------- -------------- ---------- -------------- ---------- --------------

Outstanding at beginning of
year............................ 2,702,246 $39.22 2,469,800 $34.50 1,751,600 $34.46
Granted........................... 1,160,300 22.70 665,165 50.36 735,700 34.72
Exercised......................... (133,307) 26.94 (221,876) 23.57 -- --
Forfeited, cancelled.............. (90,700) 38.07 (199,950) 35.45 (2,500) 39.06
Transferred....................... (29,480) 50.36 (10,893) 37.87 (15,000) 39.06
Expired........................... -- -- -- -- -- --
---------- ---------- ----------
Outstanding at end of year........ 3,609,059 34.30 2,702,246 39.22 2,469,800 34.50
========== ========== ==========
Options exercisable at year-end... 810,731 $34.63 337,903 $28.73 None
Weighted-average fair value of
options granted during the
year............................ $ 3.55 $ 10.93 $ 6.55

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WTD. AVG. EXERCISABLE WTD. AVG.
EXERCISE PRICES DECEMBER 31, 2001 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
--------------- ----------------- ---------------- -------------- ----------------- --------------

$22-30 1,505,953 8.81 years $23.78 345,653 $27.38
34-42 1,280,234 7.44 36.97 307,832 34.72
46-54 822,872 8.24 49.41 157,246 50.36
--------- -------
22-54 3,609,059 8.19 34.30 810,731 34.63
========= =======

The fair value of the stock options granted has been estimated using the
Bloomberg Model with the following assumptions:

2001 2000 1999
------ ------ ------

Risk-free interest rate..................................... 5.50% 6.10% 6.31%
Expected life, in years..................................... 7.0 7.0 7.0
Expected volatility......................................... 23.29% 22.18% 21.46%
Compound annual dividend growth............................. 9.21% 8.89% 9.02%
Estimated fair value per option (US $)...................... $ 3.55 $10.93 $ 6.55

Harris Bankcorp Mid-Term Incentive Plan

The Bank maintains the Mid-Term Incentive Plan which was established in
January 2000. The Plan is intended to enhance the Bank's ability to attract and
retain high quality employees and to provide a strong incentive to employees to
achieve Bank of Montreal's governing objective of maximizing value for its
shareholders.

Payouts under the plan to participants depend on the achievement of
specific performance criteria that are set at the grant date. The right to
receive distributions under the plan vest and are paid out after three years
based on various factors including the Bank of Montreal share price.
Compensation expense for this plan totalled $6.8 million in 2001. There was no
compensation expense related to this plan in 2000.

Harris Bankcorp Stock Appreciation Rights Plan

The Harris Bankcorp Stock Appreciation Rights Plan was fully paid out
between November 23, 1999 and January 22,2000. All rights were exercised at that
time. Compensation expense for this plan totaled $0.3 million in 1999. No
compensation expense was recorded in 2000 or 2001.

The following table details the stock appreciation rights outstanding at
December 31, 2001, 2000 and 1999.

2001 2000 1999
-------- -------- --------

Outstanding beginning of the year........................... -- 58,000 331,700
Granted..................................................... -- -- --
Exercised................................................... -- (58,000) (273,700)
Cancelled................................................... -- -- --
Transferred................................................. -- -- --
-------- -------- --------
Outstanding end of the year............................... -- -- 58,000
======== ======== ========

13. LEASE EXPENSE AND OBLIGATIONS

Rental expense for all operating leases was $13.6 million in 2001, $13.3
million in 2000 and $15.0 million in 1999. These amounts include real estate
taxes, maintenance and other rental-related operating costs of $2.9 million,
$3.8 million and $3.3 million for 2001, 2000 and 1999, respectively, paid under
net lease arrangements. Lease commitments are primarily for office space.

Minimum rental commitments as of December 31, 2000 for all noncancelable
operating leases are as follows:

(IN THOUSANDS)
--------------

2002........................................................ $ 8,264
2003........................................................ 6,710
2004........................................................ 5,127
2005........................................................ 5,158
2006........................................................ 5,116
2007 and thereafter......................................... 27,854
-------
Total minimum future rentals......................... $58,229
=======

Occupancy expenses for 2001, 2000 and 1999 have been reduced by $15
million, $13 million and $12.7 million, respectively, for rental income from
leased premises.

14. INCOME TAXES

The 2001, 2000 and 1999 applicable income tax expense (benefit) was as
follows:

FEDERAL STATE TOTAL
-------- ------- --------
(IN THOUSANDS)

2001: Current............................................... $ 38,271 $(3,254) $ 35,017
Deferred.............................................. (23,860) (923) (24,783)
-------- ------- --------
Total $ 14,411 $(4,177) $ 10,234
======== ======= ========
2000: Current............................................... $ 93,491 $ 1,952 $ 95,443
Deferred.............................................. 1,631 260 1,891
-------- ------- --------
Total............................................. $ 95,122 $ 2,212 $ 97,334
======== ======= ========
1999: Current............................................... $ 45,094 $(1,637) $ 43,457
Deferred.............................................. (5,511) 1,257 (4,254)
-------- ------- --------
Total............................................. $ 39,583 $ (380) $ 39,203
======== ======= ========

Tax benefits of $2.7 million related to options were recorded directly to
stockholder's equity in 2001. No such benefits were recorded in 2000 or 1999.

Deferred tax assets (liabilities) are comprised of the following at
December 31, 2001, 2000 and 1999:

DECEMBER 31
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Gross deferred tax assets:
Allowance for possible loan losses..................... $ 95,253 $ 49,026 $ 45,189
Deferred expense and prepaid income.................... 13,037 11,640 10,131
Deferred employee compensation......................... 7,865 4,130 1,893
Pension and medical trust.............................. -- 2,134 5,501
Other assets........................................... 11,641 4,370 5,646
-------- -------- --------
Deferred tax assets.................................. 127,796 71,300 68,360
-------- -------- --------
Gross deferred tax liabilities:
Depreciable assets..................................... (31,197) (1,537) (967)
Other liabilities...................................... (15,386) (13,333) (9,072)
-------- -------- --------
Deferred tax liabilities............................. (46,583) (14,870) (10,039)
-------- -------- --------
Net deferred tax assets................................ 81,213 56,430 58,321
-------- -------- --------
Tax effect of adjustment related to available-for-sale
securities................................................ (13,258) 7,562 90,829
-------- -------- --------
Net deferred tax assets including adjustment related to
available-for-sale securities............................. $ 67,955 $ 63,992 $149,150
======== ======== ========

At December 31, 2001 and 2000, the respective net deferred tax assets of
$81.2 million and $56.4 million included $72.8 million and $49.0 million for
Federal taxes and $8.4 million and $7.4 million for state taxes, respectively.
Management believes that the realization of the net deferred tax assets is more
likely than not based on existing carryback ability and expectations as to
future taxable income.

Total income tax expense of $10.2 million for 2001, $97.3 million for 2000,
and $39.2 million for 1999 reflects effective tax rates of 11.1 percent, 30.1
percent, and 21.4 percent, respectively. The reasons for the differences between
actual tax expense and the amount determined by applying the U.S. Federal income
tax rate of 35 percent to income before income taxes were as follows:

YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)

Computed tax expense............... $ 32,377 35.0% $113,322 35.0% $ 64,227 35.0%
Increase (reduction) in income tax
expense due to:
Tax-exempt income from loans and
investments net of municipal
interest expense
disallowance.................. (891) (1.0) (1,045) (0.3) (1,718) (0.9)
Bank-owned insurance............. (16,507) (17.8) (15,758) (4.9) (14,477) (7.9)
Equity ownership in
securitization trust.......... (278) (0.3) (1,673) (0.5) (5,601) (3.1)
State income taxes............... (2,715) (2.9) 1,438 0.4 (247) (0.1)
Other, net....................... (1,752) (1.9) 1,050 0.4 (2,981) (1.6)
-------- ----- -------- ---- -------- ----
Actual tax expense................. $ 10,234 11.1% $ 97,334 30.1% $ 39,203 21.4%
======== ===== ======== ==== ======== ====

The tax expense from net gains on security sales amounted to $13.8 million,
$5.7 million, and $5.3 million in 2001, 2000, and 1999, respectively.

15. REGULATORY CAPITAL

The Bank, as a state-member bank, must adhere to the capital adequacy
guidelines of the Federal Reserve Board (the "Board"), which are not
significantly different than those published by other U.S. banking regulators.
The guidelines specify minimum ratios for Tier 1 capital to risk-weighted assets
of 4 percent and total regulatory capital to risk-weighted assets of 8 percent.

Risk-based capital guidelines define total capital to consist primarily of
Tier 1 (core) and Tier 2 (supplementary) capital. In general, Tier 1 capital is
comprised of stockholder's equity, including certain types of preferred stock,
less goodwill and certain other intangibles. Core capital must comprise at least
50 percent of total capital. Tier 2 capital basically includes subordinated debt
(less a discount factor during the five years prior to maturity), other types of
preferred stock and the allowance for possible loan losses. The portion of the
allowance for possible loan losses includable in Tier 2 capital is limited to
1.25 percent of risk-weighted assets.

The Board also requires an additional measure of capital adequacy, the Tier
1 leverage ratio, which is evaluated in conjunction with risk-based capital
ratios. The Tier 1 leverage ratio is computed by dividing period-end Tier 1
capital by adjusted quarterly average assets. The Board established a minimum
ratio of 3 percent applicable only to the strongest banking organizations
having, among other things, excellent asset quality, high liquidity, good
earnings and no undue interest rate risk exposure. Other institutions are
expected to maintain a minimum ratio of 4 percent.

The Federal Deposit Insurance Corporation Improvement Act of 1991 contains
prompt corrective action provisions that established five capital categories for
all Federal Deposit Insurance Corporation ("FDIC")-insured institutions ranging
from "well capitalized" to "critically undercapitalized." Classification within
a category is based primarily on the three capital adequacy measures. An
institution is considered "well capitalized" if its capital level significantly
exceeds the required minimum levels, "adequately capitalized" if it meets the
minimum levels, "undercapitalized" if it fails to meet the minimum levels,
"significantly undercapitalized" if it is significantly below the minimum levels
and "critically undercapitalized" if it has a ratio of tangible equity to total
assets of 2 percent or less.

Noncompliance with minimum capital requirements may result in regulatory
corrective actions that could have a material effect on the Bank's financial
statements. Depending on the level of noncompliance, regulatory corrective
actions may include the following: requiring a plan for restoring the
institution to an acceptable capital category, restricting or prohibiting
certain activities and appointing a receiver or conservator for the institution.

As of December 31, 2001, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. Management is not aware of any conditions or events
since December 31, 2001 that have changed the capital category of the Bank.

At December 31, 2001 the Bank had $255 million of minority interest in
preferred stock of subsidiaries, including $250 million noncumulative,
exchangeable Series A preferred stock with dividends payable at the rate of
7 3/8% per annum. The Bank also had a total of $5 million of preferred stock
issued by subsidiaries with cumulative dividends payable at the rate of LIBOR
plus 100 basis points adjusted as of the first business day of the calendar
quarter which the record date falls. During both 2001 and 2000, $18 million of
dividends were paid on the preferred stock. All issues of preferred stock
qualify as Tier 1 Capital for U.S. banking regulatory purposes.

The following table summarizes the Bank's risk-based capital ratios and
Tier 1 leverage ratio for the past two years as well as the minimum amounts and
ratios as per capital adequacy guidelines and FDIC prompt corrective action
provisions.

TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------------ -------------------------
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ------------- -------- ------------- ---------
(IN THOUSANDS)

As of December 31, 2001:
Total Capital to Risk-Weighted
Assets............................ $1,995,799 12.26% M $ 1,302,316 M 8.00% M $ 1,627,895 M 10.00%
Tier 1 Capital to Risk-Weighted
Assets............................ $1,596,658 9.80% M $ 651,697 M 4.00% M $ 977,546 M 6.00%
Tier 1 Capital to Average Assets.... $1,596,658 8.23% M $ 776,018 M 4.00% M $ 970,023 M 5.00%
As of December 31, 2000:
Total Capital to Risk-Weighted
Assets............................ $1,903,085 10.98% M $ 1,386,583 M 8.00% M $ 1,733,229 M 10.00%
Tier 1 Capital to Risk-Weighted
Assets............................ $1,569,134 9.06% M $ 692,774 M 4.00% M $ 1,039,162 M 6.00%
Tier 1 Capital to Average Assets.... $1,569,134 7.40% M $ 848,181 M 4.00% M $ 1,060,226 M 5.00%

16. INVESTMENTS IN SUBSIDIARIES AND STATUTORY RESTRICTIONS

The Bank's investment in the combined net assets of its wholly-owned
subsidiaries was $639 million and $581 million at December 31, 2001 and 2000,
respectively.

Provisions of both Illinois and Federal banking laws place restrictions
upon the amount of dividends that can be paid to Bankcorp by its bank
subsidiaries. Illinois law requires that no dividends may be paid in an amount
greater than the net profits then on hand, reduced by certain loan losses (as
defined). In addition to these restrictions, Federal Reserve member banking
subsidiaries require prior approval of Federal banking authorities if dividends
declared by a subsidiary bank, in any calendar year, will exceed its net profits
(as defined in the applicable statute) for that year, combined with its retained
net profits, as so defined, for the preceding two years. Based on these and
certain other prescribed regulatory limitations, the Bank could have declared,
without regulatory approval, $227 million of dividends at December 31, 2001.
Actual dividends paid, however, would be subject to prudent capital maintenance.
Cash dividends paid to Bankcorp by the Bank amounted to $84 million and $83
million in 2001 and 2000, respectively.

The Bank is required by the Federal Reserve Act to maintain reserves
against certain of their deposits. Reserves are held either in the form of vault
cash or balances maintained with the Federal Reserve Bank. Required reserves are
essentially a function of daily average deposit balances and statutory reserve
ratios prescribed by type of deposit. During 2001 and 2000, daily average
reserve balances of $255 million and $209 million, respectively, were required
for the Bank. At year-end 2001 and 2000, balances on deposit at the Federal
Reserve Bank totaled $264 million and $285 million, respectively.

17. CONTINGENT LIABILITIES

The Bank and certain 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 financial
position or results of operations.

18. FOREIGN ACTIVITIES (BY DOMICILE OF CUSTOMER)

Income and expenses identifiable with foreign and domestic operations are
summarized in the table below:

FOREIGN DOMESTIC CONSOLIDATED
-------- ----------- ------------
(IN THOUSANDS)

2001
Total operating income................................... $ 47,534 $ 1,404,325 $ 1,451,859
Total expenses........................................... 18,127 1,341,226 1,359,353
-------- ----------- -----------
Income before taxes...................................... 29,407 63,099 92,506
Applicable income taxes.................................. 11,688 (1,454) 10,234
-------- ----------- -----------
Net income............................................... $ 17,719 $ 64,553 $ 82,272
======== =========== ===========
Identifiable assets at year-end.......................... $228,741 $19,507,430 $19,736,171
======== =========== ===========
2000
Total operating income................................... $ 53,698 $ 1,754,161 $ 1,807,859
Total expenses........................................... 15,597 1,468,484 1,484,081
-------- ----------- -----------
Income before taxes...................................... 38,101 285,677 323,778
Applicable income taxes.................................. 15,143 82,191 97,334
-------- ----------- -----------
Net income............................................... $ 22,958 $ 203,486 $ 226,444
======== =========== ===========
Identifiable assets at year-end.......................... $223,976 $21,065,639 $21,289,615
======== =========== ===========
1999
Total operating income................................... $ 46,974 $ 1,379,131 $ 1,426,105
Total expenses........................................... 14,803 1,227,797 1,242,600
-------- ----------- -----------
Income before taxes...................................... 32,171 151,334 183,505
Applicable income taxes.................................. 12,786 26,417 39,203
-------- ----------- -----------
Net income............................................... $ 19,385 $ 124,917 $ 144,302
======== =========== ===========
Identifiable assets at year-end.......................... $322,297 $19,715,768 $20,038,065
======== =========== ===========

Determination of rates for foreign funds generated or used are based on the
actual external costs of specific interest-bearing sources or uses of funds for
the periods. Internal allocations for certain unidentifiable income and expenses
were distributed to foreign operations based on the percentage of identifiable
foreign income to total income. As of December 31, 2001, 2000 and 1999,
identifiable foreign assets accounted for 1 percent, 1 percent and 2 percent,
respectively, of total consolidated assets.

19. BUSINESS COMBINATIONS AND DISPOSITIONS/INTANGIBLES

At December 31, 2000 and 1999, intangible assets, including goodwill
resulting from business combinations, amounted to $221 million and $242 million,
respectively. Amortization of these intangibles amounted to $22.7 million in
2000, $22.7 million in 1999, and $21.5 million in 1998. The impact of purchase
accounting adjustments, other than amortization of intangibles, was not material
to the Bank's reported results.

In March 2000, the Bank sold its corporate trust business. In separate and
unrelated transactions, the indenture trust business was sold to a subsidiary of
The Bank of New York Company, Inc., and the shareholder services business to
Computershare Limited. The combined sales resulted in a pretax gain of $45.6
million.

On December 1, 2000, the Bank sold its merchant card business to the credit
card processing joint venture (Moneris) formed between Bank of Montreal and
Royal Bank of Canada. The sale resulted in a pretax gain to the Bank of $60.2
million, which was eliminated in the consolidation of the Bank's results with
Bank of Montreal.

20. RELATED PARTY TRANSACTIONS

During 2001, 2000, and 1999, the Bank engaged in various transactions with
BMO and its subsidiaries. These transactions included the payment and receipt of
service fees and occupancy expenses, purchasing and selling Federal funds,
repurchase and reverse repurchase agreements, short-term borrowings, interest
rate and foreign exchange rate contracts. The purpose of these transactions was
to facilitate a more efficient use of combined resources and to better serve
customers. Fees for these services were determined in accordance with applicable
banking regulations. During 2001, 2000, and 1999, the Bank received from BMO
approximately $24.9 million, $14.7 million and $14.6 million respectively,
primarily for trust services, data processing and other operations support
provided by the Bank. The Corporation made payments to BMO of approximately
$32.1 million, $17.0 million and $17.2 million in 2001, 2000 and 1999,
respectively.

The Bank and BMO combine their U.S. foreign exchange activities. Under this
arrangement, the Bank and BMO share FX net profit in accordance with a specific
formula set forth in the agreement. This agreement expires in April 2002 but may
be extended at that time. Either party may terminate the arrangement at its
option. FX revenues are reported net of expenses. 2001, 2000 and 1999 foreign
exchange revenues included $8.8 million, $7.2 million and $8.3 million of net
profit, respectively, under this agreement.