Forward-Looking Information

The statements contained in this Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the Company's expectation, intentions, beliefs or strategies regarding the future. Forward-looking statements include the Company's statements regarding tax treatment as a real estate investment trust, liquidity, provision for loan losses, capital resources and investment activities. In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "expect," "intend" and other similar expressions, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. It is important to note that the Company's actual results could differ materially from those described herein as anticipated, believed, estimated or expected. Among the factors that could cause the results to differ materially are the risks discussed in Item 1A. "Risk Factors" in the Company's 2008 Form 10-K and in the "Risk Factors" section included in the Company's Registration Statement on Form S-11 (File No. 333-40257), with respect to the Preferred Shares declared effective by the Securities and Exchange Commission on February 5, 1998. The Company assumes no obligation to update any such forward-looking statement.

Results of Operations

First Quarter 2009 Compared with First Quarter 2008

The Company's net income for the first quarter of 2009 was $4.9 million, compared to $5.3 million from the first quarter 2008. Earnings decreased primarily because of the initial recognition of Illinois state income taxes during the current quarter.

Interest income on securities purchased under agreement to resell for the first quarter of 2009 was $9 thousand, on an average balance of $34 million, with an annualized yield of 0.11%. During the same period in 2008, the interest income on securities purchased under agreement to resell was $634 thousand, on an average balance of $69 million, with an annualized yield of 3.69%. The decrease in income was attributable to lower yields in the short-term money market. The Federal Fund rates at March 31, 2009 was 0.18% compared to the Federal Fund rates at March 31, 2008 of 2.61%. First quarter 2009 interest income on the Notes receivable (Notes) totaled $64 thousand and yielded 6.4% on $4 million of average principal outstanding for the quarter compared to $82 thousand and a 6.4% yield on $5.1 million average principal outstanding for first quarter 2008. The decrease in income was attributable to a reduction in the Notes balance because of customer payoffs in the Securing Mortgage Loans. At March 31, 2009 and 2008, there were no Securing Mortgage Loans on nonaccrual status. Interest income on securities available-for-sale for the current quarter was $5.4 million resulting in a yield of 4.52% on an average balance of $476 million, compared to $4.7 million with a yield of 4.5% on an average balance of $413 million for the same period a year ago. Virtually all income in the current quarter was attributable to the mortgage-backed security portfolio.

There were no Company borrowings during first quarter 2009 or 2008.

First quarter 2009 operating expenses totaled $179 thousand, an increase of $38 thousand or 27% from the first quarter of 2008. General and administrative expenses totaled $120 thousand, an increase of $22 thousand over the same period in 2008, primarily due to increases in insurance costs and regulatory filings and processing costs, and director fees. Advisory fees for the first quarter 2009 were $56 thousand compared to $39 thousand a year earlier, primarily due to increase in production costs.

On March 30, 2009, the Company paid a cash dividend of $0.46094 per share on outstanding Preferred Shares to the stockholders of record on March 15, 2009 as declared on March 4, 2009. On March 30, 2008, the Company paid a cash dividend of $0.46094 per share on outstanding Preferred Shares to the stockholders of record on March 15, 2008 as declared on March 5, 2008.

The Company classifies all securities as available-for-sale. The Company has no intent to sell specific securities, and the Company has the ability to hold all securities to maturity. Available-for-sale securities are reported at fair value with unrealized gains and losses included as a separate component of stockholders' equity. At March 31, 2009, net unrealized gains on available-for-sale securities were $14.5 million compared to $3.4 million of unrealized gains on March 31, 2008.

In making a determination of temporary vs. other-than-temporary impairment of an investment, a major consideration of management is whether the Company will be able to collect all amounts due according to the contractual terms of the investment. Such a determination involves estimation of the outcome of future events as well as knowledge and experience about past and current events. Factors considered include the following: whether the fair value is significantly below cost and the decline is attributable to specific adverse conditions in an industry or geographic area; the period of time the decline in fair value has existed; if an outside rating agency has downgraded the investment; if dividends have been reduced or eliminated; if scheduled interest payments have not been made and finally, whether the financial condition of the issuer has deteriorated. In addition, it may be necessary for the Company to demonstrate its ability and intent to hold a debt security to maturity.

Liquidity Risk Management

The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Company's financial commitments. In managing liquidity, the Company takes into account various legal limitations placed on a REIT.

The Company's principal asset management requirements are to maintain the current earning asset portfolio size through the acquisition of additional Notes or other qualifying assets in order to pay dividends to its stockholders after satisfying obligations to creditors. The acquisition of additional Notes or other qualifying assets is funded with the proceeds obtained as a result of repayment of principal balances of individual Securing Mortgage Loans or maturities or sales of securities. The payment of dividends on the Preferred Shares is made from legally available funds, arising from operating activities of the Company. The Company's cash flows from operating activities principally consist of the collection of interest on the Notes, mortgage-backed securities and other earning assets. The Company does not have and does not anticipate having any material capital expenditures.

In order to remain qualified as a REIT, the Company must distribute annually at least 90% of its adjusted REIT ordinary taxable income, as provided for under the Internal Revenue Code, to its common and preferred stockholders. The Company currently expects to distribute dividends annually equal to 90% or more of its adjusted REIT ordinary taxable income.

The Company anticipates that cash and cash equivalents on hand and the cash flow from the Notes and mortgage-backed and U.S. treasury securities will provide adequate liquidity for its operating, investing and financing needs including the capacity to continue preferred dividend payments on an uninterrupted basis. In additional, the Company believes that the $80 million capital contribution from the Company's parent in March 2009 should provide additional opportunity to invest in earning assets.

As presented in the accompanying Consolidated Statements of Cash Flows, the primary sources of funds in addition to $55.3 million provided from operations during the three months ended March 31, 2009, were $48.1 million from the maturities of securities available-for-sale and the $80 million from the issuance of the common stock. In the prior period ended March 31, 2008, the primary sources of funds other than $4.9 million from operations were $121.2 million from the maturities of securities available-for-sale. The primary uses of funds for the three months ended March 31, 2009 were $128.6 million for purchases of securities available-for-sale and $4.6 million in preferred stock dividends paid. Net cash provided by financing activities were $75.4 million compared to $7.6 million used in the prior period ended March 31, 2008. The primary reason was the issuance of stock and capital contribution from the Company's parent totaling $80 million. For the prior year's quarter ended March 31, 2008, the primary uses of funds were $121.3 million for purchases of securities available-for-sale and $4.6 million in preferred stock dividends and $3.0 million in common stock dividends paid.

Market Risk Management

The Company's market risk is composed primarily of interest rate risk. There have been no material changes in market risk or the manner in which the Company manages market risk since December 31, 2008.

Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board ("FASB") issued three related Staff Positions ("FSP") to provide additional application guidance and disclosure requirements regarding fair value measurements and impairments of securities. FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," provides guidance on determining fair value when there is no active market and requires additional disaggregated disclosures. FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," relate to fair value disclosures under FAS 107 for financial instruments that are not currently reflected on the balance sheet at fair value and require disclosures on a quarterly basis rather than the current annual basis. FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," relate to the evaluation of other-than-temporary impairment ("OTTI") for debt securities classified as available-for-sale or held-to-maturity, the identification of credit and noncredit components of impairment, the recognition of impairment in earnings or OCI and require significant expanded disclosures on a quarterly basis. The three Staff Positions are effective for periods ending after June 15, 2009. The Company is in the process of assessing the impact of adopting the Staff Positions on its financial position and results of operations.

The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 160, "Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB 51," as of January 1, 2009. The Statement requires those entities that have an outstanding noncontrolling (minority) interest in a subsidiary to report that noncontrolling interest as equity in the consolidated financial statements. The adoption of the Statement did not have a material effect on the Company's financial position or results of operations.

Tax Matters

As of March 31, 2009, the Company believes that it is in full compliance with the REIT federal tax rules, and expects to qualify as a REIT under the provisions of the Internal Revenue Code. The Company expects to meet all REIT requirements regarding the ownership of its stock and anticipates meeting the annual distribution requirements. Beginning January 1, 2009, Illinois requires a "captive" REIT to increase its state taxable income by the amount of dividends paid. Under this law, a captive REIT includes a REIT of which 50% of the voting power or value of the beneficial interest or shares is owned by a single person. Management believes that the Company would be classified as a "captive" REIT under Illinois law, in light of the fact that (1) all of the Company's outstanding common shares are held by Harris Capital Holdings, Inc. a wholly owned subsidiary of Harris N.A. and (2) the Company's Common Stock represents more than 50% of the voting power of the Company's equity securities and (3) the Common Stock is not listed for trading on an exchange. Management believes that the future state tax expense to be incurred by the Company beginning January 1, 2009 should not have a material adverse effect upon the Company's ability to declare and pay future dividends on the preferred shares. The current Illinois statutory tax rate is 7.3%. This belief is based upon the ownership interest of the Company, whereby any tax expense incurred is expected to primarily reduce the net earnings available to the holder of the Common Stock. For the first quarter of 2009, $385,000 Illinois income tax was recorded.

Financial Statements of Harris N.A.

The following unaudited financial information for the Bank is included because the Company's Preferred Shares are automatically exchangeable for a new series of preferred stock of the Bank upon the occurrence of certain events.

                          HARRIS N.A. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CONDITION


                                                        March 31,        December 31,        March 31,
                                                           2009              2008               2008
                                                       (unaudited)         (audited)        (unaudited)
                                                               (in thousands except share data)

ASSETS
Cash and demand balances due from banks                $  1,098,403      $   1,072,255      $  1,359,417
Money market assets:
Interest-bearing deposits at banks ($10.1 billion,
$24.7 billion, and $0 held at Federal Reserve Bank
at March 31, 2009, December 31, 2008, and March 31,
2008 respectively)                                       11,134,016         26,031,291         1,046,522
Federal funds sold and securities purchased under
agreement to resell                                         326,313            182,063           582,712

Total cash and cash equivalents                        $ 12,558,732      $  27,285,609      $  2,988,651
Securities available-for-sale at fair value
(amortized cost of $7.2 billion at March 31, 2009
and $9.2 billion at December 31, 2008 and March 31,
2008)                                                     7,265,687          9,283,283         9,254,701
Trading account assets and derivative instruments         1,302,193          1,367,833           447,057
Loans, net of unearned income                            25,099,589         26,396,381        27,660,618
Allowance for loan losses                                  (607,561 )         (574,224 )        (405,603 )

Net loans                                              $ 24,492,028      $  25,822,157      $ 27,255,015
Loans held for sale                                          72,587             29,544            88,178
Premises and equipment                                      521,719            533,516           514,250
Bank-owned insurance                                      1,315,451          1,304,315         1,263,651
Goodwill and other intangible assets                        772,696            779,444           804,202
Other assets                                                881,225            900,354           987,105

Total assets                                           $ 49,182,318      $  67,306,055      $ 43,602,810

LIABILITIES
Deposits in domestic offices - noninterest-bearing     $ 12,055,125      $  28,059,575      $  6,294,205
 - interest-bearing (includes $156.2 million,
$77.7 million, and $0 measured at fair value at
March 31, 2009, December 31, 2008 and March 31,
2008, respectively)                                      24,086,415         24,374,034        23,044,496
Deposits in foreign offices   - interest-bearing            806,129            920,235           971,270

Total deposits                                         $ 36,947,669      $  53,353,844      $ 30,309,971
Federal funds purchased                                     299,678             78,525           404,218
Securities sold under agreement to repurchase             1,541,936          3,501,758         1,010,239
Short-term borrowings                                       593,229            359,476           561,612
Short-term senior notes                                           -             75,000           930,000
Accrued interest, taxes and other expenses                  194,142            247,825           231,008
Accrued pension and post-retirement                         113,228            171,933            83,366
Other liabilities                                           592,350            631,487           786,652
Long-term notes - senior                                  2,096,500          2,096,500         2,096,500
Long-term notes - subordinated                              292,750            292,750           297,750
Long-term notes - secured                                 2,375,000          2,375,000         2,375,000

Total liabilities                                      $ 45,046,482      $  63,184,098      $ 39,086,316

STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized
40,000,000 shares; issued and outstanding
17,149,512 shares at March 31, 2009, December 31,
2008, and March 31, 2008                               $    171,495      $     171,495      $    171,495
Surplus                                                   2,172,217          2,172,029         2,168,784
Retained earnings                                         1,737,956          1,734,472         1,947,945
Accumulated other comprehensive loss                       (195,832 )         (206,039 )         (21,730 )

Stockholder's equity before noncontrolling
interest - preferred stock of subsidiary               $  3,885,836      $   3,871,957      $  4,266,494
Noncontrolling interest - preferred stock of
subsidiary                                                  250,000            250,000           250,000
Total stockholder's equity                             $  4,135,836      $   4,121,957      $  4,516,494

Total liabilities and stockholder's equity             $ 49,182,318      $  67,306,055      $ 43,602,810

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