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 this Report on Form 10-Q, 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

Third Quarter 2009 Compared with Third Quarter 2008

The Company's net income for the third quarter of 2009 was $5.3 million compared to $5.1 million for the third quarter 2008.

Interest income on securities purchased under agreement to resell for the third quarter of 2009 was $7 thousand, on an average balance of $27 million, with an annualized yield of 0.10%. During the same period in 2008, the interest income on securities purchased under agreement to resell was $101 thousand, on an average balance of $24 million, with an annualized yield of 1.7%. The decrease in income was attributable to lower yields in the short-term money market. As an indication, the Federal Fund rate at September 30, 2009 was 0.15% compared to the Federal Fund rate at September 30, 2008 of 1.8%. Third quarter 2009 interest income on the Notes receivable (Notes) totaled $60 thousand and yielded 6.4% on $3.8 million of average principal outstanding for the quarter compared to $73 thousand and a 6.4% yield on $4.5 million average principal outstanding for third quarter 2008. The decrease in income was attributable to a reduction in the Notes balance because of customer payoffs on the Securing Mortgage Loans. At September 30, 2009 and 2008, there were no Securing Mortgage Loans on nonaccrual status. Interest income on securities available-for-sale for the current quarter was $5.8 million resulting in a yield of 4.34% on an average balance of $534 million, compared to $5.1 million with a yield of 4.45% on an average balance of $458 million for the same period a year ago. The increase in outstandings was primarily attributable to additional funds available to the Company resulting from the previously reported $80 million common equity infusion during first quarter 2009. Virtually all income in the current quarter was attributable to the mortgage-backed security portfolio.

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

Third quarter 2009 and 2008 operating expenses both totaled $134 thousand. General and administrative expenses totaled $91 thousand, an increase of $14 thousand over the same period in 2008, primarily due to increases in director fees and legal costs which was partially offset by reduced processing costs. Advisory fees for the third quarter 2009 were $40 thousand compared to $53 thousand a year earlier, a decrease of $13 thousand primarily due to certain charges for treasury services being assessed directly rather than as part of advisory fees.

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 September 30, 2009, net unrealized gains on available-for-sale securities were $18.8 million compared to $1.7 million of unrealized losses on September 30, 2008 and $10.6 million net unrealized gains at December 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 it does not intend to sell the debt security and that it is more-likely-than-not that it will not be required to sell the security before the recovery of its amortized cost basis.

Nine Months Ended September 30, 2009 compared with September 30, 2008

The Company's net income for the nine months ended September 30, 2009 was $15.4 million. This represented a $284 thousand or 2% decrease from earnings for the nine month's ended September 30, 2008. Earnings decreased primarily because of lower interest yields on earning assets in 2009 compared to 2008.

Interest income on securities purchased under agreement to resell for the nine months ended September 30, 2009 was $24 thousand, on an average balance of $31 million, with a yield of .10%. During the same period in 2008, the interest income on securities purchased under agreement to resell was $909 thousand on an average balance of $43 million, with a yield of 2.8%. Interest income on the Notes for the nine months ended September 30, 2009 totaled $187 thousand, yielding 6.4% on $3.9 million of average principal outstanding compared to $233 thousand of income yielding 6.4% on $4.8 million of average principal outstanding for the same period in 2008. The decrease in income was attributable to a reduction in the Notes balance because of customer payoffs on the Securing Mortgage Loans. Interest income on securities available-for-sale for the nine months ended September 30, 2009 was $16.8 million resulting in a yield of 4.3% on an average balance of $517 million, compared to $14.9 million resulting in a yield of 4.49% on an average balance of $443 million for the same period a year ago. The increase in interest income from available-for-sale securities is primarily attributable to growth in the portfolio of mortgage-backed securities. The Company's first quarter 2009 $80 million common equity infusion from the Bank resulted in an increase in earning assets. There were no Company borrowings during either period.

Operating expense for the nine months ended September 30, 2009 totaled $431 thousand, an increase of $28 thousand from the same period a year ago. Advisory fees for the nine months ended September 30, 2009 were $136 thousand compared to $155 thousand for the same period a year ago primarily due to certain charges for treasury services being assessed directly rather than as part of advisory fees in the current year. General and administrative expenses totaled $286 thousand, an increase of $49 thousand or 21% from the same period in 2008 as a result of increased costs for director fees, legal costs and also due to change in assessing treasury costs. Loan servicing expenses for the nine months ended September 30, 2009 totaled $9 thousand, a decrease of $2 thousand or 18% from 2008. This decrease is attributable to the reduction in the principal balance of the Notes because servicing costs vary directly with these balances.

On September 30, 2009, the Company paid a cash dividend of $0.46094 per share on outstanding Preferred Shares to the stockholders of record on September 15, 2009 as declared on September 2, 2009. On June 22, 2009 the Company paid a cash dividend in the amount of $261,477 to the common stockholder of record on June 15, 2009. On September 30, 2008, the Company paid a cash dividend of $0.46094 per share on outstanding Preferred Shares to the stockholders of record on September 15, 2008 as declared on September 3, 2008. On September 12, 2008 the Company paid a common stock dividend in the amount of $650 thousand payable on the outstanding common shares to the stockholder of record on September 1, 2008. The Company elected under Internal Revenue Code Section 858(a) to treat this dividend as paid in 2007.

Applicable banking statutes permit national banks to declare and pay dividends without prior Office of the Comptroller of the Currency (OCC) approval when the total of a bank's retained net income from the prior two years plus earnings for the current year is greater than the planned dividend. Beginning in the quarter ended March 31, 2009, the Bank no longer had sufficient capacity to declare and pay dividends without prior regulatory approval of the OCC. The Company, as an indirect subsidiary of the Bank, is also subject to these limitations relating to dividend approval regardless of the level of retained earnings and current profits on a separate company basis. As a result, before the Company's Board of Directors declares dividends on the Preferred Shares, the Bank must receive prior approval from the OCC, which was received for the most recent dividend declaration in September, 2009. With respect to any dividends on the Preferred Shares that may be declared by the Company's Board of Directors in the fourth quarter ended December 31, 2009, the Company has sought and received permission from the OCC for such a declaration, subject to the Company's determination that such dividends are appropriate. The Company anticipates the need to request similar approvals from the OCC in the subsequent quarter ending March 31, 2010 and at this time, the Company has no reason to expect such approvals will not be received.

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. Subject to prior regulatory approval described above, the Company currently expects to distribute dividends annually equal to 90% or more of its adjusted REIT ordinary taxable income.

The Company anticipates that cash and cash equivalents on hand and the cash flow from the Notes and mortgage-backed and U.S. treasury securities will provide adequate liquidity for its operating, investing and financing needs including the capacity to continue preferred dividend payments on an uninterrupted basis.

As presented in the accompanying Consolidated Statements of Cash Flows, the primary sources of funds in addition to $16.5 million provided from operations during the nine months ended September 30, 2009, were $218.7 million from the maturities of securities available-for-sale and $80 million from the purchase of the Company's common stock by its parent. In the prior period ended September 30, 2008, the primary sources of funds other than $15.3 million from operations were $213 million from the maturities of securities available-for-sale. The primary uses of funds for the nine months ended September 30, 2009 were $286.6 million for purchases of securities available-for-sale and $13.8 million in preferred stock dividends paid and $261 thousand in common stock dividends paid. Net cash provided by financing activities was $65.9 million compared to $17.5 million used in the prior period ended September 30, 2008. The primary reason for the increase in net cash provided by financing activities was the issuance of stock and associated capital contribution from the Company's parent totaling $80 million. For the prior year's quarter ended September 30, 2008, the primary uses of funds were $211.6 million for purchases of securities available-for-sale, $13.8 million in preferred stock dividends paid and $3.6 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

The FASB issued ASC 105, Generally Accepted Accounting Principles, which established the FASB Accounting Standards Codification as the sole source of authoritative nongovernmental U.S. generally accepted accounting principles ("GAAP") in June 2009. The Statement does not change existing GAAP. Pursuant to the provisions of FASB ASC 105, the Company has updated references to GAAP in its financial statements for the period ended September 30, 2009.

The FASB issued ASC 855, Subsequent Events (formerly referred to as SFAS No. 165) in May 2009. The pronouncement establishes recognition and disclosure standards for events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance is effective on a prospective basis for interim periods ending after June 15, 2009. The Company adopted the guidance as of June 30, 2009 and it had no impact on the Company's financial position or results of operations.

The FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140," (FASB ASC 860, Transfers and Servicing) in June 2009. The Statement improves the relevance, comparability and transparency of information presented in a reporting entity's financial statements about a transfer of financial assets, the effects of a transfer on its financial position, financial performance and cash flows, and the transferor's continuing involvement, if any, with the transferred financial assets. The Statement is

effective for interim and annual reporting periods beginning after November 15, 2009. The Company is in the process of assessing the impact of adopting this guidance on its financial position and results of operations.

The FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R) (FASB ASC 810, Consolidations) in June 2009. The Statement requires the use of a qualitative approach to identify the entity that has a controlling financial interest in a variable interest entity. The Statement is effective for interim and annual reporting periods beginning after November 15, 2009. The Company is in the process of assessing the impact of adopting this guidance on its financial position and results of operations.

The FASB issued Accounting Standards Update ("ASU") 2009-05, Measuring Liabilities at Fair Value ("ASU 2009-05") in August 2009. ASU 2009-05 reiterates the definition of fair value for a liability as the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date and requires a company to consider its own nonperformance risk, including its own credit risk, in fair-value measurements of liabilities. The update is effective for interim and annual reporting periods that begin after August 27, 2009 and applies to all fair value measurements of liabilities required by FASB ASC 820 Fair Value Measurements and Disclosure. No new fair value measurements are required by the new guidance. The adoption of ASU 2009-05 as of October 1, 2009 is not expected to have a material impact on the Company's consolidated financial position or results of operations.

Tax Matters

As of September 30, 2009, the Company believes that it is in full compliance with the REIT federal income 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., (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. This belief is based upon the ownership interest of the Company, whereby any tax expense incurred is expected to primarily reduce the net earnings available to the holder of the Company's Common Stock. The current Illinois statutory tax rate is 7.3%. For the third quarter and first nine months of 2009, $418,000 and $1.2 million of Illinois income tax expense was recorded.

Subsequent Events

On October 22, 2009, Moody's Investors Services, Inc. ("Moody's") placed its long-term ratings for Bank of Montreal (the Company's ultimate parent) on review for possible downgrade. At that time, Moody's downgraded the bank financial strength rating of Harris N.A. to C+ from B-. In addition, Moody's lowered its rating for the Company's Preferred Stock from A1 to A2 and described this action as a "correction" relating to a prior ratings downgrade of Harris N.A.'s long-term deposit rating in 2003. Moody's further commented that it is considering changes to its current ratings methodology for subordinated capital of all banks (including the Company's Preferred Stock). The Company's Preferred Stock remains on review for possible downgrade.

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


                                                      September 30       December 31       September 30
                                                          2009               2008              2008
                                                       (unaudited)        (audited)         (unaudited)
                                                               (in thousands except share data)

ASSETS
Cash and demand balances due from banks               $     873,618      $  1,072,255      $   5,653,314
Money market assets:
Interest-bearing deposits at banks ($4.6 billion,
$24.7 billion, and $0 held at Federal Reserve Bank
at September 30, 2009, December 31, 2008, and
September 30, 2008, respectively)                         5,406,077        26,031,291            833,011
Federal funds sold and securities purchased under
agreement to resell                                          73,780           182,063          1,403,085

Total cash and cash equivalents                       $   6,353,475      $ 27,285,609      $   7,889,410
Securities available-for-sale at fair value
(amortized cost of $6.7 billion, $9.2 billion and
$8.2 billion at September 30, 2009, December 31,
2008 and September 30, 2008, respectively)                6,851,813         9,283,283          8,192,457
Trading account assets and derivative instruments           745,975         1,367,833          1,240,223
Loans, net of unearned income                            23,030,674        26,396,381         27,771,882
Allowance for loan losses                                  (693,124 )        (574,224 )         (514,991 )

Net loans                                             $  22,337,550      $ 25,822,157      $  27,256,891
Loans held for sale                                          47,275            29,544             23,051
Premises and equipment                                      526,488           533,516            533,973
Bank-owned insurance                                      1,329,400         1,304,315          1,292,934
Goodwill and other intangible assets                        760,836           779,444            803,079
Other assets                                                908,386           900,354            732,427

Total assets                                          $  39,861,198      $ 67,306,055      $  47,964,445

LIABILITIES
Deposits in domestic offices - noninterest-bearing    $   6,670,922      $ 28,059,575      $  12,492,356
 - interest-bearing (includes $554.8 million,
$77.7 million, and $68.7 million measured at fair
value at September 30, 2009, December 31, 2008 and
September 30, 2008, respectively)                        18,794,752        24,374,034         22,865,888
Deposits in foreign offices   - interest-bearing          1,335,451           920,235          1,332,890

Total deposits                                        $  26,801,125      $ 53,353,844      $  36,691,134
Federal funds purchased                                     246,363            78,525            135,700
Securities sold under agreement to repurchase             2,194,755         3,501,758            906,836
Short-term borrowings                                       585,341           359,476            336,802
Short-term senior notes                                           -            75,000             75,000
Accrued interest, taxes and other expenses                  188,452           247,825            213,213
Accrued pension and post-retirement                         106,971           171,933             54,928
Other liabilities                                           581,463           631,487            342,931
Long-term notes - senior/unsecured                        2,396,500         2,096,500          2,096,500
Long-term notes - senior/secured                          2,375,000         2,375,000          2,375,000
Long-term notes - subordinated                              292,750           292,750            292,750

Total liabilities                                     $  35,768,720      $ 63,184,098      $  43,520,794

STOCKHOLDERS' EQUITY
Common stock ($10 par value); authorized
40,000,000 shares; issued and outstanding
17,149,512 shares at September 30, 2009,
December 31, 2008, and September 30, 2008             $     171,495      $    171,495      $     171,495
Surplus                                                   2,174,661         2,172,029          2,171,386
Retained earnings                                         1,640,337         1,734,472          1,890,968
Accumulated other comprehensive loss                       (144,015 )        (206,039 )          (40,198 )

Stockholder's equity before noncontrolling
interest - preferred stock of subsidiary              $   3,842,478      $  3,871,957      $   4,193,651
Noncontrolling interest - preferred stock of
subsidiary                                                  250,000           250,000            250,000

Total stockholders' equity                            $   4,092,478      $  4,121,957      $   4,443,651

Total liabilities and stockholders' equity            $  39,861,198      $ 67,306,055      $  47,964,445

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