HARRIS PREFERRED CAPITAL CORP, 424A, 1998-02-02

HARRIS PREFERRED CAPITAL CORP
424A, 1998-02-02
ASSET-BACKED SECURITIES

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 2, 1998

PROSPECTUS
10,000,000 SHARES
HARRIS PREFERRED CAPITAL CORPORATION
% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED SHARES
LOGO OF
HARRIS TRUST AND SAVINGS BANK

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Harris Preferred Capital Corporation (the "Company") is hereby offering (the
"Offering") 10,000,000 shares of its % Noncumulative Exchangeable Preferred
Stock, Series A, par value $1.00 per share (the "Series A Preferred Shares").
Dividends on the Series A Preferred Shares are payable at the rate of %
per annum of the liquidation preference (an amount equal to $ per annum
per share) if, when and as authorized by the Board of Directors of the Company.
Dividends are not cumulative and, if authorized, are payable quarterly in
arrears on the thirtieth day of March, June, September and December in each
year, commencing March 30, 1998. If no dividend is authorized on the Series A
Preferred Shares by the Company for a quarterly dividend period, holders of the
Series A Preferred Shares will have no right to receive a dividend for that
period, and the Company will have no obligation to pay a dividend for that
period, whether or not dividends are authorized, declared and paid for any
future period. Dividends in each dividend period shall accrue from the first
day of such period, whether or not authorized, declared or paid in the prior
period. Each of the Series A Preferred Shares will be exchanged automatically
for one newly issued % Noncumulative Preferred Share, Series A (a "Bank
Preferred Share") of Harris Trust and Savings Bank (the "Bank"), on the
occurrence of an Exchange Event (as defined). Capitalized terms used herein are
defined in the Glossary beginning on page 88.

SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, INCLUDING THE FOLLOWING:
. A decline in interest rates could have an adverse effect on the Company;
. Dividends are not cumulative; a quarterly dividend not authorized will not
be payable in a future quarter;
. A substantial portion of the Company's assets will initially consist of
obligations payable only from the assets securing the obligations, which
may not be sufficient to repay the principal of the obligations;
. Series A Preferred Shares may be automatically exchanged for Bank
Preferred Shares in the event the Bank is experiencing financial
difficulties; under such circumstances, the Bank would likely be unable to
pay dividends on the Bank Preferred Shares; the Bank Preferred Shares will
not be listed on any exchange and therefore will be an illiquid
investment;
. Federal regulators of the Bank could impose restrictions on the operations
of the Company or the Company's ability to pay dividends;
. Properties securing much of the Company's initial portfolio are
geographically concentrated in Illinois and Arizona;
. The Company may not qualify as a REIT for federal income tax purposes and
would therefore be subject to federal income tax on its taxable income at
regular corporate rates, thereby reducing the assets available to pay
dividends to holders of Series A Preferred Shares;
. The Company was incorporated in September 1997 and has no operating
history;
. The officers and directors of the Company do not have experience operating
or managing a REIT;
. The Board of Directors of the Company may change the Company's investment
policies and operating policies and strategies without the approval of the
holders of the Series A Preferred Shares;
. The Company could issue additional preferred shares of the Company that
rank equal to the Series A Preferred Shares without the approval of the
holders of the Series A Preferred Shares; and
. The Company is dependent upon the Bank and its affiliates as advisor and
servicer; potential conflicts of interest may arise with respect to
transactions between the Company and the Bank.
(continued on next page)

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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- --------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $25.00 $ $
- --------------------------------------------------------------------------------
Total(4)................................ $250,000,000 $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from February , 1998.
(2) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1,200,000.
(4) In addition, the Bank will make a capital contribution to the Company in an
amount equal to $250,000,000.

----------

The Series A Preferred Shares are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Series A
Preferred Shares offered hereby will be made in New York, New York on or about
February , 1998.

----------

MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
NESBITT BURNS SECURITIES INC.

----------

The date of this Prospectus is February , 1998.
<PAGE>

(continued from previous page)
The Series A Preferred Shares are not redeemable prior to , 2003
(except upon the occurrence of a Tax Event, as described herein). On and after
, 2003, the Series A 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 liquidation preference thereof ($25.00 per share), plus the
quarterly accrued and unpaid dividend, if any, thereon. The Company may not
redeem the Series A Preferred Shares without prior approval from the Board of
Governors of the Federal Reserve System or appropriate successor federal
regulatory agency (the "Board of Governors"). The Series A Preferred Shares
are not subject to any sinking fund or mandatory redemption and are not
convertible into any other securities of the Company.

Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") 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% (the
"Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED
INTO CONSERVATORSHIP OR RECEIVERSHIP. IN ADDITION, UNDER SUCH CIRCUMSTANCES,
THE BANK WOULD LIKELY BE UNABLE TO PAY DIVIDENDS ON THE BANK PREFERRED SHARES.
POTENTIAL INVESTORS IN THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD
CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH ELSEWHERE IN THIS
PROSPECTUS. The Bank believes, however, that based on various factors,
including the Bank's financial condition and operating history (see "The
Bank"), and the Bank's understanding of the Board of Governors' policies and
procedures, the likelihood of an Exchange Event occurring is extremely remote.

In the event of the Automatic 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 Series A Preferred Shares, except that the Bank Preferred
Shares would not be listed on the New York Stock Exchange, Inc. (the "NYSE"),
and would rank on an equal basis in terms of cash dividend payments and
liquidation preference with any outstanding shares of preferred stock of the
Bank. In addition, the Bank's deposits and its secured, senior, general and
subordinated debt would rank senior to the Bank Preferred Shares. Holders of
Series A Preferred Shares cannot exchange their Series A Preferred Shares for
Bank Preferred Shares voluntarily, and, absent the occurrence of the Automatic
Exchange, holders of Series A Preferred Shares will have no dividend, voting,
liquidation preference or other rights with respect to the Bank or any
security of the Bank. See "Description of Series A Preferred Shares--Automatic
Exchange."

Prior to this Offering, there has been no market for the Series A Preferred
Shares. The Series A Preferred Shares have been approved for listing on the
New York Stock Exchange, Inc. (the "NYSE"), subject to notice of issuance,
under the trading symbol "HBC." Trading of the Series A Preferred Shares on
the NYSE is expected to commence within 30 days after the initial delivery of
the Series A Preferred Shares. The Bank does not intend to apply for listing
of the Bank Preferred Shares on any national securities exchange or for
quotation of the Bank Preferred Shares through the Nasdaq Stock Market. There
can be no assurance as to the liquidity of the trading markets for the Series
A Preferred Shares or the Bank Preferred Shares, or that an active public
market for the Series A Preferred Shares or the Bank Preferred Shares would
develop or be maintained.

The Company has been formed for the purpose of raising capital for the Bank.
The Company's principal business objective is to acquire, hold, finance and
manage assets consisting of obligations secured by real property, as well as
certain other qualifying REIT assets (the "Mortgage Assets"). All 1,000 of the
shares of the Company's issued and outstanding common stock, par value $1.00
per share (the "Common Stock"), are owned by the Bank. The Company expects
that all or substantially all of its Mortgage Assets will be acquired from the
Bank and affiliates of the Bank. Initially, approximately $358 million of the
Mortgage Assets (the "Initial Mortgage Assets") will consist of obligations
issued by the Bank (the "Bank Secured Obligations") that are recourse only to
the Securing Mortgage Loans (as defined) that are secured by real property
located primarily in Illinois and Arizona. The principal amount of the Bank
Secured Obligations will constitute approximately 80% of the principal amount
of the Securing Mortgage Loans. The Initial Mortgage Assets will also include
approximately $133 million of Mortgage-Backed Securities. See "Business and
Strategy--General Description of Mortgage Assets" and "--Description of
Securing Mortgage Loans."

The Company expects to qualify as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the taxable year ending
December 31, 1998. Under the charter of the Company, no individual is
permitted to beneficially own more than 5% of any series of preferred stock of
the Company, including the Series A Preferred Shares. Related transfer
restrictions are described under "Description of Stock--Restrictions on
Ownership and Transfer."

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A
PREFERRED SHARES. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING,
THE PURCHASE OF SERIES A PREFERRED SHARES TO COVER SYNDICATE SHORT POSITIONS
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

THE SERIES A PREFERRED SHARES AND THE BANK PREFERRED SHARES DO NOT EVIDENCE
DEPOSITS WITH THE BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER INSURER.

2
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................ 4
The Company.............................................................. 4
The Bank................................................................. 5
Risk Factors............................................................. 7
The Offering............................................................. 8
The Formation............................................................ 10
Benefits to the Bank..................................................... 10
Business and Strategy.................................................... 11
Tax Status of the Company................................................ 13
RISK FACTORS.............................................................. 14
Declining Interest Rates Will Reduce Earnings of the Company............. 14
Dividends May Not Be Authorized Quarterly and Dividends Not Authorized
Will Not Be Paid........................................................ 14
Most Mortgage Assets Will Be Payable Only From Assets Securing Them...... 14
Automatic Exchange for Bank Preferred Shares Could Occur When Value of
Bank Preferred Shares is Impaired....................................... 14
Bank Preferred Shares Will Not Be Listed on Any Exchange and Markets May
Not Be Liquid........................................................... 15
Dividends and Operations of the Company Restricted by Regulation......... 15
Geographic Concentration of Mortgage Loans............................... 15
Tax Risks................................................................ 16
Dependence upon the Bank as Advisor and Servicer......................... 17
Relationship with the Bank and Its Affiliates; Conflicts of Interest..... 17
No Operating History..................................................... 18
No Credit Enhancement or Special Hazard Insurance........................ 18
Real Estate Market Conditions............................................ 18
Delays in Liquidating Defaulted Mortgage Loans........................... 18
Legal Considerations..................................................... 18
Special Risks Relating to Commercial Mortgage Loans...................... 19
Environmental Considerations............................................. 19
Risk of Future Revisions in Policies and Strategies by Board of
Directors............................................................... 19
Possible Leverage........................................................ 19
No Third Party Valuation of the Mortgage Assets; No Arm's-Length
Negotiations with Affiliates............................................ 19
No Prior Market for Series A Preferred Shares............................ 20
Additional Issuances of Preferred Stock Could Have Dilutive Effect....... 20
Risk of Fraudulent Release of Mortgages.................................. 20
Risk Factors Relating to the Bank........................................ 20
THE COMPANY............................................................... 22
USE OF PROCEEDS........................................................... 22
CAPITALIZATION............................................................ 23
BUSINESS AND STRATEGY..................................................... 24
General.................................................................. 24
Dividend Policy.......................................................... 24
Liquidity and Capital Resources.......................................... 25
General Description of Mortgage Assets................................... 25
Management Policies and Programs......................................... 27
Description of Securing Mortgage Loans................................... 29
Description of Initial Mortgage-Backed Securities........................ 34
Servicing................................................................ 34
Employees................................................................ 35
Competition.............................................................. 36
Legal Proceedings........................................................ 36
MANAGEMENT................................................................ 36
Directors and Executive Officers......................................... 36
Independent Directors.................................................... 37
</TABLE>
<TABLE>
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PAGE
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<S> <C>
Audit Committee.......................................................... 37
Compensation of Directors and Officers................................... 37
Limitation of Liability and Indemnification of Directors and Officers.... 38
The Advisor.............................................................. 38
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION........................... 39
The Formation............................................................ 39
Benefits to the Bank..................................................... 40
DESCRIPTION OF SERIES A PREFERRED SHARES.................................. 41
General.................................................................. 41
Dividends................................................................ 42
Automatic Exchange....................................................... 43
Voting Rights............................................................ 44
Redemption............................................................... 44
Rights Upon Liquidation.................................................. 45
Independent Director Approval............................................ 46
Restrictions on Ownership and Transfer................................... 46
DESCRIPTION OF STOCK...................................................... 46
Common Stock............................................................. 46
Preferred Stock.......................................................... 47
Restrictions on Ownership and Transfer................................... 47
Super-majority Director Approval......................................... 49
Business Combinations.................................................... 49
Control Share Acquisitions............................................... 49
FEDERAL INCOME TAX CONSEQUENCES........................................... 50
General.................................................................. 50
Taxation of the Company.................................................. 50
Failure to Qualify....................................................... 54
Tax Treatment of Automatic Exchange...................................... 54
Taxation of United States Stockholders................................... 55
Certain United States Federal Income Tax Considerations Applicable to
Foreign Holders......................................................... 56
Information Reporting Requirements and Backup Withholding Tax............ 57
Other Tax Consequences................................................... 57
ERISA CONSIDERATIONS...................................................... 57
General.................................................................. 57
Plan Asset Regulation.................................................... 58
Effect of Plan Asset Status.............................................. 59
Prohibited Transactions.................................................. 59
Unrelated Business Taxable Income........................................ 60
THE BANK.................................................................. 60
Certain Information Regarding the Bank................................... 60
Selected Consolidated Financial and Other Data........................... 62
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 67
Recent Developments...................................................... 75
Management of the Bank................................................... 76
Certain Relationships and Related Transactions........................... 77
Property................................................................. 77
Litigation............................................................... 78
Description of Bank Preferred Shares..................................... 78
Supervision and Regulation............................................... 78
UNDERWRITING.............................................................. 85
EXPERTS................................................................... 87
RATINGS................................................................... 87
LEGAL MATTERS............................................................. 87
AVAILABLE INFORMATION..................................................... 87
GLOSSARY.................................................................. 88
INDEX TO COMPANY FINANCIAL STATEMENT...................................... CF-1
INDEX TO BANK FINANCIAL STATEMENTS........................................ BF-1
</TABLE>

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. The offering by Harris
Preferred Capital Corporation (the "Company") of 10,000,000 shares of its %
Noncumulative Exchangeable Preferred Stock, Series A, par value $1.00 per share
(the "Series A Preferred Shares"), is referred to herein as the "Offering."
Capitalized terms used herein are defined in the Glossary beginning on page 88.

THE COMPANY

Harris Preferred Capital Corporation is a newly formed Maryland corporation
incorporated on September 24, 1997, pursuant to the Maryland General
Corporation Law ("MGCL"). The Company's principal business objective is to
acquire, hold, finance and manage assets consisting of a limited recourse note
or notes issued by Harris Trust and Savings Bank (the "Bank") secured by real
estate mortgage assets and other obligations secured by real property, as well
as certain other qualifying REIT assets (the "Mortgage Assets"). The Company
will elect to be subject to tax as a real estate investment trust (a "REIT")
under 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
distributes its earnings to its stockholders and maintains its qualification as
a REIT. All of the shares of the Company's common stock, par value $1.00 per
share (the "Common Stock"), are owned by 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 Series A Preferred Shares are
outstanding. The Company has been 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.

The Company and the Bank are undertaking the Offering for two principal
reasons: (i) the qualification of the Series A 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 Series A
Preferred Shares as a minority interest in a consolidated subsidiary of the
Bank, and (ii) the tax deductibility of the dividends payable on the Series A
Preferred Shares, as a result of the Company's qualification as a REIT.

Each Series A Preferred Share will be exchanged automatically (the "Automatic
Exchange") for one newly issued % Noncumulative Preferred Share, Series A, of
the Bank (a "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 ("FDICIA"),
(ii) the Bank is placed into conservatorship or receivership, (iii) the Board
of Governors of the Federal Reserve System or appropriate successor federal
regulatory agency (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 5.0% (the
"Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR THE BANK HAS BEEN PLACED INTO
CONSERVATORSHIP OR RECEIVERSHIP. IN ADDITION, UNDER SUCH CIRCUMSTANCES, THE
BANK WOULD LIKELY BE UNABLE TO PAY DIVIDENDS ON THE BANK PREFERRED SHARES.
POTENTIAL INVESTORS IN THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD
CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH UNDER "THE BANK." See
also "Description of Series A Preferred Shares--Automatic Exchange." The Bank
will be considered to be less than "adequately capitalized" under the
regulations if it has (i) a Tier 1 leverage ratio of less than 4.0%, (ii) a
Tier 1 risk-based capital ratio of less than 4.0%, or (iii) a total risk-based
capital ratio of less than 8.0%. Tier 1 capital consists of common
shareholder's equity, noncumulative perpetual preferred stock, and minority
interests in consolidated subsidiaries, less certain intangible assets and
investments in certain subsidiaries. Total capital consists of Tier 1 capital
plus supplementary capital (which includes cumulative perpetual preferred
stock, qualifying subordinated debt, and a

4
<PAGE>

limited amount of the allowance for loan and lease losses) to the extent such
supplementary capital does not exceed 100% of Tier 1 capital, less certain
equity investments. For purposes of the regulations, the Bank's capital
category is determined as of the most recent date (i) certain quarterly
financial reports are required to be filed with the regulators; (ii) a final
report of examination has been delivered to the Bank; or (iii) the Bank is
notified in writing by the Board of Governors of its capital category or a
change in such category. For its fiscal years ended December 31, 1996, 1995 and
1994, the Bank's Tier 1 leverage ratio was 6.65%, 6.44% and 6.60%, its Tier 1
risk-based capital ratio was 7.44%, 7.37% and 7.82%, and its total risk-based
capital ratio was 10.74%, 10.86% and 11.22%, respectively. Based on unaudited
results, at September 30, 1997, the Bank's Tier 1 leverage ratio was 6.61%, its
Tier 1 risk-based capital ratio was 7.38%, and its total risk-based capital
ratio was 10.63%. Subject to regulatory approval, the Bank may use a portion of
the proceeds from the sale of the Initial Mortgage Assets to the Company to
redeem up to $150 million of existing subordinated notes qualifying as Tier 2
capital. After giving effect to the Offering and assuming the foregoing
redemption takes place, those ratios for September 30, 1997, would have been
8.22%, 9.18% and 11.30%, respectively.

Initially, approximately $358 million of the Mortgage Assets of the Company
(the "Initial Mortgage Assets") will consist of obligations issued by the Bank
(the "Bank Secured Obligations") that are recourse only to the Securing
Mortgage Loans (as defined herein). Repayment of the Bank Secured Obligations
will be secured by an assignment of the Securing Mortgage Loans to the Company
pursuant to an agreement between the Company and the Bank (the "Mortgage Loan
Assignment Agreement"). The Bank Secured Obligations bear interest at a rate of
% per year and are scheduled to mature October 1, 2027. The proceeds thereof
(net of obligations and expenses) are expected to be reinvested in additional
Mortgage Assets as described in "Business and Strategy--General Description of
Mortgage Assets" and "--Management Policies and Programs." The Initial Mortgage
Assets will also include approximately $133 million of Mortgage-Backed
Securities (GNMA Platinum Securities or Fannie Mae Seven-year Balloon
Securities).

The principal executive offices of the Company are located at 111 West Monroe
Street, Chicago, Illinois 60690, and its telephone number is (312) 461-2121.

THE BANK

The Bank is a wholly owned subsidiary of Harris Bankcorp, Inc., a multibank
holding company incorporated under the laws of the State of Delaware,
headquartered in Chicago and registered under the Bank Holding Company Act of
1956, as amended. At September 30, 1997, the Bank was conducting business from
60 domestic branch offices, an international banking facility, and 96 automated
teller machines ("ATMs") in the Chicago area. At September 30, 1997, the Bank
had total assets of $15.3 billion, total deposits of $10.3 billion, total loans
(net of unearned income) of $8.4 billion and total stockholder's equity of $1.3
billion. Harris Bankcorp, Inc., the Bank's parent, is a wholly owned subsidiary
of Bankmont Financial Corp., a wholly owned U.S. subsidiary of Bank of
Montreal.

The Bank Preferred Shares will be issued only upon the occurrence of the
Exchange Event. The Bank Preferred Shares will not be registered with the
Securities and Exchange Commission (the "Commission").

5
<PAGE>

Summary Consolidated Financial Data of the Bank

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
---------------------- ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net interest income (FTE
basis)................... $ 326,625 $ 299,418 $ 403,979 $ 360,697 $ 345,548 $ 331,616 $ 352,102
Provision for loan
losses................... 46,555 43,307 57,382 42,756 37,308 52,265 55,326
Noninterest income........ 229,705 192,387 265,500 276,384 257,108 263,126 266,979
Noninterest expense....... 385,879 329,319(1) 446,446(1) 420,072 468,814(2) 417,862 426,560
Provision for income
taxes/FTE adjustment..... 46,540 44,846 62,570 64,967 28,592 45,158 39,834
Cumulative effect of
change in accounting for
income taxes............. -- -- -- -- -- 1,782 --
Net income................ 77,356 74,333 103,081 109,286 67,942 77,675 97,361
FINANCIAL CONDITION DATA
(PERIOD END):
Total assets.............. 15,291,169 15,112,902 14,206,666 11,970,485 11,928,006 10,224,452 9,581,034
Loans receivable, net..... 8,382,298 7,859,330 8,147,180 7,459,857 6,356,771 5,924,320 5,300,023
Deposits.................. 10,321,268 10,000,953 9,726,205 7,030,551 7,015,586 6,552,316 6,070,590
Stockholder's equity...... 1,250,375 1,156,355 1,192,566 837,241 729,731 734,451 695,134
RATIOS:
Performance ratios:
Return on average
assets................. 0.69% 0.76% 0.77% 0.91% 0.62% 0.79% 0.98%
Return on average
equity................. 8.50% 10.47%(1) 10.20%(1) 14.07% 9.49%(2) 11.11% 14.73%
Net interest margin..... 3.44% 3.56% 3.53% 3.55% 3.78% 3.93% 4.14%
Noninterest expense to
average assets......... 2.59% 2.52% 3.34% 3.49% 4.30% 4.23% 4.27%
Asset quality ratios:
Nonperforming assets to
total loans............ 0.32% 0.30% 0.23% 0.50% 1.03% 1.06% 1.76%
Allowance for loan loss
to nonperforming
assets................. 404% 468% 586% 251% 139% 152% 100%
Allowance for loan loss
to total loans......... 1.28% 1.39% 1.33% 1.26% 1.42% 1.61% 1.77%
Allowance for loan loss
to total nonperforming
loans.................. 416% 471% 605% 256% 142% 170% 105%
Net charge-offs to
average loans.......... 0.78% 0.59% 0.62% 0.57% 0.70% 0.99% 1.03%
Bank regulatory capital
ratios:
Tier 1 leverage ratio... 6.61% 6.69% 6.65% 6.44% 6.60% 7.15% 7.36%
Tier 1 risk-based ratio. 7.38% 7.39% 7.44% 7.37% 7.82% 8.24% 8.47%
Total risk-based ratio.. 10.63% 10.75% 10.74% 10.86% 11.22% 12.05% 12.48%
</TABLE>
- --------
(1) In September 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund ("SAIF"). The one-time special assessment of
$16.7 million ($10.0 million after-tax) was recorded during third quarter
1996. Excluding the SAIF assessment, return on equity would have been
11.88% and 11.19% for the nine months ended September 30, 1996, and the
year ended December 31, 1996, respectively.
(2) In 1994, a one-time $51.3 million charge ($33.4 million after-tax) was
recorded resulting from management's decision to absorb the impact of
higher interest rates on mortgage-backed securities held in certain
customer accounts of the Bank's Securities Lending unit. Excluding the
effect of this charge, return on equity would have been 14.16%.

6
<PAGE>

RISK FACTORS

THE PURCHASE OF SERIES A PREFERRED SHARES OFFERED HEREBY IS SUBJECT TO
CERTAIN RISKS. SEE "RISK FACTORS" COMMENCING ON PAGE 14. Among such risks are
the following:

. Because the rate at which dividends are to be paid on the Series A
Preferred Shares is fixed and many of the Securing Mortgage Loans have interest
rates that are adjustable, a decline in interest rates might adversely affect
the Company's cash flow and its ability to pay dividends on the Series A
Preferred Shares, especially following the maturity of the Initial Mortgage
Assets.

. Dividends on Series A Preferred Shares are not cumulative. Consequently, if
the Board of Directors of the Company (the "Board of Directors") does not
authorize a dividend on the Series A Preferred Shares for any quarterly period,
the holders thereof would not be entitled to recover such dividend whether or
not funds are or subsequently become available. The Board of Directors may
determine, in its business judgment, that it would be in the best interests of
the Company to pay less than the full amount of the stated dividends on the
Series A Preferred Shares or no dividends for any quarter notwithstanding that
funds are available. To remain qualified as a REIT, however, the Company must
distribute annually at least 95% of its "REIT taxable income" to stockholders,
and the Company expects that the Board of Directors will authorize dividends on
the Series A Preferred Shares quarterly.

. The Bank Secured Obligations will be recourse only to the Securing Mortgage
Loans. Accordingly, in the event of a default on the Securing Mortgage Loans,
the Company may not receive sufficient payments on the Bank Secured Obligations
to make distributions on the Series A Preferred Shares.

. A decline in the performance and capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could lead to the
automatic exchange of the Series A Preferred Shares for Bank Preferred Shares,
which would represent an investment in the Bank and not in the Company. Under
such circumstances, the Bank would likely be unable to pay dividends on the
Bank Preferred Shares. An investment in the Bank is subject to certain risks
that are distinct from the risks associated with an investment in the Company.
For example, an investment in the Bank would involve risks relating to the
capital levels of and other federal regulatory requirements applicable to the
Bank and the performance of the Bank's loan portfolio. In the event of a
liquidation of the Bank, the claims of the Bank's depositors and of its
secured, senior, general and subordinated creditors will be entitled to a
priority of payment over the claims of holders of equity securities such as the
Bank Preferred Shares. As a result, if the Bank were to be placed into
receivership, the holders of the Bank Preferred Shares likely would receive, if
anything, substantially less than they would have received had the Series A
Preferred Shares not been exchanged for Bank Preferred Shares. Potential
investors in the Series A Preferred Shares should carefully consider the
description of the Bank set forth under "The Bank."

. Although the Series A Preferred Shares will be listed on the New York Stock
Exchange, Inc. (the "NYSE"), the Bank does not intend to apply for listing of
the Bank Preferred Shares on any national securities exchange or for quotation
of the Bank Preferred Shares through the Nasdaq Stock Market. Consequently,
there can be no assurance as to the liquidity of the trading markets for the
Bank Preferred Shares, if issued, or that an active public market for the Bank
Preferred Shares would develop or be maintained.

. As a subsidiary of the Bank, the Company is subject to the risk that
federal regulators of the Bank will restrict the ability of the Company to
transfer assets, to make distributions to stockholders, including dividends to
the holders of Series A Preferred Shares, or to redeem shares of preferred
stock of the Company (the "Preferred Stock"). Under certain circumstances,
certain of these restrictions could result in the Company's failure to qualify
as a REIT.

. Risks associated with mortgage loans generally, and particularly the
geographic concentration of the Securing Mortgage Loans in Illinois and
Arizona, could adversely affect the value of the Series A Preferred Shares and
the Mortgage Assets held by the Company.

7
<PAGE>

. If the Company fails to maintain its status as a REIT for federal income
tax purposes, it will be subject to corporate income tax thereby reducing the
assets available to pay dividends to holders of Series A Preferred Shares.

. The Board of Directors of the Company may change the Company's investment
policies and operating policies and strategies without the approval of the
holders of the Series A Preferred Shares.

. The Company could issue additional preferred shares of the Company that
rank equal to the Series A Preferred Shares without the approval of the holders
of the Series A Preferred Shares.

. The Company will be dependent in virtually every phase of its operations on
the diligence and skill of the officers and employees of the Bank and its
affiliates acting on behalf of the Company.

. Because of the relationship between the Company and the Bank and its
affiliates, conflicts of interests may arise between the Company and the Bank
and its affiliates.

. The Company is a newly organized corporation with no operating history.

THE OFFERING

For a more complete description of the terms of the Series A Preferred Shares
specified in the following summary, see "Description of Series A Preferred
Shares."

Issuer.................... Harris Preferred Capital Corporation, a newly
formed Maryland corporation.

Securities Offered........ 10,000,000 Series A Preferred Shares.

Ranking................... The Series A Preferred Shares rank senior to
the Company's Common Stock with respect to
dividend rights and rights upon liquidation.
Additional shares of Preferred Stock ranking
senior to the Series A Preferred Shares may not
be issued without the approval of holders of at
least 67% of the Series A Preferred Shares.
Additional shares of Preferred Stock ranking on
a parity with the Series A Preferred Shares may
not be issued without the approval of a
majority of the Board of Directors and a
majority of the Independent Directors (as
defined herein).

Dividends................. Dividends on the Series A Preferred Shares are
payable at the rate of % per annum of the
liquidation preference (an amount equal to
$ per annum per share), if, when and as
authorized by the Board of Directors of the
Company. If authorized, dividends are payable
quarterly in arrears on the 30th day of March,
June, September and December in each year,
commencing March 30, 1998. Dividends accrue in
each quarterly period from the first day of
such period, whether or not dividends are paid
with respect to the preceding period. Dividends
on the Series A Preferred Shares are not
cumulative and, accordingly, if no dividend is
authorized on the Series A Preferred Shares by
the Company for a quarterly dividend period,
holders of the Series A Preferred Shares will
have no right to receive a dividend for that
period, and the Company will have no obligation
to pay a dividend for that period, whether or
not dividends are authorized and paid for any
future period with respect to either the Series
A Preferred Shares or the Common Stock. If no
dividend is paid on the Series A Preferred
Shares for a quarterly dividend period, the
payment of dividends on the Common Stock will
be prohibited for that period and at least the
following three quarterly dividend periods. See
"Description of Series A Preferred Shares--
Dividends."

8
<PAGE>

Liquidation Preference.... The liquidation preference for each Series A
Preferred Share is $25.00. Upon liquidation,
holders of Series A Preferred Shares will
additionally be entitled to receive an amount
equal to the quarterly accrued and unpaid
dividend, if any, thereon. See "Description of
Series A Preferred Shares--Rights Upon
Liquidation."

Redemption................ The Series A Preferred Shares are not
redeemable prior to , 2003 (except
upon the occurrence of a Tax Event, as defined
in "Description of Series A Preferred Shares--
Redemption"). On and after , 2003,
the Series A 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 liquidation preference thereof, plus the
quarterly accrued and unpaid dividend, if any,
thereon. Any redemption is subject to the prior
written approval of the Board of Governors.
Upon the occurrence of a Tax Event, the Company
will have the right to redeem the Series A
Preferred Shares in whole (but not in part) at
a redemption price of $25.00 per share, plus
the quarterly accrued and unpaid dividend, if
any, thereon to the date of redemption. See
"Description of Series A Preferred Shares--
Redemption." The Series A Preferred Shares are
not subject to any sinking fund or mandatory
redemption and are not convertible into any
other securities of the Company.

Automatic Exchange........ Each Series A Preferred Share will be exchanged
automatically for one Bank Preferred Share upon
the occurrence of the Exchange Event. See
"Description of Series A Preferred Shares--
Automatic Exchange" and "The Bank--Description
of Bank Preferred Shares."

Voting Rights............. Holders of Series A Preferred Shares will not
have any voting rights, except as expressly
provided herein. On any matter on which holders
of the Series A Preferred Shares may vote, each
Series A Preferred Share will be entitled to
one vote. See "Description of Series A
Preferred Shares--Voting Rights."

Ownership Limits.......... Beneficial ownership by any individual of more
than 5% of any outstanding series of Preferred
Stock, including the Series A Preferred Shares
offered hereby, is restricted in order to
preserve the Company's status as a REIT for
federal income tax purposes. See "Description
of Stock--Restrictions on Ownership and
Transfer."

Listing................... The Series A Preferred Shares have been
approved for listing on the NYSE, subject to
notice of issuance, under the trading symbol
"HBC." Trading of the Series A Preferred Shares
on the NYSE is expected to commence within 30
days after the initial delivery of the Series A
Preferred Shares.

Ratings................... Upon issuance, the Series A Preferred Shares
will be rated "a1" by Moody's Investors
Service, Inc. and A by Standard & Poor's
Ratings Services. As a result of the
announcement of the proposed merger of Bank of
Montreal and Royal Bank of Canada, the Moody's
rating will be placed under review for possible
downgrade. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating organization.
See "Ratings."

Use of Proceeds........... The net proceeds to the Company from the
Offering, together with proceeds received as
capital contributions from the Bank, will be
used to acquire the Initial Mortgage Assets and
to pay the expenses of the Offering and the
formation of the Company. See "Use of
Proceeds."

9
<PAGE>

THE FORMATION

Prior to or simultaneously with the completion of the Offering, the Company
and the Bank will engage in the transactions described under "Certain
Transactions Constituting the Formation--The Formation." These transactions are
designed (i) to facilitate the Offering, (ii) to provide for the acquisition by
the Company of the Initial Mortgage Assets from the Bank, and (iii) to enable
the Company to qualify as a REIT for federal income tax purposes commencing
with its taxable year ending December 31, 1998.

The following diagram outlines the relationship between the Company and the
Bank relevant to the Offering following consummation of the Offering:

LOGO

BENEFITS TO THE BANK

The Bank expects to realize the following benefits (which are described in
more detail under "Certain Transactions Constituting the Formation--Benefits to
the Bank") in connection with the Offering and the other transactions
constituting the formation of the Company:

. The Bank expects that the Series A Preferred Shares will qualify as
Tier 1 capital of the Bank for U.S. banking regulatory purposes under
relevant regulatory capital guidelines.

. The dividends payable on the Series A Preferred Shares will be
deductible for income tax purposes as a result of the Company's
qualification as a REIT.

. The Bank will receive approximately $ million upon consummation of
the Offering in connection with the acquisition of the Initial Mortgage
Assets by the Company (approximately $ million of which represents new
funds after giving effect to the Bank's expense of purchasing the Company's
Common Stock and additional capital contributions). The Initial Mortgage
Assets are comprised of publicly traded Mortgage-Backed Securities with a
determinable secondary market value and the Bank Secured Obligations, the
principal value of which is determined by reference to the estimated market
value of Securing Mortgage Loans which collateralize the Bank Secured
Obligations. The Securing Mortgage Loan pool serving to collateralize and
service the Bank Secured Obligations was valued through an

10
<PAGE>

application of a statistical simulation technique known as Monte Carlo
analysis. This is a sophisticated methodology appropriate for assessing
most likely outcomes for events that are randomly determined. The expected
cash flows from mortgage loans with embedded prepayment options are subject
to uncertainty with respect to the future level of interest rates. Since
there is no assured outcome as to the future course of interest rates,
statistical simulation models provide an approach to valuing assets such as
mortgage loans. The market value estimate for the Securing Mortgage Loans
derived utilizing this valuation methodology was $452 million, reflecting a
composite discount rate on the expected cash flows of 7.08%. This
evaluation of the Securing Mortgage Loans indicates a gain of $4 million
over current carrying value. Inasmuch as a sale to a third party of these
assets is not contemplated, the principal purpose served by the valuation
is to substantiate the economic adequacy of the collateral securing and
servicing the Bank Secured Obligations. The Company has agreed that it will
extend credit on the Securing Mortgage Loans in a principal amount not to
exceed 80% of the value of the Securing Mortgage Loans. The rate on the
Bank Secured Obligations is determined by a spread over the 3-year U.S.
treasury note of 100 basis points. At the time of analysis, the 3-year U.S.
treasury note yield was 6.00% and the indicated rate on the Bank Secured
Obligations was 7.00%. The pricing of the Bank Secured Obligations was
determined by reference to the statistically estimated option-adjusted
spread and option-adjusted duration of the Securing Mortgage Loans. The 3-
year U.S. treasury note has a modified duration which approximates the
option-adjusted duration of the Securing Mortgage Loans. The 100 basis
point spread to the treasury discount curve is based upon empirical market
data regarding the observed spread on similar traded market instruments.
The Mortgage-Backed Securities included in the Initial Mortgage Assets had
a secondary market value approximately equal to the then carrying value of
$133.4 million. The Company will purchase these Mortgage-Backed Securities
at the indicated secondary market value obtained at the time of purchase.
In all cases, the valuation methods utilized are intended to provide
estimated values which could be realized in an arm's-length negotiated sale
with knowledgeable third parties under generally observed pricing
conventions.

. The Bank will be entitled to receive annual advisory and servicing fees
and annual dividends in respect of the Common Stock. For the first 12
months following completion of the Offering, these annual fees and
dividends are anticipated to be approximately $ million.

. The Bank, as Servicer, also will be entitled to retain any ancillary
fees, including, but not limited to, late payment charges, prepayment fees,
penalties and assumption fees collected in connection with the mortgage
loans serviced by it. In addition, the Bank, as Servicer, will receive any
benefit derived from interest earned on collected principal and interest
payments between the date of collection and the date of remittance to the
Company and from interest earned on tax and insurance impound funds with
respect to mortgage loans serviced by the Servicer.

BUSINESS AND STRATEGY

General. The Company has been formed for the purpose of raising capital for
the Bank. The Company's principal business objective is to acquire, hold,
finance and manage Mortgage Assets that will generate net income for
distribution to stockholders. Initially, a substantial portion of the assets of
the Company will consist of obligations issued by the Bank that are recourse
only to the Securing Mortgage Loans. The Company intends to acquire
substantially all of its 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. As of the date of this Prospectus, the Company has not entered
into any agreements with third parties with respect to the purchase of Mortgage
Assets. Other than with respect to the temporary investment of payments of
interest and principal on its Mortgage Assets, the Company anticipates that it
will purchase Mortgage Assets from unrelated third parties only if neither the
Bank nor any affiliate of the Bank has an amount or type of Mortgage Assets
sufficient to meet the requirements of the Company.

11
<PAGE>

The Company currently intends to maintain at least 90% 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 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) in 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
the payment of principal or interest. Loans that are in a "nonaccrual status"
are generally loans that are past due 90 days or more in principal or interest.

Initial Mortgage Assets. Simultaneously with the consummation of the
Offering, the Bank, as owner of the Company's Common Stock, will make a capital
contribution to the Company equal to $250 million. The Company will use the
aggregate net proceeds (after underwriting discounts and expenses of the
Offering and the formation) of approximately $ million received in
connection with both the Offering and such capital contribution by the Bank to
purchase (i) obligations issued by the Bank that are recourse only to the
Securing Mortgage Loans (as defined herein) and (ii) Mortgage-Backed
Securities. See "Business and Strategy--General Description of Mortgage Assets"
and "Use of Proceeds."

The principal amount of the Bank Secured Obligations will equal approximately
80% of the aggregate outstanding principal amount of the Securing Mortgage
Loans. See "Business and Strategy--General Description of Mortgage Assets."

The Company and the Bank believe that the fair value of the Initial Mortgage
Assets will at least equal the amount that the Company will pay for the Initial
Mortgage Assets. For assets which will be purchased directly, the fair value
has been determined in reference to the market price of specific securities if
actively traded, or utilizing a valuation model to estimate a present value
price given the current market yields on comparable securities if specific
prices are not available. The interest rate on the Bank Secured Obligations has
been set to provide a reasonable spread over the Treasury security with a
maturity most consistent with the average life of the Securing Mortgage Loans.
These valuation methods are intended to approximate values which could be
realized in an arm's-length negotiated sale with knowledgeable third parties.
However, no third party valuations of the Initial Mortgage Assets have been or
will be obtained for purposes of the Offering. See "Risk Factors--No Third
Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations with
Affiliates."

Servicing Agreement. The Bank will service the Securing Mortgage Loans and
the other Mortgage Loans purchased by the Company on behalf of, and as agent
for, the Company and will be entitled to receive fees in connection with the
servicing thereof pursuant to the servicing agreement (the "Servicing
Agreement"). The Bank in its role as servicer under the Servicing Agreement is
hereinafter referred to as the "Servicer." See "Business and Strategy--
Servicing."

Advisory Agreement. The Company will enter into an advisory agreement with
the Bank (the "Advisory Agreement") pursuant to which the Bank will administer
the day-to-day operations of the Company. The Bank in its role as advisor under
the terms of the Advisory Agreement is hereinafter referred to as the
"Advisor." The Advisor will be 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 Advisor 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 Advisor may, with the approval of a majority
of the Board of Directors, as well as a majority of the Independent Directors,
subcontract all or a portion of its obligations under the Advisory 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 any affiliate of the Bank. The Advisor will

12
<PAGE>

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. Although the Advisor and its
personnel have substantial experience in mortgage finance and in the
administration of Mortgage Assets, none has substantial experience in
monitoring compliance with the requirements necessary to qualify as a REIT.

The Advisory Agreement has an initial term of one year, and may be renewed
for additional one-year periods. The Advisory Agreement may be terminated by
the Company at any time upon 60 days' prior written notice. As long as any
Series A 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 Independent Directors. The Advisor will be entitled to receive
an advisory fee equal to $50,000 per year, payable in equal quarterly
installments. See "Management--The Advisor."

Additional Investments. 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.
Additional shares of Preferred Stock ranking on a parity with the Series A
Preferred Shares may not be issued by the Company without the approval of a
majority of the Board of Directors and a majority of the Independent Directors.
See "Description of Series A Preferred Shares--Independent Director Approval."
The Company does not currently intend to issue any additional shares of
Preferred Stock unless it simultaneously receives additional capital
contributions from the Bank sufficient to support the issuance of such
additional shares of Preferred Stock.

Management. The Board of Directors will be composed of six members, two of
whom will be Independent Directors. Pursuant to the terms of the Series A
Preferred Shares, the Independent Directors will consider the interests of the
holders of both the Series A Preferred Shares and the Common Stock in
determining whether any proposed action requiring their approval is in the best
interests of the Company. The Company currently has six officers, each of whom
is an officer and/or director of the Bank and/or affiliate of the Bank and is
compensated by the Bank. The Company has no other employees and does not
anticipate that it will require additional employees. See "Management."

Newly Formed Entity. As a newly formed entity, the Company has no prior
operating history. As of the date hereof, it has $1,000 of assets and
stockholder's equity and no indebtedness. Immediately after the issuance by the
Company of the Series A Preferred Shares to the public, the contribution of
capital by the Bank to the Company and the purchase by the Company of the
Initial Mortgage Assets, the Company will have approximately $ million
represented by Initial Mortgage Assets, $10 million of stated capital
attributable to the Series A Preferred Shares, $1,000 of stated capital
attributable to the Common Stock and approximately $ million of additional
paid-in capital. See "Capitalization." The par value of the Series A Preferred
Shares is $1.00 per share. Net proceeds received by the Company from the
Offering in excess of the aggregate par value of the Series A Preferred Shares
is considered additional paid-in capital and may be used by the Company for
various corporate purposes. The par value of the Series A Preferred Shares is
unrelated to the liquidation preference or the redemption price of such shares.

TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under the Code, commencing with
its taxable year ending December 31, 1998. As a REIT, the Company generally
will not be subject to federal income tax on net income and capital gains to
the extent that it makes sufficient distributions of its income to the holders
of its Common Stock and Preferred Stock, including the Series A Preferred
Shares, and maintains its qualification as a REIT.

A REIT is subject to a number of organizational and operational requirements,
including a requirement that it currently distribute to stockholders at least
95% of its "REIT taxable income" (not including capital gains). Notwithstanding
qualification for taxation as a REIT, the Company may be subject to federal,
state and/or local tax. See "Risk Factors--Tax Risks" and "Federal Income Tax
Consequences."

13
<PAGE>

RISK FACTORS

Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Series A Preferred Shares in the Offering. This Prospectus contains
forward-looking statements that involve risks and uncertainties. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE
THOSE DISCUSSED BELOW. IN ADDITION, PROSPECTIVE INVESTORS SHOULD ALSO
CAREFULLY CONSIDER THE INFORMATION CONCERNING THE BANK SET FORTH UNDER "THE
BANK."

DECLINING INTEREST RATES WILL REDUCE EARNINGS OF THE COMPANY

The Company's income will consist primarily of interest payments on the
Mortgage Assets held by it. If there is a decline in interest rates during a
period of time when the Company must reinvest payments of interest and
principal in respect of 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 Series A Preferred Shares. Because the
rate at which dividends, if, when and as authorized and declared, are payable
on the Series A 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 Series A
Preferred Shares.

DIVIDENDS MAY NOT BE AUTHORIZED QUARTERLY AND DIVIDENDS NOT AUTHORIZED WILL
NOT BE PAID

Dividends on the Series A Preferred Shares are not cumulative. Consequently,
if the Board of Directors does not authorize a dividend on the Series A
Preferred Shares for any quarterly period, the holders of the Series A
Preferred Shares would not be entitled to recover such dividend whether or not
funds are or subsequently become available. Quarterly dividends may not always
be paid on the Series A Preferred Shares. The Board of Directors may
determine, in its business judgment, that it would be in the best interests of
the Company to pay less than the full amount of the stated dividend on the
Series A Preferred Shares or no dividend for any quarter, notwithstanding that
funds are available. Factors that may be considered by the Board of Directors
in making this determination are 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 95% of its
"REIT taxable income" (not including capital gains) to stockholders. See "--
Tax Risks" and "Federal Income Tax Consequences--Taxation of the Company--
Organizational Requirements."

MOST MORTGAGE ASSETS WILL BE PAYABLE ONLY FROM ASSETS SECURING THEM

A substantial portion of the Initial Mortgage Assets will consist of Bank
Secured Obligations, which will be the Company's primary assets. The Bank
Secured Obligations will be recourse only to the Securing Mortgage Loans,
which will be assigned to the Company by the Bank and will be secured by real
property. Although the Securing Mortgage Loans will be assigned to the
Company, the Company is required to remit to the Bank any collected funds in
excess of the amount due on the Bank Secured Obligations. In the event of
nonpayment of interest or default on the Bank Secured Obligations, the
Company's only recourse will be to exercise its rights under the Securing
Mortgage Loans, either directly or through the Bank as Servicer. It is
anticipated that additional Mortgage Assets acquired by the Company will
consist of similar limited recourse obligations.

AUTOMATIC EXCHANGE FOR BANK PREFERRED SHARES COULD OCCUR WHEN VALUE OF BANK
PREFERRED SHARES IS IMPAIRED

The purchase of Series A Preferred Shares involves risk with respect to the
performance and capital levels of the Bank. A decline in the performance and
capital levels of the Bank or the placement of the Bank into conservatorship
or receivership could result in the automatic exchange of the Series A
Preferred Shares for Bank Preferred Shares, which would be an investment in
the Bank and not in the Company. As a result, holders of Series A Preferred
Shares would become preferred stockholders of the Bank at a time when the
Bank's financial condition was deteriorating or when the Bank had been placed
into conservatorship or receivership. If an Exchange Event occurs, the Bank
would likely be unable to pay dividends on the Bank Preferred Shares. An

14
<PAGE>

investment in the Bank is also subject to certain risks that are distinct from
the risks associated with an investment in the Company. For example, an
investment in the Bank would involve risks relating to the capital levels of,
and other federal regulatory requirements applicable to, the Bank, and the
performance of the Bank's loan portfolio. An investment in the Bank is also
subject to the general risks inherent in equity investments in depository
institutions. In the event of a liquidation of the Bank, the claims of
depositors and secured, senior, general and subordinated creditors of the Bank
would be entitled to a priority of payment over the claims of holders of
equity interests such as the Bank Preferred Shares. As a result, if the Bank
were to be placed into receivership, the holders of the Bank Preferred Shares
likely would receive, if anything, substantially less than they would have
received had the Series A Preferred Shares not been exchanged for Bank
Preferred Shares. Potential investors in the Series A Preferred Shares should
carefully consider the description of the Bank and certain risk factors set
forth under "The Bank." See also "Description of Series A Preferred Shares--
Automatic Exchange."

BANK PREFERRED SHARES WILL NOT BE LISTED ON ANY EXCHANGE AND MARKETS MAY NOT
BE LIQUID

Although the Series A Preferred Shares will be listed on the NYSE, the Bank
does not intend to apply for listing of the Bank Preferred Shares on any
national securities exchange or for quotation of the Bank Preferred Shares
through the Nasdaq Stock Market. Consequently, there can be no assurance as to
the liquidity of the trading markets for the Bank Preferred Shares, if issued,
or that an active public market for the Bank Preferred Shares would develop or
be maintained.

DIVIDENDS AND OPERATIONS OF THE COMPANY RESTRICTED BY REGULATION

Because the Company is a subsidiary of the Bank, banking regulatory
authorities will have the right to examine the Company and its activities.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
such regulatory authorities will have the authority to restrict the ability of
the Company to transfer assets, to make distributions to its stockholders
(including dividends to the holders of Series A Preferred Shares, as described
below), or to redeem shares of Preferred Stock, or even to require the Bank to
sever its relationship with or divest its ownership of the Company. Such
actions could potentially result in the Company's failure to qualify as a
REIT.

Payment of dividends on the Series A Preferred Shares could also be subject
to regulatory limitations if the Bank became less than "adequately
capitalized" for purposes of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). Less than "adequately capitalized" is
currently defined as having (i) a total risk-based capital ratio of less than
8.0%, (ii) a Tier 1 risk-based capital ratio of less than 4.0%, or (iii) a
Tier 1 leverage ratio of less than 4.0% (or 3.0% under certain circumstances
not currently applicable to the Bank). Based on unaudited results, at
September 30, 1997, the Bank's total risk-based capital ratio was 10.63%, its
Tier 1 risk-based capital ratio was 7.38% and its Tier 1 leverage ratio was
6.61%. Subject to regulatory approval, the Bank may use a portion of the
proceeds from the sale of the Initial Mortgage Assets to the Company to redeem
up to $150 million of existing subordinated notes qualifying as Tier 2
capital. After giving effect to the Offering and assuming the foregoing
redemption takes place, such ratios would be 11.30%, 9.18% and 8.22%,
respectively.

If the Automatic Exchange occurs, the Bank would likely be unable to pay
dividends on the Bank Preferred Shares. In all circumstances following the
Automatic Exchange, the Bank's ability to pay dividends would be subject to
various restrictions under applicable regulations. Furthermore, in the event
the Bank is placed into conservatorship or receivership (whether before or
after the Automatic Exchange), the Bank would be unable to pay dividends on
the Bank Preferred Shares. In addition, in the event of a liquidation of the
Bank, the claims of the Bank's depositors and of its secured, senior, general
and subordinated creditors would be entitled to a priority of payment over the
dividend and other claims of holders of equity interests such as the Bank
Preferred Shares.

GEOGRAPHIC CONCENTRATION OF MORTGAGE LOANS

Certain geographic regions of the United States may from time to time
experience natural disasters or weaker regional economic conditions and
housing markets, and, consequently, may experience higher rates of loss and
delinquency on Mortgage Loans generally. Any concentration of the Mortgage
Loans in such a region

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may present risks in addition to those generally present with respect to
mortgage loans. The Company currently anticipates that a substantial portion
of the residential properties underlying the Securing Mortgage Loans and the
other Mortgage Loans purchased by the Company will be located in Illinois and
Arizona. These Mortgage Loans may be subject to a greater risk of default than
other comparable Mortgage 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.

TAX RISKS

ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. The Company intends to
operate so as to qualify as a REIT under the Code. Although the Company
believes that it will be owned and organized and will operate in such a
manner, and Chapman and Cutler will render certain opinions, described under
"Federal Income Tax Consequences," regarding the Company's qualification as a
REIT, no assurance can be given that the Company will be able to operate in
such a manner so as to qualify as a REIT or to remain so qualified.
Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters
and circumstances, not entirely within the Company's control and not addressed
by the opinion of Chapman and Cutler, may affect the Company's ability to
qualify as a REIT. Although the Company is not aware of any proposal in
Congress to amend the tax laws in a manner that would materially and adversely
affect the Company's ability to operate as a REIT, no assurance can be given
that new legislation or new regulations, administrative interpretations or
court decisions will not significantly change the tax laws in the future with
respect to qualification as a REIT or the federal income tax consequences of
such qualification.

The Company is relying on the opinion of Chapman and Cutler, counsel to the
Company, regarding various issues affecting the Company's ability to qualify,
and retain qualification, as a REIT. Such legal opinion is not binding on the
Internal Revenue Service (the "IRS") or the courts and no assurance can be
given that such opinion will not be challenged by the IRS.

If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. As a result, the amount available for distribution to
the Company's stockholders including the holders of the Series A Preferred
Shares, would be reduced for the year or years involved. In addition, unless
entitled to relief under certain statutory provisions, the Company would be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. A failure of the Company to qualify
as a REIT would not necessarily give the Company the right to redeem the
Series A Preferred Shares, nor would it give the holders of the Series A
Preferred Shares the right to have their shares redeemed. See "Description of
Series A Preferred Shares--Redemption."

Notwithstanding that the Company currently intends to operate in a manner
designed to enable it to qualify as a REIT, future economic, market, legal,
tax or other considerations may cause the Company to determine that it is in
the best interest of the Company and the holders of its Common Stock and
Preferred Stock to revoke the REIT election. As long as any Series A Preferred
Shares are outstanding, any such determination by the Company may not be made
without the approval of a majority of the Independent Directors. The tax law
prohibits the Company from electing treatment as a REIT for the four taxable
years following the year of such revocation. See "Federal Income Tax
Consequences."

REIT REQUIREMENTS WITH RESPECT TO STOCKHOLDER DISTRIBUTIONS. To qualify as a
REIT under the Code, the Company generally will be required each year to
distribute as dividends to its stockholders at least 95% of its "REIT taxable
income" (excluding capital gains). Failure to comply with this requirement
would result in the Company's income being subject to tax at regular corporate
rates. In addition, the Company will be subject to a 4% nondeductible excise
tax on the amount, if any, by which certain distributions considered as paid
by it with respect to any calendar year are less than the sum of 85% of its
ordinary income for the calendar year, 95%

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<PAGE>

of its capital gains net income for the calendar year and any undistributed
taxable income from prior periods. Under certain circumstances, banking
regulatory authorities may restrict the ability of the Company, as a
subsidiary of the Bank, to make distributions to its stockholders. Such a
restriction could subject the Company to federal income and excise tax and
result in the Company's failure to meet REIT requirements with respect to
stockholder distributions. See "--Dividends and Operations of the Company
Restricted by Regulation."

REDEMPTION UPON OCCURRENCE OF A TAX EVENT. At any time following the
occurrence of a Tax Event (as defined under "Description of Series A Preferred
Shares--Redemption"), even if such Tax Event occurs prior to ,
2003, the Company will have the right to redeem the Series A Preferred Shares
in whole but not in part. The occurrence of a Tax Event will not, however,
give the holders of the Series A Preferred Shares any right to have such
shares redeemed. See "Description of Series A Preferred Shares--Redemption."

AUTOMATIC EXCHANGE UPON OCCURRENCE OF THE EXCHANGE EVENT. Upon the
occurrence of the Exchange Event, the outstanding Series A Preferred Shares
will be automatically exchanged on a one-for-one basis into Bank Preferred
Shares. See "Description of Series A Preferred Shares--Automatic Exchange."
Assuming, as is anticipated to be the case, that the Bank Preferred Shares are
nonvoting, the Automatic Exchange will be taxable, and each holder of Series A
Preferred Shares will have a gain or loss, as the case may be, measured by the
difference between the basis of such holder in the Series A Preferred Shares
and the fair market value of the Bank Preferred Shares received in the
Automatic Exchange. Assuming that such holder's Series A Preferred Shares were
held as capital assets prior to the Automatic Exchange, any gain or loss will
be capital gain or loss. See "Federal Income Tax Consequences--Tax Treatment
of Automatic Exchange."

DEPENDENCE UPON THE BANK AS ADVISOR AND SERVICER

The Company will be dependent for the selection, structuring and monitoring
of its Mortgage Assets on the diligence and skill of the officers and
employees of the Advisor. See "Management." Termination of the Advisory
Agreement with the Bank requires the affirmative vote of a majority of the
Board of Directors of the Company, a majority of which is composed of officers
of the Bank. In addition, the Company will be dependent upon the expertise of
the Servicer for the servicing of the Mortgage Loans. The Advisor may
subcontract all or a portion of its obligations under the Advisory Agreement,
and the Servicer may subcontract all or a portion of its obligations under the
Servicing Agreement, to one or more affiliates, and under certain conditions
to non-affiliates, involved in the business of managing Mortgage Assets. In
the event the Advisor or the Servicer subcontracts its obligations in such a
manner, the Company will be dependent upon the subcontractor to provide
services. See "Management--The Advisor" and "Business and Strategy--
Servicing."

RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST

The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock of the
Company and will administer the day-to-day activities of the Company in its
role as Advisor under the Advisory Agreement. The Bank will also act as
Servicer of the Mortgage Loans on behalf of the Company under the Servicing
Agreement. In addition, other than the Independent Directors, all of the
officers and directors of the Company are also officers and/or directors of
the Bank and/or affiliates of the Bank. Their compensation is paid by the
Bank, and they have substantial responsibilities in connection with their work
as officers of the Bank. As the holder of all of the outstanding voting stock
of the Company, the Bank will have the right to elect all directors of the
Company, including the Independent Directors.

The Bank and its affiliates may have interests which are not identical to
those of the Company. Consequently, conflicts of interest may arise with
respect to transactions, including without limitation, the acquisition of the
Initial Mortgage Assets; future acquisitions of Mortgage Assets from the Bank
and/or affiliates of the Bank; servicing of Mortgage Loans; future
dispositions of Mortgage Assets to the Bank; and the renewal, termination or
modification of the Advisory Agreement or the Servicing Agreement. It is the
intention of the Company and the Bank that any agreements and transactions
between the Company, on the one hand, and the Bank and/or its affiliates, on
the other hand, are fair to all parties and consistent with market terms,
including prices paid and received for the Initial Mortgage Assets, on the
acquisition or disposition of Mortgage Assets by the Company or in connection
with the servicing of Mortgage Loans. The requirement in the terms of the
Series

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<PAGE>

A Preferred Shares that certain actions of the Company be approved by a
majority of the Independent Directors is also intended to ensure fair dealings
between the Company and the Bank and its affiliates. However, there can be no
assurance that such agreements or transactions will be on terms as favorable
to the Company as those that could have been obtained from unaffiliated third
parties. See "Business and Strategy--Management Policies and Programs--
Conflict of Interest Policies."

NO OPERATING HISTORY

The Company is a newly organized corporation with no operating history and
no revenues to date.

NO CREDIT ENHANCEMENT OR SPECIAL HAZARD INSURANCE

The Bank generally does not intend to obtain credit enhancements such as
mortgagor bankruptcy insurance or to obtain special hazard insurance for the
Mortgage Assets, other than standard hazard insurance, which will in each case
only relate to individual Mortgage Loans. Accordingly, during the time it
holds the Mortgage Assets for which third party insurance is not obtained, the
Company will be subject to risks of borrower defaults and bankruptcies and
special hazard losses that are not covered by standard hazard insurance (such
as those occurring from earthquakes or floods). In addition, in the event of a
default on any Mortgage Loan, the Company would bear the risk of loss of
principal to the extent of any deficiency between (i) the value of the related
mortgaged property, plus any payments from the borrower or an insurer (or
guarantor in the case of Commercial Mortgage Loans) and (ii) the amount owing
on the Mortgage Loan.

REAL ESTATE MARKET CONDITIONS

The results of the Company's operations will be affected by various factors,
many of which are beyond the control of the Company, such as: (i) local and
other economic conditions affecting real estate value, particularly in
Illinois and Arizona, (ii) the level of interest income generated by the
Mortgage Assets, (iii) the market value of such Mortgage Assets and (iv) the
supply of and demand for such Mortgage Assets. Further, there can be no
assurance that the value of the Initial Mortgage Assets or the values of
properties securing such Mortgage Assets, have remained or will remain at the
levels existing on the dates of origination of such Mortgage Assets.

DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS

Even assuming that the mortgaged properties underlying the Mortgage Assets
held by the Company provide adequate security for such Mortgage Assets,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property
securing a Mortgage Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
In Illinois, nonjudicial sales of mortgaged properties are not allowed,
requiring a judicial action to foreclose. Furthermore, in some states (not
including Illinois), an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a mortgaged property. In the event
of a default by a mortgagor, these restrictions, among other things, may
impede the ability of the Bank to foreclose on or sell the mortgaged property
or to obtain proceeds sufficient to repay all amounts due on the related
Mortgage Loan. In addition, the Servicer will be entitled to deduct from
collections received all expenses reasonably incurred in attempting to recover
amounts due and not yet repaid on liquidated Mortgage Loans, including legal
fees and costs of legal action, real estate taxes, insurance and maintenance
and preservation expenses, thereby reducing amounts available with respect to
the Mortgage Loans.

LEGAL CONSIDERATIONS

Applicable state laws generally regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the servicing and collection of the Mortgage Loans. Depending on
the provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Bank to collect all or part of the principal of or interest on
the Mortgage Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the Bank to damages and administrative
sanctions.

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<PAGE>

SPECIAL RISKS RELATING TO COMMERCIAL MORTGAGE LOANS

The Initial Mortgage Assets will not contain or be secured by any Commercial
Mortgage Loans. In the future, however, the Company may acquire interests in
Commercial Mortgage Loans. Commercial Mortgage Loans have certain distinct
risks. 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 total book value of the Mortgage Assets of the Company at the
time of its acquisition. Commercial Mortgage Loans generally lack standardized
terms, which may complicate their structure. Commercial real estate properties
themselves tend to be unique and are more difficult to value than residential
real estate properties. Commercial Mortgage Loans also tend to have shorter
maturities than Residential Mortgage Loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon"
payment due on maturity. In addition, commercial real estate properties,
particularly industrial and warehouse properties, are generally subject to
relatively greater environmental risks than non-commercial properties and to
the corresponding burdens and costs of compliance with environmental laws and
regulations. See "--Environmental Considerations." Also, there may be costs
and delays involved in enforcing rights of a property owner against tenants in
default under the terms of leases with respect to commercial properties. For
example, tenants may seek the protection of the bankruptcy laws, which could
result in termination of lease contracts.

ENVIRONMENTAL CONSIDERATIONS

In the event that the Company is forced to foreclose on a defaulted Mortgage
Loan to recover its investment in such Mortgage 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.

RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS

The Board of Directors has established the investment policies and operating
policies and strategies of the Company, all material aspects of which are
described in this Prospectus. These policies may be amended or revised from
time to time at the discretion of the Board of Directors (in certain
circumstances subject to the approval of a majority of the Independent
Directors) without a vote of the Company's stockholders, including holders of
the Series A Preferred Shares. The ultimate effect of any change in the
policies and strategies of the Company on a holder of Series A Preferred
Shares may be positive or negative. See "Business and Strategy--Management
Policies and Programs."

POSSIBLE LEVERAGE

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 Independent Directors of the Company). 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.

NO THIRD PARTY VALUATION OF THE MORTGAGE ASSETS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES

No third party valuations were obtained for purposes of the Offering, and
there can be no assurance that the fair value of the Initial Mortgage Assets
will not differ from the amount payable by the Company.

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<PAGE>

In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Assets even in circumstances where an affiliate of the Company is selling the
Mortgage Assets to, or purchasing the Mortgage Assets from, the Company.
Accordingly, although the Company and the Bank intend that future acquisitions
or dispositions of Mortgage Assets be on a fair value basis, there can be no
assurance that the consideration to be paid (or received) by the Company to
(or from) the Bank or any of its affiliates in connection with future
acquisitions or dispositions of Mortgage Assets will not differ from the fair
value of such Mortgage Assets.

NO PRIOR MARKET FOR SERIES A PREFERRED SHARES

Prior to the Offering, there has been no public market for the Series A
Preferred Shares, and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be
resold at or above the initial public offering price.

ADDITIONAL ISSUANCES OF PREFERRED STOCK COULD HAVE DILUTIVE EFFECT

The charter of the Company authorizes 20,000,000 shares of Preferred Stock
of the Company, 10,000,000 shares of which are being sold in this offering.
The Company could issue additional preferred shares that rank equal to the
Series A Preferred Shares without the approval of the holders of the Series A
Preferred Shares. Such future issuances could have the effect of diluting the
holders of the Series A Preferred Shares.

RISK OF FRAUDULENT RELEASE OF MORTGAGES

Because of the expense and administrative inconvenience involved, the
Company will not record the assignment to the Company of the Mortgage Loans
under the Mortgage Loan Assignment Agreement. As a result, the Bank will
remain the mortgagee of record. The recording acts of most states serve to
protect the mortgagor in its reliance on the real estate records for
determining who is entitled to payment under the mortgage. Therefore, were the
Bank to fraudulently record a satisfaction of a mortgage without remitting the
proceeds to the Company, the Company may be unable to collect amounts owed
under the mortgage from the mortgagor.

RISK FACTORS RELATING TO THE BANK

Because of the possibility of the Automatic Exchange, the purchase of the
Series A Preferred Shares involves a high degree of risk with respect to the
performance and capital levels of the Bank. Prospective investors in the
Series A Preferred Shares should carefully consider the following risk factors
and other considerations relating to the Bank before deciding whether to
invest in such shares. See "The Bank."

POSSIBLE ADVERSE EFFECTS OF ECONOMIC CONDITIONS. Economic conditions beyond
the Bank's control may have a significant impact on the Bank's operations,
including changes in net interest income. Examples of such conditions include:
(i) the strength of credit demand by customers; (ii) the introduction and
growth of new investment instruments and transaction accounts by nonbank
financial competitors; and (iii) changes in the general level of interest
rates, including changes resulting from the monetary activities of the Board
of Governors.

Economic growth in the Bank's market areas is dependent upon the local
economy. Adverse changes in the economy of the Chicago metropolitan area and
other market areas would likely reduce the Bank's growth rate and could
otherwise have a negative effect on its business, including the demand for new
loans, the ability of customers to repay loans and the value of the collateral
pledged as security therefor.

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<PAGE>

INCREASE IN INTEREST RATES MAY ADVERSELY EFFECT OPERATING RESULTS. The
Bank's operating results depend to a large extent on its net interest income,
which is the difference between the interest the Bank receives from its loans,
securities and other assets and the interest the Bank pays on its deposits and
other liabilities. Interest rates are highly sensitive to many factors,
including governmental monetary policies and domestic and international
economic and political conditions. Conditions such as inflation, recession,
unemployment, money supply, international disorders and other factors beyond
the control of the Bank may affect interest rates. If generally prevailing
interest rates increase, the "net interest spread" of the Bank, which is the
difference between the rates of interest earned and the rates of interest paid
by the Bank, is likely to contract, resulting in less net interest income.

The Bank's liabilities have shorter terms and are more interest-sensitive
than its assets. There can be no assurance that the Bank will be able to
adjust its asset and liability positions sufficiently to offset any negative
effect of changing market interest rates.

ALLOWANCE FOR LOAN LOSSES MAY BE INSUFFICIENT. The amount of future loan
losses is susceptible to changes in economic, operating and other conditions,
including changes in interest rates, beyond the control of the Bank. Such
losses may exceed current estimates. There can be no assurance that the
allowance will prove sufficient to cover actual loan losses in the future. The
Bank's allowance for loan losses is now 404% of nonperforming assets.

COMPETITION. The Bank faces strong direct competition for deposits, loans
and other financial services from other commercial banks, thrifts, credit
unions, stockbrokers and finance divisions of auto and farm equipment
companies. Some of the competitors are local, while others are statewide or
nationwide. Several major multibank holding companies currently operate in the
Chicago metropolitan area. Many of these financial institutions are larger
than the Bank and have greater access to capital and other resources. Some of
the financial institutions and financial services organizations with which the
Bank competes are not subject to the same degree of regulation as that imposed
on bank holding companies, and federally insured, state-chartered banks and
national banks. As a result, such nonbank competitors have advantages over the
Bank in providing certain services.

The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. The Bank's future success
will depend in part on its ability to address the needs of its customers by
using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in the
Bank's operations. Many of the Bank's competitors have greater resources to
invest in technological improvements. There can be no assurance that the Bank
will be able to effectively implement such products and services or be
successful in marketing such products and services to its customers.

MANAGEMENT OF GROWTH. The Bank's past and expected growth involves a variety
of risks, including maintaining loan quality in the context of loan portfolio
growth, maintaining adequate management personnel and systems to oversee such
growth, maintaining adequate internal audit, loan review and compliance
functions, and implementing additional policies, procedures and operating
systems required to support such growth. Failure of the Bank to successfully
address these issues could have a material adverse effect on the Bank's
results of operations and financial condition.

ABSENCE OF A PUBLIC MARKET FOR BANK PREFERRED SHARES. The Bank does not
intend to apply for listing of the Bank Preferred Shares on any national
securities exchange or for quotation of the Bank Preferred Shares through the
Nasdaq Stock Market. If the Bank Preferred Shares are issued, there can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares or that an active public market for the Bank Preferred Shares would
develop or be maintained.

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<PAGE>

GOVERNMENT REGULATION. The Bank is subject to extensive federal and state
legislation, regulation and supervision. Recently enacted, proposed and future
legislation and regulations have had, will continue to have or may have
significant impact on the financial services industry. Some of the legislative
and regulatory changes may benefit the Bank; others, however, may increase its
costs of doing business and assist competitors of the Bank. There can be no
assurance that state or federal regulators will not, in the future, impose
further restriction or limits on the Bank's activities. See "The Bank--
Supervision and Regulation."

YEAR 2000 COMPLIANCE. A critical issue has emerged in the banking industry
and for the economy overall regarding how existing application software
programs and operating systems can accommodate the date value for the year
2000. Many existing application software products in the marketplace were
designed only to accommodate a two digit date position which represents the
year (e.g., "95' is stored on the system and represents the year 1995). As a
result, the year 1999 (i.e., "99') could be the maximum date value these
systems will be able to accurately process. Management is in the process of
working with its software vendors to assure that the Bank is prepared for the
year 2000. Nevertheless, the inability of the Bank to successfully address
year 2000 issues could result in interruptions in the Bank's business and have
a material adverse effect on the Bank's results of operations.

THE COMPANY

The Company is a newly formed Maryland corporation created for the purpose
of raising capital for the Bank. The Company's principal business objective is
to acquire, hold, finance and manage Mortgage Assets that will generate net
income for distribution to stockholders. The Company may hold its assets
through a subsidiary entity. The Company anticipates that a substantial
portion of its Mortgage Assets will consist of obligations of the Bank that
are recourse only to the Securing Mortgage Loans.

Generally, the Company expects that it will acquire its Mortgage Assets from
the Bank and affiliates of the Bank. The Bank will administer the day-to-day
operations of the Company in its role as Advisor under the Advisory Agreement.
All of the Common Stock of the Company is owned by the Bank. The Company will
elect to be subject to tax as a REIT under the Code, and will generally not be
subject to federal income tax to the extent that it distributes its earnings
to its stockholders and maintains its qualification as a REIT. For a further
description of the operations of the Company, see "Business and Strategy,"
"Management," "Risk Factors" and "Federal Income Tax Consequences."

The Series A Preferred Shares will be exchanged automatically on a one-for-
one basis for Bank Preferred Shares upon the occurrence of the Exchange Event.
CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES COULD BE REPLACED BY
AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE BANK'S FINANCIAL
CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED INTO
CONSERVATORSHIP OR RECEIVERSHIP. IN ADDITION, UNDER SUCH CIRCUMSTANCES THE
BANK WOULD LIKELY BE UNABLE TO PAY DIVIDENDS ON THE BANK PREFERRED SHARES.
POTENTIAL INVESTORS IN THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD
CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH UNDER "THE BANK." See
also "Description of Series A Preferred Shares--Automatic Exchange."

USE OF PROCEEDS

The gross proceeds to the Company from the sale of the Series A Preferred
Shares offered hereby will be $250 million. Simultaneously with the
consummation of the Offering, the Bank will make capital contributions to the
Company with respect to its Common Stock equal to $250 million. The Company
will use the aggregate net proceeds of approximately $ million (after
expenses of the Offering and the formation) received in connection with both
the Offering and such capital contributions by the Bank to acquire the Initial
Mortgage Assets from the Bank upon the consummation of the Offering. See
"Business and Strategy."

22
<PAGE>

The following table illustrates the use of proceeds by the Company from the
sale of the Series A Preferred Shares offered hereby and the capital
contributions by the Bank described above.

<TABLE>
<S> <C>
Gross proceeds from the Offering of Series A Preferred
Shares..................................................... $250,000,000
Gross proceeds from the capital contributions by the Bank... 250,000,000
Underwriting discount and expenses..........................
------------
Net proceeds to be applied to the acquisition of the Initial
Mortgage Assets from the Bank.............................. $
============
</TABLE>

The Bank will not receive any transaction fees upon consummation of the
Offering, including any advance payment in respect of advisory or servicing
fees.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
January 2, 1998 (the date of the audited financial statement of the Company)
and as adjusted to reflect (i) the consummation of the Offering and (ii) the
transactions described in "Certain Transactions Constituting the Formation--
The Formation" and the use of the proceeds therefrom as described under "Use
of Proceeds."

<TABLE>
<CAPTION>
JANUARY 2, 1998
-------------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
DEBT
Total long-term debt................................... -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value per share; none
authorized, issued and outstanding, actual; and
20,000,000 shares authorized, 10,000,000 shares issued
and outstanding, as adjusted.......................... -- $10,000
Common Stock, $1.00 par value; 1,000 shares authorized,
1,000 shares issued and outstanding, actual and as
adjusted.............................................. $ 1(1) 1
Additional paid-in capital............................. -- (1)
------- -------
Total stockholders' equity........................... 1
------- -------
TOTAL CAPITALIZATION..................................... $ 1 $
======= =======
</TABLE>
- --------
(1) The Company was formed with an initial capitalization of $1,000.
Immediately prior to the consummation of the Offering, the Bank will make
capital contributions to the Company equal to $250 million. Upon
consummation of the Offering, the Common Stock capital amount will equal
$1,000. The additional paid-in capital of $ million represents (i) the
total capital contributions made by the Bank to the Company minus the
aggregate underwriting discount and Offering and organization expenses and
(ii) the full $250 million raised in the Offering minus the aggregate $10
million par value of the Series A Preferred Shares.

23
<PAGE>

BUSINESS AND STRATEGY

GENERAL

The Company has been formed for the purpose of raising capital for the Bank.
The Company's principal business objective is to acquire, hold, finance and
manage Mortgage Assets that will generate net income for distribution to
stockholders. The Company will acquire the Initial Mortgage Assets from the
Bank for an aggregate purchase price of approximately $ million. See
"Certain Transactions Constituting the Formation--The Formation."

In order to preserve its status as a REIT under the Code, substantially all
of the assets of the Company will consist of the Initial Mortgage Assets and
other qualified REIT real estate assets under the REIT Provisions. See
"Federal Income Tax Consequences."

DIVIDEND POLICY

The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of stock equal to not less than 95% of the
Company's "REIT taxable income" (excluding capital gains). In order to remain
qualified as a REIT, the Company must distribute annually at least 95% of its
"REIT taxable income" (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the Series A Preferred Shares and
none or no material portion of the dividends on the Common Stock will
constitute non-taxable returns of capital.

Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors.

There are several limitations on the Company's ability to pay dividends on
the Common Stock (none of which should adversely affect the legal right of the
Company to pay dividends in respect of the Series A Preferred Shares). First,
under the Company's current dividend policy, the Company may not make any
distribution in respect of the Common Stock with respect to any year to the
extent that, after taking into account such proposed distribution, total cash
or property distributions on the Company's outstanding shares of Preferred
Stock and Common Stock with respect to that year would exceed 105% of the
Company's "REIT taxable income" (excluding capital gains) for that year plus
net capital gains of the Company for that year. This policy regarding the
limitations on payment of dividends in respect of Common Stock may not be
modified without the approval of a majority of the Independent Directors.
Second, if the Company fails to declare and pay full dividends on the Series A
Preferred Shares in any dividend period, the Company may not make any
dividends or other distributions with respect to the Common Stock, until such
time as dividends on all outstanding Series A Preferred Shares have been (i)
declared and paid for three consecutive dividend periods and (ii) declared and
paid or declared and a sum sufficient for the payment thereof has been set
apart for payment for the fourth consecutive dividend period. See "Description
of Series A Preferred Shares--Dividends." Third, Maryland law provides that
dividends may not be paid on the stock of the Company if, after giving effect
to the dividends: (i) the Company would not be able to pay indebtedness of the
Company as the indebtedness becomes due in the usual course of business; or
(ii) the Company's total assets would be less than the sum of the Company's
total liabilities plus, unless the Charter permits otherwise, the amount that
would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights on dissolution are superior to those
receiving the distribution. It is, however, possible that these limitations on
the Company's ability to pay dividends on the Common Stock could affect the
ability of the Company to qualify as a REIT for federal income tax purposes.
See "Federal Income Tax Consequences--Taxation of the Company--Organizational
Requirements."

In the event that the Bank were to pay dividends on the Bank Preferred
Shares, such dividends would be paid out of the Bank's retained earnings.

Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
banking regulatory authorities will have additional authority to restrict the
ability of the Company to make dividend payments to its stockholders.

24
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Assets as Mortgage Assets held by the Company are repaid.
The acquisition of such additional Mortgage Assets will be funded with the
proceeds of principal repayments on its current portfolio of Mortgage Assets.
The Company does not anticipate that it will have any other material capital
expenditures. The Company believes that cash generated from the payment of
interest and principal on the Securing Mortgage Loans will enable full
payments to be made on the Bank Secured Obligations and that such payments
along with payments with respect to the other Mortgage Assets held by the
Company will provide the Company with sufficient funds to meet its operating
requirements and to pay dividends in accordance with the requirements to be
taxed as a REIT for the foreseeable future.

GENERAL DESCRIPTION OF MORTGAGE ASSETS

Initial Mortgage Assets. It is anticipated that approximately $358 million
of the Company's initial assets will consist of obligations issued by the Bank
that are recourse only to the underlying Mortgage Loans (the "Securing
Mortgage Loans"). The principal amount of the Bank Secured Obligations will
equal approximately 80% of the principal amount of the Securing Mortgage
Loans. The Initial Mortgage Assets will also include approximately $133
million of Mortgage-Backed Securities (the "Initial Mortgage-Backed
Securities").

Description of the Bank Secured Obligations. Simultaneously with the
consummation of the Offering, the Company will acquire the Bank Secured
Obligations pursuant to the terms of a loan agreement with the Bank (the "Bank
Loan Agreement"). The Bank Secured Obligations will be recourse only to the
Securing Mortgage Loans that are secured by real property. The Bank Secured
Obligations will mature on October 1, 2027. The principal amount of the Bank
Secured Obligations will equal approximately 80% of the aggregate of the
outstanding principal amount of the Securing Mortgage Loans. The Bank Secured
Obligations will initially pay interest at % per annum. Payments of
interest will be made monthly out of payments on the Securing Mortgage Loans.
Pursuant to an agreement between the Company and the Bank (the "Mortgage Loan
Assignment Agreement"), the Company through the Bank as agent will receive all
scheduled payments made on the Securing Mortgage Loans, will retain a portion
of any such payments equal to the amount due on the Bank Secured Obligations
and will remit the balance, if any, to the Bank. The Company will also retain
approximately 80% of any prepayments of principal in respect of the Securing
Mortgage Loans and will apply such amounts as a prepayment on the Bank Secured
Obligations. Repayment of the Bank Secured Obligations will be secured by an
assignment of the Securing Mortgage Loans to the Company pursuant to the
Mortgage Loan Assignment Agreement. The assignment of the Securing Mortgage
Loans by the Bank to the Company will be without recourse. The Company will
have a security interest in the real property securing the Securing Mortgage
Loans and will be entitled to enforce payment on the Securing Mortgage Loans
in its own name if a mortgagor should default. In the event of such a 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 Securing Mortgage Loans will be administered by the Servicer, as
agent of the Company, and the Company will have the right to perfect its
security interest in the Securing Mortgage Loans. Following repayment of the
Bank Secured Obligations, the Company will reassign its interest in any
outstanding Securing Mortgage Loans (without recourse or warranty) and deliver
them to, or as directed by, the Bank.

Mortgage-Backed Securities. The Company may from time to time acquire fixed-
rate or variable-rate Mortgage-Backed Securities representing interests in
pools of Mortgage Loans. A portion of any such Mortgage-Backed Securities may
have been originated by the Bank 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 FHLMC, Fannie Mae and the Government

25
<PAGE>

National Mortgage Association ("GNMA"). The Company does not intend to acquire
any interest-only, principal-only or similar speculative Mortgage-Backed
Securities.

Residential Mortgage Loans. The Bank may from time to time directly 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 the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("Fannie Mae"). Under current regulations, the maximum
principal balance allowed on conforming Residential Mortgage Loans ranges from
$227,150 ($340,725 for Residential Mortgage Loans secured by mortgaged
properties located in either Alaska or Hawaii) for one-unit residential loans
to $436,600 ($654,900 for Residential Mortgage Loans secured by mortgaged
properties located in either Alaska or Hawaii) for four-unit residential
loans. 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
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.

Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties, including stock allocated to a dwelling unit in a residential
cooperative housing corporation. Residential real estate properties underlying
Residential Mortgage Loans consist of individual dwelling units, individual
cooperative apartment units, individual condominium units, two- to four-family
dwelling units, planned unit developments and townhouses. The Company
currently expects that most of the Residential Mortgage Loans to be acquired
by it will be adjustable rate Mortgage Loans; however, the Company may also
purchase fixed rate Residential Mortgage Loans.

Commercial Mortgage Loans. While no Commercial Mortgage Loans will be
included in the Initial Mortgage Assets, the Company may from time to time in
the future 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 immediately following such
acquisition. Unlike Residential Mortgage Loans, Commercial Mortgage Loans
generally lack standardized terms. 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. See "Risk Factors--Special Risks Relating to Commercial
Mortgage Loans" and "--Environmental Considerations." 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 restate 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 complicating factors, including environmental considerations, which
are generally not present in foreclosures of Residential Mortgage Loans. See
"Risk Factors--Special Risks Relating to Commercial Mortgage Loans" and "--
Environmental Considerations."

26
<PAGE>

Other Real Estate Assets. The Company may invest up to 5% of the total value
of its portfolio 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.

MANAGEMENT POLICIES AND PROGRAMS

In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect
to the acquisition and disposition of assets, use of capital and leverage,
credit risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of
a majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also "--
Dividend Policy."

Asset Acquisition and Disposition Policies. Subsequent to the acquisition of
the Initial Mortgage Assets, the Company anticipates that it will from time to
time purchase additional Mortgage Assets out of proceeds received in
connection with the repayment or disposition of Mortgage Assets, or the
issuance of additional shares of Preferred Stock or the contribution of
additional capital by the Bank. The Company intends to acquire all or
substantially all of such 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 currently anticipates that the Mortgage Assets that it purchases
will include those secured by Residential Mortgage Loans, as described in "--
General Description of Mortgage Assets," and Mortgage-Backed Securities,
although if the Bank and/or any of its affiliates develop additional Mortgage
Asset products, the Company may purchase such additional types of Mortgage
Assets. In addition, the Company may also from time to time acquire limited
amounts of other assets eligible to be held by REITs. The Company currently
anticipates that it will not acquire the right to service any Mortgage Asset
it may acquire in the future. The Company anticipates that any servicing
arrangement that it enters into in the future will contain fees and other
terms consistent with secondary market standards.

The Company currently intends to maintain at least 90% of its portfolio in
the Initial Mortgage Assets and obligations which are comparable to the
Initial Mortgage Assets. As indicated above, the Company may invest in other
assets eligible to be held by REITs. Mortgage Loans acquired from entities
other than the Bank and its affiliates will have characteristics comparable to
those originated by the Bank and its affiliates. The Company's current policy
prohibits the acquisition of an interest in any Mortgage Loans which (i) are
delinquent (more than 30 days past due) in the payment of principal or
interest at the time of proposed acquisition; (ii) are or were at any time
during the preceding 12 months (a) in nonaccrual status or (b) renegotiated
due to financial deterioration of the borrower; or (iii) have been, more than
once during the preceding 12 months, more than 30 days past due in the payment
of principal or interest. Loans that are in a "nonaccrual status" are
generally loans that are past due 90 days or more in principal or interest.

The Company currently intends to maintain 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 Asset, to require the Servicer of any Mortgage
Loan to dispose of the Mortgage Loan for any of these reasons or for any other
reason.

The Company will develop forms of assignment and a policy regarding
recording of mortgage assignments for Residential Mortgage Loans. Initially,
the assignment of the Mortgage Loans under the Mortgage Loan Assignment
Agreement will not be recorded. See "Risk Factors--Risk of Fraudulent Release
of Mortgages."

Capital and Leverage Policies. To the extent that the Board of Directors
determines that additional funding is required, the Company may raise such
funds through additional equity offerings, debt financing or retention of cash
flow (after consideration of provisions of the Code requiring the distribution
by a REIT of a certain

27
<PAGE>

percentage of taxable income and taking into account taxes that would be
imposed on undistributed taxable income), or a combination of these methods.

The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the
Company might incur. Notwithstanding the foregoing, the Company may not,
without the approval of a majority of the Independent Directors, incur debt
for borrowed money other than debt not in excess of 25% of the Company's total
stockholders' equity. Any such debt incurred may include intercompany advances
made by the Bank to the Company.

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, including
the Series A Preferred Shares, and the Company may not issue additional shares
of Preferred Stock on a parity with the Series A Preferred Shares either in
the payment of dividends or in the distribution of assets in liquidation
without the approval of a majority of the Board of Directors and a majority of
the Company's Independent Directors. The Company does not currently intend to
issue any additional series of Preferred Stock unless it simultaneously
receives additional capital contributions from the Bank equal to the sum of
the aggregate offering price of such additional Preferred Stock and the
Company's expenses in connection with the issuance of such additional shares
of Preferred Stock. Prior to its issuance of additional shares of Preferred
Stock, the Company will take into consideration the Bank's regulatory capital
requirements and the cost of raising and maintaining that capital at the time.
See "Certain Transactions Constituting the Formation--Benefits to the Bank."

Credit Risk Management Policies. The Company intends that each Mortgage Loan
assigned to the Company by the Bank or an affiliate of the Bank will represent
a first lien position and will be originated in the ordinary course of the
originator's real estate lending activities based on the underwriting
standards generally applied (at the time of origination) for the originator's
own account. See "--Description of Securing Mortgage Loans--Underwriting
Standards." The Company also intends that all Mortgage Assets held by the
Company will be serviced pursuant to the Servicing Agreement, which requires
servicing in conformity with accepted secondary market standards, with any
servicing guidelines promulgated by the Company and, in the case of the
Residential Mortgage Loans, with Fannie Mae and FHLMC guidelines and
procedures. The Company may also choose, at any time subsequent to its
acquisition of Mortgage Assets, to dispose of any Mortgage Loan for any
reason, including as a result of a Mortgage Loan securing such Mortgage Asset
being placed in a "nonaccrual status" or renegotiated due to the financial
deterioration of the borrower or having been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal or
interest, as described above.

Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank and its affiliates, it is likely that conflicts of
interest will arise with respect to certain transactions, including, without
limitation, the Company's acquisition of Mortgage Assets from, or disposition
of Mortgage Assets to, the Bank or its affiliates and the modification of the
Bank Loan Agreement, the Advisory Agreement or the Servicing Agreement. It is
the Company's policy that the terms of any financial dealings with the Bank
and its affiliates will be consistent with those available from third parties
in the mortgage lending industry. In addition, neither the Bank Loan
Agreement, the Advisory Agreement nor the Servicing Agreement may be modified
or terminated without the approval of a majority of the Independent Directors.

Conflicts of interest between the Company and the Bank and its affiliates
may also arise in connection with making decisions that bear upon the credit
arrangements that the Bank or one of its affiliates may have with a borrower.
Conflicts could also arise in connection with actions taken by the Bank as a
controlling person in the Company. It is the intention of the Company and the
Bank that any agreements and transactions between the Company, on the one
hand, and the Bank or its affiliates, on the other hand, including, without
limitation, the Servicing Agreement, the Bank Loan Agreement and the Mortgage
Loan Assignment Agreement, are fair to all

28
<PAGE>

parties and are consistent with market terms for such types of transactions.
The Servicing Agreement provides that foreclosures and dispositions of the
Mortgage Loans are to be performed with a view toward maximizing the recovery
by the Company, and the Servicer shall service the Mortgage Loans solely with
a view toward the interests of the Company, and without regard to the
interests of the Bank or any of its affiliates. The requirement in the terms
of the Series A Preferred Shares that certain actions of the Company be
approved by a majority of the Independent Directors is also intended to ensure
fair dealings between the Company and the Bank and its affiliates. However,
there can be no assurance that any such agreement or transaction will be on
terms as favorable to the Company as would have been obtained from
unaffiliated third parties.

There are no provisions in the Company's Charter limiting any officer,
director, security holder or affiliate of the Company from having any direct
or indirect pecuniary interest in any Mortgage Assets to be acquired or
disposed of by the Company or in any transaction in which the Company has an
interest or from engaging in acquiring, holding or managing such Mortgage
Assets. As described herein, it is expected that the Bank and its affiliates
will have direct interests in transactions with the Company (including without
limitation, the issuance of Mortgage Assets to the Company); however, it is
not currently anticipated that any of the officers or directors of the Company
will have any interests in such Mortgage Assets.

Other Policies. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940, as amended.
The Company does not intend to (i) invest in the securities of other issuers
for the purpose of exercising control over such issuers, (ii) underwrite
securities of other issuers, (iii) actively trade in loans or other
investments, (iv) offer securities in exchange for property, or (v) make loans
to third parties, including without limitation, officers, directors or other
affiliates of the Company. The Company may, under certain circumstances,
purchase the Series A Preferred Shares in the open market or otherwise. The
Company has no present intention of causing the Company to repurchase any
shares of its stock, and any such action would be taken only in conformity
with applicable federal and state laws and the requirements for qualifying as
a REIT.

The Company intends to publish and distribute to stockholders, in accordance
with the rules of the NYSE, annual reports containing financial statements
prepared in accordance with generally accepted accounting principles and
certified by the Company's independent public accountants. The terms of the
Series A Preferred Shares provide that the Company shall maintain its status
as a reporting company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), for as long as any of the Series A Preferred Shares are
outstanding.

The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or
other considerations may cause the Board of Directors, subject to approval by
a majority of the Independent Directors, to determine that it is in the best
interests of the Company and its stockholders to revoke its REIT status.

DESCRIPTION OF SECURING MORTGAGE LOANS

Information with respect to the Securing Mortgage Loans is presented as of
September 15, 1997. Factual data with respect to the Securing Mortgage Loans
relates to those Mortgage Loans which are expected to comprise the Securing
Mortgage Loans. The actual Securing Mortgage Loans may differ in certain
respects from the Securing Mortgage Loans as described in this Prospectus;
provided, however, that (i) at least 85% of the Securing Mortgage Loans
(measured by aggregate outstanding principal balance) shall include mortgages
described herein, and (ii) the Bank must first determine that any differences
between the Securing Mortgage Loans as described herein and actual Securing
Mortgage Loans are not material.

The aggregate principal amount of the Securing Mortgage Loans will equal
approximately $448 million.

29
<PAGE>

Payments on the Securing Mortgage Loans will be received by the Company
monthly in arrears on the 15th day of each month or such earlier date on which
payment in full of the Securing Mortgage Loans is made (the "Final Payment
Date") or, if the 15th day of a month is not a business day, on the first
business day following the 15th day of such month (a "Monthly Payment Date").

The Securing Mortgage Loans will mature beginning in July 2000 and bear
interest at rates ranging from 4.375% to 10.000% with a weighted average
interest rate of 7.44% per annum. The Final Payment Date may occur at an
earlier date if final payment on the Securing Mortgage Loans occurs earlier
than such date, because of unscheduled prepayments. In general, the Securing
Mortgage Loans will provide for monthly escrow payments for taxes and
insurance.

General. The Residential Mortgage Loans among the Securing Mortgage Loans
were originated in the ordinary course of the real estate lending activities
of either the Bank or one of the Bank's affiliates. Certain of the Residential
Mortgage Loans may have been originated by mortgagees approved by the
Secretary of Housing and Urban Development or institutions (such as banks,
credit unions and insurance companies) subject to supervision and examination
by federal and state authorities and then sold to the Bank or one of the
Bank's affiliates. All of such Residential Mortgage Loans were originated
generally in accordance with the underwriting standards customarily employed
by the originator during the period in which such Mortgage Loans were
originated.

All of the Residential Mortgage Loans among the Securing Mortgage Loans were
originated between 1988 and 1997, and have original terms to stated maturity
of five to 30 years. The weighted average number of months since origination
of such Residential Mortgage Loans (calculated as of September 15, 1997) was
30 months. The weighted average "Loan-to-Value Ratio" of such Residential
Mortgage Loans was 68.00%. "Loan-to-Value Ratio" means the ratio (expressed as
a percentage) of the original principal amount of a mortgage loan to the
lesser of (i) the appraised value at origination of the underlying mortgage
property, and (ii) if the mortgage loan was made to finance the acquisition of
property, the purchase price of the mortgaged property.

Except as described below, upon transfer of the residential mortgaged
property underlying a Residential Mortgage Loan among the Securing Mortgage
Loans that is an adjustable rate Mortgage Loan, the mortgage note generally
will not preclude assumption of the related Residential Mortgage Loan by the
proposed transferee if the proposed transferee satisfies certain criteria with
respect to its ability to repay the Residential Mortgage Loan. The mortgage
notes with respect to certain of the Residential Mortgage Loans contain "due-
on-sale" provisions, which prevent the assumption of the Residential Mortgage
Loan by a proposed transferee and accelerate the payment of the outstanding
principal balance of the Residential Mortgage Loan. "Due-on-sale" provisions
in mortgage notes with respect to adjustable rate Residential Mortgage Loans
may be applicable in the period prior to the first Rate Adjustment Date (as
defined herein) or following the exercise of a conversion option fixing the
interest rate.

None of the Residential Mortgage Loans among the Securing Mortgage Loans (i)
is currently delinquent in the payment of principal or interest; (ii) is or
was at any time during the preceding 12 months (a) in nonaccrual status or (b)
renegotiated due to the financial deterioration of the borrower; or (iii) was,
more than once during the preceding 12 months, more than 30 days past due in
the payment of principal or interest. If, prior to the acquisition of the
Securing Mortgage Loans, any Residential Mortgage Loan included in the
description of the Securing Mortgage Loans herein falls within any of the
foregoing categories, the Company will not acquire such Mortgage Loan but will
instead acquire a Mortgage Loan similar in aggregate outstanding principal
balance and product type which does not fall into any of these categories.

Residential Mortgage Loans. The following types of Residential Mortgage Loan
products, each of which is more fully described below, will be included in the
Securing Mortgage Loans: seven-year extendable, 5/1 year ARM, ten-year
balloon, 3/1 year ARM, five-year extendable, one-year ARM, ten-year fixed,
six-month LIBOR, balloon, biweekly, 30-year fixed, 15-year fixed and three-
year ARM.

30
<PAGE>

The following table sets forth certain information with respect to each type
of Residential Mortgage Loans eligible to be included in the Securing Mortgage
Loans as of September 15, 1997:

TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXPECTED
MONTHS
AGGREGATE PERCENTAGE REMAINING
PRINCIPAL BY TO
BALANCE AGGREGATE MATURITY
(IN PRINCIPAL OR
TYPE THOUSANDS) BALANCE REPRICING
- ---- ---------- ---------- ---------
<S> <C> <C> <C>
Ten-year fixed.................................. $ 26,682 5.958% 82
15-year fixed................................... 499 0.111 145
30-year fixed................................... 2,103 0.470 311
Biweekly........................................ 2,662 0.594 114
Balloon......................................... 4,315 0.964 103
Ten-year balloon................................ 60,123 13.427 100
Six-month LIBOR................................. 16,715 3.733 3
One-year ARM.................................... 44,806 10.006 6
Three-year ARM.................................. 81 0.018 15
3/1 year ARM.................................... 54,391 12.146 20
5/1 year ARM.................................... 74,578 16.654 25
Five-year extendable............................ 50,159 11.201 35
Seven-year extendable........................... 110,689 24.718 48
-------- -------
Total......................................... $447,803 100.000%
======== =======
</TABLE>

The majority of the Residential Mortgage Loans included in the Securing
Mortgage Loans are extendable mortgage loans, balloons, adjustable rate
mortgages and automatically convertible mortgages.

35.9% of the Securing Mortgage Loans are extendable mortgage loans (such as
the five-year extendable and the seven-year extendable), which are Mortgage
Loans with a 30-year maturity with a fixed interest rate for the initial
period (five to seven years in the case of the loans referenced above) and a
one-time interest rate adjustment to another fixed rate for the remainder of
the term.

14.4% of the Residential Mortgage Loans included in the Securing Mortgage
Loans are balloon loans (such as the balloon and ten-year balloon), which are
Mortgage Loans originated with a term to stated maturity that is shorter than
the period on which the corresponding amortization schedule is based. As a
result, upon the maturity of a balloon loan, the mortgagor will be required to
make a "balloon payment" which will be significantly larger than previous
monthly payments due on such balloon loans.

31
<PAGE>

78.7% of the Residential Mortgage Loans included in the Securing Mortgage
Loans bear interest at adjustable rates. The interest rate on an "adjustable
rate mortgage" or an "ARM" is typically tied to an index (such as the interest
rate on United States Treasury Bills), and is adjustable periodically. ARMs
are typically subject to lifetime interest rate caps and periodic interest
rate caps. As of September 15, 1997, the interest rates of the Residential
Mortgage Loans included in the Securing Mortgage Loans ranged from 4.375% per
annum to 10.000% per annum and the weighted average interest rate was 7.44%
per annum. The following table contains certain additional data with respect
to the interest rates of the Residential Mortgage Loans included in the
Securing Mortgage Loans as of September 15, 1997:

CURRENT INTEREST RATE OF RESIDENTIAL MORTGAGE LOANS

<TABLE>
<CAPTION>
CURRENT AGGREGATE PERCENTAGE
INTEREST NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
RATE MORTGAGE LOANS (IN THOUSANDS) PRINCIPAL BALANCE
- -------- -------------- ----------------- -----------------
<S> <C> <C> <C>
4.000%-4.999%.............. 1 $ 378 0.084%
5.000%-5.249%.............. 2 359 0.080
5.250%-5.499%.............. 2 298 0.067
5.500%-5.749%.............. 6 804 0.179
5.750%-5.999%.............. 20 3,533 0.789
6.000%-6.249%.............. 86 12,234 2.732
6.250%-6.499%.............. 106 15,829 3.535
6.500%-6.749%.............. 161 24,340 5.436
6.750%-6.999%.............. 348 45,649 10.194
7.000%-7.249%.............. 375 57,543 12.850
7.250%-7.499%.............. 377 58,021 12.958
7.500%-7.749%.............. 472 68,688 15.339
7.750%-7.999%.............. 306 49,750 11.110
8.000%-8.249%.............. 238 35,188 7.858
8.250%-8.499%.............. 268 46,640 10.415
8.500%-8.749%.............. 110 18,308 4.088
8.750%-8.999%.............. 53 7,292 1.628
9.000%-9.249%.............. 17 1,576 0.352
9.250%-9.499%.............. 9 776 0.173
9.500%-9.749%.............. 0 0 0.000
9.750%-9.999%.............. 1 479 0.107
10.000%-10.249%............. 1 118 0.026
----- -------- -------
Total..................... 2,959 $447,803 100.000%
===== ======== =======
</TABLE>

"Gross Margin," with respect to a Residential Mortgage Loan that is an ARM,
means the applicable fixed percentage which is added to the applicable index
to calculate the current interest rate paid by the borrower of such
Residential Mortgage Loan (without taking into account any interest rate caps
or minimum interest rates). Gross Margin is inapplicable to fixed rate
Residential Mortgage Loans. As of September 15, 1997, the weighted average
Gross Margin of the adjustable rate Residential Mortgage Loans included in the
Securing Mortgage Loans was approximately 2.710%.

The following table sets forth certain additional data with respect to the
Gross Margin of the adjustable rate Residential Mortgage Loans included in the
Securing Mortgage Loans as of September 15, 1997:

GROSS MARGIN

<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE
NUMBER PRINCIPAL BY
OF BALANCE AGGREGATE
MORTGAGE (IN PRINCIPAL
GROSS MARGIN LOANS THOUSANDS) BALANCE
- ------------ -------- ---------- ----------
<S> <C> <C> <C>
0.000%-1.499%.................................... 0 $ 0 0.000%
1.500%-2.499%.................................... 21 1,887 0.535
2.500%-3.499%.................................... 2,101 350,712 99.465
Greater than 3.500%.............................. 0 0 0.000
----- -------- -------
Total.......................................... 2,122 $352,599 100.000%
===== ======== =======
</TABLE>

32
<PAGE>

The interest rate of each type of ARM product included in the Securing
Mortgage Loans (such as the One-year ARMs and the Three-year ARMs)
periodically adjusts (the time of each adjustment, a "Rate Adjustment Date")
subject to lifetime interest rate caps, to minimum interest rates and, in the
case of most ARMs in the Securing Mortgage Loans, to maximum periodic
adjustment increases or decreases, each as specified in the mortgage note
relating to the ARM. Information set forth below regarding interest rate caps
and minimum interest rates applies to the Securing Mortgage Loans only.
Mortgage Loans purchased by the Company after consummation of the Offering may
be subject to different interest rate caps and minimum interest rates.

Each ARM bears interest at its initial interest rate until its first Rate
Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on an adjustable rate Mortgage Loan will be
adjusted to an amount that will fully amortize the then-outstanding principal
balance of such Residential Mortgage Loan over its remaining term to stated
maturity and that will be sufficient to pay interest at the adjusted interest
rate. Certain of the types of Residential Mortgage Loan products that are ARMs
contain an option, which may be exercised by the mortgagor, to convert the ARM
into a fixed rate loan for the remainder of the mortgage term. If an ARM is
converted into a fixed rate loan, the interest rate will be determined at the
time of conversion as specified in the mortgage note relating to such Mortgage
Loan and will remain fixed at such rate until the stated maturity of such
Residential Mortgage Loan. All the Securing Mortgage Loans allow the mortgagor
to prepay at any time some or all of the outstanding principal balance of the
Securing Mortgage Loan without a fee or penalty.

28.8% of the Residential Mortgage Loans included in the Securing Mortgage
Loans are automatically convertible Mortgage Loans (such as the 3/1 year ARM
and 5/1 year ARM). The interest rate for these automatically convertible
Mortgage Loans is fixed at an initial rate for a certain amount of years
(three to five years in the case of the loans referenced above), after which
time the loan automatically converts to a one-year ARM and the interest rate
adjusts annually thereafter as if the Residential Mortgaged Loan were a one-
year ARM with a lifetime interest rate cap. There is no ability to continue at
a fixed rate after the first Rate Adjustment Date.

Underwriting Standards. The Bank has represented to the Company that all of
the Securing Mortgage Loans were originated generally in accordance with the
underwriting policies customarily employed by the originator during the period
in which the Securing Mortgage Loans were originated.

In the Mortgage Loan approval process, the Bank assesses both the borrower's
ability to repay the Mortgage Loan and, in appropriate cases, the adequacy of
the proposed security. Credit policies and procedures are established by the
board of directors of the Bank, which delegates credit approval to certain
senior officers in accordance therewith.

The approval process for all types of Mortgage Loans includes on-site
appraisals of the properties securing such loans and a review of the
applicant's financial statements and credit, payment and banking history,
financial statements of any guarantors, and tax returns of guarantors of
multi-family Residential Mortgage Loans and Commercial Loans. The Bank
generally lends up to 95% of the appraised value of single-family residential
dwellings to be owner-occupied. The Loan-to-Value Ratio generally applied by
the Bank to multi-family Residential Mortgage Loans and Commercial Loans has
been 80% of the appraised value of the property.

The Bank requires title insurance policies protecting the priority of the
Bank's liens for all Mortgage Loans and also requires fire and casualty
insurance for Mortgage Loans. The borrower selects the insurance carrier,
subject to the Bank's approval. Generally, for any Residential Mortgage Loan
in an amount exceeding 80% of the appraised value of the security property,
the Bank currently requires mortgage insurance from an independent mortgage
insurance company.

Substantially all fixed-rate Mortgage Loans originated by the Bank contain a
"due-on-sale" clause providing that the Bank may declare a Mortgage Loan
immediately due and payable in the event, among other things, that the
borrower sells the property securing the loan without the consent of the Bank.
The Bank's ARMs generally are assumable.

33
<PAGE>

Geographic Distribution. 69.0% of the aggregate principal balance of the
residential real estate properties underlying the Bank's Residential Mortgage
Loans included in the Securing Mortgage Loans are located in Illinois, and
23.0% are located in Arizona. Consequently, these Residential Mortgage Loans
may be subject to a greater risk of default than other comparable Residential
Mortgage Loans in the event of adverse economic, political or business
developments in Illinois and Arizona that may affect the ability of
residential property owners in any of these areas to make payments of
principal and interest on the underlying mortgages.

Loan-to-Value Ratios; Insurance. The Residential Mortgage Loans included in
the Securing Mortgage Loans having Loan-to-Value Ratios of greater than 80%,
are insured under primary mortgage guaranty insurance policies. At the time of
origination of the Residential Mortgage Loans, each of the primary mortgage
insurance policy insurers was approved by Fannie Mae or FHLMC. A standard
hazard insurance policy is required to be maintained by the mortgagor with
respect to each Residential Mortgage Loan in an amount equal to the maximum
insurable value of the improvements securing such Residential Mortgage Loan or
the principal balance of such Residential Mortgage Loan, whichever is less. If
the residential real estate property underlying a Residential Mortgage Loan is
located in a flood zone, such Residential Mortgage Loan may also be covered by
a flood insurance policy as required by law. No special hazard insurance
policy or mortgagor bankruptcy insurance will be maintained by the Company
with respect to the Residential Mortgage Loans among the Securing Mortgage
Loans, nor will any Residential Mortgage Loan be insured by the Federal
Housing Administration or guaranteed by the Veterans Administration.

DESCRIPTION OF INITIAL MORTGAGE-BACKED SECURITIES

The Initial Mortgage-Backed Securities will consist of either 6.50% or 7.00%
GNMA Platinum Securities or Fannie Mae Seven-year Balloon Securities purchased
from the Bank.

The Fannie Mae Seven-year Balloon Mortgage-Backed Security is backed by a
pool of balloon Mortgage Loans that are amortized on a 30-year schedule but
carry a maximum term of seven years. Fannie Mae guarantees full payment of
principal by the end of seven years.

The GNMA Platinum Certificates represent an interest in a pool of GNMA I
Certificates or GNMA II Certificates with the same pool type, coupon rate and
original term to maturity. The GNMA Platinum Certificates will have the same
fixed coupon rates as the underlying GNMA Certificates and are guaranteed as
to the timely payment of principal and interest by GNMA. The Mortgage Loans
underlying GNMA Certificates consist of government loans secured by mortgaged
loans on residential properties, including level payment mortgage loans and
"buy down" mortgage loans. All Mortgage Loans underlying a particular GNMA
Certificate must be of the same type (for example, all level payment single
family mortgages) and have a fixed annual interest rate.

SERVICING

The Mortgage Loans will be serviced by the Bank pursuant to the terms of the
Servicing Agreement. The Bank in its role as servicer under the terms of the
Servicing Agreement is herein referred to as the "Servicer." The Servicer will
receive a fee equal to 0.25% per annum on the principal balances of the loans
serviced. Payment of such fees will be subordinate to payments of dividends on
the Series A Preferred Shares.

The Servicing Agreement requires the Servicer to service the Mortgage 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 Servicer to service the
Mortgage Loans solely with a view toward the interests of the Company and
without regard to the interests of the Bank or any of its affiliates. The
Servicer 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 Mortgage Loans it services. The
Servicer will also provide accounting and reporting services required by the
Company for such Mortgage Loans. The Servicing

34
<PAGE>

Agreement requires the Servicer to follow such collection procedures as are
customary in the industry, including contacting delinquent borrowers and
supervising foreclosures and property disposition in the event of unremedied
defaults in accordance with servicing guidelines promulgated by the Company.
The Servicer may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreement, subject to the reasonable
consent of the Company and approval of a majority of the Independent
Directors. The Servicer will not, in connection with subcontracting any of its
obligations under the Servicing Agreement, be discharged or relieved in any
respect from its obligation to the Company to perform its obligations under
the Servicing Agreement.

The Servicer will be required to pay all expenses related to the performance
of its duties under the Servicing Agreement. The Servicer will be required to
make advances of taxes and required insurance premiums that are not collected
from borrowers with respect to any Mortgage Loan serviced by it, unless it
determines that such advances are nonrecoverable from the mortgagor, insurance
proceeds or other sources with respect to such Mortgage Loan. If such advances
are made, the Servicer generally will be reimbursed prior to the Company's
receipt of the proceeds of such Mortgage Loan. The Servicer also will be
entitled to reimbursement for expenses incurred by it in connection with the
liquidation of defaulted Mortgage Loans serviced by it and in connection with
the restoration of mortgaged property. The Servicer will be responsible to the
Company for any loss suffered as a result of the Servicer's failure to make
and pursue timely claims or as a result of actions taken or omissions made by
the Servicer which cause the policies to be canceled by the insurer. The
Servicer may institute foreclosure proceedings, exercise any power of sale
contained in any mortgage or deed of trust, obtain a deed in lieu of
foreclosure or otherwise and hold mortgage proceeds for the benefit of the
Company acquire title to a mortgaged property underlying a Mortgage Loan by
operation of law or otherwise in accordance with the terms of the Servicing
Agreement. The Servicer shall not, however, have the authority to enter into
contracts in the name of the Company.

The Company may terminate the Servicing Agreement upon the occurrence of one
or more events specified in the Servicing Agreement. Such events relate
generally to the Servicer's proper and timely performance of its duties and
obligations under the Servicing Agreement. In addition, the Company may also
terminate the Servicing Agreement without cause upon 60 days' notice and
payment of a termination fee that is competitive with that which is generally
payable in the industry. The termination fee will be based on the aggregate
outstanding principal amount of the Mortgage Loans then serviced under the
Servicing Agreement. As long as any Series A Preferred Shares remain
outstanding, the Company may not terminate, or elect to renew, the Servicing
Agreement without the approval of a majority of the Independent Directors.

As is customary in the mortgage loan servicing industry, the Servicer will
be entitled to retain any late payment charges, prepayment fees, penalties and
assumption fees collected in connection with the Mortgage Loans serviced by
it. The Servicer will receive any benefit derived from interest earned on
collected principal and interest payments between the date of collection and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds with respect to Mortgage Loans serviced by it.

When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law
and governmental regulations. The terms of a particular Mortgage Loan or
applicable law, however, may provide that the Servicer is prohibited from
exercising the "due-on-sale" clause under certain circumstances related to the
security underlying the Mortgage Loan and the buyer's ability to fulfill the
obligations thereunder. Upon any assumption of a Mortgage Loan by a
transferee, a fee equal to a specified percentage of the outstanding principal
balance of the Mortgage Loan is typically required, which sum will be retained
by the Servicer as additional servicing compensation.

EMPLOYEES

The Company has six officers. The executive officers of the Company are
described further below under "Management." The Company does not anticipate
that it will require any additional employees because it has retained the
Advisor to perform certain functions pursuant to the Advisory Agreement
described below under

35
<PAGE>

"Management--The Advisor." Each officer of the Company currently is also an
officer and/or director of the Bank and/or affiliates of the Bank. The Company
will maintain 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 any 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.

COMPETITION

The Company does not anticipate that it will 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.

LEGAL PROCEEDINGS

The Company is not the subject of any material litigation. None of the
Company, the Bank or any affiliate of the Bank is currently involved in nor,
to the Company's knowledge, currently threatened with any material litigation
with respect to the Initial Mortgage Assets, other than routine litigation
arising in the ordinary course of business, most of which is expected to be
covered by liability insurance.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's Board of Directors consists of six members. Pursuant to the
terms of the Series A Preferred Shares, the Independent Directors will
consider the interests of the holders of both the Series A Preferred Shares
and the Common Stock in determining whether any proposed action requiring
their approval is in the best interests of the Company. The Company currently
has six officers. The Company has no other employees and does not anticipate
that it will require additional employees. See "Business and Strategy--
Employees."

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

<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Michael D. Williams............... 42 Chairman of the Board of Directors
Paul R. Skubic.................... 49 President, Director
Pierre O. Greffe.................. 45 Chief Financial Officer
Thomas R. Sizer................... 59 Secretary, Director
Frank M. Novosel.................. 51 Treasurer, Director
John F. Faulhaber................. 51 Vice President of Operations
Margaret M. Sulkin................ 39 Assistant Treasurer
Delbert J. Wacker................. 66 Director
David J. Blockowicz............... 55 Director
</TABLE>

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

Mr. Williams has been Senior Vice President, Community Bank Management, of
the Bank since June 1996. Prior to that he was Senior Vice President, Retail
Banking, of Household Bank, f.s.b., a company he joined in April of 1978.
Household Bank's 54 Illinois branches were acquired by the Bank in June 1996.

36
<PAGE>

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

Mr. Greffe has been Senior Vice President and Chief Financial Officer of the
Bank since June 1994. Prior to that he was Vice President of Finance,
Corporate and Institutional Financial Services, of Bank of Montreal in
Toronto. Mr. Greffe has been with the Bank of Montreal family of companies
since November 1974. Mr. Greffe is a member of the Certified Management
Accountant Institute of Canada.

Mr. Sizer has been Vice President and Secretary of the Bank since 1983.
Prior to that time he was a Vice President of the Bank. He holds a Juris
Doctor degree from Fordham University, New York.

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.

Mr. Faulhaber has been Vice-President and Division Administrator,
Residential Mortgages, at the Bank since 1994. Prior to this position, he was
Manager, Secondary Mortgage Market, since 1991. He currently serves on the
Bank's Asset/Liability Committee.

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 HealthSystem. From
November 1990 to September 1993, he completed various financial consulting
projects for Lutheran General. Since that time, he has been retired from
active employment.

Mr. Blockowicz is a certified public accountant. Prior to 1991, Mr.
Blockowicz was a partner with Arthur Andersen & Co. for several years. In
1991, he formed his own public accounting firm. In 1995, he formed and became
a partner in Blockowicz & Del Guidicie LLC.

INDEPENDENT DIRECTORS

The terms of the Series A Preferred Shares require that, as long as any
Series A Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors of the Company. See
"Description of Series A Preferred Shares--Independent Director Approval."
Delbert J. Wacker and David J. Blockowicz will be the Company's initial
Independent Directors. As long as there are only two Independent Directors,
any action that requires the approval of a majority of Independent Directors
must be approved by both Independent Directors.

If at any time the Company fails to declare and pay a quarterly dividend
payment on the Series A 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 Series A 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 Stock will be
deemed to be an Independent Director for purposes of the actions requiring the
approval of a majority of the Independent Directors. See "Description of
Series A Preferred Shares--Voting Rights."

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 and David J. Blockowicz.

COMPENSATION OF DIRECTORS AND OFFICERS

The Company intends to pay the Independent Directors of the Company fees for
their services as directors. The Independent Directors will 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.

37
<PAGE>

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

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The charter of the
Company contains such a provision which eliminates such liability to the
maximum extent permitted by Maryland law.

The charter of the Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become
subject or which such person may incur by reason of his status as a present or
former director or officer of the Company. The Bylaws of the Company obligate
it, to the maximum extent permitted by Maryland law, to indemnify and to pay
or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former director or officer who is made a
party to the proceeding by reason of his service in that capacity or (b) any
individual who, while a director of the Company and at the request of the
Company, serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, partner or trustee of such corporation,
real estate, investment trust, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity. The charter and Bylaws also permit the
Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to any
employee or agent of the Company or a predecessor of the Company.

The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the
MGCL, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of liability on
the basis that personal benefit was improperly received, unless in either case
a court orders indemnification and then only for expenses. In addition, the
MGCL permits a corporation to advance reasonable expenses to a director or
officer upon the corporation's receipt of (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the corporation and (b) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met.

In addition to the above indemnification, the Company expects to provide
liability insurance to its directors and officers.

THE ADVISOR

In connection with the consummation of the Offering, and the formation of
the Company as described herein, the Company will enter into the Advisory
Agreement with the Bank to administer the day-to-day

38
<PAGE>

operations of the Company. The Bank in its role as advisor under the terms of
the Advisory Agreement is herein referred to as the "Advisor." The Advisor
will be responsible for (i) monitoring the credit quality of the Mortgage
Assets held by the Company, (ii) advising the Company with respect to the
reinvestment of income from, and principal payments on, the Initial Mortgage
Assets, and with respect to the acquisition, management, financing and
disposition of the Company's Mortgage Assets, and (iii) monitoring the
Company's compliance with the requirements necessary to qualify as a REIT. The
Advisor may from time to time subcontract all or a portion of its obligations
under the Advisory Agreement to one or more of its affiliates involved in the
business of mortgage finance and the administration of Mortgage Assets. The
Advisor may, with the approval of a majority of the Board of Directors, as
well as a majority of the Independent Directors, subcontract all or a portion
of its obligations under the Advisory Agreement to unrelated third parties.
The Advisor 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 Advisor and its affiliates have substantial experience in the mortgage
lending industry, both in the origination and in the servicing of mortgage
loans. At September 30, 1997, the Advisor and its domestic affiliates owned
approximately $1.8 billion of residential mortgage loans. In their residential
mortgage loan business, the Advisor and its affiliates originate and purchase
residential mortgage loans and then sell such loans to investors, primarily in
the secondary market, while generally retaining the rights to service such
loans. The Advisor and its affiliates also purchase servicing rights on
residential mortgage loans. At September 30, 1997, in addition to loans
serviced for its own portfolio, the Advisor serviced residential mortgage
loans having an aggregate principal balance of approximately $1.2 billion.

The Advisory Agreement has an initial term of one year, and may be renewed
for additional one-year periods. The Advisory Agreement may be terminated by
the Company at any time upon 60 days' prior written notice. As long as any
Series A 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 Independent Directors. The Advisor will be entitled to receive
an annual advisory fee equal to $50,000 payable in equal quarterly
installments with respect to the advisory and management services provided by
it to the Company. Payment of such fees will be subordinated to payments of
dividends on the Series A Preferred Shares.

As a result of the relationship between the Bank and the Company, certain
conflicts of interest may arise. See "Risk Factors--Relationship with the Bank
and its Affiliates; Conflicts of Interest."

The principal executive offices of the Advisor are located at 111 West
Monroe Street, Chicago, Illinois 60690, and its telephone number at such
address is (312) 461-2121.

CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION

THE FORMATION

Prior to or simultaneously with the consummation of the Offering, the
Company and the Bank will engage in the transactions described below, which
are designed to (i) facilitate the Offering, (ii) provide for the acquisition
of the Initial Mortgage Assets by the Company, and (iii) enable the Company to
qualify as a REIT for federal income tax purposes commencing with its taxable
year ending December 31, 1998.

Transactions constituting the formation of the Company will include the
following:

. The Bank has acquired 1,000 shares of Common Stock and will make
additional capital contributions with respect thereto equal to $250
million, from which will be paid underwriting discounts and expenses of the
Offering and the formation of the Company and to capitalize the Company.

. The Charter of the Company will be amended to provide for 1,000
authorized shares of Common Stock and 20,000,000 authorized shares of
Preferred Stock, and to establish the terms of the Series A Preferred
Shares.

. The Company will sell to the public 10,000,000 Series A Preferred
Shares in the Offering.

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<PAGE>

. The Company will acquire the Initial Mortgage Assets from the Bank for
approximately $ million. In addition, the Bank will assign the
Securing Mortgage Loans to the Company and the Company will acquire a
security interest in the real property securing the Securing Mortgage Loans
which will be perfected as to creditors of the Bank.

. The Company will enter into the Advisory Agreement with the Advisor
pursuant to which the Advisor will manage the Mortgage Assets and
administer the day-to-day operations of the Company. See "Management--The
Advisor."

. The Company will enter into the Servicing Agreement with the Servicer
pursuant to which the Servicer will service the Securing Mortgage Loans and
other Mortgage Loans held by the Company. See "Business and Strategy--
Servicing."

The Bank currently owns, and following the consummation of the Offering will
continue to own, all of the issued and outstanding shares of Common Stock of
the Company. In addition to its ownership of 100% of the Common Stock of the
Company, the Bank will also have responsibility for the day-to-day management
and custody of the Company's assets, in its capacity as Advisor under the
Advisory Agreement, and Servicer under the Servicing Agreement. 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 Series A Preferred
Shares are outstanding. See "Management--The Advisor" and "Risk Factors--
Relationship with the Bank and its Affiliates; Conflicts of Interest."

The Company and the Bank believe that the fair value of the Initial Mortgage
Assets will at least equal the amount (approximately $ million) that the
Company will pay for the Initial Mortgage Assets. However, no third party
valuations of the Initial Mortgage Assets have been or will be obtained for
purposes of the Offering, and there can be no assurance that the fair value of
the Initial Mortgage Assets will not differ from the amount to be paid by the
Company. See "Risk Factors--No Third Party Valuation of the Mortgage Assets;
No Arm's-Length Negotiations with Affiliates" and "--Relationship with the
Bank and Its Affiliates; Conflicts of Interest."

BENEFITS TO THE BANK

The Bank expects to realize the following benefits in connection with the
Offering and other transactions constituting the formation of the Company:

. The Bank expects that the Series A Preferred Shares will qualify as
Tier 1 capital for U.S. banking regulatory purposes.

. The dividends payable on the Series A Preferred Shares will be
deductible for income tax purposes as a result of the Company's
qualification as a REIT.

. The Bank has advised the Company that the treatment of the Series A
Preferred Shares as Tier 1 capital of the Bank and the Company's ability to
deduct, for income tax purposes, the dividends payable on the Series A
Preferred Shares as a result of the Company's qualification as a REIT will
provide the Bank with a more cost-effective means of obtaining regulatory
capital than if the Bank were to issue preferred stock itself. Further, if
the Bank issued a class of preferred stock with dividend rights, the
dividends payable on such Bank preferred stock would not be deductible by
the Bank for income tax purposes.

40
<PAGE>

<TABLE>
<S> <C>
Advisory Fee............................................... $ 50,000
Servicing Fees............................................. (1)
Common Stock Dividends..................................... (2)
-----------
$
===========
</TABLE>
- --------
(1) Assumes that for the first 12 months following completion of the
Offering, the Company holds Residential Mortgage Loans or Bank Secured
Obligations secured by Residential Mortgage Loans with the same
outstanding principal balances as those Residential Mortgage Loans
included in the Initial Mortgage Assets. See "Business and Strategy--
Servicing" for a description of the basis upon which the servicing fees
will be calculated.

(2) The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's "REIT taxable
income" (excluding capital gains) over the amount of dividends paid in
respect of Preferred Stock. The aggregate annual dividend amount of the
Series A Preferred Shares is approximately $ million. Assuming that
(i) the Initial Mortgage Assets are held for the 12-month period
following consummation of the Offering, (ii) principal repayments are
reinvested in additional Mortgage Assets with characteristics similar
to those of the Initial Mortgage Assets, and (iii) interest rates
remain constant during such 12-month period, the Company anticipates
that the Initial Mortgage Assets will generate "REIT taxable income"
(excluding capital gains) of approximately $ million, after payment
of servicing and advisory fees, during such 12-month period.

. The Bank also will be entitled to retain any ancillary fees, including,
but not limited to, late payment charges, prepayment fees, penalties and
assumption fees collected in connection with the Mortgage Loans serviced by
it. In addition, the Bank, as Servicer, will receive any benefit derived
from interest earned on collected principal and interest payments between
the date of collection and the date of remittance to the Company and from
interest earned on tax and insurance impound funds with respect to Mortgage
Loans serviced by the Servicer.

DESCRIPTION OF SERIES A PREFERRED SHARES

The following summary of the material terms and provisions of the Series A
Preferred Shares does not purport to be complete and is subject to and
qualified in its entirety by reference to the terms and provisions of the
Charter establishing the Series A Preferred Shares and the other provisions of
the Company's Charter, the forms of which have been filed with the Commission
as exhibits to the Registration Statement of which this Prospectus forms a
part. See "Description of Stock."

GENERAL

The Series A Preferred Shares form a series of the Preferred Stock of the
Company, which Preferred Stock may be issued from time to time in one or more
series with such designations preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption as are determined by the
Company's Board of Directors. The Board of Directors has authorized the
Company to issue the Series A Preferred Shares.

When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the stock of the Company or
any other securities of the Company convertible into or carrying rights or
options to purchase any such shares. The Series A Preferred Shares will not be
convertible into shares of Common Stock or any other class or series of stock
of the Company and will not be subject to any sinking fund or other obligation
of the Company for their repurchase or retirement. The Series A Preferred
Shares will be exchanged automatically on a one-for-one basis for Bank
Preferred Shares upon the occurrence of the Exchange Event.

The transfer agent, registrar and dividend disbursement agent for the Series
A Preferred Shares will be the Bank. The registrar for the Series A Preferred
Shares will send notices to stockholders of any meetings at which holders of
the Series A Preferred Shares have the right to elect directors of the Company
or to vote on any other matter.

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<PAGE>

DIVIDENDS

Holders of Series A Preferred Shares shall be entitled to receive, if, when
and as authorized and declared by the Board of Directors of the Company out of
assets of the Company legally available therefor, noncumulative cash dividends
at the rate of % per annum of the liquidation preference (equivalent to
$ per share per annum). If authorized and declared, dividends on the
Series A Preferred Shares shall be payable quarterly in arrears on March 30,
June 30, September 30 and December 30 (or, if any such day is not a Business
Day, on the next Business Day) of each year, at such annual rate, commencing
on March 30, 1998. Dividends in each quarterly period will accrue from the
first day of such period, whether or not authorized, declared or paid for the
prior quarterly period. Each authorized and declared dividend shall be payable
to holders of record as they appear at the close of business on the stock
register of the Company on such record dates, not exceeding 45 days preceding
the payment dates thereof, as shall be fixed by the Board of Directors of the
Company. Dividends payable on the Series A Preferred Shares for any dividend
period shall be computed on the basis of a 360 day year consisting of twelve
30-day months.

The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to authorize or
declare a dividend on the Series A Preferred Shares for a quarterly dividend
period, then holders of the Series A Preferred Shares will have no right to
receive a dividend for that period, and the Company will have no obligation to
pay a dividend for that period, whether or not dividends are authorized,
declared and paid for any future period with respect to either the Series A
Preferred Shares or the Common Stock. If the Company fails to pay or authorize
and set aside for payment a quarterly dividend on the Series A Preferred
Shares, holders of the Preferred Stock of the Company, including the Series A
Preferred Shares, will be entitled to elect two directors. See "--Voting
Rights."

If full dividends on the Series A Preferred Shares for any dividend period
shall not have been authorized, declared and paid, or authorized, declared and
a sum sufficient for the payment thereof shall not have been set apart for
such payments, no dividends shall be authorized, declared or paid or set aside
for payment and no other distribution shall be authorized, declared or made or
set aside for payment upon the Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the Series A Preferred Shares as
to dividends or amounts upon liquidation, nor shall any Common Stock or any
other capital stock of the Company ranking junior to or on a parity with the
Series A Preferred Shares as to dividends or amounts upon liquidation be
redeemed, purchased or otherwise acquired for any consideration (or any monies
to be paid to or made available for a sinking fund for the redemption of any
such capital stock) by the Company (except by conversion into or exchange for
other stock of the Company ranking junior to the Series A Preferred Shares as
to dividends and amounts upon liquidation), until such time as dividends on
all outstanding Series A Preferred Shares have been (i) authorized, declared
and paid for three consecutive dividend periods and (ii) authorized, declared
and paid, or authorized, declared and a sum sufficient for the payment thereof
has been set apart for payment, for the fourth consecutive dividend period.

When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Series A Preferred Shares and the shares of
any other series of stock ranking on a parity as to dividends with the Series
A Preferred Shares, all dividends authorized or declared upon the Series A
Preferred Shares and any other series of stock ranking on a parity as to
dividends with the Series A Preferred Shares shall be authorized and declared
pro rata so that the amount of dividends authorized and declared per share on
the Series A Preferred Shares and such other series of stock shall in all
cases bear to each other the same ratio that full dividends, for the then-
current dividend period, per share of the Series A Preferred Shares (which
shall not include any accumulation in respect of unpaid dividends for prior
dividend periods) and full dividends, including required or permitted
accumulations, if any, on each other series of stock bear to each other.

For a discussion of the tax treatment of distributions to stockholders, see
"Federal Income Tax Consequences--Taxation of United States Stockholders" and
"--Taxation of Foreign Stockholders," and for a discussion of certain
potential regulatory limitations on the Company's ability to pay dividends,
see "Risk Factors--Dividends and Operations of the Company Restricted by
Regulation."

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<PAGE>

AUTOMATIC EXCHANGE

Each Series A Preferred Share will be exchanged automatically for one newly
issued Bank Preferred Share in the event (i) the Bank becomes less than
"adequately capitalized"under regulations established pursuant to FDICIA, (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 5.0% (i.e., the Exchange Event).
The Bank will be considered to be less than "adequately capitalized" under the
regulations if it has (i) a Tier 1 leverage ratio of less than 4.0%, (ii) a
Tier 1 risk-based capital ratio of less than 4.0%, or (iii) a total risk-based
capital ratio of less than 8.0%. Upon the Exchange Event, each holder of
Series A Preferred Shares shall be unconditionally obligated to surrender to
the Bank the certificates representing each Series A Preferred Share of such
holder, and the Bank shall be unconditionally obligated to issue to such
holder in exchange for each such Series A Preferred Share a certificate
representing one Bank Preferred Share. Any Series A Preferred Shares purchased
or redeemed by the Company prior to the Time of Exchange (as defined below)
shall not be deemed outstanding and shall not be subject to the Automatic
Exchange.

The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
earliest possible Business Day such exchange could occur following the
Exchange Event (the "Time of Exchange"), as evidenced by the issuance by the
Bank of a press release prior to such time. As of the Time of Exchange, all of
the Series A Preferred Shares will be deemed canceled without any further
action by the Company, all rights of the holders of Series A Preferred Shares
as stockholders of the Company will cease, and such persons shall thereupon
and thereafter be deemed to be and shall be for all purposes the holders of
Bank Preferred Shares. The Company will mail notice of the occurrence of the
Exchange Event to each holder of Series A Preferred Shares within 30 days of
such event, and the Bank will deliver to each such holder certificates for
Bank Preferred Shares upon surrender of certificates for Series A Preferred
Shares. Until such replacement stock certificates are delivered (or in the
event such replacement certificates are not delivered), certificates
previously representing Series A Preferred Shares shall be deemed for all
purposes to represent Bank Preferred Shares. All corporate action necessary
for the Bank to issue the Bank Preferred Shares will be completed upon
completion of the Offering. Accordingly, once the Exchange Event occurs, no
action will be required to be taken by holders of Series A Preferred Shares,
by the Bank or by the Company in order to effect the Automatic Exchange as of
the Time of Exchange.

Holders of Series A Preferred Shares, by purchasing such Series A Preferred
Shares, will be deemed to have agreed to be bound by the unconditional
obligation to exchange such Series A Preferred Shares for Bank Preferred
Shares upon the occurrence of the Exchange Event. The obligation of the
holders of Series A Preferred Shares to surrender such shares and the
obligation of the Bank to issue Bank Preferred Shares in exchange for Series A
Preferred Shares shall be enforceable by the Bank and such holders,
respectively, against the other.

Absent the occurrence of the Exchange Event, no shares of Bank Preferred
Shares will be issued. Upon the occurrence of the Exchange Event, the Bank
Preferred Shares to be issued as part of the Automatic Exchange would
constitute a newly issued series of preferred stock of the Bank and would
constitute 100% of the issued and outstanding shares of Bank Preferred Shares.
Holders of Bank Preferred Shares would have the same dividend rights,
liquidation preference, redemption options and other attributes as to the Bank
as holders of Series A Preferred Shares have as to the Company, except that
the Bank Preferred Shares would not be listed on the NYSE and there would be
no redemption for a Tax Event. Any accrued and unpaid dividends on the Series
A Preferred Shares as of the Time of Exchange would be deemed to be accrued
and unpaid dividends on the Bank Preferred Shares. The Bank Preferred Shares
would rank on an equal basis in terms of dividend payment and liquidation
preference with any outstanding shares of preferred stock of the Bank. The
Bank Preferred Shares will not be registered with the Commission and will be
offered pursuant to an exemption from registration under Section 3(a)(2) of
the Securities Act of 1933, as amended (the "Securities Act"). The Bank does
not intend to apply for listing of the Bank Preferred Shares on any national
securities exchange or for quotation of the Bank Preferred Shares through the
Nasdaq Stock Market. Absent the occurrence of the Exchange Event, however, the

43
<PAGE>

Bank will not issue any Bank Preferred Shares, although the Bank will be able
to issue preferred stock in series other than that of the Bank Preferred
Shares. There can be no assurance as to the liquidity of the trading markets
for the Bank Preferred Shares, if issued, or that an active public market for
the Bank Preferred Shares would develop or be maintained.

Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of Series A Preferred Shares
will have no dividend, voting, liquidation preference or other rights with
respect to any security of the Bank; such rights as are conferred by the
Series A Preferred Shares exist solely as to the Company. See "The Bank--
Description of Bank Preferred Shares."

VOTING RIGHTS

Except as indicated below, the holders of the Series A Preferred Shares will
not be entitled to vote. In the event the holders of Series A Preferred Shares
are entitled to vote as indicated below, each Series A Preferred Share will be
entitled to one vote on matters on which holders of the Series A Preferred
Shares are entitled to vote. There will not be cumulative voting.

If, at the time of any annual meeting of the Company's stockholders for the
election of directors, the Company has failed to pay or declare and set aside
for payment a quarterly dividend during any of the four preceding quarterly
dividend periods on any series of Preferred Stock of the Company, including
the Series A Preferred Shares, the number of directors then constituting the
Board of Directors of the Company will be increased by two (if not already
increased by two due to a default in preferred dividends), and the holders of
the Series A Preferred Shares, voting together with the holders of all other
series of Preferred Stock as a single class, will be entitled to elect such
two additional directors to serve on the Company's Board of Directors at each
such annual meeting. Each director elected by the holders of shares of the
Preferred Stock shall continue to serve as such director until the later of
(i) the full term for which he or she shall have been elected or (ii) the
payment of four quarterly dividends on the Preferred Stock, including the
Series A Preferred Shares.

The affirmative vote or consent of the holders of at least 67% of the
outstanding shares of each series of Preferred Stock of the Company, including
the Series A Preferred Shares, will be required (a) to create any class or
series of stock which shall, as to dividends or distribution of assets, rank
prior to or on a parity with any outstanding series of Preferred Stock of the
Company other than a series which shall not have any right to object to such
creation or (b) alter or change the provisions of the Company's Charter
(including the terms of the Series A Preferred Shares) so as to adversely
affect the voting powers, preferences or special rights of the holders of a
series of Preferred Stock of the Company; provided that if such amendment
shall not adversely affect all series of Preferred Stock of the Company, such
amendment need only be approved by at least 67% of the holders of shares of
all series of Preferred Stock adversely affected thereby.

REDEMPTION

The Series A Preferred Shares will not be redeemable prior to ,
2003 (except upon the occurrence of a Tax Event). On or after such date, the
Series A Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on not less than 30 nor
more than 60 days' notice by mail, at the liquidation preference thereof, plus
the quarterly accrued and unpaid dividend to the date of redemption, if any,
thereon. Nonpayment of dividends does not cause any restriction on the
Company's right to redeem the Series A Preferred Shares.

In the event that fewer than all the outstanding Series A Preferred Shares
are to be redeemed, the number of Series A Preferred Shares to be redeemed
shall be determined by the Board of Directors, and the shares to be redeemed
shall be determined by lot or pro rata as may be determined by the Board of
Directors or by any other method as may be determined by the Board of
Directors in its sole discretion to be equitable, provided that such method
satisfies any applicable requirements of any securities exchange on which the
Series A Preferred Shares are then listed.

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<PAGE>

Unless full dividends on the Series A Preferred Shares have been or are
contemporaneously authorized, declared and paid, or authorized, declared and a
sum sufficient for the payment thereof has been set apart for payment for the
then-current dividend period, no Series A Preferred Shares shall be redeemed
unless all outstanding Series A Preferred Shares are redeemed and the Company
shall not purchase or otherwise acquire any Series A Preferred Shares;
provided, however, that the Company may purchase or acquire Series A Preferred
Shares pursuant to a purchase or exchange offer made on the same terms to
holders of all outstanding Series A Preferred Shares.

The Company will also have the right at any time, upon the occurrence of a
Tax Event, to redeem the Series A Preferred Shares, in whole (but not in part)
at a redemption price of $25.00 per share, plus the quarterly accrued and
unpaid dividend to the date of redemption, if any, thereon. "Tax Event" means
the receipt by the Company of an opinion of a nationally recognized law firm
experienced in such matters to the effect that, as a result of (i) any
amendment to, clarification of, or change (including any announced prospective
change) in, the laws or treaties (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein
affecting taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the interpretation
of such Administrative Action or any interpretation or pronouncement that
provides for a position with respect to such Administrative Action that
differs from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or change is
made known, which amendment, clarification or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Series A Preferred Shares, there is a material risk that (a) dividends paid or
to be paid by the Company with respect to the stock of the Company are not, or
will not be, fully deductible by the Company for United States federal income
tax purposes or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.

RIGHTS UPON LIQUIDATION

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
legally available for distribution to stockholders under applicable law,
before any distribution of assets is made to holders of Common Stock or any
other class of stock ranking junior to the Series A Preferred Shares upon
liquidation, subject to rights of the Company's general creditors and the
rights of holders of any class or series of equity securities having a
preference with respect to distribution upon liquidation, liquidating
distributions in the amount of $25.00 per share, plus the quarterly accrued
and unpaid dividend thereon, if any, to the date of liquidation.

After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
stock of the Company ranking on a parity with the Series A Preferred Shares in
the distribution of assets upon any liquidation, dissolution or winding up of
the affairs of the Company, then the holders of the Series A Preferred Shares
and such other classes or series of stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.

For such purposes, the consolidation or merger of the Company with or into
any other entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
liquidation, dissolution or winding up of the Company.

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<PAGE>

INDEPENDENT DIRECTOR APPROVAL

The terms of the Series A Preferred Shares require that, as long as any
Series A Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors. Delbert J. Wacker and
David J. Blockowicz will be the Company's initial Independent Directors. See
"Management--Independent Directors." As long as there are only two Independent
Directors, any action that requires the approval of a majority of Independent
Directors must be approved by both Independent Directors. In order to be
considered "independent," a director must not be a current officer or employee
of the Company or a current director, officer or employee of the Bank or any
other affiliate of the Bank. In addition, any members of the Board of
Directors of the Company elected by holders of Preferred Stock, including the
Series A Preferred Shares, will be deemed to be Independent Directors for
purposes of approving actions requiring the approval of a majority of the
Independent Directors. The actions which require approval of a majority of the
Independent Directors include (i) the issuance of additional Preferred Stock
ranking senior to, or on a parity with, the Series A Preferred Shares, (ii)
the modification of the general distribution policy or the authorization of
any distribution in respect of Common Stock for any year if, after taking into
account any such proposed distribution, total distributions on the Series A
Preferred Shares and the Common Stock would exceed an amount equal to the sum
of 105% of the Company's "REIT taxable income" (excluding capital gains) for
such year plus net capital gains of the Company for that year, (iii) the
acquisition of real estate assets other than Mortgage Assets, (iv) the
redemption of any shares of Common Stock, (v) the termination or modification
of, or the election not to renew, the Advisory Agreement or the Servicing
Agreement or the subcontracting of any duties under the Servicing Agreement or
the Advisory Agreement to third parties unaffiliated with the Bank, (vi) any
dissolution, liquidation or termination of the Company prior to ,
2003, and (vii) the determination to revoke the Company's REIT status. The
Charter provides that, in determining whether any proposed action requiring
their approval is in the best interests of the Company, the Independent
Directors will consider the interests of holders of both the Common Stock and
the Preferred Stock, including, without limitation, holders of the Series A
Preferred Shares.

RESTRICTIONS ON OWNERSHIP AND TRANSFER

For information regarding restrictions on ownership and transfer of the
Series A Preferred Shares, see "Description of Stock--Restrictions on
Ownership and Transfer."

DESCRIPTION OF STOCK

The following summary of the material terms of the stock of the Company is
qualified in its entirety by reference to the Charter and Bylaws of the
Company, the forms of which have been filed with the Commission as exhibits to
the Registration Statement of which this Prospectus forms a part.

COMMON STOCK

General. The Company is authorized by the Charter to issue up to 1,000
shares of Common Stock. Upon consummation of the Offering and the transactions
described in "Transactions Constituting the Formation," the Company will have
outstanding 1,000 shares of Common Stock, all of which will be held by the
Bank. In addition, the Bank is required to maintain direct or indirect
ownership of at least 80% of the outstanding shares of Common Stock so long as
any Series A Preferred Shares are outstanding.

Dividends. Holders of Common Stock are entitled to receive dividends when,
as and if authorized by the Board of Directors out of assets legally available
therefor, provided that, if the Company fails to authorize and pay or
authorize, declare and set apart full dividends on the Series A Preferred
Shares in any dividend period, the Company may not pay any dividends or other
distributions with respect to the Common Stock until such time as dividends on
all outstanding Series A Preferred Shares have been (i) authorized and paid
for three

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consecutive dividend periods and (ii) authorized, declared and paid, or
authorized, declared and a sum sufficient for the payment thereof has been set
apart for payment, for the fourth consecutive dividend period. In order to
remain qualified as a REIT, the Company must distribute annually at least 95%
of its annual "REIT taxable income" (not including capital gains) to
stockholders. See "Federal Income Tax Consequences--Organizational
Requirements."

Voting Rights. Subject to the rights, if any, of the holders of any class or
series of Preferred Stock, all voting rights are vested in the Common Stock.
The holders of Common Stock are entitled to one vote per share. All of the
issued and outstanding shares of Common Stock are currently held by the Bank.

As the holder of all of the outstanding shares of Common Stock, the Bank
will be able, subject to the terms of the Series A Preferred Shares and any
other class or series of stock subsequently issued by the Company, to elect
and remove directors, amend the Charter, and take such other actions requiring
stockholder approval under the MCGL or otherwise.

Rights Upon Liquidation. In the event of the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the
full preferential amounts to which such holders are entitled, the holders of
Common Stock will be entitled to share equally and ratably in any assets
remaining, after the payment of all debts and liabilities.

PREFERRED STOCK

The Company is authorized by the Charter to issue up to 20 million shares of
Preferred Stock. Subject to limitations prescribed by Maryland law and the
Company's Charter, the Board of Directors or, if then constituted, a duly
authorized committee thereof, is authorized to issue, from the authorized but
unissued shares of stock of the Company, Preferred Stock in such classes or
series as the Board of Directors may determine and to establish, from time to
time, the number of shares of Preferred Stock to be included in any such class
or series and to fix the designation and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of any
such class or series, and such other subjects or matters as may be fixed by
resolution of the Board of Directors.

Upon issuance against full payment of the purchase price therefor, shares of
Preferred Stock will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in Articles
Supplementary relating to that class or series.

Articles Supplementary relating to each class or series of Preferred Stock
will set forth the preferences and other terms of such class or series,
including without limitation the following: (1) the designation of such class
or series; (2) the number of shares of such class or series offered and the
liquidation preference per share of such class or series; (3) the dividend
rate(s), period(s), and/or payment date(s) or method(s) of calculation thereof
applicable to such class or series; (4) whether dividends on such class or
series of Preferred Stock are cumulative or not and, if cumulative, the date
from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the terms
and conditions of redemption, if applicable, of such class or series; (7) the
relative ranking and preferences of such class or series as to dividend rights
and rights upon liquidation, dissolution or winding up of the affairs of the
Company; (8) any limitations on issuance of any class or series of Preferred
Stock ranking senior to or on a parity with such class or series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of the Company; (9) any other specific terms,
preferences, rights, limitations or restrictions of such class or series; and
(10) any voting powers of such class or series.

RESTRICTIONS ON OWNERSHIP AND TRANSFER

The Company's Charter contains certain restrictions on the number of shares
of Preferred Stock that individual stockholders may directly or beneficially
own. For the Company to qualify, and to continue to qualify, as a REIT under
the Code, no more than 50% of the value of its outstanding shares of capital
stock may be

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owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities and using certain constructive ownership
principles) during the last half of a taxable year (other than the first year)
(the "Five or Fewer Test"). The stock of the Company must also be beneficially
owned by 100 or more persons during at least 335 days of a taxable year or
during a proportionate part of a shorter taxable year (other than the first
year) (the "One Hundred Persons Test"). Absent any restrictions on the number
of shares of Preferred Stock that a stockholder may acquire and own (directly
or indirectly), there would be a possibility that the Company might fail the
Five or Fewer Test or the One Hundred Persons Test. In order to avoid the
possibility that the Company may fail the Five or Fewer Test or the One
Hundred Persons Test, the Company has adopted certain share ownership
limitations in its Charter.

Subject to certain exceptions specified in the Company's Charter, no natural
person or entity which is considered to be an individual under the Code is
permitted to own (including shares deemed to be owned by virtue of the
relevant attribution provisions of the Code), more than 5% (the "Ownership
Limit") of any issued and outstanding class or series of Preferred Stock. The
Board of Directors may (but in no event will be required to), upon receipt of
a ruling from the IRS or an opinion of counsel satisfactory to it, raise or
waive the Ownership Limit with respect to a holder if such holder's ownership
will not then or in the future jeopardize the Company's status as a REIT.
Further, the Charter of the Company contains restrictions on the acquisition
and ownership of Preferred Stock intended to ensure compliance with the One
Hundred Persons Test. Such provisions include a restriction that if any
transfer of shares of capital stock of the Company would cause the Company to
be owned by fewer than 100 persons, such transfer shall be null and void and
the intended transferee will acquire no rights to the stock.

The Charter of the Company provides that shares of any class or series of
Preferred Stock owned, or deemed to be owned, by, or transferred to a
stockholder in excess of the Ownership Limit, or which would otherwise cause
the Company to fail to qualify as a REIT (the "Excess Shares"), will
automatically be transferred, by operation of law, to a trustee as a trustee
of a trust for the exclusive benefit of a charity to be named by the Company.
Any distributions paid on the Excess Shares prior to the discovery of the
prohibited transfer or ownership are to be repaid by the transferee to the
trustee; subject to applicable law, any vote of the Excess Shares while the
shares were held by the transferee prior to the Company's discovery of the
prohibited transfer or ownership thereof shall be void and the transferee
shall be deemed to have given its proxy to the trustee; provided, however,
that if the Company has already taken irreversible corporate action, then the
trustee shall not have authority to rescind and recast such vote. Any unpaid
distributions with respect to the transferee will be rescinded as void. In
liquidation, the transferee stockholder's ratable share of the Company's
assets would be limited to the price paid by the transferee for the Excess
Shares or, if no value was given, the price per share equal to the closing
market price on the date of the purported transfer. The trustee of the trust
shall promptly sell the Excess Shares to any person whose ownership is not
prohibited, whereupon the interest of the trust shall terminate. Proceeds of
the sale shall be paid to the transferee up to its purchase price (or, if the
transferee did not purchase the shares, the value on its date of acquisition)
and any remaining proceeds shall be paid to a charity to be named by the
Company.

The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition or ownership of less than
5% of a class or series of issued and outstanding Preferred Stock (or the
acquisition or ownership of an interest in an entity that owns shares of such
series of Preferred Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively
in excess of 5% of such class or series of Preferred Stock, and thus subject
such stock to the applicable Ownership Limit. Direct or constructive ownership
in excess of the Ownership Limit would cause ownership of the shares in excess
of the limit to be transferred to the trustee.

All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.

The Ownership Limit provisions will not be automatically removed even if the
REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration

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limitation is increased. The foregoing restrictions on transferability and
ownership will not apply, however, if the Board of Directors determines that
it is no longer in the best interests of the Company to attempt to qualify, or
continue to qualify, as a REIT.

The Charter of the Company requires that any person who beneficially owns
0.5% (or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred
Stock of the Company must provide certain information to the Company within 30
days of June 30 and December 31 of each year. In addition, each stockholder
shall upon demand be required to disclose to the Company in writing such
information as the Company may request in order to determine the effect, if
any, of such stockholder's actual and constructive ownership on the Company's
status as a REIT and to ensure compliance with the Ownership Limit.

SUPER-MAJORITY DIRECTOR APPROVAL

The Charter of the Company requires approval by two-thirds of the Company's
Board of Directors in order for the Company to file a voluntary petition of
bankruptcy.

BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns, directly or indirectly, 10%
or more of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of such an Interested Stockholder are prohibited for five
years after the most recent date on which the Interested Stockholder becomes
an Interested Stockholder. Thereafter, any such business combination must be
(i) recommended by the board of directors of such corporation and (ii)
approved by the affirmative vote of at least (a) 80% of the votes entitled to
be cast by holders of outstanding voting shares of the corporation and (b)
two-thirds of the votes entitled to be cast by holders of voting shares other
than voting shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Bank beneficially owns more than ten percent of
the Company's voting shares and would, therefore, together with its
affiliates, be subject to the business combination provision of the MGCL.
However, pursuant to the statute, the Company has exempted any business
combinations involving the Bank and any present or future affiliate thereof
and, consequently, the five-year prohibition and the super-majority vote
requirements will not apply to business combinations between any of them and
the Company. As a result, the Bank and any present or future affiliate thereof
may be able to enter into business combinations with the Company that may not
be in the best interest of its stockholders without compliance by the Company
with the super-majority vote requirements and the other provisions of the
statute.

CONTROL SHARE ACQUISITIONS

The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares which, if aggregated with all other such shares previously acquired
which the person is entitled to vote, would entitle the acquiror to vote (i)
20% or more but less than one-third; (ii) one-third or more but less than a
majority; or (iii) a majority of the outstanding shares. Control shares do not
include shares that the acquiring person is entitled to vote on the basis of
prior stockholder approval. A "control share acquisition" means the
acquisition of control shares subject to certain exemptions.

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A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.

The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or excepted by the charter or bylaws
of the corporation prior to a control share acquisition.

The Bylaws of the Company contain a provision exempting from the control
share statute any shares of stock owned by the Bank or any affiliate of the
Bank.

FEDERAL INCOME TAX CONSEQUENCES

GENERAL

The following general summary of material federal income tax considerations
regarding the Offering is based upon current law. The information set forth
below, to the extent that it constitutes summaries of legal matters or legal
conclusions, has been reviewed by Chapman and Cutler, and it is such firm's
opinion that such information is accurate in all material respects. The
discussion below is based on existing U.S. federal income tax law, which is
subject to change, with possible retroactive effect. The discussion below
summarizes the material federal income tax consequences with respect to an
investment in the Series A Preferred Shares, however the discussion does not
address all aspects of taxation that may be relevant given the circumstances
of a particular stockholder or to certain types of stockholders (including
insurance companies, tax-exempt entities, financial institutions or broker-
dealers, foreign corporations and persons who are not citizens or residents of
the United States, except to the extent discussed) subject to special
treatment under the U.S. federal income tax laws.

EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND SALE
OF THE SERIES A PREFERRED SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS
A REAL ESTATE INVESTMENT TRUST, INCLUDING THE U.S. FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

TAXATION OF THE COMPANY

General. The Company will elect to be taxed as a REIT under the Code and the
applicable Treasury Regulations (the "REIT Requirements" or the "REIT
Provisions"), commencing with its taxable year ending December 31, 1998. The
Company believes that, commencing with its taxable year ending, December 31,
1998, it will be owned and organized and will operate in such a manner as to
qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner, but no assurance can be given that it
will operate in a manner so as to qualify or remain qualified as a REIT.

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The REIT Requirements are technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
based in its entirety on the applicable Code provisions, rules and regulations
promulgated thereunder, and administrative and judicial interpretations
thereof.

In the opinion of Chapman and Cutler, commencing with the Company's taxable
year ending December 31, 1998, the Company will be organized in conformity
with the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that this opinion is
based on certain factual assumptions relating to the organization and
operation of the Company and is conditioned upon certain representations made
by the Company as to factual matters, such as the organization and expected
manner of operation of the Company as described herein and including
representations that (i) the Company will be operated as a separate entity
with its own officers, books and records; (ii) the stock of the Bank is not
(directly or indirectly) owned by five of fewer individuals; (iii) at all
times, the Company will beneficially hold all of its assets for investment
purposes and not as (A) stock in trade or other property of a kind which would
properly be includible in inventory if on hand at the close of the taxable
year or (B) property held primarily for sale to customers in the ordinary
course of the Company's trade or business; and (iv) the Company's investment
in mortgage-backed securities will be limited to certain Fannie Mae and/or
Ginnie Mae Platinum Certificates. Moreover, such qualification and taxation as
a REIT depends upon the Company's ability to meet, through actual annual
operating results, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the Code discussed below, the
results of which will not be reviewed by Chapman and Cutler on a continuing
basis. No assurance can be given that the actual results of the Company's
operation for any one taxable year will satisfy such requirements. See "--
Failure to Qualify."

If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is annually distributed to stockholders. Such
treatment substantially eliminates the federal "double taxation" on earnings
(at the corporate and the stockholder levels) that generally results from
investment in a corporation.

Notwithstanding the Company's qualification as a REIT, the Company may be
subject to federal income and excise tax as follows:

First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.

Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preference, if
any.

Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying
net income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income.

Fourth, if the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other
than sales of foreclosure property and sales that qualify for a statutory
safe harbor), such income will be subject to a 100% tax.

Fifth, if the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the
75% or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.

Sixth, if the Company should fail to distribute, or fail to be treated as
having distributed, with respect to each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.

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The Company does not now intend to acquire any appreciated assets from a
corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event
of such an acquisition, the Company could, under certain circumstances, be
subject to tax upon disposition of such assets.

Organizational Requirements. The Code defines a REIT as a corporation,
trust, or association (i) that is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (iii) that
would be taxable as a domestic corporation, but for the REIT Requirements;
(iv) that is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is
held by 100 or more persons; (vi) not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) at any time
during the last half of each taxable year; and (vii) meets certain other
tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (i) through (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made to be taxed
as a REIT. For purposes of condition (vi), certain tax-exempt entities are
generally treated as individuals, and the beneficiaries of a pension trust
that qualifies under Section 401(a) of the Code and that holds shares of a
REIT will be treated as holding shares of the REIT in proportion to their
actuarial interests in the pension trust. See "--Taxation of United States
Stockholders--Treatment of Tax-Exempt Stockholders." In the opinion of Chapman
and Cutler, based on representations made by the Company as to how the Company
will be operated, the Company does not constitute a financial institution
within the meaning of condition (iv) above.

In the opinion of Chapman and Cutler, preferred stock is taken into account
for purposes of determining whether a REIT satisfies conditions (v) and (vi)
above. The Company believes that it will issue sufficient shares pursuant to
the Offering to allow it to satisfy conditions (v) and (vi) above. In
addition, the Company's Charter includes certain restrictions regarding
transfer of its shares, which restrictions are intended to assist the Company
in continuing to satisfy the share ownership requirements described in (v) and
(vi) above. Such transfer and ownership restrictions are described under
"Description of Stock--Restrictions on Ownership and Transfer." Also, while
certain options to acquire stock would be taken into account for the purpose
of determining whether conditions (v) and (vi) are satisfied, in the opinion
of Chapman and Cutler, because of the contingent nature of the Automatic
Exchange, the Automatic Exchange does not constitute an option by the Bank to
acquire the Series A Preferred Shares for this purpose and the possibility
that the Automatic Exchange might occur will not affect the status of the
Company as a REIT prior to an actual occurrence of the Automatic Exchange.

In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company satisfies this requirement.

Income Tests. In order to maintain qualification as a REIT, the Company must
annually satisfy two gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (as interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of income
qualifying for the 75% gross income test listed above, dividends, interest,
and gain from the sale or other disposition of stock or securities and certain
other types of gross income (or from any combination of the foregoing).

For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation must be
secured by real property having a fair market value at the time of acquisition
at least equal to the principal amount of the loan. The term "interest"
includes only an amount that

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constitutes compensation for the use or forbearance of money. For example, a
fee received or accrued by a lender which is in fact a charge for services
performed for a borrower rather than a charge for the use of borrowed money is
not includable as interest; amounts earned as consideration for entering into
agreements to make loans secured by real property, although not interest, are
otherwise treated as within the 75% and 95% classes of gross income so long as
the determination of those amounts does not depend on the income or profits of
any person. By statute, the term interest does not include any amount based on
income or profits except that the Code provides that (i) interest "based on a
fixed percentage or percentages of receipts or sales" is not excluded and (ii)
when the REIT makes a loan that provides for interest based on the borrower's
receipts or sales and a portion of such receipts or sales under one or more
leases is based on income or profits, only a proportionate amount of the
contingent interest paid by the borrower will be disqualified as interest.

The Company anticipates that all the interest on the Mortgage Assets will
satisfy the 75% and 95% gross income tests.

Relief Provisions. If the Company fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even
if these relief provisions apply, a tax would be imposed with respect to the
excess net income.

Asset Tests. At the close of each quarter of its taxable year, the Company
must satisfy three tests relating the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering, or long-term
(at least five years) debt offering of the Company), cash, cash items, and
government securities. The Company anticipates that substantially all of its
assets will fall in this category. Second, not more than 25% of the value of
the Company's total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities.

After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests and to take such
action within 30 days after the close of any quarter as may be required to
cure any noncompliance, but no assurance can be given that such asset tests
will be met.

Annual Distribution Requirements. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount at least equal to (A) the sum of
(i) 95% of the Company's "REIT taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income, if any, from foreclosure property in excess of the special tax
on income from foreclosure property, minus (B) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the
Company does not distribute (or is not treated as having distributed) all of
its net capital gain or distributes (or is treated as having distributed) at
least 95%, but less than 100% of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gains corporate
tax rates.

The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirement. However, under some circumstances, the
payment of dividends on the Series A Preferred Shares could be subject

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to regulatory limitations. See "Risk Factors--Dividend and Operations of the
Company Restricted by Regulation." If the Company fails to declare and pay
full dividends on the Series A Preferred Shares in any dividend period, the
Company may not make any dividends or other distributions (including
redemptions and purchases) with respect to the Common Stock until such time as
dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period. If the Company becomes
subject to this prohibition, it could have REIT taxable income during a
taxable year in excess of the distributions with respect to the Series A
Preferred Shares. It is anticipated that if this should occur, the Company
would be eligible to make and would in fact make so-called consent dividends,
where no actual distributions are made but the Company and the holders of the
Common Stock would be treated solely for tax purposes as if distributions in
the amount of the consent dividends were made.

"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.

It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement the Company may find it necessary to arrange
for borrowings or to pay dividends in the form of taxable stock dividends if
it is practicable to do so.

Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions described above do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in
any year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific
statutory provisions, the Company will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost, and will not be permitted to requalify unless it distributes any
earnings and profits attributable to the period when it failed to qualify.

TAX TREATMENT OF AUTOMATIC EXCHANGE

Upon the occurrence of the Exchange Event, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis for
Bank Preferred Shares. See "Description of Series A Preferred Shares--
Automatic Exchange." The Automatic Exchange will be a taxable exchange with
respect to which each holder of the Series A Preferred Shares will have a gain
or loss, as the case may be, measured by the difference between the basis of
such holder in the Series A Preferred Shares and the fair market value of the
Bank Preferred Shares received in the Automatic Exchange. Assuming that such
holder's Series A Preferred Shares were held as capital assets for the
applicable time period prior to the Automatic Exchange, any gain or loss will
be capital gain or loss. The basis of the holder in the Bank Preferred Shares
will be their fair market value at the time of the Automatic Exchange.

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TAXATION OF UNITED STATES STOCKHOLDERS

As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax
purposes (i) a citizen or resident or the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have authority to control all substantial decisions
of the trust. A "Non-United States Stockholder" is any holder of Series A
Preferred Shares that is not a United States Stockholder.

Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital
gains dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gains dividends will be treated
as long-term capital gain (to the extent they do not exceed the Company's
actual net capital gain) for the taxable year without regard to the period for
which the stockholder has held its stock. However, corporate stockholders may
be required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to applicable provisions of the Code. A distribution in
excess of current or accumulated earnings and profits will first be treated as
a tax-free return of capital, reducing the tax basis in the United States
Stockholder's Series A Preferred Shares, and a distribution in excess of the
United States Stockholder's tax basis in its Series A Preferred Shares will be
taxable gain realized from the sale of such shares. Dividends declared by the
Company in October, November or December of any year payable to a stockholder
of record on a specified date in any such month shall be treated as both paid
by the Company and received by the stockholder on December 31 of such year;
provided that the dividend is actually paid by the Company during January of
the following calendar year. Stockholders may not claim the benefit of any tax
losses of the Company on their own income tax returns.

Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock.

Sale of Shares. Upon a sale or other disposition of the Series A Preferred
Shares, a stockholder of Series A Preferred Shares will generally recognize a
capital gain or loss in an amount equal to the difference between the amount
realized and such stockholder's adjusted basis in such shares, which gain or
loss will be long-term or short-term depending on how long the shares have
been held. The Taxpayer Relief Act of 1997 (the "1997 Act") creates several
maximum rates at which capital gain of an individual may be taxed, depending
upon how long the capital asset is held before its sale. Generally, capital
gain of an individual who is subject to tax at the maximum ordinary income tax
rate is subject to a maximum capital gain tax rate of 20% (or 10% in the case
of certain other taxpayers subject to lower marginal tax rates) if the capital
asset is held for more than 18 months; capital gain realized by such an
individual with respect to a capital asset held for more than one year but not
more than 18 months is subject to a maximum capital gain tax rate of 28%; and
capital gain realized by such an individual with respect to an asset held for
one year or less is subject to tax at the ordinary income tax rates. For
corporate taxpayers, capital gains are currently subject to tax at corporate
ordinary income tax rates. Losses incurred on the sale or exchange of Series A
Preferred Shares held for less than six months will be deemed a long-term
capital loss to the extent of any capital gain dividends received by the
selling stockholder with respect to such shares.

Treatment of Tax-Exempt Stockholders. Distributions from the Company to a
tax-exempt employee's pension trust or other domestic tax-exempt stockholder
will not constitute "unrelated business taxable income" unless the stockholder
has borrowed to acquire or carry its shares of the Company. A tax-exempt
employee's pension trust that holds more than 10% of the shares of the capital
stock of the Company may under certain

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circumstances be required to treat a certain percentage of dividends as
unrelated business taxable income if the Company is "predominantly held" by
qualified trusts. For these purposes, a qualified trust is any trust defined
under the Code and exempt from tax under applicable provisions of the Code. As
a consequence of the look-through provisions of the Code, which generally
affects ownership by pension trusts of shares of REITs, any qualified pension
trust that owns more than 10% of the shares of the capital stock of the
Company might be required to treat a certain portion of the dividends paid as
unrelated business taxable income, if the conditions set forth in the Code are
satisfied. Assuming compliance with the ownership limit described in
"Description of Stock--Restrictions on Ownership," the Company does not
anticipate that such conditions will be satisfied.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
HOLDERS

The following discussion summarizes certain United States federal income tax
consequences of the acquisition, ownership and disposition of the Series A
Preferred Shares by an initial purchaser of the Series A Preferred Shares
that, for United States federal income tax purposes, is not a "United States
person" (a "Non-United States Holder"). For purposes of this discussion, a
"United States person" means: a citizen or individual resident of the United
States; a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof;
an estate the income of which is includable in gross income for United States
federal income tax purposes regardless of its source; or a trust if a United
States court is able to exercise primary supervision over the administration
of the trust and one or more United States persons have the authority to
control all substantial decisions of the trust. This discussion is necessarily
of a general nature and does not consider any specific facts or circumstances
that may apply to a particular Non-United States Holder. Prospective investors
are urged to consult their tax advisors regarding the United States federal
tax consequences of acquiring, holding and disposing of the Series A Preferred
Shares as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.

Dividends. Dividends paid by the Company out of current and accumulated
earnings and profits, as determined for United States federal income tax
purposes, to a Non-United States Holder will generally be subject to
withholding of United States federal income tax at the rate of 30%, unless
reduced or eliminated by an applicable tax treaty or unless such dividends are
treated as effectively connected with a United States trade or business of the
Non-United States Holder. Distributions paid by the Company in excess of its
current and accumulated earnings and profits will be treated first as a
nontaxable return of capital to the extent of the holder's adjusted basis in
his Series A Preferred Shares and, thereafter, as gain from the sale or
exchange of a capital asset as described "--Gain on Disposition." If it cannot
be determined at the time a distribution is made whether such distribution
will exceed the current and accumulated earnings and profits of the Company,
the distribution will be subject to withholding at the same rate as dividends.
Amounts so withheld, however, will be refundable or creditable against the
Non-United States Holder's United States federal income tax liability if it is
subsequently determined that such distribution was, in fact, in excess of the
current and accumulated earnings and profits of the Company provided that the
required information is furnished to the IRS. If the receipt of a dividend is
treated as being effectively connected with the conduct of a United States
trade or business by a Non-United States Holder, the dividend received by such
holder will be subject to United States federal income tax in the same manner
as United States persons generally (and, in the case of a corporate holder,
possibly the branch profits tax).

Gain on Disposition. A Non-United States Holder will generally not be
subject to United States federal income tax on gain recognized on a sale or
other disposition of the Series A Preferred Shares unless (i) the gain is
effectively connected with the conduct of a United States trade or business by
the Non-United States Holder, (ii) in the case of a Non-United States Holder
who is a nonresident alien individual and holds the Series A Preferred Shares
as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other requirements are met, or (iii)
the Series A Preferred Shares constitute "United States real property
interests" ("USRPIs"). The Company does not believe that the Series A
Preferred Shares are, or are likely to become, USRPIs. Gain that is
effectively connected with the conduct of a United States trade or business

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by a Non-United States Holder will be subject to United States federal income
tax in the same manner as United States persons generally (and, in the case of
a corporate holder, possibly the branch profits tax) but will not be subject
to withholding. Non-United States Holders should consult applicable treaties,
which may provide for different rules.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.

United States Stockholders. Under certain circumstances, a United States
Stockholder of Series A Preferred Shares may be subject to backup withholding
at a rate of 31% on payments made with respect to, or cash proceeds of a sale
or exchange of, Series A Preferred Shares. Backup withholding will apply only
if the holder (i) fails to furnish the person required to withhold with its
Taxpayer Identification Number ("TIN") which, for an individual, would be his
or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of interest
and dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. A United States Stockholder should consult with
a tax advisor regarding qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. Backup withholding is not
an additional tax. Rather, the amount of any backup withholding with respect
to a payment to a United States Stockholder will be allowed as a credit
against such United States Stockholder's United States federal income tax
liability and may entitle such United States Stockholder to a refund, provided
that the required information is furnished to the IRS.

Foreign Stockholders. Additional issues may arise pertaining to information
reporting and backup withholding with respect to Foreign Stockholders, and a
Foreign Stockholder should consult with a tax advisor with respect to any such
information reporting and backup withholding requirements. Backup withholding
with respect to a Foreign Stockholder is not an additional tax. Rather, the
amount of any backup withholding with respect to a payment to a Foreign
Stockholder will be allowed as a credit against any United States federal
income tax liability of such Foreign Stockholder. If withholding, results in
an overpayment of taxes, a refund may be obtained, provided that the required
information is furnished to the IRS.

OTHER TAX CONSEQUENCES

The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.

ERISA CONSIDERATIONS

GENERAL

In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), a collective investment fund or separate account in which
such plans invest and any other investor using assets that are treated as the
assets of an employee benefit plan subject to ERISA (each, a "Plan" and
collectively, "Plans") should consider (a) whether the ownership of Series A
Preferred Shares is in accordance with the

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documents and instruments governing such Plan; (b) whether the ownership of
Series A Preferred Shares is solely in the interest of Plan participants and
beneficiaries and otherwise consistent with the fiduciary's responsibilities
and in compliance with the requirements of Part 4 of Title I of ERISA,
including, in particular, the diversification, prudence and liquidity
requirements of Section 404 of ERISA and the prohibited transaction provisions
of Section 406 of ERISA and Section 4975 of the Code; (c) whether the
Company's assets are treated as assets of the Plan; and (d) the need to value
the assets of the Plan annually. In addition, the fiduciary of an individual
retirement arrangement under Section 408 of the Code (an "IRA") considering
the purchase of Series A Preferred Shares should consider whether the
ownership of Series A Preferred Shares would result in a non-exempt prohibited
transaction under Section 4975 of the Code.

The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Code and regulations and
rulings thereunder, and may be changed (perhaps adversely and with retroactive
effect) by future legislative, administrative or judicial actions. PLANS AND
IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD
CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.

PLAN ASSET REGULATION

Under Department of Labor regulations governing what constitutes the assets
of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation," 29
C.F.R. Sec. 2510.3-101), when a Plan or IRA makes an equity investment in
another entity, the underlying assets of the entity will not be considered
Plan Assets if the equity interest is a "publicly-offered security."

For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable," (b) part of a class of
securities that is "widely held," and (c) sold to the Plan or IRA as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may
be allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred. The
Series A Preferred Shares will be registered under the Securities Act and the
Exchange Act within the time periods specified in the Plan Asset Regulation.

The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.

The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable." The Company believes that any
restrictions imposed on the transfer of the Series A Preferred Shares are
limited to the restrictions on transfer generally permitted under the Plan
Asset Regulation and are not likely to result in the failure of the Series A
Preferred Shares to be "freely transferable."

A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan.
However, the Company believes that under the Plan Asset Regulation the Series
A Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to
be assets of any Plan or IRA investing in the Series A Preferred Shares.

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EFFECT OF PLAN ASSET STATUS

ERISA generally requires that the assets of a Plan be held in trust and that
the trustee, or an investment manager (within the meaning of Section 3(38) of
ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, the assets of the Company under
current law do not appear likely to be assets of the Plans receiving Series A
Preferred Shares as a result of the Offering. However, if the assets of the
Company were deemed to be assets of the Plans under ERISA, certain directors
and officers of the Company might be deemed fiduciaries with respect to the
Plans that invest in the Company and the prudence and other fiduciary
standards set forth in ERISA would apply to them and to all investments.

If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with
respect to the investing Plan or IRA could be prohibited transactions unless a
statutory or administrative exemption is available. In addition, investment
authority would also have been improperly delegated to such fiduciaries, and,
under certain circumstances, Plan fiduciaries who make the decision to invest
in the Series A Preferred Shares could be liable as co-fiduciaries for actions
taken by the Company that do not conform to the ERISA standards for
investments under Part 4 of Title I of ERISA.

PROHIBITED TRANSACTIONS

Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit
with a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction
involving the transfer of Plan assets to, or use of Plan assets by or for the
benefit of, a party in interest. Additionally, Section 406 prohibits a Plan
fiduciary from dealing with Plan assets in its own interest or for its own
account, from acting in any capacity in any transaction involving the Plan on
behalf of a party (or representing a party) whose interests are adverse to the
interests of the Plan, and from receiving any consideration for its own
account from any party dealing with the Plan in connection with a transaction
involving Plan assets. Similar provisions in Section 4975 of the Code apply to
transactions between disqualified persons and Plans and IRAs and result in the
imposition of excise taxes on such disqualified persons.

If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.

If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his or her
beneficiary, the IRA would lose its tax-exempt status. The other penalties for
prohibited transactions would not apply.

Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank or
any of their affiliates is a party in interest or disqualified person with
respect to the Plan. Any such prohibited transaction could be treated as
exempt under ERISA and the Code if the Series A Preferred Shares were acquired
pursuant to and in accordance with one or more "class exemptions" issued by
the Department of Labor, such as Prohibited Transaction Class Exemption
("PTCE") 75-1 (an exemption for certain transactions involving employee
benefit plans and broker-dealers (such as the Underwriters), reporting
dealers, and banks), PTCE 84-14 (an exemption for certain transactions
determined by an independent qualified professional asset manager), PTCE 90-1
(an exemption for certain transactions involving insurance company pooled
separate accounts), PTCE 91-38 (an exemption for certain transactions
involving bank collective investment funds), PTCE 95-60 (an exemption for
certain transactions involving an insurance company's general account) and
PTCE 96-23 (an exemption for certain transactions determined by a qualifying
in-house asset manager).

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A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction. However, as indicated above under "--Plan Asset Regulation," the
Company believes that under the Plan Asset Regulation the Series A Preferred
Shares should be treated as "publicly-offered securities" and, accordingly,
the underlying assets of the Company should not be considered to be assets of
any Plan or IRA investing in the Series A Preferred Shares.

UNRELATED BUSINESS TAXABLE INCOME

Plan fiduciaries should also consider the consequences of holding more than
10% of the Series A Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "Federal Income Tax Consequences--Taxation of United
States Stockholders--Treatment of Tax-Exempt Stockholders."

THE BANK

CERTAIN INFORMATION REGARDING THE BANK

General. The Bank is an Illinois banking corporation 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. Harris Bankcorp,
Inc. also owns 13 other banks, 12 in the counties surrounding Chicago and one
in Arizona. Another Chicago metropolitan area multibank holding company,
Harris Bankmont, Inc., was purchased in 1994 by Bankmont Financial Corp.,
which is also the parent company of Harris Bankcorp, Inc. Harris Bankmont,
Inc. owns 13 banks and, together with Harris Bankcorp, is collectively
referred to as "Harris Bank." At September 30, 1997, Harris Bank's assets
amounted to $21.6 billion, with the Bank representing approximately 70% of
that total.

The Bank maintains 60 domestic branch offices, an international banking
facility and 96 automated teller machines in the Chicago metropolitan area.
The Bank also has representative offices in the cities of Los Angeles, New
York and Tokyo; a branch office in Nassau; and an Edge Act subsidiary in New
York, engaged in international banking and finance. At September 30, 1997, the
Bank had total assets of $15.3 billion, total deposits of $10.3 billion, total
loans (net of unearned income) of $8.4 billion and equity capital of $1.3
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, corporate and personal trust services,
charge cards 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 trust and trust-related services (including
global custody, master trust, transfer agent and registrar, and estate
administration).

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 and the FDIC. 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

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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. See "--Regulation and Supervision."

The audited consolidated financial statements of the Bank for the years
ended December 31, 1995 and 1996 are included herein. See "--Selected
Consolidated Financial and Other Data."

Business Environment. As the flagship institution in the organization, the
Bank is an integral part of the organization's current and future business
strategy. The Bank's business environment is characterized by the significant
structural changes common to many U.S. financial services providers. The
Midwest in particular presents an attractive opportunity and the Chicago
metropolitan area a unique market (approximately 8 million people) for the
Bank's growth. The metropolitan Chicago area market represents the most
fragmented market in the U.S. with the top 5 competitors accounting for
slightly less than half of the market (based on deposits), roughly two-thirds
the Midwest average. The Bank, however, believes that the market remains
underserved with a low ratio of branches per person. The Bank is taking
advantage of opportunities presented by these circumstances through:

. capitalizing on a distribution network consisting of 60 locations (along
with 80 other locations owned by affiliates) for marketing a full range
of banking, trust and investment management services

. augmenting its distribution network with direct and alternative channels
of distribution such as electronic banking

. targeting the wealth market given that the Chicago metropolitan area is
among the most affluent markets in the U.S.

. leveraging its position in corporate banking through a financial
advisory service approach and gaining market share in the rapidly
consolidating corporate trust market through internal growth and
potential acquisitions

Although primarily focusing on U.S. domestic customers, identifiable foreign
assets accounted for 6% of the Bank's total consolidated assets at December
31, 1996. For 1996, foreign net income was approximately 16% of the Bank's
consolidated net income. Foreign net 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 $10.0 million.

Household Branch Acquisition. On June 28, 1996 the Bank completed the
acquisition of 54 branches previously owned by Household Bank, f.s.b.
("Household"), a wholly-owned subsidiary of Household International, Inc. The
54 branches are located throughout the Chicago metropolitan area. In addition
to acquiring real and personal property, the Bank has assumed certain deposit
liabilities and purchased other assets, primarily consumer loans. In
anticipation of this transaction, on June 27, 1996 the Bank increased its
capital base by $340 million, in part through a direct cash infusion of $325
million of common equity by Harris Bankcorp, Inc. and the issuance of $15
million of long term subordinated debt.

At the closing, the Bank assumed deposits totaling $2.9 billion. In
addition, the Bank acquired loans amounting to $340 million along with real
property and certain other miscellaneous assets. After paying a purchase price
of $277 million, the Bank received approximately $2.24 billion in cash from
Household as consideration for the deposit liabilities assumed, net of assets
purchased. The purchase price of $277 million was recorded as an intangible
asset, along with certain fair value adjustments and deferred acquisition
costs, resulting in goodwill and other intangibles recognized of $284 million.

Credit Card Portfolio Sale. On September 4, 1997, the Bank announced that it
had entered into a contract to transfer its credit card portfolio to a company
to be owned by BankBoston Corporation, First Annapolis Consulting, Inc. and
Bankmont Financial Corp. The transaction closed January 29, 1998.

At the time of the announcement, the Bank's charge card portfolio balance
amounted to approximately $750 million, representing 5% of the Bank's total
consolidated assets. Upon completion of the transfer, the Bank received cash
and an equity interest in the newly formed company, which it immediately sold
for cash to Bankmont Financial Corp. The impact of this transaction on the
Bank's financial position and future results of operations is not expected to
be material.

61
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated financial data set forth below for each of the
years in the five year period ended December 31, 1996, has been derived from
the Bank's consolidated financial statements included elsewhere herein. The
selected consolidated financial data presented below should be read in
conjunction with the Bank's consolidated financial statements and notes thereto
and other information appearing elsewhere herein.
Comparative Consolidated Statement of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(FULLY TAXABLE EQUIVALENT (FTE) BASIS,
DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees........ $646,767 $608,241 $446,605 $376,820 $429,748
Money market assets:
Deposits at banks........... 30,480 38,153 30,227 23,870 30,691
Federal funds sold and
securities purchased under
agreement to resell........ 11,000 17,833 19,945 14,237 10,108
Trading account.............. 4,969 4,556 2,796 6,537 21,056
Securities held-to-maturity.. -- 51,642 54,221 130,556 134,531
Securities available-for-
sale........................ 188,022 109,048 87,487 -- --
-------- -------- -------- -------- --------
Total interest income 881,238 829,473 641,281 552,020 626,134
-------- -------- -------- -------- --------
INTEREST EXPENSE
Domestic deposits............ 168,431 110,815 87,028 72,556 97,114
Foreign deposits............. 114,299 144,528 90,452 57,850 65,072
Short-term borrowings........ 152,360 165,427 104,640 69,510 98,893
Senior notes................. 22,425 31,125 -- -- --
Long-term notes.............. 19,744 16,881 13,613 20,488 12,953
-------- -------- -------- -------- --------
Total interest expense.... 477,259 468,776 295,733 220,404 274,032
-------- -------- -------- -------- --------
NET INTEREST INCOME.......... 403,979 360,697 345,548 331,616 352,102
Provision for loan losses.... 57,382 42,756 37,308 52,265 55,326
-------- -------- -------- -------- --------
Net Interest Income after
Provision for Loan Losses... 346,597 317,941 308,240 279,351 296,776
-------- -------- -------- -------- --------
NONINTEREST INCOME
Trust and investment
management fees............. 83,195 117,078 115,042 113,193 111,083
Trading account.............. 7,725 4,831 (747) 4,803 (5,389)
Foreign exchange............. 9,978 14,230 19,749 23,804 24,536
Charge card.................. 46,830 41,368 36,997 36,134 35,992
Services fees and charges.... 71,440 58,106 62,224 66,618 70,069
Gain on sales of foreign
claims...................... -- -- -- -- 15,823
Securities gains............. 8,531 23,079 5,117 11,967 3,817
Other........................ 37,801 17,692 18,726 6,607 11,048
-------- -------- -------- -------- --------
Total noninterest income.. 265,500 276,384 257,108 263,126 266,979
-------- -------- -------- -------- --------
NONINTEREST EXPENSES
Employment................... 251,467 247,087 242,498 233,860 216,850
Net occupancy................ 36,530 35,060 34,571 36,688 38,173
Equipment.................... 34,208 35,267 35,076 36,252 39,708
Marketing.................... 24,973 21,335 21,055 19,147 16,879
Communication and delivery... 19,252 17,455 14,974 14,941 15,123
Deposit insurance............ 18,155 4,762 9,726 9,114 10,112
Experts services............. 17,696 18,425 12,428 12,549 12,917
Trust customer charge........ -- -- 51,335 -- --
Writedown of property held
for expansion............... -- -- -- -- 11,802
Other........................ 29,235 34,712 40,360 47,603 56,527
-------- -------- -------- -------- --------
431,516 414,103 462,023 410,154 418,091
Goodwill and other valuation
intangibles................. 14,930 5,969 6,791 7,708 8,469
-------- -------- -------- -------- --------
Total noninterest
expenses................. 446,446 420,072 468,814 417,862 426,560
-------- -------- -------- -------- --------
FTE pretax income............ 165,651 174,253 96,534 124,615 137,195
Applicable income taxes...... 48,179 53,566 12,151 27,243 16,223
FTE adjustment............... 14,391 11,401 16,441 17,915 23,611
-------- -------- -------- -------- --------
Income before cumulative
effect of a change in
accounting principle....... 103,081 109,286 67,942 79,457 97,361
Cumulative effect on prior
years (to December 31, 1992)
of changing the accounting
method for income taxes..... -- -- -- 1,782 --
-------- -------- -------- -------- --------
NET INCOME................ $103,081 $109,286 $ 67,942 $ 77,675 $ 97,361
======== ======== ======== ======== ========
PER COMMON SHARE STATISTICS
Net income per share......... $ 10.31 $ 10.93 $ 6.79 $ 7.77 $ 9.74
Common stock dividends....... 4.19 3.92 3.00 6.25 3.85
AVERAGE SHARES OUTSTANDING
(in thousands).............. 10,000 10,000 10,000 10,000 10,000
PROFITABILITY RATIOS
Net income:
% Average total assets...... 0.77% 0.91% 0.62% 0.79% 0.98%
% Average stockholder's
equity..................... 10.20% 14.07% 9.49% 11.11% 14.73%
CAPITAL RATIOS
Tier 1 leverage ratio....... 6.65% 6.44% 6.60% 7.15% 7.36%
Tier 1 risk-based capital
ratio...................... 7.44% 7.37% 7.82% 8.24% 8.47%
Total risk-based capital
ratio...................... 10.74% 10.86% 11.22% 12.05% 12.48%
NUMBER OF EMPLOYEES AT YEAR-
END (full-time equivalent
basis)...................... 4,813 4,256 4,179 4,293 3,983
</TABLE>

62
<PAGE>

Comparative Consolidated Statement of Condition

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
(DAILY AVERAGES, DOLLARS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and demand balances
due from banks......... $ 1,061,029 $ 1,081,748 $ 1,025,296 $1,028,000 $1,024,439
Money market assets;
Interest-bearing
deposits at banks..... 576,878 556,862 674,738 639,142 639,863
Federal funds sold and
securities purchased
under agreements to
resell................ 199,578 302,398 486,667 416,939 259,457
Portfolio securities:
Held-to-maturity....... -- 622,380 565,901 1,973,420 1,889,119
Available-for-sale..... 2,879,072 1,715,822 1,529,791 4,415 --
Trading account assets.. 70,452 64,777 39,812 110,493 250,578
Domestic loans, net of
unearned income........ 7,618,469 6,826,960 5,797,439 5,246,771 5,380,086
Foreign office loans,
net of unearned income. 59,235 50,183 43,177 55,970 76,787
----------- ----------- ----------- ---------- ----------
Total loans............ 7,677,704 6,877,143 5,840,616 5,302,741 5,456,873
Allowance for possible
loan losses............ (99,381) (89,661) (91,441) (93,516) (94,100)
Premises and equipment.. 164,020 145,659 144,465 149,222 162,304
Customers' liability on
acceptances............ 87,972 104,994 80,813 71,844 104,498
Goodwill and other
valuation intangibles.. 167,767 27,313 30,040 37,243 42,171
Other assets............ 562,002 641,800 566,437 220,419 248,688
----------- ----------- ----------- ---------- ----------
TOTAL ASSETS......... $13,347,093 $12,051,235 $10,893,135 $9,860,362 $9,983,890
=========== =========== =========== ========== ==========
LIABILITIES
Demand deposits......... $ 2,319,943 $ 2,307,609 $ 2,336,834 $2,176,362 $1,922,958
Interest checking
deposits............... 358,230 209,406 234,614 229,481 233,962
Money market accounts... 773,059 525,760 640,269 677,938 752,794
Savings deposits and
certificates........... 1,960,134 884,365 810,840 831,504 913,725
Other time deposits..... 673,968 681,547 719,478 751,011 712,515
Deposits in foreign
officers............... 2,168,342 2,455,804 2,129,070 1,854,646 1,653,201
----------- ----------- ----------- ---------- ----------
Total deposits....... 8,253,676 7,064,491 6,871,105 6,520,942 6,189,155
Short-term borrowings... 3,066,484 2,929,729 2,553,653 2,229,355 2,803,769
Senior notes............ 392,283 512,205 -- -- --
Acceptances outstanding. 87,969 105,064 80,818 73,711 104,501
Other liabilities....... 233,489 426,940 436,894 102,012 87,439
Long-term notes......... 302,705 235,822 235,000 235,000 138,005
----------- ----------- ----------- ---------- ----------
TOTAL LIABILITIES.... 12,336,606 11,274,251 10,177,470 9,161,020 9,322,869
Stockholder's equity.... 1,010,487 776,984 715,665 699,342 661,021
----------- ----------- ----------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S
EQUITY.............. $13,347,093 $12,051,235 $10,893,135 $9,860,362 $9,983,890
=========== =========== =========== ========== ==========
RATIOS (Percentage of
total average assets)
Money market assets..... 5.8% 7.1% 10.7% 10.7% 9.0%
Portfolio securities and
trading account assets. 22.1 19.9 19.6 21.2 21.4
Loans, net of unearned
income................. 57.5 57.1 53.6 53.8 54.7
Deposits................ 61.8 58.6 63.1 66.1 62.0
Short-term borrowings... 23.0 24.3 23.4 22.6 28.1
Common stockholder's
equity................. 7.6 6.4 6.6 7.1 6.6
SELECTED YEAR-END DATA
Loans, net of unearned
income................. $ 8,147,180 $ 7,459,857 $ 6,356,771 $5,924,320 $5,300,023
Allowance for possible
loan losses............ 108,408 94,153 90,492 93,990 94,258
Total assets............ 14,206,666 11,970,485 11,928,006 10,224,452 9,581,034
Deposits................ 9,726,205 7,030,551 7,015,566 6,552,316 6,070,590
Long-term subordinated
notes.................. 310,000 295,000 235,000 235,000 235,000
Common stockholder's
equity................. 1,192,566 837,241 729,731 734,451 695,134
YEAR-END STOCKHOLDER'S
EQUITY PER COMMON
SHARE.................. $ 119.26 $ 83.72 $ 72.97 $ 73.45 $ 69.51
</TABLE>

63
<PAGE>

The data presented for the quarter and nine months ending September 30, 1997
and 1996 are unaudited but have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting of
normal, recurring accruals that the Bank considers necessary for a fair
presentation of the financial position and results of operations for the
periods presented. Operating results for the period ended September 30, 1997,
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1997. The selected financial data presented
below should be read in conjunction with the Bank's consolidated financial
statements and notes thereto and other information appearing elsewhere herein.

Comparative Consolidated Average Statement of Condition

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(UNAUDITED, DAILY
AVERAGES,
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks.............. $1,157,522 $1,065,573
Money market assets:
Interest-bearing deposits at banks.................. 557,034 686,479
Federal funds sold and securities purchased under
agreement to resell................................ 235,564 154,197
Portfolio securities available-for-sale.............. 3,811,632 2,948,318
Trading account assets............................... 50,834 60,104
Domestic loans, net of unearned income............... 8,132,273 7,817,121
Foreign office loans, net of unearned income......... 96,529 56,877
----------- -----------
Total loans....................................... 8,228,802 7,873,998
Allowance for possible loan losses................... (105,231) (103,575)
Premises and equipment............................... 215,585 178,489
Customers' liability on acceptances.................. 48,513 89,280
Goodwill and other valuation intangibles............. 291,282 305,772
Other assets......................................... 642,112 486,651
----------- -----------
TOTAL ASSETS...................................... $15,133,649 $13,745,286
=========== ===========
LIABILITIES
Demand deposits...................................... $ 2,516,457 $ 2,259,273
Interest checking deposits........................... 398,343 507,367
Money market accounts................................ 1,081,123 1,026,308
Savings deposits and certificates.................... 2,955,941 2,953,661
Other time deposits.................................. 1,079,494 516,216
Deposits in foreign offices.......................... 1,909,231 1,519,709
----------- -----------
Total deposits.................................... 9,940,589 8,782,534
Short-term borrowings................................ 2,798,269 2,761,099
Senior notes......................................... 596,304 441,483
Acceptances outstanding.............................. 48,513 89,280
Other liabilities.................................... 182,278 206,732
Long-term notes...................................... 325,000 310,000
----------- -----------
TOTAL LIABILITIES................................. 13,890,953 12,591,128
Stockholder's equity................................. 1,242,696 1,154,158
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $15,133,649 $13,745,286
=========== ===========
RATIOS (Percentage of total average assets)
Money market assets.................................. 5.2% 6.1%
Portfolio securities and trading account assets...... 25.5 21.9
Loans, net of unearned income........................ 54.4 57.3
Deposits............................................. 65.7 63.9
Short-term borrowings................................ 18.5 20.1
Common stockholder's equity.......................... 8.2 8.4
SELECTED QUARTER-END DATA
Loans, net of unearned income........................ $ 8,382,298 $ 7,859,330
Allowance for possible loan losses................... 107,180 108,949
Total assets......................................... 15,291,169 15,112,902
Deposits............................................. 10,321,268 10,000,953
Long-term subordinated notes......................... 325,000 310,000
Common stockholder's equity.......................... 1,250,375 1,156,355
QUARTER-END COMMON STOCKHOLDER'S EQUITY PER COMMON
SHARE............................................... $ 125.04 $ 115.64
</TABLE>

64
<PAGE>

Comparative Consolidated Average Statement of Condition

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(UNAUDITED, DAILY
AVERAGES,
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks.............. $ 1,140,334 $ 1,037,872
Money market assets:
Interest-bearing deposits at banks.................. 603,063 516,449
Federal funds sold and securities purchased under
agreement to resell................................ 212,667 205,602
Portfolio securities available-for-sale.............. 3,605,054 2,814,895
Trading account assets............................... 58,376 70,847
Domestic loans, net of unearned income............... 8,084,638 7,537,108
Foreign office loans, net of unearned income......... 85,974 55,662
----------- -----------
Total loans....................................... 8,170,612 7,592,770
Allowance for possible loan losses................... (106,281) (97,217)
Premises and equipment............................... 204,121 157,451
Customers' liability on acceptances.................. 64,408 86,987
Goodwill and other valuation intangibles............. 295,385 122,161
Other assets......................................... 649,526 548,206
----------- -----------
TOTAL ASSETS...................................... $14,897,265 $13,056,023
=========== ===========
LIABILITIES
Demand deposits...................................... $ 2,477,475 $ 2,304,578
Interest checking deposits........................... 437,857 316,092
Money market accounts................................ 1,093,632 675,934
Savings deposits and certificates.................... 2,981,234 1,624,230
Other time deposits.................................. 839,304 759,181
Deposits in foreign offices.......................... 1,759,204 2,274,132
----------- -----------
Total deposits.................................... 9,588,706 7,954,147
Short-term borrowings................................ 2,785,284 3,133,415
Senior notes......................................... 733,059 393,976
Acceptances outstanding.............................. 64,424 86,982
Other liabilities.................................... 194,559 238,837
Long-term notes...................................... 315,110 300,255
----------- -----------
TOTAL LIABILITIES................................. 13,681,142 12,107,612
Stockholder's equity................................. 1,216,123 948,411
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $14,897,265 $13,056,023
=========== ===========
RATIOS (Percentage of total average assets)
Money market assets.................................. 5.5% 5.5%
Portfolio securities and trading account assets...... 24.6 22.1
Loans, net of unearned income........................ 54.8 58.2
Deposits............................................. 64.4 60.9
Short-term borrowings................................ 18.7 24.0
Common stockholder's equity.......................... 8.2 7.3
SELECTED PERIOD-END DATA
Loans, net of unearned income........................ $ 8,382,298 $ 7,859,330
Allowance for possible loan losses................... 107,180 108,949
Total assets......................................... 15,291,169 15,112,902
Deposits............................................. 10,321,268 10,000,953
Long-term subordinated notes......................... 325,000 310,000
Common stockholder's equity.......................... 1,250,375 1,156,355
QUARTER-END COMMON STOCKHOLDER'S EQUITY PER COMMON
SHARE............................................... $ 125.04 $ 115.64
</TABLE>

65
<PAGE>

Comparative Consolidated Statement of Income

<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(UNAUDITED, FULLY TAXABLE
EQUIVALENT (FTE) BASIS)
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees.............. $175,947 $168,386 $519,710 $479,548
Money market assets:
Deposits at banks................. 7,120 9,118 24,036 20,443
Federal funds sold and securities
purchased under agreement to
resell........................... 3,457 2,132 9,216 8,373
Trading account.................... 1,029 1,116 3,015 3,757
Securities available-for-sale...... 60,835 49,603 176,397 138,132
-------- -------- -------- -------- ---
Total interest income........... 248,388 230,355 732,374 650,253
-------- -------- -------- -------- ---
INTEREST EXPENSE
Domestic deposits.................. 63,961 55,608 180,276 113,729
Foreign deposits................... 26,257 19,619 70,542 90,065
Short-term borrowings.............. 37,048 35,179 108,545 115,535
Senior notes....................... 8,433 6,437 31,594 16,723
Long-term notes.................... 5,389 4,790 14,792 14,783
-------- -------- -------- --------
Total interest expense.......... 141,088 121,633 405,749 350,835
-------- -------- -------- --------
NET INTEREST INCOME................ 107,300 108,722 326,625 299,418
Provision for loan losses.......... 15,466 14,981 46,555 43,307
-------- -------- -------- --------
Net Interest Income after Provision
for Loan Losses................... 91,834 93,741 280,070 256,111
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management
fees.............................. 25,978 19,704 74,791 62,070
Trading account.................... 735 626 3,130 4,132
Foreign exchange................... 1,348 1,692 3,462 8,686
Charge card........................ 12,877 13,007 37,142 33,891
Service fees and charges........... 21,968 20,649 62,856 51,456
Securities gains................... 5,742 664 9,518 4,110
Other.............................. 15,166 8,970 38,806 28,042
-------- -------- -------- --------
Total noninterest income........ 83,814 65,312 229,705 192,387
-------- -------- -------- --------
NONINTEREST EXPENSES
Employment......................... 75,516 65,657 220,470 187,327
Net occupancy...................... 12,066 10,030 34,312 26,034
Equipment.......................... 10,344 8,453 29,234 24,905
Marketing.......................... 5,127 6,573 16,167 17,301
Communication and delivery......... 5,455 4,742 15,601 14,005
Deposit insurance.................. 628 18,363 1,826 18,399
Expert services.................... 8,600 3,896 21,544 11,282
Other.............................. 9,432 8,533 28,220 21,181
-------- -------- -------- --------
127,168 126,247 367,374 320,434
Goodwill and other valuation
intangibles....................... 6,235 6,079 18,505 8,885
-------- -------- -------- --------
Total noninterest expenses...... 133,403 132,326 385,879 329,319
-------- -------- -------- --------
FTE pretax income.................. 42,245 26,727 123,896 119,179
Applicable income taxes............ 11,405 6,121 34,810 34,088
FTE adjustment..................... 3,978 4,695 11,730 10,758
-------- -------- -------- --------
NET INCOME...................... $ 26,862 $ 15,911 $ 77,356 $ 74,333
======== ======== ======== ========
EARNINGS PER SHARE (based on
10,000,000 average shares
outstanding)...................... $ 2.69 $ 1.59 $ 7.74 $ 7.43
Common stock dividends............. 0.80 1.74 3.04 3.34
PROFITABILITY RATIOS
Net income:
% Average total assets............ 0.70% 0.46% 0.69% 0.76%
% Average common stockholder's
equity........................... 8.58 5.48 8.50 10.47
CAPITAL RATIOS
Tier 1 leverage ratio............. 6.61 6.69 6.61 6.69
Tier 1 risk-based capital ratio... 7.38 7.39 7.38 7.39
Total risk-based capital ratio.... 10.63 10.75 10.63 10.75
</TABLE>

66
<PAGE>

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

Third Quarter 1997 Compared to Third Quarter 1996

The Bank's net income for the third quarter of 1997 was $26.9 million
compared to $15.9 million in the year ago quarter. 1996 results included a
one-time $10.0 million after-tax charge resulting from legislation to re-
capitalize the Savings Association Insurance Fund ("SAIF"). Excluding the SAIF
charge, earnings increased 4% from the same quarter a year ago.

Third quarter net interest income on a fully taxable equivalent basis of
$107.3 million compared to $108.7 million a year ago. Average earning assets
rose 9% to $12.90 billion from $11.79 billion in 1996, primarily attributable
to an increase of $863 million or 29% in portfolio securities available-for-
sale and an increase of 5% or $355 million in average loans. Commercial and
residential real estate lending were strong contributors to this growth.
Funding for this asset growth came primarily from other time deposits and
foreign time deposits, which increased by an average of $563 million and $390
million, respectively. The remainder was spread between Now accounts, money
market accounts, savings deposits and certificates, and short-term borrowings.
Net interest margin declined to 3.30% from 3.67% in the same quarter last
year, reflecting a higher average cost of funds. The Bank's declining net
interest margin principally reflects strong earning asset growth and slower
core deposit growth. As a result, much of the incremental supporting
liabilities are wholesale funds with higher effective rates. In addition, the
current mix of earning assets includes a higher percentage of investment
securities and a lower percentage of consumer loans, resulting in a lower
yield on earning assets than in the prior year's third quarter.

The third quarter 1997 provision for loan losses was $15.5 million compared
to $15.0 million for the third quarter of 1996. Net charge-offs increased from
$11.2 million to $18.5 million in the current quarter, primarily reflecting
higher charge card portfolio writeoffs.

Noninterest income increased $18.5 million, or 28%, from third quarter 1996.
In the current quarter trust fees rose by $6.3 million and service charge fees
increased $1.3 million. Securities gains improved $5.1 million compared to
third quarter 1996. Foreign exchange income declined $0.3 million and charge
card income declined $0.1 million. Other income, which includes syndication
fees, foreign fees, bank-owned life insurance and gains on mortgage sales,
increased $6.2 million from 1996.

Third quarter noninterest expenses of $133.4 million rose $1.1 million from
third quarter last year. Excluding the one-time $16.7 million SAIF assessment,
noninterest expenses increased 15%, reflecting continued growth and
development of certain lines of business.

Additional commentary on the matters included in the above summary is
provided in the following sections of this report.

Nine Months Ended September 30, 1997 Compared to 1996

The Bank's earnings for the nine months ended September 30, 1997 were $77.4
million compared to $74.3 million a year ago. 1996 results included a $10.0
million one-time after-tax charge for the recapitalization of the Savings
Association Insurance Fund ("SAIF"). Excluding the impact of this charge,
earnings declined 8% for the first nine months of 1997 versus the comparable
period of 1996. Earnings comparability between years was affected by the June
1996 purchase of Household Bank's Chicagoland retail banking business. In
addition to the impact of the Household transaction, during the first quarter
a year ago the Bank realized a $2.4 million after-tax gain from the sale of
its securities custody and related trustee services business for large
institutions. Excluding the impact of the Household transaction (which
includes the SAIF charge) and the gain from the sale of the custody business
for large institutions, core earnings decreased 2% from a year ago.

Net interest income on a fully taxable equivalent basis was $326.6 million
in the current period, an increase of $27.2 million or 9% from $299.4 million
in the first nine months of 1996. Average earning assets increased to $12.69
billion from $11.23 billion a year ago, attributable to an increase of 17% in
interest bearing deposits at

67
<PAGE>

banks, a 28% increase in portfolio securities and an 8% increase in average
loans. Commercial and residential real estate lending were the leading
contributors to this growth. Incremental funding came primarily from Now
accounts, money market accounts and savings deposits and certificates, which
increased $122 million, $418 million and $1.36 billion, respectively. Net
interest margin declined to 3.44% from 3.56% in 1996, reflecting a higher
average cost of funds. The declining net interest margin principally reflects
earning asset growth funded primarily by non-core deposits. As a result, much
of the incremental supporting liabilities are wholesale funds with higher
effective rates.

The 1997 provision for loan losses of $46.6 million was up $3.3 million from
$43.3 million a year ago. Net charge-offs increased by $14.5 million to $47.8
million, primarily reflecting higher charge card portfolio writeoffs.

Noninterest income increased $37.3 million to $229.7 million in 1997
compared to a year ago. During the first quarter of 1996, the Bank sold its
securities custody and related trustee services business for large
institutions, recording a $4.0 million pretax gain. In the current year, trust
income increased $12.7 million, charge card income increased $3.3 million and
service charge fees increased $11.4 million. Foreign exchange income declined
$5.2 million. Other sources of noninterest income which include syndication
fees, gains on mortgage loan sales and fees on letters of credit increased
$10.8 million. Without the contribution from the Household transaction and the
sale of the custody business for large institutions, the Corporation's
noninterest income would have increased $35.4 million or 19% from the prior
year.

Noninterest expenses of $385.9 million rose $56.6 million from a year ago.
Excluding all Household-related charges, total noninterest expenses increased
$36.2 million or 12% in 1997 compared to a year earlier, primarily
attributable to the cost of a property lease cancellation and the one-time
cost of systems conversions in addition to normal expense increases associated
with business expansion.

Average Earning Assets
Net Interest Margin

<TABLE>
<CAPTION>
DAILY AVERAGE BALANCES NINE MONTHS ENDED SEPTEMBER
(IN MILLIONS) QUARTER ENDED SEPTEMBER 30, 30,
AVERAGE RATES EARNED AND ------------------------------ ------------------------------
PAID 1997 1996 1997 1996
(FULLY TAXABLE EQUIVALENT -------------- -------------- -------------- --------------
BASIS) BALANCES RATES BALANCES RATES BALANCES RATES BALANCES RATES
------------------------- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets. $12,901 7.64% $11,790 7.77% $12,690 7.72% $11,234 7.73%
======= ======= ======= =======
Interest-bearing
liabilities............ $11,093 5.05 $ 9,971 4.84 $10,890 4.98 $ 9,413 4.98
Noninterest-bearing
sources of funds....... 1,808 1,819 1,800 1,821
------- ------- ------- -------
Total supporting
liabilities........... $12,901 4.34 $11,790 4.10 $12,690 4.28 $11,234 4.17
======= ======= ======= =======
Net interest margin
(related to average
interest-earning
assets)................ 3.30% 3.67% 3.44% 3.56%
==== ==== ==== ====
</TABLE>

Third quarter net interest income on an FTE basis was $107.3 million
compared to $108.7 million for the third quarter 1996. Average earning assets
increased 9% or $1.1 billion and net interest margin, the other principal
determinant of net interest income, declined from 3.67% to 3.30% in the
current quarter.

Average loans rose $355 million, or 5%. Commercial and residential real
estate loans increased $749 million and $141 million, respectively, somewhat
offset by a decrease in installment loans, charge card loans and finance and
mortgage loans of $242 million, $202 million and $125 million, respectively.
Average portfolio securities were up 29%, or $863 million, primarily
reflecting increased holdings of U.S. Federal agency securities. Total money
market assets declined $48 million or 6% over third quarter 1996 levels.

Funding for this asset growth came primarily from other time deposits and
foreign time deposits, which increased by an average of $563 million and $390
million, respectively. The remainder was spread between Now accounts, money
market accounts, savings deposits and certificates, and short-term borrowings.

68
<PAGE>

The Corporation's declining net interest margin principally reflects strong
earning asset growth and slower core deposit growth. As a result, much of the
incremental supporting liabilities are wholesale funds with higher effective
rates. In addition, the mix of earning assets includes a higher percentage of
investment securities and a lower percentage of consumer loans, resulting in a
lower yield on earning assets.

For the first nine months of 1997, net interest income on an FTE basis was
$326.6 million, an increase of $27.2 million or 9% from $299.4 million in the
same period a year ago. Average earning assets increased to $12.69 billion
from $11.23 billion a year ago, primarily attributable to an increase in both
portfolio securities and loans of $790 million and $578 million, respectively.
Net interest margin declined to 3.44% from 3.56% in 1996, principally
reflecting a higher average cost of funds. The average cost of funds has
increased because incremental funding for asset growth has primarily come in
the form of higher-cost wholesale funds.

Capital Position

The Bank's total equity capital at September 30, 1997 was $1.25 billion,
compared with $1.19 billion and $1.16 billion at December 31, 1996 and
September 30, 1996, respectively. During the preceding twelve months, the Bank
declared common dividends of $38.9 million.

U.S. banking regulators issued risk-based capital guidelines, based on the
international "Basle Committee" agreement, which are applicable to all U.S.
banks and bank holding companies. These guidelines serve to: 1) establish a
uniform capital framework which is more sensitive to risk factors, including
off-balance sheet exposures; 2) promote the strengthening of capital
positions; and 3) diminish a source of competitive inequality arising from
differences in supervisory requirements among countries. The guidelines
specify minimum ratios for Tier 1 capital to risk-weighted assets of 4% and
total regulatory capital to risk-weighted assets of 8%.

Risk-based capital guidelines define total capital to consist 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 equal at least
50% 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 Bank's Tier
1 and total risk-based capital ratios were 7.38% and 10.63%, respectively, at
September 30, 1997.

Another regulatory capital measure, the Tier 1 leverage ratio, is computed
by dividing period-end Tier 1 capital by adjusted quarterly average assets.
The Federal Reserve 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, including those experiencing or
anticipating significant growth, are expected to maintain a ratio which
exceeds the 3 percent minimum by at least 100 to 200 basis points. The Bank's
Tier 1 leverage ratio was 6.61% for the third quarter of 1997.

The Federal Deposit Insurance Corporation Improvement Act of 1991 contains
provisions that establish five capital categories for all FDIC-insured
institutions ranging from "well capitalized" to "critically undercapitalized."
Based on those regulations that became effective on or before September 30,
1997, the Bank was designated as "well capitalized," the highest capital
category.

Capital adequacy guidelines generally restrict the inclusion of intangible
assets in Tier 1 capital; however, mortgage servicing rights and the premium
on purchased credit card relationships may be included with (i.e., not
deducted from) Tier 1 capital provided that certain percentage limitations are
not violated. Identifiable intangibles acquired before February 19, 1992
continue to be included with Tier 1 capital. All other intangibles (including
core deposit premiums and goodwill), along with amounts in excess of the above
limits, are deducted from Tier 1 capital for purposes of risk-based and
leverage capital ratio calculations. At September 30, 1997, the Bank's
intangible assets totaled $284 million, including approximately $269 million
of intangibles excluded under capital guidelines. The Bank's tangible Tier 1
leverage ratio (which excludes all intangibles) was 6.51% for the third
quarter of 1997.

69
<PAGE>

The following is a summary of the Bank's capital ratios:

<TABLE>
<CAPTION>
SEPTEMBER DECEMBER SEPTEMBER
30, 1997 31, 1996 30, 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets (end of period)............ $15,291,169 $14,206,666 $15,112,902
=========== =========== ===========
Average assets (quarter)................ $15,133,649 $14,213,973 $13,745,286
=========== =========== ===========
Risk-based on-balance sheet assets...... $ 9,746,351 $ 9,357,673 $ 9,262,597
=========== =========== ===========
Risk-based off-balance sheet assets..... $ 3,829,482 $ 3,399,172 $ 3,256,364
=========== =========== ===========
Total risk-based assets, net of
deductions (based on regulatory
accounting principles)................. $13,303,823 $12,478,998 $12,236,612
=========== =========== ===========
Tier 1 capital.......................... $ 982,148 $ 928,872 $ 904,021
=========== =========== ===========
Supplementary capital................... $ 432,180 $ 411,408 $ 411,949
=========== =========== ===========
Total capital, net of deductions (based
on regulatory accounting principles)... $ 1,414,242 $ 1,340,198 $ 1,315,910
=========== =========== ===========
Tier 1 leverage ratio................... 6.61% 6.65% 6.69%
Risk-based capital ratios
Tier 1................................ 7.38% 7.44% 7.39%
Total................................. 10.63% 10.74% 10.75%
</TABLE>

Nonperforming Assets

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans...................... $25,749 $17,879 $23,078
Restructured loans.................... -- 40 40
------- ------- -------
Total nonperforming loans........... 25,749 17,919 23,118
Other assets received in satisfaction
of debt.............................. 778 582 142
------- ------- -------
Total nonperforming assets.......... $26,527 $18,501 $23,260
======= ======= =======
Nonperforming loans to total loans
(end of period)...................... 0.31% 0.22% 0.30%
Nonperforming assets to total loans
(end of period)...................... 0.32% 0.23% 0.30%
90-day past due loans still accruing
interest............................. $55,462 $41,119 $37,166
======= ======= =======
</TABLE>

Nonperforming assets consist of loans placed on nonaccrual status when
collection of interest is doubtful, restructured loans on which interest is
being accrued but which have terms that have been renegotiated to provide for
a reduction of interest or principal, and real estate or other assets which
have been acquired in full or partial settlement of defaulted loans. These
assets, as a group, are not yielding at rates comparable to earning assets.

Nonperforming assets at September 30, 1997 totaled $27 million, or .32% of
total loans, up from $19 million or .23% of total loans at December 31, 1996
and up from $23 million or .30% of loans a year earlier.

Interest shortfall for the quarter ended September 30, 1997 was $1.0 million
compared to $1.8 million in the third quarter a year ago. For the first nine
months of 1997, interest shortfall was $2.4 million compared to $4.6 million
in the comparable 1996 period.

Impaired loans are defined as those where it is probable that amounts due
according to contractual terms, including principal and interest, will not be
collected. Both nonaccrual and certain restructured loans meet this
definition. Impaired loans are measured by the Bank at the present value of
expected future cash flows or, alternatively, at the fair value of collateral.
Known losses of principal on these loans have been charged off.

70
<PAGE>

Interest income on nonaccrual loans is recognized only at the time cash is
received and only if the collection of the entire principal balance is
expected. Interest income on restructured loans is accrued according to the
most recently agreed upon contractual terms.

Allowance for Possible Loan Losses

<TABLE>
<CAPTION>
IMPAIRED LOANS IMPAIRED LOANS
FOR WHICH THERE IS FOR WHICH THERE IS TOTAL IMPAIRED
RELATED ALLOWANCE NO RELATED ALLOWANCE LOANS
------------------ -------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SEPTEMBER 30, 1997
Balance................. $20,145 $ 5,604 $25,749
Related allowance....... 4,597 -- 4,597
------- ------- -------
Balance, net of
allowance.............. $15,548 $ 5,604 $21,152
======= ======= =======
DECEMBER 31, 1996
Balance................. $ 2,394 $15,485 $17,879
Related allowance....... 2,308 -- 2,308
------- ------- -------
Balance, net of
allowance.............. $ 86 $15,485 $15,571
======= ======= =======
SEPTEMBER 30, 1996
Balance................. $ 5,469 $17,609 $23,078
Related allowance....... 4,618 -- 4,618
------- ------- -------
Balance, net of
allowance.............. $ 851 $17,609 $18,460
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS
QUARTER ENDED ENDED SEPTEMBER
SEPTEMBER 30, 30,
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average impaired loans......................... $27,475 $24,149 $27,655 $32,261
Total interest income on impaired loans........ $ 17 $ 15 $ 75 $ 119
Interest income on impaired loans recorded on a
cash basis.................................... $ 17 $ 15 $ 75 $ 119
</TABLE>

The Bank's provision for loan losses for the current quarter of $15.5
million was approximately $0.5 million higher than last year's third quarter.
Net charge-offs increased from $11.2 million to $18.5 million for the current
quarter, bringing net charge-offs on a year-to-date basis to $47.8 million
compared to $33.3 million in the same 1996 period. The increase in third
quarter net charge-offs was primarily attributable to higher write-offs of
charge card, commercial and installment balances in the third quarter of 1997
compared to the same quarter last year. For the third quarter of 1997, net
charge-offs related to charge card, commercial and installment loans were
$13.3 million, $3.7 million and $1.5 million, respectively, compared to $9.6
million, $1.3 million and $0.2 million, respectively, for the third quarter of
1996.

At September 30, 1997, the allowance for possible loan losses was $107
million, equal to 1.30% of total loans outstanding, down from $109 million or
1.41% of total loans one year ago; the allowance as a percentage of
nonperforming loans decreased from 471% at September 30, 1996, to 416% at
September 30, 1997.

71
<PAGE>

<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period........... $110,230 $105,158 $108,408 $ 94,153
-------- -------- -------- --------
Charge-offs............................ (20,636) (14,583) (54,682) (41,601)
Recoveries............................. 2,120 3,393 6,899 8,290
-------- -------- -------- --------
Net charge-offs........................ (18,516) (11,190) (47,783) (33,311)
Provision charged to operations........ 15,466 14,981 46,555 43,307
Allowance related to acquired loans.... -- -- -- 4,800
-------- -------- -------- --------
Balance at September 30................ $107,180 $108,949 $107,180 $108,949
======== ======== ======== ========
Net charge-offs as a percentage of
provision charged to operations....... 120% 75% 103% 77%
Allowance for possible loan losses to
nonperforming loans (period-end)...... 416% 471%
Allowance for possible loan losses to
nonperforming assets (period-end)..... 404% 468%
Allowance for possible loan losses to
total loans outstanding (period-end).. 1.30% 1.41%
</TABLE>

1996 Compared to 1995

The Bank's 1996 net income was $103.1 million. Earnings and return on
average common equity ("ROE") comparability between years was affected by the
June 1996 purchase of Household Bank's Chicagoland retail banking business. As
part of the Household transaction, the Bank was assessed a one-time $10
million after-tax charge resulting from third quarter 1996 legislation to
recapitalize the Savings Association Insurance Fund ("SAIF"). This charge
should significantly reduce the Bank's obligation for future deposit insurance
premiums. In addition to the Household acquisition, the Bank's earnings
comparability was affected by net gains from debt portfolio securities
transactions amounting to $23.1 million in 1995 compared to an $8.5 million
net gain for 1996. Most of the 1995 gains were recognized during the second
quarter when conditions in the U.S. bond market led to significant price
rallies and profit opportunities not typically available. Excluding the effect
of these debt portfolio securities gains and the impact of the Household
transaction (which includes the $10 million after-tax SAIF charge), 1996
earnings increased 19% from 1995. This increase in earnings is attributable to
strong business growth across corporate, private and retail banking, and to
sustained cost control.

ROE for 1996, excluding the Household transaction, was 13.80% and return on
average assets ("ROA") was 0.88%. For 1995, ROE was 14.07% and ROA was 0.91%.

For 1996, net interest income on a fully taxable equivalent basis of $404.0
million was up 12% from 1995. Net interest margin decreased from 3.55% to
3.53% in 1996, while average earning assets rose 13% from $10.15 billion to
$11.45 billion, and average loans increased 12% or $807 million. Excluding the
contribution of the Household transaction, net interest income would have
increased $17.8 million or 5% year-to-year.

Noninterest income decreased 4% to $265.5 million for 1996, primarily
because of the reduction in net gains from debt portfolio securities
transactions and a $33.9 million or 29% decline in trust fees. While personal
and corporate trust fees grew strongly during 1996, total trust fees and
related noninterest expenses decreased as a result of the Bank's sale of its
securities custody and related trustee services business for large
institutions in January 1996.

Total noninterest expenses were $446.4 million in the current year.
Excluding the effect of charges related to the acquisition and ongoing
operations of the Household retail banking business acquired at the end of
second quarter 1996 (including the one-time special SAIF assessment), expenses
declined by 7% compared to 1995.

72
<PAGE>

Income taxes decreased by $5.4 million during 1996 primarily reflecting
lower pretax income.

The 1996 provision for loan losses of $57.4 million was up $14.6 million
from $42.8 million in 1995. Net loan charge-offs during 1996 were $47.9
million compared to $39.1 million in 1995, primarily reflecting higher
writeoffs in the charge card portfolio.

Nonperforming assets at December 31, 1996, totaled $18.5 million, or 0.2% of
total loans compared to $37.4 million or 0.5% at the end of the previous year.
At December 31, 1996, the allowance for possible loan losses was $108.4
million or 1.3% of total loans outstanding compared to $94.2 million or 1.3%
of loans at the end of 1995. As a result, the ratio of the allowance for
possible loan losses to nonperforming assets increased from 252% at December
31, 1995, to 586% at December 31, 1996.

At December 31, 1996, the Bank's consolidated equity capital amounted to
$1.19 billion, up from $837 million at December 31, 1995. The increase
resulted from a $325 million equity infusion by Harris Bankcorp, Inc., and
earnings for the prior twelve months, offset somewhat by $31 million of after-
tax unrealized holding losses related to the Bank's debt and equity securities
classified as available for sale. Also, the Bank paid $41.9 million of
dividends on common stock. In conjunction with the acquisition of Household
Bank's Chicagoland retail banking business, the Bank increased its capital
base by $340 million, in part through the issuance of $15 million of long term
subordinated debt. The balance of the capital, $325 million, was provided via
the aforementioned infusion of equity by Harris Bankcorp, Inc.

The Bank's regulatory capital leverage ratio was 6.65% compared to 6.44% one
year earlier. Regulators require most banking institutions to maintain capital
leverage ratios of not less than 4.0%. At December 31, 1996, the Bank's Tier 1
and Total Risk-based capital ratios were 7.44% and 10.74%, respectively,
compared to respective ratios of 7.37% and 10.86% at December 31, 1995. The
1996 year-end ratios substantially exceeded minimum required regulatory ratios
of 4.0% and 8.0%, respectively.

1995 Compared to 1994

The Bank's 1995 net income was $109.3 million, up 61% from $67.9 million in
1994. For 1995, the return on average common equity was 14.07% and the return
on average assets was 0.91%, compared to returns of 9.49% and 0.62%,
respectively, in 1994. Year to year earnings comparisons were significantly
affected by a one-time $33.4 million after-tax charge in 1994 resulting from
management's decision to absorb the impact of higher interest rates on
mortgage-backed securities held in certain customer accounts of the Bank's
Securities Lending unit. The Bank's Securities Lending unit had invested in
floating rate mortgage-backed securities with caps on interest ranging from
8.5% to 10% as agent on behalf of customers since 1991, with the total
positions growing to $2.3 billion (representing about one-third of total
customer positions) by the second quarter of 1994. Activity in these accounts
was governed by individual customer agreements that specified in general terms
requirements for investing in high credit-quality instruments with shorter
term maturities. The Bank had discretion to invest on behalf of customers
under these terms. Bank management believed that the securities satisfied
customer guidelines at the time of their acquisition. Subsequent to March 31,
1994, however, rising short-term rates substantially extended the average
duration of the securities. Given customer expectations and a concern that
further rate increases could have a disproportionate negative impact on market
values, the Bank made a decision to eliminate all the mortgage-backed
securities from these customer accounts and absorb the full loss on behalf of
customers. The decision reflected the incompatibility of the recently extended
duration of the securities with the fundamental nature of these customer
accounts, and to maintain customer relationships. As a result of the January
1996 sale of its securities custody and related trustee services business for
large institutions, the Bank has exited the securities lending business.
Excluding the effect of the securities lending charge, returns on average
common equity and average assets were, respectively, 14.16% and 0.93% in 1994,
compared to 14.07% and 0.91% in 1995; and 1995 earnings increased by 8%
compared to 1994. The earnings gain was attributable to strong growth and
business momentum broadly across the Bank and in particular loan growth in
corporate banking, community banking and the credit card business; sustained
cost control, overhead reduction and operations consolidation; gains from
securities transactions; and reduced FDIC premiums.

73
<PAGE>

Net interest income on a fully taxable equivalent ("FTE") basis was $360.7
million in 1995, up $15.2 million or 4% from $345.5 million in 1994. Average
earning assets rose 11% to $10.14 billion from $9.14 billion in 1994,
attributable to an increase of 18% or $1.04 billion in average loans. Net
interest margin declined to 3.55% in 1995 from 3.78% in 1994, reflecting rate
compression in certain asset categories, a lower mix of noninterest-bearing
deposits, and the relationship which existed in the markets between short and
longer term rates.

Noninterest income increased $19.3 million or 7% in 1995, to $276.4 million.
In 1995, net gains from the sale of debt securities amounted to $23.1 million,
compared to $5.1 million in 1994. Most of these 1995 gains were recognized in
the second quarter when conditions in the U.S. bond market led to significant
price rallies. This enabled the Bank to sell certain U.S. government agency
securities and reinvest the proceeds to reposition its portfolio, taking
advantage of profit opportunities not typically available. Money market and
bond trading profits increased by $5.5 million in 1995, while charge card fees
increased $4.4 million, and trust and investment management revenue rose $2.0
million. Other sources of non-interest income, which include fees for letters
of credit, corporate finance income and gains on asset sales, decreased $1.0
million year to year. Service charges declined by $4.1 million due to the
higher interest rate environment and to customer refunds with respect to FDIC
insurance. Foreign exchange revenue decreased by $5.5 million. This revenue is
now reported net of expenses under a new profit sharing arrangement with Bank
of Montreal effective April 3, 1995.

Noninterest expenses in 1995 declined to $420.1 million from $468.8 million
in the previous year, reflecting the one-time $51.3 million (pretax) charge in
the securities lending unit in 1994 and lower FDIC insurance premiums in 1995.
Excluding the effect of these two events, noninterest expenses increased by
2%.

Income taxes increased by $41.4 million in 1995, reflecting substantially
higher pretax income and a smaller tax-exempt municipal bond portfolio.

The 1995 provision for loan losses was $42.8 million, up from $37.3 million
in 1994. Net loan charge-offs for the current year were $39.1 million, down
from $40.8 million in 1994, resulting primarily from lower write-offs in the
commercial loan and real estate mortgage loan portfolios.

Nonperforming assets at December 31, 1995 totaled $37.4 million or 0.5% of
total loans, down from $65.3 million or 1.03% of loans at December 31, 1994.
At December 31, 1995, the allowance for possible loan losses was $94.2 million
or 1.3% of total loans outstanding, compared with $90.5 million or 1.4% of
loans at the end of 1994. As a result, the ratio of the allowance for possible
loan losses to nonperforming assets increased from 139% at December 31, 1994,
to 252% at December 31, 1995. During the first quarter of 1995, the Bank
adopted Statement of Financial Accounting Standards ("SFAS") No. 114--
Accounting by Creditors for Impairment of a Loan and SFAS No. 118--Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures.
SFAS No. 114 addresses accounting by creditors for impairment of certain
loans. It requires that impaired loans within the scope of the statement
(primarily commercial credits) be 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. The Bank determines loan impairment when assessing the
adequacy of the allowance for possible loan losses. SFAS No. 118 permits
existing income recognition practices to continue. The adoption of these
Statements did not have a material impact on the Bank's net income or
financial position.

At December 31, 1995, the Bank's consolidated equity capital increased
$107.5 million from 1994 year-end to $837 million. The increase resulted from
earnings for the prior twelve months and $37.4 million of after-tax unrealized
holding gains related to the Bank's debt and equity securities classified as
available for sale. Also, the Bank paid $39.2 million of dividends. To support
continued business growth and expansion, effective December 27, 1995, the Bank
increased its capital base by $60 million by issuing long-term subordinated
debt, purchased by Harris Bankcorp, Inc.

74
<PAGE>

The Bank's regulatory capital leverage ratio was 6.44% for fourth quarter
1995 compared to 6.60% for fourth quarter 1994. Regulators require most
banking institutions to maintain capital leverage ratios of not less than
4.0%. At December 31, 1995, the Bank's Tier 1 and Total Risk-based capital
ratios were 7.37% and 10.86%, respectively, compared to respective ratios of
7.82% and 11.22% at December 31, 1994. The 1995 year-end ratios substantially
exceeded minimum required regulatory ratios of 4.0% and 8.0%, respectively.

RECENT DEVELOPMENTS

Announcement of Parent Merger Agreement

On January 23, 1998, Bank of Montreal, the indirect owner of all of the
Bank's Common Stock, announced that it has agreed to merge with Royal Bank of
Canada as equal partners. This transaction is subject to regulatory and
shareholder approval.

1997 Financial Results

The Bank's 1997 net income was $104.3 million, up $1.2 million or 1% from
1996, reflecting continued strong business and revenue growth somewhat offset
by higher noninterest expenses.

Net interest income on a fully taxable equivalent basis was $437.0 million,
up $33.0 million or 8% from 1996. Average earning assets rose $1.4 billion or
12% to $12.8 billion in the current year, attributable to an increase of $798
million in debt securities and $563 million in average loans. Commercial and
retail mortgage lending were the strongest contributors to this loan growth.
Net interest margin declined to 3.40% from 3.53% in 1996, principally
reflecting a higher average cost of funds.

Noninterest income of $311.8 million was up $46.3 million or 17% in 1997
from last year. Trust and investment management fees rose $19.5 million or 23%
while service charges on deposits were up $12.8 million or 18%. Other income,
which includes syndication fees, foreign fees, and gains on mortgage sales,
increased $12.0 million from 1996. Net portfolio gains were $12.8 million
currently compared to $8.5 million a year ago.

Noninterest expenses were $522.5 million in 1997. The first six months of
the prior year did not include operating expenses associated with the
Household transaction or the related amortization of goodwill and other
intangible assets. Excluding the impact of the Household transaction, total
expenses increased 13% for the year ended December 31, 1997.

The 1997 provision for loan losses at the Bank of $58.4 million was up from
$57.4 million in 1996. Net loan charge-offs during the current year were $67.1
million compared to $47.9 million last year, with most of the increase
attributable to write-offs in the credit card portfolio. As previously
announced, the Bank has entered into an agreement to sell its credit card
business.

Nonperforming assets at December 31, 1997 totaled $8 million, or 0.1% of
total loans, compared to $19 million or 0.2% a year ago. At December 31, 1997,
the allowance for possible loan losses was $100 million, equal to 1.2% of
loans outstanding compared to $108 million at the end of 1996, equal to 1.3%
of loans outstanding. The ratio of the allowance for possible loan losses to
nonperforming assets rose from a multiple of 5.9 at December 31, 1996 to 12.6
at December 31, 1997.

At December 31, 1997, equity capital of the Bank amounted to $1.28 billion,
up from $1.19 billion at December 31, 1996. The leverage capital ratio was
6.55% for fourth quarter 1997 compared to 6.65% in the same quarter one year
earlier.

75
<PAGE>

MANAGEMENT OF THE BANK

The persons who are directors of the Bank are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ------------------
<S> <C> <C>
Alan G. McNally.......................................... 52 Chairman of the
Board of Directors
Pastora San Juan Cafferty................................ 57 Director
F. Anthony Comper........................................ 52 Director
Susan T. Congalton....................................... 51 Director
Wilbur H. Gantz.......................................... 60 Director
James J. Glasser......................................... 63 Director
Dr. Leo M. Henikoff...................................... 58 Director
Richard M. Jaffee........................................ 62 Director
Edward W. Lyman, Jr...................................... 55 Director
Charles H. Shaw.......................................... 65 Director
Richard E. Terry......................................... 60 Director
James O. Webb............................................ 66 Director
</TABLE>

The Bank's Board of Directors consists of twelve members, who are all also
directors of Harris Bankcorp, Inc. Directors are elected annually. Each
present director, except Mrs. Congalton (an attorney), has been employed in an
executive capacity by his or her employer for at least the past five years.
Set forth below is certain biographical information concerning each director,
including principal occupation, the year first elected a director of the Bank
and other directorships.

Pastora San Juan Cafferty, Professor, University of Chicago, and a Director
of WMX Technologies, Peoples Energy Corporation and Kimberly-Clark
Corporation. Elected in 1997.

F. Anthony Comper, President and Chief Operating Officer and a Director of
Bank of Montreal. Elected in 1990.

Susan T. Congalton, Managing Director, Lupine Partners (private
investments). Elected in 1988.

Wilbur H. Gantz, President and Chief Executive Officer of PathoGenesis
Corporation (diagnostic health care) and a Director of W.W. Grainger, Gillette
Corporation and Bank of Montreal. Elected in 1984.

James J. Glasser, Chairman Emeritus of GATX Corporation (capital equipment
and services for extracting, processing and distributing dry and liquid bulk
commodities) and a Director of The B.F. Goodrich Company and Stone Container
Corporation. Elected in 1980.

Dr. Leo M. Henikoff, President, and Chief Executive Officer of Rush-
Presbyterian-St. Luke's Medical Center (health care and related services).
Elected in 1986.

Richard M. Jaffee, Chairman, Oil-Dri Corporation of America (a developer,
manufacturer and marketer of sorbent products). Elected in 1995.

Edward W. Lyman, Jr., Vice Chair of the Board of the Bank and Harris
Bankcorp, Inc. Elected in 1995.

Alan G. McNally, Chairman of the Board and Chief Executive Officer of the
Bank and Harris Bankcorp, Inc. Elected in 1993.

Charles H. Shaw, Chairman, The Charles H. Shaw Company (real estate
development). Elected in 1990.

Richard E. Terry, Chairman and Chief Executive Officer, Peoples Energy
Corporation (public utility), and a Director of Amsted Industries. Elected in
1992.

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James O. Webb, President, James O. Webb & Associates, Inc. (consultant in
new ventures and business development). Elected in 1995.

In addition to Messrs. McNally and Lyman, the Bank had fourteen executive
officers at December 31, 1997--Harry G. Ackstein, age 59, Jeffrey D.
Butterfield, age 51, Charles H. Davis, age 55, Michael E. Godwin, age 48,
Pierre O. Greffe, age 45, Louis F. Lanwermeyer, age 49, Michael B. Lowe, age
52, Scott B. McCallum, age 38, Richard J. Moreland, age 51, Paul V. Reagan,
age 51, William E. Thonn, age 49, Charles R. Tonge, age 50, Edward J.
Williams, age 55, and Sohrab Zargham, age 56. Each officer, other than Mr.
Reagan, who was, prior to 1995, Managing Director and Counsel with Bankers
Trust Company, has held executive positions with the Bank or an affiliate for
at least the past five years.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Directors and officers of the Bank and their associates were customers of
and had transactions with the Bank in the ordinary course of business during
1997. All outstanding loans, commitments, financing leases, transactions in
money market instruments and deposit relationships included in such
transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others and did not involve more than a normal risk of
collectibility or present other unfavorable features.

The Bank's common stock is owned indirectly by Bank of Montreal. During
1997, the Bank engaged in various transactions with Bank of Montreal and its
subsidiaries. These transactions included the payment by Bank of Montreal and
receipt by the Bank of service fees and occupancy expenses, and purchasing and
selling Federal funds, repurchase and reverse repurchase agreements, long-term
borrowings and interest rate and foreign exchange 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 1997, the
Bank received from Bank of Montreal a total of approximately $14.3 million for
all the above transactions, primarily for trust services, data processing and
other operations support provided by the Bank.

In order to facilitate the Bank's exit from the securities custody and
related trustee services business for large institutions, the Bank and
Bankmont Financial Corp. entered into an agreement effective December 31,
1996, whereby Bankmont Financial Corp. assumes responsibility for potential
costs (subject to limits) related to certain litigation matters involving the
Bank. As part of this agreement, Bankmont Financial Corp. incurred $2.7
million of costs through the date of the agreement and $1.3 million more
through December 31, 1997. In return for assuming this obligation, Bankmont
Financial Corp. is entitled to receive funds from a contingent revenue
arrangement between the Bank and Citibank. No amounts were received in 1997.
Management anticipates that this arrangement will be concluded in the first
quarter of 1998 upon receipt by Bankmont Financial Corp. of a payment between
$2.8 million and $3.5 million. Bankmont Financial Corporation paid the Bank
$480,000 as consideration for accepting this arrangement, which was recorded
as income.

The Bank and Bank of Montreal combine their U.S. foreign exchange activities
under an agreement whereby foreign exchange net profit is shared by the Bank
and Bank of Montreal in accordance with a specific formula. This agreement
expires in April 2002 but may be extended at that time. Either party may
terminate the arrangement at its option. Foreign exchange revenues are
reported net of expenses. The Bank's 1997 foreign exchange revenues included
$5.4 million under this agreement.

PROPERTY

The Bank's headquarters and main banking premises are located at 111 West
Monroe Street, Chicago, Illinois. This bank and office building complex is
comprised of three connected buildings containing a total of approximately
1,590,000 gross square feet. Approximately 54 percent of the rentable space is
committed to use by the Bank. Virtually all of the remaining space in the
entire building complex has been rented to tenants,

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including Bank of Montreal. The Bank holds title to this property. The Bank
also owns its operations center. This 15-story building contains approximately
415,000 gross square feet and is totally dedicated to Bank use. It is located
at 311 West Monroe Street. Nonbank subsidiaries, certain branches and
divisions of the Bank and certain other subsidiaries conduct activities from
leased premises. In 1990 and 1991, the Bank purchased air rights and a 72,000
square foot parcel of vacant land in Chicago's downtown business district.
Construction plans for a new operations and office building complex on this
site were deferred.

LITIGATION

The Bank is a defendant 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.

DESCRIPTION OF BANK PREFERRED SHARES

Absent the occurrence of an Exchange Event, no Bank Preferred Shares will be
issued. Upon the occurrence of an Exchange Event, the Bank Preferred Shares to
be issued as part of the Automatic Exchange would constitute a newly issued
series of Preferred Shares of the Bank and would constitute 100% of the issued
and outstanding Bank Preferred Shares. The Bank Preferred Shares would have a
liquidation preference of $25.00 per share and be subject to redemption by the
Bank on the same terms as the Series A Preferred Shares (except that there
would be no redemption for a Tax Event). In the event of a liquidation of the
Bank, the claims of the Bank's depositors and of its secured, senior, general
and subordinated creditors would be entitled to a priority of payment over the
dividend and other claims of holders of equity interests such as the Bank
Preferred Shares. Nonpayment of dividends does not cause any restriction on
the Bank's right to redeem the Bank Preferred Shares. Any accrued and unpaid
dividends on the Series A Preferred Shares as of the Exchange Event would be
accounted for as accrued and unpaid dividends on the Bank Preferred Shares.
The Bank Preferred Shares would rank equal to in terms of dividend payments
and liquidation preference, or senior to, any outstanding Preferred Shares of
the Bank. The Bank Preferred Shares would not entitle the holders to vote
except in the same circumstances as the Series A Preferred Shares. Dividends
on the Bank Preferred Shares would be non-cumulative and payable at the rate
of % per annum of the liquidation preference, if, when and as authorized by
the board of directors of the Bank. For a description of restrictions on the
Bank's ability to pay dividends, including dividends on the Bank Preferred
Shares, see "The Bank--Supervision and Regulation--Dividend Limitations."
Potential investors in the Series A Preferred Shares should carefully consider
the information set forth herein under the heading "Risk Factors--Automatic
Exchange for Bank Preferred Shares," "--Bank Preferred Shares Will Not Be
Listed on any Exchange" and "--Risk Factors." The Bank does not intend to
apply for listing of the Bank Preferred Shares on any national securities
exchange or for quotation of the Bank Preferred Shares through the Nasdaq
Stock Market. Absent the occurrence of an Exchange Event, however, the Bank
will not issue any Bank Preferred Shares, although the Bank will be able to
issue Preferred Shares in series other than that of the Bank Preferred Shares.
There can be no assurance as to the liquidity of the trading markets for the
Bank Preferred Shares, if issued, or that an active public market for the Bank
Preferred Shares would develop or be maintained.

SUPERVISION AND REGULATION

General

Banks are extensively regulated under federal and state laws. As a result,
the business, financial condition and prospects of the Bank can be materially
affected not only by management decisions and general economic conditions, but
also by applicable statutes and regulations and other regulatory
pronouncements and policies promulgated by regulatory agencies with
jurisdiction over the Bank, such as the Board of Governors, the Federal
Deposit Insurance Corporation (the "FDIC") and the Illinois Office of Banks
and Real Estate. The effect of such statutes, regulations and other
pronouncements and policies can be significant, cannot be predicted with a
high degree of certainty and can change over time. Furthermore, such statutes,
regulations and other pronouncements and policies are generally intended to
protect the Bank's depositors and the FDIC's deposit insurance funds, not to
protect holders of securities such as the Bank Preferred Shares.

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Banks are subject to enforcement actions by their regulators for legal and
regulatory violations. In addition to compliance with statutory and regulatory
limitations and requirements concerning financial and operating matters, the
Bank must file periodic and other reports and information with its regulators
and is subject to examination by each of its regulators.

In addition to banking laws, regulations and regulatory agencies, the Bank
and its affiliates are subject to various other laws, regulations and
regulatory agencies, all of which directly or indirectly affect the Bank's
operations and management.

References to and descriptions of the regulation of banks contained herein
constitute brief summaries of the material legal restrictions and requirements
applicable to the Bank . The following discussion is not intended to
constitute, and does not purport to be, a complete statement of all legal
restrictions and requirements applicable to the Bank.

The statutory requirements applicable to, and regulatory supervision of,
banks have increased significantly and have undergone substantial change in
recent years. To a great extent, these changes are embodied in the Financial
Institutions Reform, Recovery and Enforcement Act ("FIRREA"), enacted in
August 1989, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), enacted in December 1991, and the regulations promulgated under
FIRREA and FDICIA. Their impact on the business, financial condition and
prospects of the Bank cannot be predicted with certainty.

The Bank also is affected by the fiscal and monetary policies of the federal
government and its agencies, including the Board of Governors. An important
purpose of these policies is to curb inflation and control recessions through
control of the supply of money and credit. The Board of Governors uses its
powers to regulate reserve requirements of its member banks and the discount
rate on its member banks' borrowings, and to conduct open market operations in
United States government securities so as to exercise control over the supply
of money and credit. These policies have a direct effect on the amount of the
Bank's loans and deposits and on the interest rates charged on loans and paid
on deposits, with the result that federal policies have a material effect on
the Bank's earnings. Future policies of the Board of Governors and other
authorities cannot be predicted, nor can their effect on future Bank earnings
be predicted. Similarly, future changes in state and federal laws and wage,
price and other economic restraints of the federal government, if any, cannot
be predicted, nor can their effect on future Bank earnings be predicted.

Banks located in Illinois were traditionally restricted as to the number and
geographic location of branches which they could establish. The Illinois
Banking Act was amended in June 1993, however, to eliminate such branching
restrictions. Accordingly, banks located in Illinois are now permitted to
establish branches anywhere in Illinois without regard to the location of
other banks' main offices or the number of branches previously maintained by
the bank establishing the branch.

Capital Requirements

Regulatory capital requirements applicable to banking organizations have
increased significantly in recent years and further increases are possible in
future periods. The Board of Governors has adopted risk-based capital
standards for state member banks like the Bank. The articulated objectives of
the Board of Governors in establishing a risk-based method of measuring
capital adequacy are (i) to make regulatory capital requirements applicable to
banks more sensitive to differences in risk profiles among banks, (ii) to
factor off-balance sheet liabilities into the assessment of capital adequacy,
(iii) to reduce disincentives for banks to hold liquid, low risk assets and
(iv) to achieve greater consistency in the evaluation of capital adequacy of
major banking organizations throughout the world by conforming to the
framework developed jointly by supervisory authorities from countries that are
parties to the "Basle Accord" adopted by such supervisory authorities in July
1988.

The Board of Governors requires banks to maintain a minimum ratio of
qualifying capital to total risk-adjusted assets. Banking organizations,
however, generally are expected to operate well above the minimum risk-

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based ratios. Risk-adjusted assets include a "credit equivalent amount" of
off-balance sheet items, determined in accordance with conversion formulae set
forth in the Board of Governors' regulations. Each asset and off balance sheet
item, after certain adjustments, is assigned to one of four risk weighting
categories, 0%, 20%, 50% or 100%, and the resulting risk-weighted values of
such items are then added together to determine a bank's aggregate risk-
weighted assets.

Current capital regulations require that a bank maintain "core" or "Tier 1"
capital equal to 4% of risk-adjusted assets and total capital equal to 8% of
risk-adjusted assets. Tier 1 capital must represent at least 50% of total
capital and consists of those items defined in applicable regulations as core
capital elements. Core capital elements include common stockholders' equity;
qualifying noncumulative perpetual preferred stock; and minority interests in
the equity accounts of consolidated subsidiaries. Core capital excludes
goodwill and other intangible assets required to be deducted in accordance
with applicable regulations.

Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists of a
limited amount of allowances for loan and lease losses; perpetual preferred
stock and related surplus (to the extent not included in Tier 1 capital);
hybrid capital instruments; mandatory convertible debt securities; term
subordinated debt; and intermediate term preferred stock, in each case subject
to applicable regulatory limitations. In determining total capital, a bank
must deduct from the sum of Tier 1 and Tier 2 capital its investments in
unconsolidated subsidiaries; reciprocal holdings of certain securities of
banking organizations; and other items required by regulation or determined to
be necessary on a case-by-case basis by the appropriate supervisory authority.

Another capital measure, the "Tier 1 leverage ratio," is defined as Tier 1
capital divided by quarterly average total assets (net of allowance for losses
and goodwill). The minimum leverage ratio is 3% for banking organizations that
do not anticipate significant growth and that have well-diversified risk
(including no undue interest rate risk), excellent asset quality, high
liquidity and good earnings. Other banking organizations are expected to have
ratios of at least 4%-5%, depending upon their particular condition and growth
plans. Higher capital ratios could be required if warranted by the particular
circumstances or risk profile of a given banking organization.

Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. An institution may be deemed to be in a
capitalization category that is one level lower than is indicated by its
actual capital position if, among other things, it receives an unsatisfactory
examination rating.

Under Board of Governors regulations, an institution is well capitalized if
it is not subject to any specific capital order or directive and it has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6%, and a leverage ratio of at least 5%. For an institution
to be adequately capitalized it must have a total risk-based capital ratio of
at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage
ratio of at least 4% (or in some cases 3%).

FDICIA generally prohibits a depository institution from making capital
distributions (including payment of dividends) if the depository institution
would thereafter be undercapitalized. "Undercapitalized" depository
institutions are subject to supervisory restrictions and must submit capital
restoration plans to their regulators. In order to be accepted by the
appropriate regulator, a bank's capital restoration plan must be guaranteed by
its holding company, up to certain limits.

"Significantly undercapitalized" depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator, and even prior to such appointment may be prohibited
from making payments with respect to subordinated debt.

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Any failure of a bank to meet its required capital ratios could result in
supervisory action, including an inability to obtain approval of regulatory
applications, an increased frequency of examination and, in the most severe
cases, placing the institution into conservatorship or receivership. The
nature and intensity of the supervisory action would depend upon the level of
noncompliance.

As of September 30, 1997, the Bank qualified as "well capitalized," with a
total risk-based capital ratio of 10.63%; a Tier 1 risk-based capital ratio of
7.38% and a leverage ratio of 6.61%.

Other Financial Institution Regulation

Transactions with Affiliates. Transactions between a bank and its holding
company or other affiliates are subject to various restrictions imposed by
statutes and by state and federal regulatory agencies. Such transactions
include loans and other extensions of credit, purchases of securities and
other assets, and payments of fees or other distributions. In general, these
restrictions limit the amount of transactions between an institution and an
affiliate of such institution, as well as the aggregate amount of transactions
between an institution and all of its affiliates, impose collateral
requirements in some cases, and require transactions with affiliates to be on
terms comparable to those for transactions with unaffiliated entities.

Dividend Limitations. As an Illinois state-chartered bank, the Bank may not
pay dividends in an amount greater than its current net profits after
deducting losses and bad debts out of undivided profits. For the purpose of
determining the amount of dividends that an Illinois bank may pay, bad debts
are defined as debts upon which interest is past due and unpaid for a period
of six months or more unless such debts are well-secured and in the process of
collection. In addition to the foregoing, the ability of the Bank to pay
dividends may be affected by restrictions imposed by the Board of Governors
and by the various minimum capital requirements and the capital and noncapital
standards established under FDICIA described above.

The Board of Governors permits a state member bank such as the Bank to pay
dividends, while it continues its banking operations, in an amount not greater
than its net profits then on hand, after deducting therefrom its losses and
bad debts. No state member bank may pay as a dividend a portion of its paid-in
capital and no state member bank may pay dividends if its accumulated losses
equal or exceed its undivided profits then on hand. Additionally, it is the
Board of Governors' view that a state member bank experiencing earnings
weaknesses should not pay cash dividends exceeding current net income or that
only can be funded in ways that weaken such bank's financial health, such as
by borrowing.

Under FDICIA, the Bank may not pay a dividend if, after paying the dividend,
the Bank would be undercapitalized.

Standards for Safety and Soundness. The Federal Deposit Insurance Act (the
"FDIA"), as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994, requires the Board of Governors, together
with the other federal bank regulatory agencies, to prescribe standards of
safety and soundness, by regulations or guidelines, relating generally to
operations and management, asset growth, asset quality, earnings, stock
valuation, and compensation. The Board of Governors and the other federal bank
regulatory agencies have in place a set of guidelines prescribing safety and
soundness standards pursuant to FDICIA, as amended. The guidelines establish
general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice
and describe compensation as excessive when the amounts paid are unreasonable
or disproportionate to the services performed by an executive officer,
employee, director or principal shareholder. In addition, the Board of
Governors adopted regulations that authorize, but do not require, the Board of
Governors to order an institution that has been given notice by the Board of
Governors that it is not satisfying any of such safety and soundness standards
to submit a compliance plan. If, after being so notified, an institution fails
to submit an acceptable compliance plan or fails in any material respect to

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implement an accepted compliance plan, the Board of Governors must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association
is subject under the "prompt corrective action" provisions of FDICIA. If an
institution fails to comply with such an order, the Board of Governors may
seek to enforce such order in judicial proceedings and to impose civil money
penalties. The Board of Governors and the other federal bank regulatory
agencies also adopted guidelines for asset quality and earnings standards.

Other FDICIA Provisions. A range of other provisions in FDICIA include
requirements applicable to: (i) real estate lending standards for banks, which
provide guidelines concerning loan-to-value ratios for various types of real
estate loans; (ii) rules requiring depository institutions to develop and
implement internal procedures to evaluate and control credit and settlement
exposure to their correspondent banks; (iii) rules implementing the FDICIA
provision prohibiting, with certain exceptions, state member banks from making
equity investments of types and amounts not permissible for national banks;
(iv) rules to ensure that risk-based capital standards take into account
concentrations of credit and the risk of non-traditional activities; (v)
expanded reporting requirements; (vi) "truth in savings" provisions; (vii) the
requirement that a depository institution give 90 days' prior notice to
customers and regulatory authorities before closing any branch; and (viii) a
prohibition on the acceptance or renewal of brokered deposits by depository
institutions that are not "well capitalized" or are "adequately capitalized"
and have not received a waiver from the FDIC.

FDICIA also directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating
to internal controls, information systems, internal audits, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
value for publicly traded shares and other standards they deem appropriate.

Prompt Corrective Action. As mentioned above, FDICIA requires the federal
banking regulators, including the Board of Governors, the OCC and the FDIC, to
take prompt corrective action with respect to depository institutions that
fall below applicable capital standards and prohibits any depository
institution from making any capital distribution that would cause it to be
undercapitalized. Institutions that are not adequately capitalized may be
subject to a variety of supervisory actions including, but not limited,
restrictions on growth, investment activities, capital distributions and
affiliate transactions and will be required to submit a capital restoration
plan which, to be accepted by the regulators, must be guaranteed in part by
any company having control of the institution. In other respects, FDICIA
provides for enhanced supervisory authority, including greater authority for
the appointment of a conservator or receiver for undercapitalized
institutions. The capital-based prompt corrective action provisions of FDICIA
and their implementing regulations apply to FDIC-insured depository
institutions, such as the Bank.

Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured institution,
the Bank is required to pay deposit insurance premiums based on the risk it
poses to the insurance fund. The FDIC has authority to raise or lower
assessment rates on insured deposits in order to achieve certain designated
reserve ratios in the insurance funds and to impose special additional
assessments. The FDIC has adopted a risk-based deposit insurance assessment
system that provides for an assessment range of zero to 0.27% (subject to a
$2,000 minimum) of deposits depending on capital and supervisory factors. Each
depository institution is assigned to one of three capital groups: "well
capitalized," "adequately capitalized" or "less than adequately capitalized."
Within each capital group, institutions are assigned to one of three
supervisory subgroups: "healthy," "supervisory concern" or "substantial
supervisory concern." Accordingly, there are nine combinations of capital
groups and supervisory subgroups to which varying assessment rates would be
applicable. An institution's assessment rate depends on the capital category
and supervisory category to which it is assigned.

The Economic Growth and Regulatory Paperwork Reduction Act of 1996 enacted
on September 30, 1996 provides that beginning with semi-annual periods after
December 31, 1996, Bank Insurance Fund deposits will also be assessed to pay
interest on the bonds (the "FICO Bonds") issued in the late 1980s by the
Financing Corporation to recapitalize the now defunct Federal Savings & Loan
Insurance Corporation. For purposes of the

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assessments to pay interest on the FICO Bonds, BIF deposits were assessed at a
rate of 20% of the assessment rate applicable to SAIF deposits until December
31, 1999. After the earlier of December 31, 1999 or the date on which the last
savings association ceases to exist, full pro rata sharing of FICO assessments
will begin. The rates of assessment for the payment of interest on the FICO
Bonds will be approximately 1.3 basis points for BIF-assessable deposits and
approximately 6.4 basis points for SAIF-assessable deposits. The payment of
the assessment to pay interest on the FICO Bonds should not materially affect
the Bank.

During the first nine months of 1997, the Bank was assessed deposit
insurance in the aggregate amount of $1.8 million. Deposit insurance may be
terminated by the FDIC upon a finding that an institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The management of the Bank does not know any
practice, condition or violation that might lead to termination of deposit
insurance.

Reserve Requirements. As a member of the Federal Reserve System, the Bank is
subject to Board of Governors regulations requiring depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Board of Governors
regulations generally require three percent reserves on the first $51.9
million of transaction accounts and $1.6 million plus ten percent on the
remainder. The first $4.0 million of otherwise reservable balances (subject to
adjustments by the Board of Governors) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements.

Community Reinvestment. Under the Community Reinvestment Act ("CRA"), a
financial institution has a continuing and affirmative obligation, consistent
with the safe and sound operation of such institution, to help meet the credit
needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires each federal banking agency, in connection with its examination of a
financial institution, to assess and assign one of four ratings to the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by the
institution, including applications for charters, branches and other deposit
facilities, relocations, mergers, consolidations, and acquisitions of assets
or assumptions of liabilities. The CRA also requires that all institutions
make public disclosure of their CRA ratings. The Bank received a
"satisfactory" rating on its most recent CRA performance evaluation.

Enforcement Actions. Federal and state statutes and regulations provide
financial institution regulatory agencies with great flexibility to undertake
enforcement action against an institution that fails to comply with regulatory
requirements, particularly capital requirements. Possible enforcement actions
range from the imposition of a capital plan and capital directive to, in the
most severe cases, place the institution into conservatorship or receivership
or the termination of deposit insurance.

Interstate Banking and Branching Legislation. On September 29, 1994, the
Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the "Interstate
Banking Act") was enacted. Under the Interstate Banking Act, adequately
capitalized and adequately managed bank holding companies are allowed to
acquire banks across state lines subject to certain limitations. In addition,
under the Interstate Banking Act, since June 1, 1997, banks have been
permitted, under some circumstances, to merge with one another across state
lines and thereby create a main bank with branches in separate states. After
establishing branches in a state through an interstate merger transaction, a
bank may establish and acquire additional branches at any location in the
state where any bank involved in the interstate merger could have established
or acquired branches under applicable federal and state law.

Under the Interstate Banking Act, states could adopt legislation permitting
interstate mergers before June 1, 1997. Alternatively, states could adopt
legislation before June 1, 1997, subject to certain conditions, opting out of
interstate branching. Illinois adopted legislation, effective September 29,
1995, permitting interstate mergers

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beginning on June 1, 1997, subject to regulatory approval and other
requirements. It is anticipated that this interstate merger and branching
ability will increase competition and further consolidate the financial
institutions industry.

Liabilities of Commonly Controlled Depository Institutions

A bank insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the
default of a commonly controlled FDIC-insured depository institution or (ii)
any assistance provided by the FDIC to a commonly controlled depository
institution in danger of default. Thus, the Bank could incur liability to the
FDIC in the event of the default of any of the other FDIC insured depository
institutions owned or controlled by Harris Bankcorp, Inc., Bankmont Financial
Corp. or Bank of Montreal. Such liability would be subordinate in right of
payment to deposit liabilities, secured obligations, any other general or
senior liability, and any obligation subordinate to depositors or other
general creditors, other than obligations owed to any affiliate of the
depository institution (with certain exceptions) and any obligations owed to
shareholders in their capacity as shareholders. Such liability would not be
subordinate to the Bank Preferred Shares. The imposition of such liabilities
in sufficient amounts could lead to the appointment of the FDIC as conservator
or receiver for the Bank.

84
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company, the Bank and each of the underwriters
named below (the "Underwriters"), the Company has agreed to sell to the
Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co., PaineWebber Incorporated, Prudential Securities
Incorporated, Smith Barney Inc. and Nesbitt Burns Securities Inc. are acting
as representatives (the "Representatives"), and the Underwriters have
severally agreed to purchase, the number of Series A Preferred Shares set
forth opposite its name below. In the Purchase Agreement, the several
Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all the Series A Preferred Shares offered hereby if any
are purchased. In the event of default by an Underwriter, the Purchase
Agreement provides that, in certain circumstances, the purchase commitments of
the nondefaulting Underwriters may be increased or the Purchase Agreement may
be terminated.
<TABLE>
<CAPTION>
NUMBER OF SERIES
A
UNDERWRITER PREFERRED SHARES
----------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Goldman, Sachs & Co.....................................
PaineWebber Incorporated................................
Prudential Securities Incorporated......................
Smith Barney Inc........................................
Nesbitt Burns Securities Inc............................
----------
Total.............................................. 10,000,000
==========
</TABLE>

The Underwriters have advised the Company that they propose initially to
offer the Series A Preferred Shares directly to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the initial
public offering of the Series A Preferred Shares, the public offering price,
concession and discount may be changed.

The Company has agreed in the Purchase Agreement that, during the period
beginning from the date of this Prospectus and continuing to and including the
date ninety days after the date of this Prospectus, it will not (i) directly
or indirectly offer, pledge, sell, contract to sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any securities that
are substantially similar to the Series A Preferred Shares or any securities
convertible into or exercisable or exchangeable for securities that are
substantially similar to the Series A Preferred Shares or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other

85
<PAGE>

agreement or any transaction that transfers, in whole or in part, the economic
consequences of ownership of securities that are substantially similar to the
Series A Preferred Shares, whether any such swap or transaction discussed in
(i) or (ii) above is to be settled by delivery of securities that are
substantially similar to the Series A Preferred Shares or such other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated.

The Series A Preferred Shares have been approved for listing on the NYSE,
subject to notice of issuance, under the trading symbol "HBC." In order to
meet one of the requirements for listing the Series A Preferred Shares on the
NYSE, the Underwriters have undertaken to sell (i) lots of 100 or more shares
to a minimum of 2,000 beneficial holders, (ii) a minimum of 1.1 million shares
and (iii) shares with a minimum aggregate market value of $40.0 million.

Prior to the Offering there has been no public market for the Series A
Preferred Shares. Trading of the Series A Preferred Shares on the NYSE is
expected to commence within 30 days after the initial delivery of the Series A
Preferred Shares. Merrill Lynch, Pierce, Fenner & Smith Incorporated and
certain of the other Underwriters have advised the Company that they intend to
make a market in the Series A Preferred Shares prior to the commencement of
trading on the NYSE. Merrill Lynch, Pierce, Fenner & Smith Incorporated and
such other Underwriters will have no obligation to make a market in the Series
A Preferred Shares, however, and may cease market making activities, if
commenced, at any time.

The Underwriters have informed the Company that they do not expect sales to
accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of shares of Series A Preferred Shares
offered by them.

The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.

Until the distribution of the Series A Preferred Shares is completed, rules
of the Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Series A Preferred Shares.
As an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Series A Preferred
Shares. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Series A Preferred Shares.

If the Underwriters create a short position in the Series A Preferred Shares
in connection with the Offering, i.e., if they sell more Series A Preferred
Shares than are set forth on the cover page of this Prospectus, the
Underwriters may reduce that short position by purchasing Series A Preferred
Shares in the open market.

The Underwriters may also impose a penalty bid on certain Underwriters and
selling group members. This means if the Underwriters purchase Series A
Preferred Shares in the open market to reduce the Underwriters' short position
or to stabilize the price of the Series A Preferred Shares, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the security to the extent that
it were to discourage resales of the security.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any offset that the
transactions described above may have on the price of the Series A Preferred
Shares. In addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.

Nesbitt Burns Securities Inc., one of the Underwriters, is a wholly owned
subsidiary of Bankmont Financial Corp., which also owns the Bank, the parent
of the Company.

86
<PAGE>

Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to affiliates of the Company, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.

EXPERTS

The Balance Sheet of the Company as of January 2, 1998 included in this
Prospectus has been audited by Coopers & Lybrand L.L.P. and the Consolidated
Financial Statements of the Bank as of December 31, 1996 and 1995 and for each
of the years in the three year period ended December 31, 1996 included in this
Prospectus have been audited by KPMG Peat Marwick LLP and Coopers & Lybrand
L.L.P., independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firms as experts in giving said reports.

RATINGS

The Series A Preferred Shares will be rated "a1" by Moody's Investors
Service, Inc. ("Moody's") and A by Standard & Poor's Ratings Services ("S&P").
On January 23, 1998, as a result of the announcement of the proposed merger of
Bank of Montreal and Royal Bank of Canada, Moody's placed the Bank's long term
deposit and debt ratings under review for possible downgrade. When issued,
Moody's rating on the Series A Preferred Shares will be subject to similar
review. On the same date, S&P affirmed its ratings of Bank securities. A
security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. No person is obligated to maintain any rating on the Series A
Preferred Shares, and, accordingly, there can be no assurance that the ratings
assigned to the Series A Preferred Shares upon initial issuance will not be
lowered or withdrawn by the assigning rating organization at any time
thereafter.

LEGAL MATTERS

The validity of the Series A Preferred Shares offered hereby and certain tax
matters described under "Federal Income Tax Consequences" will be passed upon
for the Company by Chapman and Cutler, Chicago, Illinois. The validity of the
Series A Preferred Shares will be passed upon for the Underwriters by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York. Chapman and Cutler and
Skadden, Arps, Slate, Meagher & Flom LLP may rely on the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland, with respect to certain
matters of Maryland law.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement (of which
this Prospectus forms a part) on Form S-11 (the "Registration Statement")
under the Securities Act, with respect to the Series A Preferred Shares
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information regarding the Company and the Series A
Preferred Shares offered hereby, reference is made to the Registration
Statement and the exhibits thereto.

The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street,

87
<PAGE>

Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.

The terms of the Series A Preferred Shares provide that the Company shall
maintain its status as a reporting company under the Exchange Act, for as long
as any of the Series A Preferred Shares are outstanding and pursuant thereto
will furnish shareholders with annual reports containing audited financial
statements.

GLOSSARY

"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.

"Advisory Agreement" means the agreement between the Bank and the Company
pursuant to which the Bank will (i) administer the day-to-day operations of
the Company, (ii) monitor the credit quality of the Mortgage Assets held by
the Company and (iii) advise the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets.

"ARM" or "adjustable rate mortgage" means a Mortgage Loan that features
adjustments of the underlying interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to periodic
interest rate and/or payment caps and a lifetime interest rate cap.

"ATMs" means automated teller machines.

"Automatic Exchange" means the automatic exchange on a share-for-share basis
of Series A Preferred Shares for Bank Preferred Shares upon the occurrence of
the Exchange Event.

"Balloon mortgage" means a mortgage loan originated with a term to stated
maturity that is shorter than the period on which the corresponding
amortization schedule is based. As a result, upon the maturity of a balloon
loan, the mortgagor will be required to make a "balloon payment" which will be
significantly larger than previous monthly payments due on such balloon loans.

"Bank" means Harris Trust and Savings Bank, a wholly owned subsidiary of
Harris Bankcorp, Inc., a multibank holding company incorporated under the laws
of the State of Delaware, headquartered in Chicago and registered under the
Bank Holding Company Act of 1956, as amended.

"Bank Preferred Shares" means the newly issued series of preferred stock of
the Bank for which the Series A Preferred Shares will be exchanged
automatically upon the occurrence of the Exchange Event.

"Bank Secured Obligations" means obligations issued by the Bank that are
recourse only to the Securing Mortgage Loans and are secured by real property.
The obligations bear interest at a rate of % per year and are scheduled to
mature October 1, 2027.

"Biweekly mortgage" is a fixed-rate mortgage loan with payments made every
two weeks.

"Board of Governors" means the Board of Governors of the Federal Reserve
System or other appropriate successor federal regulatory agency.

"Board of Directors" means the board of directors of the Company.

"Business Day" means a day of the year on which banks are not required or
authorized by law to close in the states of Illinois or New York.

"Bylaws" means the bylaws of the Company.

"Charter" means the charter of the Company.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commercial Mortgage Loan" means a loan secured by a first mortgage or deed
of trust on a commercial real estate property.

88
<PAGE>

"Commission" means the United States Securities and Exchange Commission.

"Common Stock" means the common stock, par value $1.00 per share, of the
Company.

"Company" means Harris Preferred Capital Corporation, a Maryland
corporation. As used in this Prospectus, such term includes the Company's
subsidiary entity.

"DOL" means the United States Department of Labor.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"Excess Shares" means the shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a shareholder in excess of
the Ownership Limit.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exchange Event" means (i) the Bank becomes less than "adequately
capitalized" under regulations established pursuant to FDICIA, (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 5.0% (i.e., the Exchange Event).

"Fannie Mae" means the Federal National Mortgage Association.

"Fannie Mae Required Net Yield" means (i) with respect to any Mortgage Loan
with an original term of 20, 25 or 30 years, Fannie Mae's required net yield
for 30-year fixed rate mortgages (covered by 60-day mandatory commitments)
that was in effect 45 days prior to the effective date of any conversion of
such Mortgage Loan and (ii) with respect to any Mortgage Loan with an original
term of 15 years, Fannie Mae's required net yield for 15-year fixed rate
mortgages (covered by 60-day mandatory commitments) that was in effect 45 days
prior to the effective date of any conversion of such Mortgage Loan.

"FDIC" means the Federal Deposit Insurance Corporation.

"FDICIA" means the Federal Deposit Insurance Corporation Improvement Act of
1991, as amended.

"FHLMC" means the Federal Home Loan Mortgage Corporation.

"15-year fixed" is a mortgage loan with fixed, equal monthly payments
amortized over a fifteen year period.

"5/1 year ARM" means a fixed rate Residential Mortgage Loan that
automatically converts to a one-year ARM in the month in which the 60th
monthly payment is due.

"Five or Fewer Test" means the Code requirement that not more than 50% in
value of the Company's outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code).

"Five-year extendable mortgage" is a mortgage loan which has an interest
rate which is fixed for an initial period of five years, at which time the
loan automatically converts to a One-year ARM.

"Foreign Stockholders" means holders of Series A Preferred Shares that are
for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii)
foreign trusts and estates.

"GNMA" means the Government National Mortgage Association.

"Gross Margin" means, with respect to a Residential Mortgage Loan that is an
ARM, the applicable fixed percentage which is added to the applicable index to
calculate the current interest rate paid by the borrower of

89
<PAGE>

the adjustable rate Mortgage Loan (without taking into account any interest
rate caps or minimum interest rates). Gross Margin is inapplicable to fixed
rate loans.

"Independent Directors" means the members of the Board of Directors who are
not current officers or employees of the Company and who are not current
directors, officers or employees of the Bank or any affiliate of the Bank.

"Initial Mortgage Assets" means the initial mortgage assets acquired by the
Company from the Bank.

"Initial Mortgage-Backed Securities" means the initial Mortgage-Backed
Securities acquired by the Company from the Bank.

"Interested Stockholder" means a person beneficially owning 10% or more of
the aggregate voting power of a Maryland corporation.

"IRA" means an individual retirement arrangement under Section 408 of the
Code.

"IRS" means the United States Internal Revenue Service.

"LIBOR" means the London Inter-Bank Offered Rate.

"Lifetime interest rate cap" means, with respect to Mortgage Loans that are
ARMs, the maximum interest rate that may accrue during any period over the
term of such Mortgage Loan as stated in the governing instruments evidencing
such Mortgage Loan.

"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the mortgaged
property underlying such Mortgagee Loan and (ii) if the Mortgage Loan was made
to finance the acquisition of property, the purchase price of the mortgaged
property.

"MGCL" means the Maryland General Corporation Law as in effect from time to
time or any successor statute thereto.

"Moody's" means Moody's Investors Service, Inc.

"Mortgage Assets" means real estate mortgage assets, including but not
limited to Residential Mortgage Loans, Commercial Mortgage Loans and Mortgage-
Backed Securities.

"Mortgage-Backed Securities" means securities rated by at least one
nationally recognized independent rating organization and representing
interests in or obligations backed by pools of Mortgage Loans.

"Mortgage Loan Assignment Agreement" means the residential mortgage loan
assignment agreement between the Company and the Bank.

"Mortgage Loans" means whole loans secured by single-family (one-to-four-
unit) residential real estate properties or by commercial real estate
properties.

"NYSE" means the New York Stock Exchange, Inc.

"Offering" means the offering of Series A Preferred Shares pursuant to the
Prospectus.

"One Hundred Persons Test" means the Code requirement that the capital stock
of the Company be owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.

"One-year ARM" means an ARM that adjusts annually beginning in the month in
which the 12th monthly payment is due.

"Ownership Limit" means the provision in the Company's Charter limiting any
person from owning (including shares deemed to be owned by the attribution
provisions of the Code) more than 5% of any issued and outstanding class or
series of Preferred Stock.

90
<PAGE>

"Periodic interest rate cap" means, with respect to ARMs, the maximum change
in the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic interest rate caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.

"Plan" means a pension, profit-sharing, retirement or other employee benefit
plan.

"Plan Asset Regulation" means the DOL regulations determining the assets of
the Plan for purposes of ERISA and the related prohibited transaction excise
tax provisions of the Code.

"Preferred Stock" means preferred stock, par value $1.00 per share, of the
Company.

"Prospectus" means this prospectus, as the same may be amended or
supplemented.

"Purchase Agreement" means the underwriting agreement by and among the
Company, the Bank and the Underwriters.

"Rate Adjustment Date" means, with respect to any ARM, a date on which the
interest rate on such ARM adjusts.

"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A
Preferred Shares.

"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.

"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.

"REIT taxable income" shall have the meaning set forth in "Federal Income
Tax Consequences--Taxation of the Company--Annual Distribution Requirements."

"Residential Mortgage Loan" means a loan secured by a first mortgage or deed
of trust on a single family (one- to four-unit) residential real estate
property.

"S&P" means Standard & Poor's Ratings Services.

"SAIF" means the Savings Association Insurance Fund.

"Securing Mortgage Loans" means those Mortgage Loans pledged by the Bank as
security for the Bank Secured Obligations.

"Securities Act" means the Securities Act of 1933, as amended.

"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.

"Servicer" means the Bank in its role as servicer under the Servicing
Agreement.

"Servicing Agreement" means the servicing agreement between the Bank and the
Company pursuant to which the Bank will service the Securing Mortgage Loans
and other Mortgage Loans held by the Company.

"Seven-year extendable mortgage" is a mortgage loan which has an interest
rate which is fixed for an initial period of seven years, at which time the
loan automatically converts to a One-year ARM.

"Six-month LIBOR" means an adjustable rate mortgage which has an interest
rate related to the six-month London Inter-Bank Offered Rate.

91
<PAGE>

"Tax Event" means the receipt by the Company of an opinion of a nationally
recognized law firm experienced in such matters to the effect that, as a
result of (i) any amendment to, clarification of, or change (including any
announced prospective change) in, the laws or treaties (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein affecting taxation, (ii) any judicial decision,
official administrative pronouncement, ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the interpretation
of such Administrative Action or judicial decision or any interpretation or
pronouncement that provides for a position with respect to such Administrative
Action or judicial decision that differs from the theretofore generally
accepted position, in each case, by any legislative body, court, governmental
authority or regulatory body, irrespective of the manner in which such
amendment, clarification or change is made known, which amendment,
clarification, or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is a material risk that (a) dividends payable by the Company with
respect to the capital stock of the Company are not, or will not be, fully
deductible for United States federal income tax purposes or (b) the Company
is, or will be, subject to more than a de minimis amount of other taxes,
duties or other governmental charges.

"3/1 year ARM" means a fixed rate Residential Mortgage Loan that
automatically converts to a One-year ARM in the month in which the 36th
monthly payment is due.

"Ten-year balloon" is a balloon mortgage with a stated maturity of ten
years.

"Ten-year fixed" is a mortgage loan with fixed, equal monthly payments
amortized over a ten year period.

"30-year fixed" is a mortgage loan with fixed, equal monthly payments
amortized over a thirty year period.

"Three-year ARM" means a fixed rate Residential Mortgage loan that is fixed
at an initial rate for the first 36 monthly payments and adjusts every three
years thereafter.

"Time of Exchange" means the time at which the Automatic Exchange occurs,
deemed to be as of 8:00 a.m. Eastern Time on the earliest possible Business
Day such exchange could occur following the Exchange Event, as evidenced by
the issuance by the Bank of a press release prior to such time.

"TIN" means Taxpayer Identification Number.

"Treasury Index" means the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank
or by any United States government department or agency.

"Treasury Regulations" means the income tax regulations promulgated under
the Code.

"Underwriters" means those underwriters to which the Company will sell the
Series A Preferred Shares pursuant to the terms of the Purchase Agreement.

"United States Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) citizens or residents of
the United States, (ii) corporations, partnerships, or other entities created
or organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.

"USRPI" means United States real property interest under Section 897(c) of
the Code.

92
<PAGE>

INDEX TO COMPANY FINANCIAL STATEMENT

<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. CF-2
Balance Sheet of Harris Preferred Capital Corporation as of January 2,
1998..................................................................... CF-3
Note to Financial Statement............................................... CF-4
</TABLE>

CF-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Harris Preferred Capital Corporation

We have audited the accompanying balance sheet of Harris Preferred Capital
Corporation (the "Company") as of January 2, 1998. This financial statement is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 our audit provides a reasonable basis for
our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Harris Preferred Capital
Corporation as of January 2, 1998, in conformity with generally accepted
accounting principles.

Coopers & Lybrand L.L.P.

Chicago, Illinois
January 2, 1998

CF-2
<PAGE>

HARRIS PREFERRED CAPITAL CORPORATION

BALANCE SHEET
AS OF JANUARY 2, 1998

<TABLE>
<S> <C>
Assets:
Cash.................................................................. $1,000
======
Stockholder's equity:
Common stock, par value $1.00 per share, 1,000 shares authorized;
1,000 shares issued and outstanding.................................. $1,000
======
</TABLE>

The note to the financial statement is an integral part of this statement.

CF-3
<PAGE>

HARRIS PREFERRED CAPITAL CORPORATION

NOTE TO FINANCIAL STATEMENT
1. ORGANIZATION

Harris Preferred Capital Corporation (the "Company"), a wholly-owned
subsidiary of Harris Trust and Savings Bank (the "Bank"), was incorporated on
September 24, 1997 in the State of Maryland.

The Company intends to invest in mortgage-related assets financed by common
and preferred stock offerings and expects to generate income for distribution
to its future preferred and common stockholders primarily from the net
interest income derived from its investments in mortgage-related assets. The
Company intends to purchase these mortgage-related assets from the Bank and
its affiliates at their estimated fair values. These assets will be recorded
in the Company's financial statements at the Bank's historical cost basis
which will approximate their estimated fair values. The Company intends to
operate in a manner that permits it to elect, and it intends to elect, to be
subject to tax as a real estate investment trust for federal income tax
purposes. The Company has not had any operations as of January 2, 1998.

The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company from a
capital contribution made by the Bank. If the public offering is not
consummated, the Bank will pay any offering costs.

CF-4
<PAGE>

INDEX TO BANK FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report............................................. BF-2
Consolidated Statement of Condition as of December 31, 1996 and 1995..... BF-3
Consolidated Statement of Income for the Years ended December 31, 1996,
1995 and 1994........................................................... BF-4
Consolidated Statement of Changes in Stockholder's Equity for the Years
ended December 31, 1996, 1995, 1994 and 1993............................ BF-5
Consolidated Statement of Cash Flows for the Years ended December 31,
1996, 1995 and 1994..................................................... BF-6
Notes to Financial Statements............................................ BF-7
Consolidated Statement of Condition as of September 30, 1997 and 1996
(unaudited)............................................................. BF-38
Consolidated Statement of Income for the Quarter and Nine Months ended
September 30, 1997 and 1996 (unaudited)................................. BF-39
Consolidated Statement of Changes in Stockholder's Equity for the Nine
Months ended September 30, 1997 and 1996 (unaudited).................... BF-40
Consolidated Statement of Cash Flows for the Nine Months ended September
30, 1997 and 1996 (unaudited) .......................................... BF-41
Notes to Interim Financial Statements (unaudited)........................ BF-42
</TABLE>

BF-1
<PAGE>

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, 1996 and
1995, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the years in the three year
period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1996 in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP Coopers & Lybrand L.L.P.
Chicago, Illinois
January 31, 1997

BF-2
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CONDITION

<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
----------- -----------
(IN THOUSANDS EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Cash and demand balances due from banks.............. $1,154,613 $1,409,760
Money market assets:
Interest-bearing deposits at banks................. 658,187 457,700
Federal funds sold and securities purchased under
agreement to resell............................... 316,275 163,944
Portfolio securities available for sale.............. 2,759,331 2,036,329
Trading account assets............................... 110,355 98,638
Loans................................................ 8,147,180 7,459,857
Allowance for possible loan losses................... (108,408) (94,153)
----------- -----------
Net loans.......................................... 8,038,772 7,365,704
Premises and equipment............................... 190,154 144,307
Customers' liability on acceptances.................. 78,983 95,326
Goodwill and other valuation intangibles............. 294,420 18,881
Other assets......................................... 605,576 179,897
----------- -----------
TOTAL ASSETS..................................... $14,206,666 $11,970,486
=========== ===========
LIABILITIES
Deposits in domestic offices--noninterest-bearing.... 3,124,027 2,420,886
- --interest bearing................................... 4,762,256 2,216,811
Deposits in foreign offices--noninterest-bearing..... 35,116 41,003
- --interest bearing................................... 1,804,806 2,351,850
----------- -----------
Total deposits................................... 9,726,205 7,030,550
Federal funds purchased and securities sold under
agreement to repurchase............................. 1,992,066 2,104,137
Short-term borrowings................................ 344,372 840,063
Senior notes......................................... 350,000 478,000
Acceptances outstanding.............................. 78,983 95,326
Accrued interest, taxes and other expenses........... 125,968 114,691
Other liabilities.................................... 86,506 175,478
Long-term subordinated notes......................... 310,000 295,000
----------- -----------
TOTAL LIABILITIES................................ 13,014,100 11,133,245
----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized, issued and
outstanding 10,000,000 shares....................... 100,000 100,000
Surplus.............................................. 600,377 275,000
Retained earnings.................................... 506,300 445,119
Unrealized holding gains (losses), net of deferred
taxes of ($9,308) in 1996 and $11,301 in 1995....... (14,111) 17,122
----------- -----------
TOTAL STOCKHOLDER'S EQUITY....................... 1,192,566 837,241
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....... $14,206,666 $11,970,486
=========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

BF-3
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees.............................. $645,319 $606,008 $444,077
Money market assets:
Deposits at banks................................. 30,480 38,153 30,227
Federal funds sold and securities purchased under
agreement to resell.............................. 11,000 17,833 19,945
Trading account.................................... 3,960 3,842 2,190
Securities available-for-sale:
U.S. Treasury and federal agency.................. 168,665 102,766 83,374
State and municipal............................... 5,550 -- --
Other............................................. 1,873 6,137 4,032
Securities held-to-maturity:
U.S. Treasury and federal agency.................. -- 27,613 16,522
State and municipal............................... -- 15,720 24,237
Other............................................. -- -- 236
-------- -------- --------
Total interest income........................... 866,847 818,072 624,840
-------- -------- --------
INTEREST EXPENSE
Deposits........................................... 282,730 255,343 177,480
Short-term borrowings.............................. 152,360 165,427 104,640
Senior notes....................................... 22,425 31,125 --
Long-term notes.................................... 19,744 16,881 13,613
-------- -------- --------
Total interest expense.......................... 477,259 468,776 295,733
-------- -------- --------
NET INTEREST INCOME................................ 389,588 349,296 329,107
Provision for loan losses.......................... 57,382 42,756 37,308
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 332,206 306,540 291,799
-------- -------- --------
NONINTEREST INCOME
Trust and investment management fees............... 83,195 117,078 115,042
Trading account.................................... 7,725 4,831 (747)
Foreign exchange................................... 9,978 14,230 19,749
Charge card........................................ 46,830 41,368 36,997
Service fees and charges........................... 71,440 58,106 62,224
Securities gains................................... 8,531 23,079 5,117
Other.............................................. 37,801 17,692 18,726
-------- -------- --------
Total noninterest income........................ 265,500 276,384 257,108
-------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation.................... 211,083 201,936 190,769
Pension, profit sharing and other employee
benefits.......................................... 40,384 45,151 51,729
Net occupancy...................................... 36,530 35,060 34,571
Equipment.......................................... 34,208 35,267 35,076
Marketing.......................................... 24,973 21,335 21,055
Communication and delivery......................... 19,252 17,455 14,974
Deposit insurance.................................. 18,155 4,762 9,726
Expert services.................................... 17,696 18,425 12,428
Trust customer charge.............................. -- -- 51,335
Other.............................................. 29,235 34,712 40,360
-------- -------- --------
431,516 414,103 462,023
Goodwill and other valuation intangibles........... 14,930 5,969 6,791
-------- -------- --------
Total noninterest expenses...................... 446,446 420,072 468,814
-------- -------- --------
Income before income taxes......................... 151,260 162,852 80,093
Applicable income taxes............................ 48,179 53,566 12,151
-------- -------- --------
NET INCOME......................................... $103,081 109,286 67,942
======== ======== ========
EARNINGS PER SHARE (based on 10,000,000 average
shares outstanding)............................... $ 10.31 $ 10.93 $ 6.79
======== ======== ========
</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

BF-4
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
UNREALIZED
HOLDING TOTAL
COMMON RETAINED GAINS STOCKHOLDER'S
STOCK SURPLUS EARNINGS (LOSSES) EQUITY
-------- -------- -------- ---------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993..................... $100,000 $275,000 $337,091 $ 22,360 $ 734,451
Net income.............. -- -- 67,942 -- 67,942
Dividends ($3.00 per
common share).......... -- -- (30,000) -- (30,000)
Change in unrealized
holding gains (losses)
on available for sale
securities, net of tax
effect of ($14,749).... -- -- -- (42,662) (42,662)
-------- -------- -------- -------- ----------
Balance at December 31,
1994..................... 100,000 275,000 375,033 (20,302) 729,731
Net income.............. -- -- 109,286 -- 109,286
Dividends ($3.92 per
common share).......... -- -- (39,200) -- (39,200)
Change in unrealized
holding gains (losses)
on available for sale
securities, net of tax
effect of $24,690...... -- -- -- 37,424 37,424
-------- -------- -------- -------- ----------
Balance at December 31,
1995..................... 100,000 275,000 445,119 17,122 837,241
Contribution to capital
surplus................ -- 325,377 -- -- 325,377
Net income.............. -- -- 103,081 -- 103,081
Dividends (common stock
$4.19 per share)....... -- -- (41,900) -- (41,900)
Change in unrealized
holding gains (losses)
on available for sale
securities, net of tax
effect of ($20,609).... -- -- -- (31,233) (31,233)
-------- -------- -------- -------- ----------
Balance at December 31,
1996..................... $100,000 $600,377 $506,300 $(14,111) $1,192,566
======== ======== ======== ======== ==========
</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

BF-5
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................ $ 103,081 $ 109,286 $ 67,942
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses........... 57,382 42,756 37,308
Depreciation and amortization,
including intangibles.............. 44,704 36,385 37,878
Deferred tax benefit................ (3,319) (1,086) (8,740)
Gain on sales of portfolio
securities......................... (8,531) (23,079) (5,117)
Trading account net cash (purchases)
sales.............................. (11,717) (62,571) 13,994
Increase in interest receivable..... (14,989) 7,766 (36,366)
(Decrease) increase in interest
payable............................ (445) 3,479 8,286
(Increase) decrease in loans held
for sale........................... (87,707) (15,293) 219,600
Other, net.......................... 12,286 46,274 (50,812)
----------- ----------- -----------
Net cash provided by operating
activities......................... 90,745 143,917 283,973
----------- ----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-
bearing deposits at banks............ (200,487) 274,383 (224,754)
Net (increase) decrease in Federal
funds sold and securities purchased
under agreement to resell............ (152,331) 220,087 103,514
Proceeds from maturities of securities
held-to-maturity..................... -- 923,361 144,248
Purchases of securities held-to-
maturity............................. -- (205,287) (510,380)
Proceeds from sales of securities
available-for-sale................... 1,269,870 1,976,729 130,937
Proceeds from maturities of securities
available-for-sale................... 4,868,823 3,270,325 1,816,306
Purchases of securities available-for-
sale................................. (6,905,006) (5,414,682) (2,170,354)
Net increase in loans................. (306,628) (1,126,889) (692,878)
Net cash received upon assumption of
certain assets and liabilities of
Household Bank f.s.b................. 2,244,009 -- --
Proceeds from sales of premises and
equipment............................ 10,270 25,745 23,926
Purchases of premises and equipment... (59,739) (58,087) (49,931)
Other, net............................ (48,343) 185,474 (10,965)
----------- ----------- -----------
Net cash provided (used) by investing
activities........................... 720,438 71,159 (1,440,331)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits... (195,549) 14,984 463,250
Net increase (decrease) in Federal
funds purchased and securities sold
under agreement to repurchase........ (112,071) (718,685) 759,704
Net (decrease) increase in other
short-term borrowings................ (495,690) 172,832 210,039
Proceeds from issuance of senior
notes................................ 1,239,436 2,978,345 --
Repayment of senior notes............. (1,367,436) (2,500,345) --
Proceeds from issuance of long-term
notes................................ 15,000 60,000 --
Proceeds from contribution to capital
surplus.............................. 325,377 -- --
Cash dividends paid on common stock... (41,900) (39,200) (30,000)
Other, net............................ (433,497) -- --
----------- ----------- -----------
Net cash provided (used) by financing
activities........................... (1,066,330) (32,069) 1,402,993
----------- ----------- -----------
Net (decrease) increase in cash and
demand balances due from banks....... (255,147) 183,007 246,635
Cash and demand balances due from
banks at January 1................... 1,409,760 1,226,753 980,118
----------- ----------- -----------
Cash and demand balances due from
banks at December 31................. $ 1,154,613 $ 1,409,760 $ 1,226,753
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of amount
capitalized)....................... $ 467,006 $ 457,517 $ 290,606
Income taxes........................ $ 54,288 $ 58,095 $ 24,461
</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

BF-6
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation and nature of operations

Harris Trust and Savings Bank ("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").

The consolidated financial statements include the accounts of the Bank and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. See Note 19 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 and 6 active nonbank
subsidiaries. The Bank and its subsidiaries provide 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
generally accepted accounting principles 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 and options contracts are revalued monthly using prevailing
market rates. Exchange adjustments are included with foreign exchange income
in the Consolidated Statement of Income.

Interest rate futures, forward rate agreements, options and guarantees

Interest rate futures contracts can be used in the management of the Bank's
risk strategy or as part of its dealer and trading activities. Open positions
on such contracts not designated as hedges of existing positions or
anticipated transactions are marked to market daily and the resulting gains
and losses are recognized in noninterest income. Deferred gains and losses on
futures contracts used to hedge existing assets and liabilities are included
in the basis of the item being hedged. For hedges of anticipated transactions,
the Bank recognizes deferred gains or losses on futures transactions as
adjustments to the cash position eventually taken. Interest rate forward rate
agreements, options and guarantees, including caps, floors and collars, are
marked to market with the resulting gains and losses recorded in trading
account income.

Interest rate swaps

The Bank engages in interest rate swaps in order to manage its interest rate
risk exposure, generate fee income and as a trading vehicle. Gains and losses
on swaps designated as hedges are deferred and recognized over the lives of
the related hedged positions. Contractual payments under interest rate swaps
designated as hedges are recognized in the Consolidated Statement of Income.
Swaps not designated as hedges are marked to market with realized and
unrealized gains and losses included with trading account income.

BF-7
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Securities

The Bank classifies securities as either trading account assets, held-to-
maturity 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. Securities are classified as held-to-
maturity when the Bank has both the positive intent and ability to hold them
to maturity. 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. Held-to-maturity securities are stated at cost, adjusted for
amortization of premium and accretion of discount. 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.

On December 29, 1995, the Bank transferred all held-to-maturity securities
to available-for-sale. See Note 2 of these Statements for further information.

Interest income on securities, including amortization of discount or
premium, is included in earnings. Realized gains and losses, as a result of
portfolio 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. Origination fees
collected on commercial loans, loan commitments, mortgage loans and standby
letters of credit, which 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. At December 31, 1996 and 1995, the Bank's Consolidated
Statement of Condition included approximately $9.6 million and $7.7 million,
respectively, of deferred loan-related fees net of deferred origination costs.

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 carried at the lower of allocated cost or current
market value, on a portfolio basis. Prior to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights, the loans were carried at the lower of original 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.

During the first quarter of 1996, the Bank adopted SFAS No. 122, Accounting
for Mortgage Servicing Rights, amended by SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The Statement applies to transactions in which a mortgage banking
enterprise acquires mortgage servicing rights through the purchase or
origination of mortgage loans and then sells or securitizes those loans with
servicing rights retained by the seller. As required by the Statement, 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 current market interest rates, loan type
and repricing interval. Mortgage servicing rights of $3.5 million were
capitalized in 1996. Amortization of mortgage servicing rights was $.1 million
in 1996. The $3.4 million unamortized balance of the mortgage servicing rights
at December 31, 1996 is reflective

BF-8
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

of the fair value of those rights. Additions and reductions to the valuation
allowance for mortgage servicing rights in 1996 were $.6 million and $.1
million, respectively, resulting in a year-end balance of $.5 million at
December 31, 1996. The adoption of the Statement did not have a material
effect on the Bank's financial position or results of operations.

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 past due
amount 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. 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. Charge card and 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.

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

During the first quarter of 1995, the Bank adopted SFAS No. 114--Accounting
by Creditors for Impairment of a Loan and SFAS No. 118--Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures. SFAS
No. 114 addresses accounting by creditors for impairment of certain loans. It
requires that impaired loans within the scope of the statement (primarily
commercial credits) be 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 according to contractual terms, including principal
and interest, will not be collected. Both nonaccrual and certain restructured
loans meet this definition. Large groups of smaller-balance, homogeneous
loans, primarily charge card, residential real estate and consumer installment
loans, are excluded from the scope of these Statements. The Bank determines
loan impairment when assessing the adequacy of the allowance for possible loan
losses. SFAS No. 118 permits existing income recognition practices to
continue. The adoption of these Statements did not have a material impact on
the Bank's net income or financial position.

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 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.

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.

BF-9
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Other assets

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 is amortized on the straight-line basis. 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 indicate that the carrying
value may not be recoverable.

Property or other assets received in satisfaction of debt are included in
"Other Assets" on the Bank's Consolidated Statement 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.

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.

The Bank adopted SFAS No. 112, Employers' Accounting for Postemployment
Benefits, in the first quarter of 1994. As required by the Statement,
postemployment benefits provided to former or inactive employees after
employment but before retirement are accrued in accordance with SFAS No. 43,
Accounting for Compensated Absences, if they meet the conditions for accrual
of compensated absences. Otherwise, postemployment benefits are accrued or
disclosed in accordance with SFAS No. 5, Accounting for Contingencies.

Cash flows

On December 29, 1995, the Bank transferred all held-to-maturity securities
to available-for-sale. See Note 2 on page 9 for further information. The non-
cash portion of this transaction was excluded from the Bank's Consolidated
Statement of Cash Flows.

Income taxes

Bankmont, Bankcorp and their wholly-owned subsidiaries including the Bank
file a consolidated Federal income tax return. Income tax return liabilities
for the Bank 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 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. 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.

BF-10
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2. PORTFOLIO SECURITIES

The amortized cost and estimated fair value of securities available-for-sale
were as follows as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996
------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury..................... $ 858,027 421 15,540 842,908
Federal agency.................... 1,844,961 -- 13,374 1,831,587
State and municipal............... 57,749 5,141 -- 62,890
Other............................. 22,013 -- 67 21,946
---------- ------ ------ ---------
Total securities................ $2,782,750 5,562 28,981 2,759,331
========== ====== ====== =========
<CAPTION>
1995
------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury..................... $ 713,104 11,250 -- 724,354
Federal agency.................... 1,159,386 11,184 1,345 1,169,225
State and municipal............... 82,027 7,345 -- 89,372
Other............................. 53,389 3 14 53,378
---------- ------ ------ ---------
Total securities................ $2,007,906 29,782 1,359 2,036,329
========== ====== ====== =========
</TABLE>

At December 31, 1996 and 1995, portfolio and trading account securities
having a par value of $1.8 billion and $1.2 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. Securities carried at
approximately $1.4 billion and $1.3 billion were sold under agreement to
repurchase at December 31, 1996 and 1995, respectively.

On November 15, 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with that report, the Bank conducted a
one-time reassessment of the classifications of securities held. As a result,
the Bank reclassified all held-to-maturity securities to available-for-sale on
December 29, 1995. The amortized cost of the transferred securities was $534
million and the related unrealized holding gain was $10 million.

BF-11
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1996, 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.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996
--------------------
AMORTIZED FAIR
COST VALUE
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Within 1 year...................................... $ 879,703 877,551
1 to 5 years....................................... 732,452 733,437
5 to 10 years...................................... 1,148,816 1,126,564
Over 10 years...................................... -- --
Other securities without stated maturity............. 21,779 21,779
---------- ---------
Total securities................................. $2,782,750 2,759,331
========== =========
</TABLE>

In 1996, 1995, and 1994 proceeds from the sale of securities available-for-
sale amounted to $1.3 billion, $2.0 billion and $146.0 million. Gross gains of
$8.6 million and gross losses of $220,000 were realized on these sales in
1996, while gross gains of $25.5 million and gross losses of $2.4 million were
realized on these sales in 1995, and gross gains of $5.1 million and virtually
no gross losses were realized in 1994. Net unrealized holding gain or loss on
trading securities included in earnings during 1995 changed by $.2 million
from an unrealized gain of $.8 million at December 31, 1995 to an unrealized
gain of $1.0 million at December 31, 1996.

3. LOANS

The following table summarizes loan balances by category:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Domestic loans:
Commercial, financial, agricultural, brokers and
dealers.......................................... $5,962,675 5,200,984
Real estate construction.......................... 101,668 113,799
Real estate mortgage.............................. 870,807 781,966
Installment....................................... 35,663 68,955
Charge card....................................... 1,034,847 1,091,502
Direct lease financing............................ -- --
Foreign loans:
Government and official institutions.............. 984 984
Banks and other financial institutions............ 137,560 160,808
Other, primarily commercial and industrial........ 2,976 40,859
---------- ---------
Total loans..................................... $8,147,180 7,459,857
---------- ---------
Less unearned income................................ -- --
Loans, net of unearned income..................... 8,147,180 7,459,857
Less allowance for possible loan losses............. 108,408 94,153
---------- ---------
Loans, net of allowance for possible loan losses.. $8,038,772 7,365,704
========== =========
</TABLE>

BF-12
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The Bank had approximately $115 million and $76 million of loans classified
as held for sale at December 31, 1996 and 1995, respectively. Approximately
69% and 73% of these respective amounts were real estate mortgages. Nonaccrual
loans, restructured loans and other nonperforming assets are summarized below:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans................................... $17,879 34,775 61,290
Restructured loans................................. 40 2,059 2,239
------- ------ ------
Total nonperforming loans.......................... 17,919 36,834 63,529
Other assets received in satisfaction of debt...... 582 608 1,780
------- ------ ------
Total nonperforming assets......................... 18,501 37,442 65,309
Gross amount of interest income that would have
been recorded if year-end nonperforming loans had
been accruing interest at their original terms.... 2,267 3,997 3,194
Interest income actually recognized................ 67 1,527 915
------- ------ ------
Interest shortfall, before consideration of any
income tax effect................................. $ 2,200 2,470 2,279
======= ====== ======
</TABLE>

At December 31, 1996 and 1995, the Bank had no aggregate public and private
sector outstanding to any single country experiencing a liquidity problem
which exceeded one percent of the Bank's consolidated assets.

4. ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................... $ 94,153 90,492 93,990
-------- ------- -------
Charge-offs................................. (57,935) (54,340) (53,268)
Recoveries.................................. 10,008 15,245 12,462
-------- ------- -------
Net charge-offs............................. (47,927) (39,095) (40,806)
Provisions charged to operations............ 57,382 42,756 37,308
Allowance related to acquired loans......... 4,800 -- --
-------- ------- -------
Balance, end of year.......................... $108,408 94,153 90,492
======== ======= =======
</TABLE>

BF-13
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Details on impaired loans and related allowance are as follows:

<TABLE>
<CAPTION>
IMPAIRED LOANS IMPAIRED LOANS TOTAL
FOR WHICH THERE IS FOR WHICH THERE IS IMPAIRED
A RELATED ALLOWANCE NO RELATED ALLOWANCE LOANS
------------------- -------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1996:
Balance............... $2,394 15,485 17,879
Related allowance..... 2,308 -- 2,308
------ ------ ------
Balance, net of
allowance.............. 86 15,485 15,571
====== ====== ======
December 31, 1995:
Balance............... 18,382 16,393 34,775
Related allowance..... 12,459 -- 12,459
------ ------ ------
Balance, net of
allowance.............. $5,923 16,393 22,316
====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Average impaired loans.................................... $29,018 49,757
Total interest income on impaired loans................... 67 1,527
Interest income on impaired loans recorded on a cash
basis.................................................... 67 1,527
</TABLE>

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:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 24,988 $ 14,546
Premises............................................... 230,466 199,099
Equipment.............................................. 234,866 209,389
Leasehold improvements................................. 17,787 16,299
-------- --------
Total................................................ 508,107 $439,333
-------- --------
Accumulated depreciation and amortization.............. 317,953 295,026
-------- --------
Premises and equipment................................. $190,154 $144,307
======== ========
</TABLE>

The provision for depreciation and amortization was $28.8 million in 1996,
$30.4 million in 1995, and $31.0 million in 1994.

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 Statement of Condition. There were no
securities purchased under agreement to resell outstanding at December 31,
1996. Securities purchased under agreement to resell totaled $79 million at
December 31, 1995. 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.

BF-14
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 Statement of Condition.
Securities sold under agreement to repurchase totaled $1.38 billion and $1.27
billion at December 31, 1996 and 1995, respectively. 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.

<TABLE>
<CAPTION>
1996 1995
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Amount outstanding at end of year................... $ -- $ 79,344
Highest amount outstanding as of any month-end
during the year.................................... 49,625 266,588
Daily average amount outstanding during the year.... 19,641 89,599
========== =========
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Securities sold under agreement to repurchase....... 1,381,557 1,277,657
Highest amount outstanding as of any month-end
during the year.................................... 2,082,633 1,960,385
Daily average amount outstanding during the year.... 1,765,949 1,620,207
========== =========
</TABLE>

7. SHORT, MEDIUM AND LONG-TERM NOTES AND UNUSED LINES OF CREDIT

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

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Fixed rate 10 1/2% subordinated note to Bankcorp due
May 31, 2001.......................................... $ 35,000 $ 35,000
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
Floating rate subordinated note to Bankcorp due
December 1, 2004...................................... 100,000 100,000
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 --
-------- --------
Total................................................ $310,000 $295,000
======== ========
</TABLE>

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 debtholder. The interest
rate on the floating rate notes reprice semiannually and float at 50 basis
points above 180 day LIBOR. At year-end 1996, 180 day LIBOR was 5.60 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

BF-15
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

other unsecured senior indebtedness of the Bank. As of December 31, 1996, $350
million of short-term notes were outstanding with original maturities of 365
days (remaining maturities ranged from 85 to 168 days) and stated interest
rates ranging from 5.50 to 6.04 percent. As of December 31, 1995, $478 million
of short-term notes were outstanding with original maturities from 29 to 180
days and stated interest rates ranging from 5.50 to 5.79 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 Statement of Condition were considered to be the best estimates
of fair value for these financial instruments. Fair values of trading account
assets and portfolio 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. A fair-value discount related to nonperforming loans
included in the above categories, along with a discount for future credit risk
throughout the portfolio, was based on an analysis of expected and
unidentified future losses. Accordingly, the fair value estimate for total
loans was reduced by these discounts, which in total approximated the
allowance for possible loan losses on the Bank's Consolidated Statement of
Condition. Additionally, management considered appraisal values of collateral
when nonperforming loans were secured by real estate.

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

BF-16
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The estimated fair values of the Bank's financial instruments at December
31, 1996 and 1995 are presented in the following table. See Note 9 for
additional information regarding fair values of off-balance-sheet financial
instruments.

<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and demand balances due
from banks................... $ 1,154,613 1,154,613 1,409,760 1,409,760
Money market assets:
Interest-bearing deposits at
banks...................... 658,187 658,187 457,700 457,700
Federal funds sold and
securities purchased under
agreement to resell........ 316,275 316,275 163,944 163,944
Portfolio securities available
for sale..................... 2,759,331 2,759,331 2,036,329 2,036,329
Trading account assets........ 110,355 110,355 98,638 98,638
Loans, net of unearned income
and allowance for possible
loan losses.................. 8,038,772 8,033,804 7,365,704 7,376,809
Customers' liability on
acceptances.................. 78,983 78,983 95,326 95,326
----------- ---------- ---------- ----------
Total on-balance-sheet
financial assets............. $13,116,516 13,111,548 11,627,401 11,638,506
=========== ========== ========== ==========
LIABILITIES:
Deposits:
Demand deposits............. $ 5,635,111 5,635,111 3,529,215 3,529,215
Time deposits............... 4,091,094 4,091,094 3,501,335 3,503,158
Federal funds purchased and
securities sold under
agreement to repurchase...... 1,992,066 1,992,066 2,104,137 2,104,137
Other short-term borrowings... 344,372 344,372 840,062 840,062
Acceptances outstanding....... 78,983 78,983 95,326 95,326
Senior notes.................. 350,000 350,000 478,000 478,000
Long-term notes............... 310,000 312,639 295,000 304,139
----------- ---------- ---------- ----------
Total on-balance-sheet
financial liabilities........ $12,801,626 12,804,265 10,843,075 10,854,037
=========== ========== ========== ==========
OFF BALANCE-SHEET FINANCIAL
INSTRUMENTS (positive
positions/(obligations))
Credit facilities............. $ (9,613) (9,613) (7,646) (7,646)
Interest rate contracts:
Dealer and trading
contracts.................. 803 803 1,041 1,041
Risk management contracts... 12,697 9,714 (5,521) (11,784)
----------- ---------- ---------- ----------
Total off-balance-sheet
financial instruments........ $ 3,887 904 (12,126) (18,389)
=========== ========== ========== ==========
</TABLE>

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, interest rate and foreign
exchange contracts, 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.

BF-17
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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, credit card lines, 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 $8.8 billion and $7.6 billion at December 31, 1996 and 1995,
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, 1996, totaled $351
million and at December 31, 1995, totaled $244 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 $1.67 billion at December 31, 1996 and
$1.56 billion at December 31, 1995. Risks associated with standby letters of
credit are reduced by participations to third parties which totaled $435
million at December 31, 1996 and $270 million at December 31, 1995.

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 $122 million at December 31, 1996 and $130 million at December
31, 1995.

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 $9.6 million at December 31, 1996 and $7.6
million at December 31, 1995.

Interest rate contracts

Interest rate contracts include futures, forward rate agreements, option
contracts, guarantees (caps, floors and collars) and swaps. The Bank enters
into these contracts for dealer, trading and risk management purposes.

Dealer and trading activity

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

BF-18
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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
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 which provide for netting of contractual receivables and
payables in the event of default or bankruptcy.

Market risk is the risk of loss as a result of changes in interest rates.
The Bank manages market risk by establishing limits which are based on dollars
at risk given a parallel shift in the yield curve. Limits are established by
product, maturity and volatility. Limits are approved by management and
monitored independently of the traders on a regular basis. Market risk is
further diminished by entering into offsetting positions. Senior management
oversees all dealer risk-related activities.

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 below).

BF-19
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

<TABLE>
<CAPTION>
MAXIMUM
CONTRACTUAL OR REPLACEMENT
NOTIONAL AMOUNT COST
--------------------- --------------
DECEMBER 31
------------------------------------
1996 1995 1996 1995
---------- ---------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards................. $ 146,861 $ 56,175 $ -- $ --
Forward rate agreements.............. 155,000 5,000 98 2
Options written...................... -- -- -- --
Options purchased.................... 1,000 -- 2 --
Guarantees written................... 855,967 1,632,121 -- --
Guarantees purchased................. 856,117 1,638,157 1,802 5,801
Swaps................................ 1,631,091 876,320 9,198 12,585
</TABLE>

The following table summarizes average end of period fair values of
dealer/trading interest rate contracts for the years ended December 31, 1996
and 1995:

<TABLE>
<CAPTION>
1996 1996 1995 1995
------------- ------------- ------------- -------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards
Unrealized gains.... $ -- $ -- $ -- $ --
Unrealized losses... -- -- -- --
Forward rate
agreements
Unrealized gains.... 98 38 2 357
Unrealized losses... (27) (21) -- (284)
Options
Purchased........... 2 -- -- 228
Written............. -- -- -- (164)
Guarantees
Purchased........... 1,802 11,588 5,801 7,867
Written............. (1,749) (11,580) (5,789) (7,987)
Swaps
Unrealized gains.... 9,198 6,187 12,585 9,806
Unrealized losses... (8,521) (4,428) (11,558) (8,624)
------- -------- -------- -------
Total Interest
Rate Contracts... $ 803 $ 1,784 $ 1,041 $ 1,199
======= ======== ======== =======
</TABLE>

BF-20
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Net gains (losses) from dealer/trading activity in interest rate contracts
and nonderivative trading account assets for the years ended December 31,
1996, 1995 and 1994 are summarized below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Rate Contracts:
Futures and forwards........................... $ 926 $(1,462) $ 1,020
Forward rate agreements........................ -- (285) (628)
Options........................................ (66) (545) (224)
Guarantees..................................... (1,215) 988 (134)
Swaps.......................................... 69 603 279
Debt Instruments................................. 8,011 5,531 (1,060)
------- ------- -------
Total Trading Revenue........................ $ 7,725 $ 4,830 $ (747)
======= ======= =======
</TABLE>

The following table summarizes the maturities and weighted average interest
rates paid and received on dealer/trading interest rate swaps:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
WITHIN 1 1 TO 3 3 TO 5 5 TO 10
YEAR YEARS YEARS YEARS TOTAL
-------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount....... $145,729 $200,408 $289,023 $167,385 $802,545
Average pay rate...... 6.36% 6.24% 6.30% 6.54% 6.35%
Average receive rate.. 5.66% 5.58% 3.85% 5.54% 4.96%
Receive Fixed Swaps:
Notional amount....... $145,729 $200,409 $229,023 $167,385 $742,546
Average pay rate...... 5.66% 5.58% 4.86% 6.11% 5.49%
Average receive rate.. 6.32% 6.37% 6.29% 6.54% 6.37%
Basis Swaps:
Notional amount....... $86,000 -- -- -- $86,000
Average pay rate...... 5.39% -- -- -- 5.39%
Average receive rate.. 5.43% -- -- -- 5.43%
Total notional
amount............. $377,458 $400,817 $518,046 $334,770 $1,631,091
</TABLE>

BF-21
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Risk management activity

In addition to its dealer activities, the Bank uses interest rate contracts,
primarily swaps, to reduce the level of financial risk inherent in mismatches
between the interest rate sensitivities of certain assets and liabilities.
During 1996 and 1995, interest rate swaps were primarily used to alter the
character of funds supporting certain fixed rate loans, the senior note
program and the municipal bond portfolio. The Bank had $584 million notional
amount of swap contracts, used for risk management purposes, outstanding at
December 31, 1996 with a fair value of $9.7 million and a replacement cost of
$13.2 million. At December 31, 1995, the Bank had $281 million notional amount
of swap contracts outstanding with a fair value of $(11.8) million and a
replacement cost of zero. 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 $0.8 million and $3.8
million, respectively, at December 31, 1996 and zero and $6.3 million,
respectively, at December 31, 1995. Risk management activity, including the
related cash positions, had no material effect on the Bank's net income for
the year ended December 31, 1996 or 1995. There were no deferred gains or
losses on terminated contracts at December 31, 1996 or 1995.

The following table summarizes swap activity for risk management purposes:

<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Amount, December 31, 1994.................................. $ 496,853
Additions.................................................. 609,406
Maturities................................................. (475,226)
Terminations............................................... (350,000)
---------
Amount, December 31, 1995.................................. 281,033
---------
Additions.................................................. 680,707
Maturities................................................. (377,659)
Terminations............................................... --
---------
Amount, December 31, 1996.................................. $ 584,081
=========
</TABLE>

The following table summarizes the maturities and weighted average interest
rates paid and received on interest rate swaps used for risk management:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------
5 TO
WITHIN 1 1 TO 3 3 TO 5 10
YEAR YEARS YEARS YEARS TOTAL
-------- ------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay Fixed Swaps:
Notional amount................ $ 31,000 110,804 57,401 34,876 234,081
Average pay rate............... 10.60% 5.81% 6.18% 6.88% 6.69%
Average receive rate 5.73 5.67 5.62 5.64 5.67
Basis Swaps:
Notional amount................ 350,000 -- -- -- 350,000
Average pay rate............... 5.42 -- -- -- 5.42
Average receive rate........... 5.81 -- -- -- 5.81
-------- ------- ------ ------ -------
Total notional amount........ $381,000 110,804 57,401 34,876 584,081
======== ======= ====== ====== =======
</TABLE>

BF-22
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Foreign exchange contracts

DEALER ACTIVITY

The Bank is a dealer in foreign exchange. 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. Effective April 3, 1995, the Bank and BMO agreed to
combine their U.S. foreign exchange activities ("FX"). 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. Beginning with second quarter 1995, FX revenues were reported net
of expenses. This agreement did not have a material impact on the Bank's 1996
or 1995 net income or financial position at December 31, 1996 or 1995.

At December 31, 1996, approximately two-thirds of the Bank's gross notional
positions in foreign currency contracts are represented by seven currencies:
English pounds, German deutsche marks, Canadian dollars, Japanese yen, Belgian
francs, Italian lira and French francs.

Foreign exchange contracts include spot, future, forward and option
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.

The following table summarizes the Bank's dealer/trading foreign exchange
contracts and their related contractual or notional amount and maximum
replacement cost:

BF-23
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes average and end of period fair values of
dealer/trading foreign exchange contracts for the years ended December 31, 996
and 1995:

<TABLE>
<CAPTION>
1996 1996 1995 1995
------------- ------------- ------------- -------------
END OF PERIOD AVERAGE END OF PERIOD AVERAGE
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Foreign Exchange
Contracts:
Spot, futures and
forwards
Unrealized gains...... $ 60,666 $ 43,477 $ 45,100 $ 137,511
Unrealized losses..... (60,666) (43,477) (45,100) (139,447)
Options
Purchased............. 1,324 1,388 1,386 6,301
Written............... (1,324) (1,398) (1,386) (6,301)
-------- -------- -------- ---------
Total Foreign
Exchange........... $ -- $ (10) $ -- $ (1,936)
======== ======== ======== =========
</TABLE>

At December 31,1996,spot, futures and forward contracts with BMO represent
$39,766 and ($24,031) of unrealized gains and unrealized losses, respectively.
Options contracts with BMO represent $1,284 and ($40) of options purchased and
options written, respectively.

Net gains (losses) from dealer/trading foreign exchange contracts, for the
years ended December 31, 1996, 1995 and 1994 are summarized below. 1996 and
1995 net foreign exchange gains include $10.0 million and $8.8 million,
respectively, of net profit under the aforementioned agreement with BMO.

<TABLE>
<CAPTION>
GAINS GAINS GAINS
(LOSSES) (LOSSES) (LOSSES)
-------- -------- --------
YEARS ENDED DECEMBER 31
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Spot, futures and forwards....................... $9,978 $14,290 $19,609
Options.......................................... -- (60) 140
------ ------- -------
Total Foreign Exchange......................... $9,978 $14,230 $19,749
====== ======= =======
</TABLE>

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 $41.9 million at December 31, 1996 and $15.5 million at December 31,
1995.

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, 1996 or 1995.

BF-24
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

10. CONCENTRATIONS OF CREDIT RISK IN FINANCIAL INSTRUMENTS

The Bank had two concentrations of credit risk arising from financial
instruments at December 31, 1996 and 1995. These concentrations were the
Midwest geographic area and individuals. Each 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, charge card loans and lines,
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 $10.2 billion or 43 percent of the Bank's total credit
exposure at December 31, 1996 and $10.4 billion or 47 percent of the Bank's
total credit exposure at December 31, 1995.

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.

Individuals

The Bank extends credit to individuals through credit card lines, style
lines of credit, installment and single payment loans. Credit card and style
lines are unsecured revolving lines of credit, accessed through VISA and
MasterCard, special drafts, and/or automated teller machines. The Bank's
credit card lines represent most of its total credit exposure to individuals.
Although credit card loans are not collateralized, measures have been
implemented to reduce credit loss. These measures include strict credit
approval criteria, card use monitoring, automated authorization procedures and
aggressive collection procedures. Further, credit card customers are broad-
based geographically, although currently about 50 percent are located in the
Midwest.

Installment and single payment loans are generally collateralized by
personal property and have a fixed maturity. The Bank ensures that it has
sufficient collateral by monitoring its value and perfecting its legal rights
to the property upon default.

The Bank's maximum risk of accounting loss, should all individual customers
fail to perform according to contract terms and all available collateral prove
to be worthless, was approximately $5.2 billion or 22 percent of the Bank's
total credit exposure at December 31, 1996 and $5.1 billion or 23 percent of
the Bank's total credit exposure at December 31, 1995.

11. RETIREMENT AND OTHER POSTEMPLOYMENT PLANS

The Bank has noncontributory defined benefit pension plans covering
virtually all its employees as of December 31, 1996. Most of the employees
participating in retirement plans were included in one primary plan ("primary
plan") during the three-year period ended December 31, 1996. The benefit
formula for this plan is

BF-25
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

based upon length of service and an employee's highest qualifying compensation
during five consecutive years of active employment. The plan is a multiple-
employer plan covering the Bank's employees as well as persons employed by
certain affiliated entities. In 1995, the Bank prospectively expanded the
definition of qualifying compensation and reduced the rate used to compute
retirement benefits.

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 1996, cumulative contributions were less than the amount recorded as
pension expense for financial reporting purposes. For 1995, cumulative
contributions were greater than the amount recorded as pension expense for
financial reporting purposes. For 1994, the minimum and maximum deductible
contribution were both zero as a result of the full funding limitation.

In 1995, the Bank changed mortality assumption rates from the 1984 Unisex
Pensioner Mortality Table to the 1983 Group Annuity Mortality Table in
accordance with the Retirement Protection Act of 1994. In addition, the
assumptions regarding future annual increases were modified as follows: the
wage base was decreased from 6% to 5% and the Consumer Price Index was reduced
by 1% at each age. These changes had no material effect on 1995 pension
expense. In 1994, the Bank elected to change the measurement date for plan
assets and liabilities from December 31 to September 30. The change had no
material effect on 1994 or prior years pension expense.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1996** 1995** 1994**
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $109,720 in 1996,
$108,756 in 1995 and $79,398 in 1994.... $ 122,445 $ 121,391 $ 91,820
========= ========= =========
Projected benefit obligation for services
rendered to date.......................... (158,286) (157,216) (127,400)
Plan assets at fair value*................. 165,439 154,445 140,516
--------- --------- ---------
Excess of plan assets over projected
benefit obligations....................... 7,153 (2,761) 13,116
Unrecognized net (gain) loss from past
experiences different from that assumed
and effects of changes in assumptions..... 618 13,013 (2,563)
Prior services cost not yet recognized in
net periodic pension cost................. (6,065) (6,578) (3,168)
Unrecognized net asset at December 31 being
recognized over 16.3 years from January 1,
1986...................................... (1,423) (1,662) (1,934)
Contributions made between measurement date
(September 30) and end of year............ 5,417 5,853 --
--------- --------- ---------
Prepaid pension cost..................... $ 5,700 $ 7,865 $ 5,451
========= ========= =========
Assumptions used:
Discount rate............................ 7.50% 7.25% 7.75%
Rate of increase in compensation......... 5.70% 5.70% 6.60%
Expected long-term asset return.......... 8.00% 8.00% 8.00%
</TABLE>
- --------
* Plan assets consist primarily of participating units in collective trust
funds administered by the Bank.
** Plan assets and obligations are allocated to the Bank based on the Bank's
pension expense as a percentage of Bankcorp's total pension expense. Plan
assets and obligations measured as of September 30.

BF-26
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Net pension expense included the following components for the primary plan:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1996** 1995** 1994**
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the
period...................................... $ 7,823 $ 5,727 $ 8,101
Interest cost on projected benefit
obligation.................................. 11,584 10,259 10,150
Actual return on plan assets................. (16,655) (24,026) 1,027
Net amortization and deferral................ 4,104 12,168 (13,102)
-------- -------- --------
Net periodic pension expense............... $ 6,856 $ 4,128 $ 6,176
======== ======== ========
</TABLE>

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:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------
1996*** 1995*** 1994***
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated benefit obligation................... $ 7,241 $ 5,786 $ 7,580
Projected benefit obligation for service rendered
to date......................................... 15,486 14,332 19,260
Accrued pension liability........................ 8,827 7,489 6,040
Net periodic pension expense..................... 2,435 4,244 6,849
Assumptions used:
Discount rate.................................. 5.25% 5.25% 5.75%
Rate increase in compensation.................. 5.70% 5.70% 6.60%
</TABLE>
- --------
*** Amounts allocated based on the Bank's supplemental retirement expense as
a percentage of Bankcorp's total supplemental retirement expense.

During 1996, 1995 and 1994, the Bank's lump-sum benefit payments to retirees
resulted in settlement losses of approximately $0.1 million, $0.8 million and
$3.1 million, respectively, reflected above as a portion of net periodic
pension expense.

The total consolidated pension expense of the Bank, including the
supplemental plan, for 1996, 1995 and 1994 was $9.4 million, $7.9 million and
$13.0 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. In 1994, the Bank expanded the plan to provide 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, although recently contributions to a trust fund have been made under
Internal Revenue Code Section 401(h).

BF-27
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In 1994 the Bank elected to change the measurement date for plan assets and
liabilities from December 31 to September 30; the change had no material
effect on 1994 benefit expense. The following table sets forth the
postretirement medical care benefit plan's status at December 31, 1996, 1995
and 1994 for the Bank:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996** 1995** 1994**
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligation:
Retirees............................ $(11,737) $(15,261) $(18,111)
Fully eligible active plan
participants....................... (2,204) (2,585) (3,197)
Other active employees not fully
eligible........................... (9,040) (9,264) (8,647)
-------- -------- --------
Accumulated postretirement benefit
obligation........................... (22,981) (27,110) (29,955)
Plan assets at fair value*............ 7,233 5,765 4,391
-------- -------- --------
Accumulated postretirement benefit
obligation in excess of plan assets.. (15,748) (21,345) (25,564)
Unrecognized net (gain) loss from past
experience different from that
assumed.............................. (8,006) (7,861) (602)
Prior service cost not yet recognized
in net periodic postretirement
benefit cost......................... 1,662 2,059 2,015
Unrecognized transition obligation.... 18,756 23,081 22,444
-------- -------- --------
Prepaid (accrued) postretirement
benefit cost......................... $ (3,336) $ (4,066) $ (1,707)
======== ======== ========

Assumptions used in determining actuarial present value of benefit
obligation:

Discount rate....................... 7.50% 7.25% 7.75%
Rate of increase in health costs:
Initial........................... 8.50% 9.00% 12.00%
Ultimate.......................... 6.00% 6.00% 7.00%
Expected long-term asset return..... 8.00% 8.00% 8.00%
</TABLE>
- --------
* Plan assets consist primarily of participating units in collective trust
funds administered by the Bank.
** Plan assets and obligations are allocated to the Bank based on the Bank's
net prepaid postretirement expense as a percentage of Bankcorp's net
prepaid post retirement expense. Plan assets and obligations measured as of
September 30.

Net postretirement benefit expense included the following components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996* 1995* 1994*
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period...... $1,248 $ 898 $1,660
Interest cost on accumulated postretirement benefit
obligation......................................... 2,228 2,268 2,817
Actual return on plan assets........................ (888) (1,216) 2
Amortization of transition obligation over 20 years. 1,774 1,774 1,774
Net amortization and deferral....................... 68 560 (168)
------ ------ ------
Net postretirement benefit expense................ $4,430 $4,284 $6,085
====== ====== ======
</TABLE>
- --------
*Amounts allocated based on the Bank's postretirement benefit expense as a
percentage of Bankcorp's total postretirement benefit expense.

BF-28
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

For 1996, the weighted average annual rate of increase in the per capita
cost of covered benefits was assumed to be 8.5 percent and was assumed to
decrease gradually to 6 percent in 2001 and remain level thereafter. For 1995
and 1994, the weighted average annual rate of increase in the per capita cost
of covered benefits was assumed to be 9 percent and 12 percent, respectively,
and was assumed to decrease gradually to 6 percent and 7 percent,
respectively, in 2001 and remain level thereafter. This health care cost trend
rate assumption had a significant effect on the amounts reported. Increasing
the assumed health care cost trend rates by one percentage point each year
would have increased the accumulated postretirement benefit obligation as of
September 30, 1996, September 30, 1995 and September 30, 1994 by $5.2 million,
$5.3 million and $6.2 million, respectively, and the aggregate service and
interest cost components of net postretirement benefit expense for 1996 by
approximately $0.7 million.

12. STOCK OPTIONS

At December 31, 1996, the Bank has two stock-based compensation plans which
are described below. During the first quarter of 1996, the Bank adopted SFAS
No. 123, Accounting for Stock-based Compensation, and elected the fair value
based method of accounting for its stock-based compensation plans. Employment
expense for these plans was $3.9 million and $0.5 million in 1996 and 1995,
respectively. There was no expense in 1994.

In January 1996, the Bank adopted the Harris Bank Stock Option Program under
the Bank of Montreal Stock Option Plan. The plan was established for certain
designated executives and certain other employees of the Bank in order to
provide incentive to attain long-term strategic goals and to attract and
retain services of key employees. On February 26, 1996, the Bank granted
451,800 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 stock options are exercisable for Bank of Montreal common stock at a
price of Canadian $31.00 per share, equal to the market price on the date of
grant (equivalent to U.S. $22.55). The estimated grant-date fair value of the
options granted on February 26, 1996 was Canadian $5.79, equivalent to U.S.
$4.26. The fair value of the option grant was estimated using the Bloomberg
model with the following assumptions: risk-free interest rate of 7.57%,
expected life of 7.5 years, expected volatility of 16.97% and compound annual
dividend growth of 5.24%. A summary of the status of the stock option plan as
of December 31, 1996 and changes during the year ended December 31, 1996 is
presented below:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE
------- -------- ----------------
<S> <C> <C>
Outstanding at 1/1/96.......................... -- --
Granted........................................ 451,800 $22.55
Exercised...................................... -- --
Forfeited, cancelled........................... 8,800 22.55
Expired........................................ -- --
-------- ------
Outstanding at 12/31/96........................ 443,000 $22.55
======== ======
Options exercisable at 12/31/96................ None
Weighted-average fair value of options granted
during 1996................................... $ 4.26
</TABLE>

The Bank maintains the Harris Bank Stock Appreciation Rights Plan which was
established in January 1995. The rights granted under this plan have either a
three-year or five-year term and are exercisable after the expiration of the
respective term, assuming cumulative performance goals are met. No rights were
granted in 1996. There are 528,000 rights outstanding at December 31, 1996.

BF-29
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

13. LEASE EXPENSE AND OBLIGATIONS

Rental expense for all operating leases was $15.5 million in 1996, $13.7
million in 1995 and $13.0 million in 1994. These amounts include real estate
taxes, maintenance and other rental-related operating costs of $4.4 million,
$4.1 million and $4.1 million for 1996, 1995, and 1994, respectively, paid
under net lease arrangements. Lease commitments are primarily for office
space.

Minimum rental commitments as of December 31, 1996 for all noncancelable
operating leases are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997....................................................... $10,337
1998....................................................... 8,438
1999....................................................... 6,200
2000....................................................... 4,949
2001....................................................... 4,964
2002 and thereafter........................................ 13,735
-------
Total minimum future rentals............................. $48,623
=======
</TABLE>

Occupancy expenses for 1996, 1995, and 1994 have been reduced by $13.8
million, $12.8 million, and $13.4 million, respectively, for rental income
from leased premises.

14. INCOME TAXES

The 1996, 1995, and 1994 applicable income tax expense (benefit) was as
follows:

<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Current................................. $45,637 $ 4,648 $1,213 $51,498
Deferred................................ (2,164) (1,155) -- (3,319)
------- ------- ------ -------
Total................................. $43,473 $ 3,493 $1,213 $48,179
======= ======= ====== =======
1995:
Current................................. $51,415 $ 3,208 $ 29 $54,652
Deferred................................ (2,242) 1,156 -- (1,086)
------- ------- ------ -------
Total................................. $49,173 $ 4,364 $ 29 $53,566
======= ======= ====== =======
1994:
Current................................. $20,277 $ 583 $ 31 $20,891
Deferred................................ (3,602) (5,138) -- (8,740)
------- ------- ------ -------
Total................................. $16,675 $(4,555) $ 31 $12,151
======= ======= ====== =======
</TABLE>

BF-30
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Deferred tax assets (liabilities) are comprised of the following at December
31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross deferred tax assets:
Allowance for possible loan losses................ $41,038 $36,742 $38,835
Intangible assets................................. 7,122 7,350 6,719
Deferred employee compensation.................... 4,196 6,515 6,124
Deferred expense and prepaid income............... 3,848 2,729 2,003
Pension and medical trust......................... 3,438 4,025 3,421
Other assets...................................... 3,359 2,729 2,686
------- ------- -------
Deferred tax assets............................. 63,001 60,090 59,788
------- ------- -------
Gross deferred tax liabilities:
Other liabilities................................. (876) (1,284) (2,068)
------- ------- -------
Deferred tax liabilities........................ (876) (1,284) (2,068)
Valuation allowance................................. -- -- --
------- ------- -------
Net deferred tax assets........................... 62,125 58,806 57,720
------- ------- -------
Tax effect of adjustment related to available-for-
sale securities.................................... 9,308 (11,301) 13,389
------- ------- -------
Net deferred tax assets including adjustment related
to available-for-sale securities................... $71,433 $47,505 $71,109
======= ======= =======
</TABLE>

At December 31, 1996 and 1995, the respective net deferred tax assets of
$62.1 million and $58.8 million included $51.5 million and $49.4 million for
Federal tax and $10.6 million and $9.4 million for Illinois tax, respectively.
The Bank has fully recognized both its Federal and Illinois deferred tax
assets. Current taxable income and taxable income generated in the statutory
carryback period is sufficient to support the entire deferred tax asset. The
deferred taxes reported on the Bank's Consolidated Statement of Condition at
December 31, 1996 and 1995 also include a $9.3 million deferred tax asset and
a $11.3 million deferred tax liability, respectively, for the tax effect of
the net unrealized gains associated with marking to market certain securities
designated as available for sale.

BF-31
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Total income tax expense of $48.2 million for 1996, $53.6 million for 1995,
and $12.2 million for 1994 reflects effective tax rates of 31.9 percent, 32.9
percent, and 15.2 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:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
PERCENT
OF PRETAX
AMOUNT INCOME
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Computed tax expense............................ $ 52,940 35.0%
Increase (reduction) in income tax expense due
to:
Tax-exempt income from loans and investments
net of municipal interest expense
disallowance................................. (3,254) (2.1)
Bank owned life insurance..................... (2,969) (2.0)
Reduction of deferred tax valuation allowance. -- --
Other, net.................................... 1,461 1.0
------------ ----------
Actual tax expense.......................... $ 48,178 31.9%
============ ==========
<CAPTION>
DECEMBER 31, 1995
--------------------------
PERCENT
OF PRETAX
AMOUNT INCOME
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Computed tax expense............................ $ 56,998 35.0%
Increase (reduction) in income tax expense due
to:
Tax-exempt income from loans and investments
net of municipal interest expense
disallowance................................. (6,422) (3.9)
Bank owned life insurance..................... (1,061) (0.7)
Reduction of deferred tax valuation allowance. -- --
Other, net.................................... 4,050 2.5
------------ ----------
Actual tax expense.......................... $ 53,565 32.9%
============ ==========
<CAPTION>
DECEMBER 31, 1994
--------------------------
PERCENT
OF PRETAX
AMOUNT INCOME
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Computed tax expense............................ $ 28,032 35.0%
Increase (reduction) in income tax expense due
to:
Tax-exempt income from loans and investments
net of municipal interest expense
disallowance................................. (9,757) (12.2)
Bank owned life insurance..................... -- --
Reduction of deferred tax valuation allowance. (2,600) (3.2)
Other, net.................................... (3,525) (4.4)
------------ ----------
Actual tax expense............................ $ 12,151 15.2%
============ ==========
</TABLE>

The tax expense from net gains on security sales amounted to $3.3 million,
$9.0 million and $4.4 million in 1996, 1995, 1994, respectively.

BF-32
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.
Effective December 31, 1992, 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 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. At year-end 1996, 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,
including those experiencing or anticipating significant growth, are expected
to maintain a ratio which exceeds the 3 percent minimum by at least 100 to 200
basis points.

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 which could have a material effect on the Bank. 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, 1996, 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, 1996 that have changed the capital category of the Bank.

BF-33
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

<TABLE>
<CAPTION>
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
---------- ------- ---------- ------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital to Risk-
Weighted Assets...... $1,340,198 10.74% ^ $998,285 ^8.00% ^$ 1,247,857 ^10.00%
Tier 1 Capital to
Risk-Weighted Assets. $ 928,872 7.44% ^ $499,394 ^4.00% ^$ 749,090 ^ 6.00%
Tier 1 Capital to
Average Assets....... $ 928,872 6.65% ^ $558,720 ^4.00% ^$ 698,400 ^ 5.00%
As of December 31, 1995:
Total Capital to Risk-
Weighted Assets...... $1,208,671 10.86% ^ $890,365 ^8.00% ^$ 1,112,957 ^10.00%
Tier 1 Capital to
Risk-Weighted Assets. $ 819,818 7.37% ^ $444,949 ^4.00% ^$ 667,423 ^ 6.00%
Tier 1 Capital to
Average Assets....... $ 819,818 6.44% ^ $509,204 ^4.00% ^$ 636,505 ^ 5.00%
</TABLE>

16. INVESTMENTS IN SUBSIDIARIES AND STATUTORY RESTRICTIONS

The Bank's investment in the combined net assets of its wholly-owned
subsidiaries was $18.1 million and $18.6 million at December 31, 1996 and
1995, 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, Bancorp subsidiaries could
have declared, without regulatory approval, $211.1 million of dividends at
December 31, 1996. Actual dividends paid, however, would be subject to prudent
capital maintenance. Cash dividends paid to Bankcorp by the Bank amounted to
$41.9 million and $39.2 million in 1996 and 1995, 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 1996 and 1995, daily average
reserve balances of $185 million and $171 million, respectively, were required
for the Bank. At year-end 1996 and 1995, balances on deposit at the Federal
Reserve Bank totaled $131 million and $419 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.

BF-34
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

18. FOREIGN ACTIVITIES (BY DOMICILE OF CUSTOMER)

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

<TABLE>
<CAPTION>
1996 (IN THOUSANDS) FOREIGN DOMESTIC CONSOLIDATED
------------------- ---------- ----------- ------------
<S> <C> <C> <C>
Total operating income................... $ 40,067 $ 1,092,280 $ 1,132,347
Total expenses........................... 13,399 967,689 981,088
---------- ----------- -----------
Income before taxes...................... 26,668 124,591 151,259
Applicable income taxes.................. 10,599 37,579 48,178
---------- ----------- -----------
Net income............................... $ 16,069 $ 87,012 $ 103,081
========== =========== ===========
Identifiable assets at year-end.......... $ 835,657 $13,371,009 $14,206,666
========== =========== ===========
<CAPTION>
1995 (IN THOUSANDS)
-------------------
<S> <C> <C> <C>
Total operating income................... $ 49,329 $ 1,045,124 $ 1,094,453
Total expenses........................... 23,922 907,680 931,602
---------- ----------- -----------
Income before taxes...................... 25,407 137,444 162,851
Applicable income taxes.................. 10,098 43,467 53,565
---------- ----------- -----------
Net income............................... $ 15,309 $ 93,977 $ 109,286
========== =========== ===========
Identifiable assets at year-end.......... $ 792,433 $11,178,052 $11,970,485
========== =========== ===========
<CAPTION>
1994 (IN THOUSANDS)
-------------------
<S> <C> <C> <C>
Total operating income................... $ 53,416 $ 828,532 $ 881,948
Total expenses........................... 23,584 778,271 801,855
---------- ----------- -----------
Income before taxes...................... 29,832 50,261 80,093
Applicable income taxes.................. 11,857 294 12,151
---------- ----------- -----------
Net income............................... $ 17,975 $ 49,967 $ 67,942
========== =========== ===========
Identifiable assets at year-end.......... $1,017,784 $10,910,222 $11,928,006
========== =========== ===========
</TABLE>

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, 1996, 1995 and
1994, identifiable foreign assets accounted for 6, 7 and 9 percent,
respectively, of total consolidated assets.

19. BUSINESS COMBINATIONS AND DISPOSITIONS/INTANGIBLES

At December 31, 1996 and 1995, intangible assets, including goodwill
resulting from business combinations, amounted to $294,420,000 and
$18,881,000, respectively. Amortization of these intangibles amounted to
$14,930,000 in 1996, $5,969,000 in 1995, and $6,791,000 in 1994. The impact of
purchase accounting adjustments, other than amortization of intangibles, was
not material to the Bank's reported results.

In January 1996, the Bank announced the sale of its securities custody and
related trustee services business for large institutions to Citibank. After
restructuring charges, the Bank recognized a $4.0 million gain on the sale.
The gain was recorded net of certain anticipated costs to exit this activity,
including employee termination benefits, amounting to approximately $13.0
million. Computation of the gain also included the Bank's estimated

BF-35
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

obligation to service affected customers on an interim basis. The Bank is
entitled to contingent revenue in the event certain levels of customer
retention are achieved by the purchaser of the business. The right to receive
such revenue in 1998 was included as consideration in an arrangement
consummated with Bankmont during 1996 (see Note 20).

On June 28, 1996, the Bank completed the acquisition of 54 branches
previously owned by Household Bank, f.s.b. ("Household"), a wholly-owned
subsidiary of Household International, Inc. The 54 branches are located
throughout the metropolitan Chicago area. In addition to acquiring real and
personal property, the Bank has assumed certain deposit liabilities and
purchased other assets, primarily consumer loans. The transaction has been
accounted for as a purchase and the Bank's consolidated financial statements
include the results of the acquired branches from the date of acquisition. In
anticipation of this transaction, on June 27, 1996 the Bank increased its
capital base by $340 million, in part through a direct cash infusion of $325
million of common equity by Bankcorp and the issuance of $15 million of long-
term subordinated debt.

The purchase price of $277 million was recorded as an intangible asset,
along with certain fair value adjustments and deferred acquisition costs,
resulting in goodwill and other intangibles recognized of $284 million.

Following is an unaudited condensed statement of condition of the Bank at
June 30, 1996, reflecting the impact of the transaction on the Bank's
financial position at the acquisition date.

<TABLE>
<CAPTION>
UNAUDITED
--------------------------------------------------
JUNE 30, 1996 HOUSEHOLD JUNE 30, 1996
WITHOUT HOUSEHOLD IMPACT AS REPORTED
----------------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and demand balances
due from banks.......... $ 1,065 $ 105 (a,f) $ 1,170
Money market and trading
account assets.......... 869 869
Portfolio securities..... 3,027 3,027
Loans, net of unearned
income.................. 7,694 340 (b) 8,034
Allowance for possible
loan losses............. (100) (5)(b) (105)
Premises and equipment... 146 30 (c) 176
Other assets............. 552 294 (b,c,d,g) 846
------- ------- -------
TOTAL ASSETS........... $13,253 $ 764 $14,017
======= ======= =======
LIABILITIES
Total deposits........... 7,726 1,643 (e,f) 9,369
Short-term borrowings.... 4,173 (1,244)(f) 2,929
Other liabilities........ 236 25 (g) 261
Long-term notes.......... 295 15 (a) 310
------- ------- -------
TOTAL LIABILITIES...... 12,430 439 12,869
------- ------- -------
STOCKHOLDER'S EQUITY
Common equity............ 823 325 (a) 1,148
------- ------- -------
TOTAL STOCKHOLDER'S
EQUITY................ 823 0 1,148
------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY.. $13,253 $ 439 $14,017
======= ======= =======
</TABLE>

BF-36
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

- --------
(a) The Bank received a contribution to capital surplus from Bankcorp of $325
million and issued to Bankcorp $15 million of subordinated debt.
(b) The Bank acquired loans amounting to $340 million plus accrued interest
receivable and established a related allowance for possible loan losses of
$4.8 million in order to record the loans at fair value.
(c) The Bank acquired fixed assets totaling $30 million including a $3.9
million adjustment to reflect land acquired at fair market value.
(d) The Bank recorded the $277 million purchase price as an intangible asset.
(e) The Bank assumed deposit liabilities totaling $2.9 billion.
(f) The Bank reduced short-term borrowings (wholesale time deposits, Federal
funds purchased, etc.) with the net cash available from Household and the
related capital infusion from Bankcorp. In addition, cash and due from
bank balances increased as a result of statutory reserve requirements on
deposits.
(g) The Bank recorded $17 million of accrued interest payable on the assumed
deposit liabilities and capitalized as apart of the purchase price
approximately $6.8 million for investment banker fees, severance costs and
other charges.

20. RELATED PARTY TRANSACTIONS

During 1996, 1995, and 1994, the Bank engaged in various transactions with
BMO and its subsidiaries. These transactions included the payment and receipt
of service fees and occupancy expenses, and purchasing and selling Federal
funds, repurchase and reverse repurchase agreements, long-term borrowings and
interest rate and foreign exchange 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 1996, 1995 and 1994,
the Bank received from BMO approximately $14.3 million, $15.7 million and
$12.8 million respectively, primarily for trust services, data processing and
other operations support provided by the Bank.

In order to facilitate the Bank's exit from the securities custody and
related trustee services business for large institutions (see Note 19), the
Bank and Bankmont entered into an agreement effective December 31, 1996
whereby Bankmont will assume responsibility for potential costs (subject to
limits) related to certain litigation matters involving the Bank. As part of
this agreement, Bankmont incurred $2.7 million of costs through the date of
the agreement. In return for assuming this obligation, Bankmont is entitled to
receive funds from a contingent revenue arrangement between the Bank and
Citibank. Bankmont paid the Bank $480,000 as consideration for accepting this
arrangement, which was recorded as income.

Effective April 3, 1995, the Bank and BMO agreed to combine their U.S.
foreign exchange activities. 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. Beginning with
second quarter 1995, FX revenues were reported net of expenses. 1996 and 1995
foreign exchange revenues included $10.0 million and $8.8 million of net
profit, respectively, under this agreement.

BF-37
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
SEPTEMBER DECEMBER SEPTEMBER
30, 31, 30,
1997 1996 1996
----------- ----------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks. $ 1,188,255 $ 1,154,613 $ 1,747,589
Money market assets:
Interest-bearing deposits at banks.... 550,173 658,187 839,856
Federal funds sold and securities
purchased under agreement to resell.. 396,400 316,275 478,625
Portfolio securities available for sale. 3,685,983 2,759,331 3,137,919
Trading account assets.................. 35,467 110,355 28,225
Loans................................... 8,382,298 8,147,180 7,859,330
Allowance for possible loan losses...... (107,180) (108,408) (108,949)
Net loans............................. 8,275,118 8,038,772 7,750,381
Premises and equipment.................. 222,857 190,154 180,470
Customers' liability on acceptances..... 41,205 78,983 100,950
Goodwill and other valuation
intangibles............................ 283,839 294,420 306,162
Other assets............................ 611,872 605,576 542,725
----------- ----------- -----------
TOTAL ASSETS........................ $15,291,169 $14,206,666 $15,112,902
=========== =========== ===========
LIABILITIES
Deposits in domestic offices--
noninterest-bearing.................... 2,729,526 3,124,027 3,181,584
- --interest-bearing...................... 5,604,026 4,762,256 4,763,849
Deposits in foreign offices--
noninterest-bearing.................... 23,421 35,116 32,775
- --interest-bearing...................... 1,964,295 1,804,806 2,022,745
----------- ----------- -----------
Total deposits...................... 10,321,268 9,726,205 10,000,953
Federal funds purchased and securities
sold under agreement to repurchase..... 2,549,327 1,992,066 2,727,932
Other short-term borrowings............. 25,457 344,372 167,331
Senior notes............................ 605,000 350,000 439,000
Acceptances outstanding................. 41,205 78,983 100,950
Accrued interest, taxes and other
expenses............................... 117,605 125,968 149,148
Other liabilities....................... 55,932 86,506 61,233
Long-term subordinated notes............ 325,000 310,000 310,000
----------- ----------- -----------
TOTAL LIABILITIES................... 14,040,794 13,014,100 13,956,547
----------- ----------- -----------
STOCKHOLDER'S EQUITY
Common stock ($10 par value); authorized
10,000,000 shares; issued and
outstanding 10,000,000 shares.......... 100,000 100,000 100,000
Surplus................................. 600,853 600,377 600,295
Retained earnings....................... 553,257 506,300 486,054
Unrealized holding losses, net of
deferred tax benefits of $14,420 in
1997, $9,308 and $26,115 in 1996....... (3,735) (14,111) (29,994)
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY.......... 1,250,375 1,192,566 1,156,355
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY............................. $15,291,169 $14,206,666 $15,112,902
=========== =========== ===========
</TABLE>

The accompanying notes to interim financial statements are an integral part of
this statement.

BF-38
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------- -----------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees...................... $175,722 $168,054 $518,995 $478,379
Money market assets:
Deposits at banks........................ 7,120 9,118 24,036 20,443
Federal funds sold and securities
purchased under agreement to resell..... 3,457 2,132 9,216 8,373
Trading account............................ 841 880 2,441 2,986
Securities available-for-sale:
U.S. Treasury and Federal agency......... 55,788 43,802 161,484 123,571
State and municipal...................... 1,166 1,357 3,525 4,241
Other.................................... 316 317 947 1,502
-------- -------- -------- --------
Total interest income.................. 244,410 225,660 720,644 639,495
-------- -------- -------- --------
INTEREST EXPENSE
Deposits................................... 90,218 75,227 250,818 203,794
Short-term borrowings...................... 37,048 35,179 108,545 115,535
Senior notes............................... 8,433 6,437 31,594 16,723
Long-term subordinated notes............... 5,389 4,790 14,792 14,783
-------- -------- -------- --------
Total interest expense................. 141,088 121,633 405,749 350,835
-------- -------- -------- --------
NET INTEREST INCOME........................ 103,322 104,027 314,895 288,600
Provision for loan losses.................. 15,466 14,981 46,555 43,307
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................... 87,856 89,046 268,340 245,353
-------- -------- -------- --------
NONINTEREST INCOME
Trust and investment management fees....... 25,978 19,704 74,791 62,070
Trading account............................ 735 626 3,130 4,132
Foreign exchange........................... 1,348 1,692 3,462 8,686
Charge card................................ 12,877 13,007 37,142 33,891
Service fees and charges................... 21,968 20,649 62,856 51,456
Portfolio securities gains................. 5,742 664 9,518 4,110
Other...................................... 15,166 8,970 38,806 28,042
-------- -------- -------- --------
Total noninterest income............... 83,814 65,312 229,705 192,387
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries and other compensation............ 63,131 56,055 183,950 155,293
Pension, profit sharing and other employee
benefits.................................. 12,385 9,602 36,520 32,034
Net occupancy.............................. 12,066 10,030 34,312 26,034
Equipment.................................. 10,344 8,453 29,234 24,905
Marketing.................................. 5,127 6,573 16,167 17,301
Communication and delivery................. 5,455 4,742 15,601 14,005
Deposit insurance.......................... 628 18,363 1,826 18,399
Expert services............................ 8,600 3,896 21,544 11,282
Other...................................... 9,432 8,533 28,220 21,181
-------- -------- -------- --------
127,168 126,247 367,374 320,434
Goodwill and other valuation intangibles... 6,235 6,079 18,505 8,885
-------- -------- -------- --------
Total noninterest expenses............. 133,403 132,326 385,879 329,319
-------- -------- -------- --------
Income before income taxes................. 38,267 22,032 112,166 108,421
Applicable income taxes.................... 11,405 6,121 34,810 34,088
-------- -------- -------- --------
NET INCOME............................. $ 26,862 $ 15,911 $ 77,356 $ 74,333
======== ======== ======== ========
EARNINGS PER SHARE (based on 10,000,000
average shares outstanding)............... $ 2.69 $ 1.59 $ 7.74 $ 7.43
======== ======== ======== ========
</TABLE>
The accompanying notes to interim financial statements are an integral part of
this statement.

BF-39
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
1997 1996
---------- ----------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT JANUARY 1................................... $1,192,566 $ 837,241
Net income........................................... 77,356 74,333
Contributions to capital............................. 476 325,295
Cash dividends--common stock......................... (30,400) (33,400)
Net change in unrealized holding gains/(losses) on
available-for-sale securities,
net of tax.......................................... 10,377 (47,114)
---------- ----------
BALANCE AT SEPTEMBER 30................................ $1,250,375 $1,156,355
========== ==========
</TABLE>

The accompanying notes to interim financial statements are an integral part of
this statement.

BF-40
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1997 1996
----------- -----------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................... $ 77,356 $ 74,333
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.......................... 46,555 43,307
Depreciation and amortization, including
intangibles....................................... 42,554 30,744
Deferred tax benefit............................... (1,793) (1,881)
Gain on sales of portfolio securities.............. (9,518) (4,110)
Trading account net sales.......................... 74,888 70,413
Net increase in interest receivable................ (18,400) (10,032)
Net decrease in interest payable................... (5,260) (2,377)
Net increase in loans held for resale.............. (43,101) (66,851)
Other, net......................................... (17,051) (66,591)
----------- -----------
Net cash provided by operating activities........ 146,230 66,955
----------- -----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing
deposits at banks................................. 108,014 (382,156)
Net increase in Federal funds sold and securities
purchased under agreement to resell............... (80,125) (314,681)
Proceeds from sales of securities available-for-
sale.............................................. 980,407 723,245
Proceeds from maturities of securities available-
for-sale.......................................... 6,725,657 3,418,401
Purchases of securities available-for-sale......... (8,605,987) (5,317,326)
Net increase in loans.............................. (239,800) (25,017)
Net cash received upon assumption of certain assets
and liabilities of Household Bank, f.s.b.......... -- 2,244,009
Proceeds from sales of premises and equipment...... 17,989 7,032
Purchases of premises and equipment................ (74,741) (38,902)
Other, net......................................... (17,011) (6,480)
----------- -----------
Net cash (used) provided by investing activities. (1,185,597) 308,125
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits........................... 595,063 79,198
Net increase in Federal funds purchased and
securities sold under agreement to repurchase..... 557,261 623,795
Net decrease in short-term borrowings.............. (318,915) (672,732)
Proceeds from issuance of senior notes............. 5,310,000 1,199,436
Repayment of senior notes.......................... (5,055,000) (1,238,436)
Proceeds from issuance of long-term notes.......... 15,000 15,000
Proceeds from issuance of preferred stock.......... -- 45,000
Contribution to capital surplus.................... -- 280,000
Cash dividends paid on common stock................ (30,400) (33,400)
Other, net......................................... -- (335,112)
----------- -----------
Net cash provided (used) by financing activities. 1,073,009 (37,251)
----------- -----------
NET INCREASE IN CASH AND DEMAND BALANCES DUE FROM
BANKS........................................... 33,642 337,829
CASH AND DEMAND BALANCES DUE FROM BANKS AT
JANUARY 1....................................... 1,154,613 1,409,760
----------- -----------
CASH AND DEMAND BALANCES DUE FROM BANKS AT
SEPTEMBER 30.................................... $ 1,188,255 $ 1,747,589
=========== ===========
</TABLE>

The accompanying notes to interim financial statements are an integral part of
this statement.

BF-41
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO INTERIM FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements of the Bank include the accounts of
the Bank and its wholly-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated. Certain reclassifications were made to
conform prior years' financial statements to the current year's presentation.

The consolidated financial statements have been prepared by management from
the books and records of the Bank, without audit by independent certified
public accountants. However, these statements reflect all adjustments (which
are of a normal recurring nature) and disclosures which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented and should be read in conjunction with the notes to
financial statements for the year ended December 31, 1996.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.

Because the results of operations are so closely related to and responsive
to changes in economic conditions, the results for any interim period are not
necessarily indicative of the results that can be expected for the entire
year.

2. LEGAL PROCEEDINGS

The Bank and its subsidiaries are defendants in various legal proceedings
arising in the normal course of business. In the opinion of management, based
on the advice of legal counsel, the ultimate resolution of these matters will
not have a material adverse effect on the Bank's consolidated financial
position.

3. CASH FLOWS

For purposes of the Bank's Consolidated Statement of Cash Flows, cash and
cash equivalents is defined to include cash and demand balances due from
banks. Cash interest payments (net of amounts capitalized) for the nine months
ended September 30, totaled $411 million and $342 million in 1997 and 1996,
respectively. Cash income tax payments over the same periods totaled $42
million and $46 million, respectively.

4. ACCOUNTING CHANGES

During the first quarter of 1997, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The Statement
provides standards based on the application of a financial components approach
to transfers and servicing of financial assets and extinguishments of
liabilities. The approach is focused on control of assets and liabilities
existing after transfers of financial assets whereby an entity recognizes the
assets it controls and the liabilities it has incurred and derecognizes the
assets it no longer controls and the liabilities it has extinguished. The
Statement provides standards to determine whether transfers of financial
assets are to be accounted for as sales or secured borrowings. The adoption of
the portions of SFAS No. 125 which were not deferred by SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," did not have a material effect on the Bank's financial position or
results of operations.

5. DERIVATIVES

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

BF-42
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO INTERIM FINANCIAL STATEMENTS--(CONTINUED)

Derivative financial instruments which 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 account income and foreign
exchange income, respectively.

Derivative financial instruments which are used in the management of the
Bank's risk strategy may qualify for hedge accounting. A derivative financial
instrument may be a hedge of an existing asset, liability, firm commitment or
anticipated transaction. Hedge accounting is used when the following criteria
are met: the hedged item exposes the Bank to price, currency or interest rate
risk; the hedging instrument reduces the exposure to risk and the hedging
instrument is designated as a hedge. At the inception of the hedge and
throughout the hedge period, a high correlation of changes in both the market
value of the hedging instrument and the fair value of the hedged item should
be probable. Additional criteria for using hedge accounting for anticipated
transactions are: the significant characteristics and expected terms of the
anticipated transaction are identified and it is probable that the anticipated
transaction will occur.

If hedge criteria are met, then unrealized gains and losses on derivative
financial instruments other than interest rate swaps are generally recognized
in the same period and in the same manner in which gains and losses from the
hedged item are recognized. Unrealized gains and losses on a hedging
instrument are deferred when the hedged item is accounted for on an historical
cost basis. The hedging instrument is marked to market when the hedged item is
accounted for on a mark to market basis.

Deferred gains and losses on interest rate futures contracts used to hedge
existing assets and liabilities are included in the basis of the item being
hedged. For hedges of anticipated transactions, the Bank recognizes deferred
gains or losses on futures transactions as adjustments to the cash position
eventually taken. Gains or losses on termination of an interest rate futures
contract designated as a hedge are deferred and recognized when the offsetting
gain or loss is recognized on the hedged item. When the hedged item is sold,
existing unrealized gains or losses on the interest rate futures contract are
recognized as part of net income at the time of the sale. Thereafter,
unrealized gains and losses on the hedge contract are recognized in income
immediately.

The Bank engages in interest rate swaps in order to manage its interest rate
risk exposure. Contractual payments under interest rate swaps designated as
hedges are accrued in the Statement of Income as a component of interest
income or expense. There is no recognition of unrealized gains and losses on
the balance sheet. Gains or losses on termination of an interest rate swap
contract designated as a hedge are deferred and amortized as an adjustment of
the yield on the underlying balance sheet position over the remainder of the
original contractual life of the terminated swap. When the hedged item is
sold, existing unrealized gains or losses on the swap contract are recognized
in income at the time of the sale. Thereafter, unrealized gains and losses on
the hedge contract are recognized as part of net income when they occur.

Interest rate options are used to manage the Bank's interest rate risk
exposure from rate lock commitments and fixed rate mortgage loans intended to
be sold in the secondary market. Changes in the market value of options
designated as hedges are deferred from income recognition and effectively
recognized as other noninterest income when the loans are sold and the hedge
position is closed. Loans intended to be sold in the secondary market are
carried at lower of amortized cost or current market value. When a hedge
contract with an embedded gain is terminated early, the deferred gain is
recorded as an adjustment to the carrying value of the loans. When a hedge
contract with an embedded loss is terminated early, the deferred loss is
charged to other noninterest income. When the hedged item is sold before the
hedge contract is terminated and the hedge contract has an embedded gain or
loss, the deferred gain or loss is recorded as other noninterest income in the
same period as part of the gain or loss on the sale of the loans. Thereafter,
unrealized gains and losses on the hedge contract are recognized as part of
net income when they occur.

BF-43
<PAGE>

HARRIS TRUST AND SAVINGS BANK AND SUBSIDIARIES

NOTES TO INTERIM FINANCIAL STATEMENTS--(CONCLUDED)

6. SALE OF CREDIT CARD PORTFOLIO

On September 4, 1997, the Bank announced that it had entered into a contract
to transfer its credit card portfolio to a company to be owned by BankBoston
Corporation, First Annapolis Consulting, Inc. and Bankmont Financial Corp. The
transaction is expected to close during first quarter 1998.

At the time of the announcement, the Bank's charge card portfolio balance
amounted to approximately $750 million, representing 5% of the Bank's total
consolidated assets. Upon completion of the transfer, the Bank will receive
cash and an equity interest in the newly formed company, which it intends to
immediately sell for cash to Bankmont Financial Corp. After the sale, the Bank
will no longer have a financial interest in the results of that business. The
impact of this transaction on the Bank's financial position and future results
of operations is not expected to be material.

BF-44
<PAGE>

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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE BANK OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUM-
STANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

---------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 14
The Company................................................................ 22
Use of Proceeds............................................................ 22
Capitalization............................................................. 23
Business and Strategy...................................................... 24
Management................................................................. 36
Certain Transactions Constituting the Formation............................ 39
Description of Series A Preferred Shares................................... 41
Description of Stock....................................................... 46
Federal Income Tax Consequences............................................ 50
ERISA Considerations....................................................... 57
The Bank................................................................... 60
Underwriting............................................................... 85
Experts.................................................................... 87
Ratings.................................................................... 87
Legal Matters.............................................................. 87
Available Information...................................................... 87
Glossary................................................................... 88
Index to Company Financial Statement....................................... CF-1
Index to Bank Financial Statements......................................... BF-1
</TABLE>

---------------

THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE COMMENCEMENT
OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI-
TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.

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10,000,000 SHARES

HARRIS PREFERRED
CAPITAL CORPORATION

% NONCUMULATIVE
EXCHANGEABLE
PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE
$25.00 PER SHARE)
EXCHANGEABLE INTO
PREFERRED SHARES
OF

HARRIS TRUST AND SAVINGS
BANK

LOGO

---------------

PROSPECTUS

---------------

MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
NESBITT BURNS SECURITIES INC.

FEBRUARY , 1998

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