10-Q 1 c72551e10vq.txt QUARTERLY REPORT -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

HARRIS BANKCORP, INC. 111 West Monroe Street Chicago, Illinois 60603 (312) 461-2121 Commission File Number 0-18179 Incorporated in the State of Delaware IRS Employer Identification No. 36-2722782 Harris Bankcorp, Inc. (the "Corporation") has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. At November 13, 2002 the Corporation had 6,667,490 shares of $8 par value common stock outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART 1. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2002 and 2001. Consolidated Statements of Condition as of September 30, 2002, December 31, 2001 and September 30, 2001. Consolidated Statements of Changes in Stockholder's Equity and Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001. Notes to the Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Financial Review). Item 3. Quantitative and Qualitative Disclosures about Market Risk. Item 4. Controls and Procedures. The above financial statements, financial review, quantitative and qualitative disclosures about market risk and controls and procedures discussion, included in the Corporation's 2002 Third Quarter Report, are filed as Exhibit A and incorporated herein by reference. PART II. OTHER INFORMATION Items 1, 2, 3, 4, and 5 are being omitted from this report because such items are not applicable to the reporting period. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Harris Bankcorp, Inc., has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 13th day of November 2002. /s/ ------------------------------------------------ Pamela C. Piarowski Chief Financial Officer /s/ ------------------------------------------------ Paul R. Skubic Chief Accounting Officer CERTIFICATIONS Harris Bankcorp, Inc. and Subsidiaries -------------------------------------------------------------------------------- I, Frank J. Techar, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Harris Bankcorp, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Harris Bankcorp, Inc. as of, and for, the periods presented in this quarterly report; 4. Harris Bankcorp, Inc.'s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Harris Bankcorp, Inc. and we have: a) designed such disclosure controls and procedures to ensure that material information relating to Harris Bankcorp, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Harris Bankcorp, Inc.'s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Harris Bankcorp, Inc.'s other certifying officers and I have disclosed, based on our most recent evaluation, to Harris Bankcorp, Inc.'s auditors and the audit committee of Harris Bankcorp, Inc.'s board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect Harris Bankcorp, Inc.'s ability to record, process, summarize and report financial data and have identified for Harris Bankcorp, Inc.'s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Harris Bankcorp, Inc.'s internal controls; and 6. Harris Bankcorp, Inc.'s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 Signature /s/ FRANK J. TECHAR --------------------------------------------- Title: President and Chief Executive Officer

CERTIFICATIONS Harris Bankcorp, Inc. and Subsidiaries -------------------------------------------------------------------------------- I, Pamela C. Piarowski, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Harris Bankcorp, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Harris Bankcorp, Inc. as of, and for, the periods presented in this quarterly report; 4. Harris Bankcorp, Inc.'s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Harris Bankcorp, Inc. and we have: a) designed such disclosure controls and procedures to ensure that material information relating to Harris Bankcorp, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Harris Bankcorp, Inc.'s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Harris Bankcorp, Inc.'s other certifying officers and I have disclosed, based on our most recent evaluation, to Harris Bankcorp, Inc.'s auditors and the audit committee of Harris Bankcorp, Inc.'s board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect Harris Bankcorp, Inc.'s ability to record, process, summarize and report financial data and have identified for Harris Bankcorp, Inc.'s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Harris Bankcorp, Inc.'s internal controls; and 6. Harris Bankcorp, Inc.'s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 Signature /s/ PAMELA C. PIAROWSKI --------------------------------------------- Title: Chief Financial Officer

CERTIFICATIONS Harris Bankcorp, Inc. and Subsidiaries -------------------------------------------------------------------------------- I, Paul R. Skubic, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Harris Bankcorp, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Harris Bankcorp, Inc. as of, and for, the periods presented in this quarterly report; 4. Harris Bankcorp, Inc.'s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Harris Bankcorp, Inc. and we have: a) designed such disclosure controls and procedures to ensure that material information relating to Harris Bankcorp, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Harris Bankcorp, Inc.'s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Harris Bankcorp, Inc.'s other certifying officers and I have disclosed, based on our most recent evaluation, to Harris Bankcorp, Inc.'s auditors and the audit committee of Harris Bankcorp, Inc.'s board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect Harris Bankcorp, Inc.'s ability to record, process, summarize and report financial data and have identified for Harris Bankcorp, Inc.'s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Harris Bankcorp, Inc.'s internal controls; and 6. Harris Bankcorp, Inc.'s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 Signature /s/ PAUL R. SKUBIC --------------------------------------------- Title: Chief Accounting Officer

FINANCIAL HIGHLIGHTS Harris Bankcorp, Inc. and Subsidiaries --------------------------------------------------------------------------------

(1) Cash earnings (loss) is defined as net income (loss) excluding the impact of amortization of goodwill and other valuation intangibles. (2) Cash return on average common stockholder's equity ("Cash ROE") is calculated as annualized net income (loss) applicable to common stock plus after-tax amortization expense of goodwill and other valuation intangibles, divided by average common stockholder's equity less average intangible assets. (3) Cash return on average assets ("Cash ROA") is calculated as net income (loss) plus after-tax amortization expense of goodwill and other valuation intangibles, divided by average assets less average intangible assets. N/R - Computation not relevant 1 REPORT FROM MANAGEMENT -------------------------------------------------------------------------------- Harris Bankcorp had net income of $75.2 million for the quarter ended September 30, 2002. In 2001, third quarter results were impacted by a special provision for loan losses of $125 million pre-tax, or $80.4 million after related income taxes. Including the effect of this special provision, the Corporation had a net loss of $20.2 million in third quarter 2001. Excluding the impact of the $125 million special provision, earnings grew 25 percent compared to the same period a year earlier. Net income for the nine months ended September 30, 2002 was $217.2 million. Including the $125 million special provision for loan losses, the corporation had net income of $105.5 million for the nine months ended September 30, 2001. Excluding the impact of the third quarter 2001 special provision for loan losses, earnings grew 17 percent for the first nine months compared to the same period a year earlier. For the current quarter, cash ROE was 19.48 percent compared to 14.76 percent one year earlier, excluding the special provision for loan losses. The Corporation benefited from continued strong business growth in consumer, mortgage and small business loans and retail deposits, a reduction in the provision for loan losses, increased earnings from treasury activities, and sound cost control. For the current quarter, net interest income on a fully taxable equivalent basis was $206.8 million, up 1 percent from third quarter last year. Net interest margin rose from 3.15 percent in the year-ago quarter to 3.36 percent currently, primarily reflecting the impact of the declining interest rate environment during 2001 and a higher mix of retail loans and deposits. Average earning assets declined 5 percent to $24.50 billion currently from $25.73 billion in third quarter 2001. Consumer, mortgage and small business loans grew by 14 percent, although total loans increased by 2 percent. Growth in these loans was offset by a decline in corporate loans. Securities available for sale were down $1.50 billion or 17 percent. Third quarter noninterest income of $134.7 million increased 12 percent from the same quarter last year. Growth in noninterest income primarily resulted from a $12.2 million increase in net gains from sales of investment securities and higher service charges on deposits. Third quarter 2002 noninterest expenses were $211.8 million compared to $203.4 million in the third quarter a year ago, a 4 percent increase. Income tax expense rose $53.7 million in the current quarter reflecting substantially higher pretax income. The third quarter 2002 provision for loan losses was $14.2 million compared to $153.3 million, including the $125 million special provision, in the third quarter a year ago. Net loan charge-offs during the current quarter were $18.6 million compared to $30.4 million in the same period last year. The decline was primarily attributable to lower write-offs in the commercial loan portfolio. Nonperforming assets at September 30, 2002 were $191 million or 1.16 percent of total loans, compared to $196 million or 1.22 percent at June 30, 2002, and $208 million or 1.28 percent a year ago. At September 30, 2002, the allowance for possible loan losses was $285 million, equal to 1.74 percent of loans outstanding, compared to $296 million or 1.82 percent at the end of the third quarter 2001. The ratio of the allowance for possible loan losses to nonperforming assets was 150 percent at September 30, 2002, compared to 143 percent at September 30, 2001. At September 30, 2002, regulatory Tier 1 capital of Harris Bankcorp amounted to $2.02 billion, up from $2.00 billion one year earlier. The regulatory leverage capital ratio was 7.46 percent for the third quarter of 2002 compared to 7.01 percent in the same quarter of 2001. Harris Bankcorp's September 30, 2002 Tier 1 and 2 -------------------------------------------------------------------------------- total risk-based capital ratios were 8.81 percent and 11.72 percent compared to respective ratios of 8.79 percent and 11.81 percent at September 30, 2001. Harris Bankcorp's capital ratios exceed the prescribed regulatory minimum for bank holding companies. For the nine months ended September 30, 2002, net interest income on a fully taxable equivalent basis increased 7 percent or $41.9 million, reflecting an increase in the net interest margin to 3.40 percent in the current period from 3.06 percent in the same period a year ago. Earning assets declined 4 percent, although average loans increased $504 million or 3 percent, with strong growth in consumer, mortgage and small business credits. Year-to-date noninterest income was $394.5 million, up 16 percent from the year earlier. Most of this increase was the result of additional net gains of $29.4 million from securities sales and higher service charge fees of $23.9 million. Total revenue for the nine months ended September 30, 2002, excluding the impact of the acquisition of First National Bank of Joliet in third quarter 2001, rose 7 percent from the same period in the prior year. The current year-to-date provision for loan losses was $73.6 million, down from $195.3 million in the first nine months of 2001, which included the $125 million special provision. Net charge-offs increased by $4.4 million to $80.4 million for the same period. Noninterest expense rose 7 percent from last year. Excluding the impact of the Joliet acquisition in third quarter 2001, noninterest expense rose 4 percent in the nine months ended September 30, 2002. Income tax expense increased $68.5 million, reflecting substantially higher pretax income in the current year. /s/ FRANK J. TECHAR Frank J. Techar October 25, 2002 President and Chief Executive Officer 3 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries

The accompanying notes to the financial statements are an integral part of these statements. 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries

The accompanying notes to the financial statements are an integral part of these statements. 5 CONSOLIDATED STATEMENTS OF CONDITION Harris Bankcorp, Inc. and Subsidiaries --------------------------------------------------------------------------------

The accompanying notes to the financial statements are an integral part of these statements. 6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries --------------------------------------------------------------------------------

The accompanying notes to the financial statements are an integral part of these statements. -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Harris Bankcorp, Inc. and Subsidiaries

The accompanying notes to the financial statements are an integral part of these statements. 7 NOTES TO THE FINANCIAL STATEMENTS Harris Bankcorp, Inc. and Subsidiaries -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION Harris Bankcorp, Inc. (the "Corporation") is a wholly-owned subsidiary of Bankmont Financial Corp. (a wholly-owned subsidiary of Bank of Montreal). The consolidated financial statements of the Corporation include the accounts of the Corporation and its wholly-owned subsidiaries including Harris Trust and Savings Bank ("HTSB"). Significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to conform the prior year's financial statements to the current year's presentation. The consolidated financial statements have been prepared by management from the books and records of the Corporation, without audit by independent certified public accountants. However, these statements reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and should be read in conjunction with the notes to the financial statements included in the Corporation's Form 10-K for the year ended December 31, 2001. 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 PROCEEDINGSThe Corporation and certain of its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these matters will not have a material adverse effect on the Corporation's consolidated financial position. -------------------------------------------------------------------------------- 3. CASH FLOWS For purposes of the Corporation's Consolidated Statements of Cash Flows, cash and cash equivalents is defined to include cash and demand balances due from banks. Cash interest payments (net of amounts capitalized) for the nine months ended September 30 totaled $671.0 million and $733.6 million in 2002 and 2001, respectively. Cash income tax payments over the same periods totaled $70.9 million and $89.1 million, respectively. -------------------------------------------------------------------------------- 4. GOODWILL AND OTHER INTANGIBLE ASSETS The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. Under this standard, goodwill and other intangible assets that have indefinite useful lives are not subject to amortization while intangible assets with finite lives are amortized. Goodwill is periodically assessed for impairment, at least annually. The Corporation has an unidentifiable intangible asset that is accounted for in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." This asset is excluded from the scope of SFAS No. 142 and continues to be amortized, including amortization of $2.35 million in third quarter 2002. Effective October 1, 2002, a new accounting standard, SFAS No. 147, "Acquisitions of Certain Financial Institutions," will require that this unidentifiable intangible asset be reclassified to goodwill and no longer be amortized starting in fourth quarter 2002. Under the transitional requirements of SFAS No. 147, the first three quarters of 2002 will be restated to reflect the reversal of previously amortized goodwill in those quarters. The impact for each of these three quarters will be $2.35 million pretax ($1.4 million after tax). Upon adoption of SFAS No. 142, the Corporation's goodwill was subject to the transitional goodwill impairment test. The impairment test is a two step process. The first step identifies potential impairment through a comparison of the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, the second step of the test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with its carrying amount. If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an 8 -------------------------------------------------------------------------------- amount equal to the excess. The Corporation's reporting units were defined as its operating segments. See Note 6 to the Financial Statements for additional information on operating segments. The first step of the transitional goodwill impairment test did not identify potential impairment. Therefore, the second step of the test was not performed and no impairment loss was recognized at transition. For the quarter and nine months ended September 30, 2001, the Corporation's net income and earnings per share on a proforma basis adjusted to exclude the amortization of goodwill is included in the following table.

The carrying value of the Corporation's goodwill, excluding $82.3 million accounted for under SFAS No. 72, as of September 30, 2002, was $113.2 million. Of this amount, $106.4 million of goodwill was assigned to Personal and Commercial Client Group and $6.8 million was assigned to Private Client Group. As of September 30, 2002, the gross carrying amount and accumulated amortization of the Corporation's amortizable intangible assets were $379.2 million and $152.4 million, respectively. Total amortization expense for the Corporation's intangible assets was $7.6 million for the quarter ended September 30, 2002 and $22.7 million for the nine months ended September 30, 2002. Estimated intangible asset amortization expense for the years ending December 31, 2003, 2004, 2005, 2006 and 2007 is $21.0 million, $21.1 million, $21.2 million, $21.3 million and $21.4 million, respectively. The estimates exclude amortization expense associated with the unidentifiable intangible asset currently accounted for in accordance with SFAS No. 72, which will be accounted for under SFAS No. 147 as of October 1, 2002. -------------------------------------------------------------------------------- 5. OTHER In July 2001, Bankmont acquired First National Bancorp, Inc. and its wholly owned subsidiary, First National Bank of Joliet ("Joliet"). First National Bancorp, Inc. was merged with and into Bankmont, followed by a capital contribution of Joliet stock to the Corporation which resulted in approximately $220 million of incremental capital. The purchase price was $220.3 million. Of this amount, $101.6 million was recorded as goodwill and $50.1 million as a core deposit premium intangible with an expected life of eight years. Under the provisions of SFAS No. 142, goodwill will not be subject to periodic amortization but will be subject to annual impairment testing. On the date of acquisition, Joliet had total assets amounting to $1.1 billion, total deposits amounting to $860 million and total liabilities amounting to $1.0 billion. -------------------------------------------------------------------------------- 6. SEGMENT REPORTING The Corporation's segments are identified by the customers served, the products and services they offer and the channels by which the products and services are delivered. The Corporation's reportable segments are Personal and Commercial Client Group, Investment Banking Group, Private Client Group and Technology and Solutions/Corporate Support. Personal and Commercial Client Group comprises community banking, which serves individuals through a Chicagoland retail bank network and small business/lower middle-market banking. The Investment Banking Group is comprised of the Corporation's corporate banking distribution to middle-market companies across the Midwest and nationally in selected specialties and the Corporation's treasury group, which serves as the Corporation's funding unit, and cash management services. The Private Client 9 -------------------------------------------------------------------------------- Group serves the needs of affluent individuals both within Chicagoland and nationally through the integrated delivery of a comprehensive offering of wealth management services, including investment management, personal trust, customized lending and financial planning. Businesses within this group include private banking, mutual fund management, retirement plan services and Harris Investment Management (the Corporation's institutional investment manager). Technology and Solutions is the technology and e-business group that provides information technology planning, strategy and development services, together with transaction-processing capabilities, and real estate operations. Corporate Support includes the corporate units that provide expertise and governance support for the Bank in areas such as law, finance, internal audit, risk management, corporate communications, human resources and learning. Corporate Support also reflects income from bank-owned insurance, inter-group eliminations and residual revenues and expenses, representing the difference between actual amounts incurred and the amounts allocated to operating segments. Segment results are presented on a fully taxable equivalent ("FTE") basis and income tax expense is allocated to the segments by an application of the Corporation's statutory tax rate to the pretax FTE basis profit or loss of each segment. Segment data includes intersegment revenues, as well as corporate overhead costs allocated to each segment based upon estimated usage of centrally provided services. The Corporation evaluates the performance of its segments and allocates resources to them based on FTE income before income taxes. 10 -------------------------------------------------------------------------------- Selected segment information is included in the following tables:

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12 FINANCIAL REVIEW Harris Bankcorp, Inc. and Subsidiaries -------------------------------------------------------------------------------- THIRD QUARTER 2002 COMPARED WITH THIRD QUARTER 2001 -------------------------------------------------------------------------------- SUMMARY The Corporation had third quarter 2002 net income of $75.2 million. In 2001, third quarter results were impacted by a special provision for loan losses of $125 million pre-tax, or $80.4 million after related income taxes. Including the effect of this special provision, the Corporation had a net loss of $20.2 million in third quarter 2001. Excluding the impact of the $125 million special provision for loan losses, earnings grew 25 percent in the current quarter compared to the same period a year ago. Cash ROE was 19.48 percent compared to 14.76 percent one year earlier, excluding the special loan loss provision. Excluding unrealized gains and losses on the securities portfolio recorded directly to equity and the special loan loss provision, cash ROE was 20.34% compared to 15.03% last year. Cash ROA was 1.17 percent compared to 0.90 percent a year ago, excluding the special provision. Third quarter net interest income on a fully taxable equivalent basis was $206.8 million, up 1 percent from $203.7 million in 2001's third quarter. Average earning assets declined 5 percent to $24.50 billion from $25.73 billion in 2001, primarily attributable to a decrease in average securities available for sale of $1.50 billion, or 17 percent. Consumer, mortgage, and small business loans grew by 14 percent, although total loans increased 2 percent. Net interest margin rose to 3.36 percent from 3.15 percent in the same quarter last year, primarily reflecting the impact of the declining interest rate environment during 2001 and relatively higher levels of retail loans and deposits compared to wholesale positions. The third quarter provision for loan losses of $14.2 million compared to $153.3 million, including the $125 million special provision, in third quarter a year ago. Net charge-offs during the current quarter were $18.6 million compared to $30.4 million in the prior year's quarter. Most of this decline was primarily attributable to lower write-offs in the commercial loan portfolio. Noninterest income increased $14.5 million or 12 percent to $134.7 million for third quarter 2002 from the same quarter last year. Growth in noninterest income primarily resulted from a $12.2 million increase in net gains from sales of investment securities, and higher service charges on deposits of $4.7 million. Third quarter 2002 noninterest expenses of $211.8 million increased $8.4 million or 4 percent from third quarter last year. Income tax expense rose $53.7 million in the current quarter reflecting substantially higher pretax income. Additional commentary on the matters included in the above summary is provided in the following sections of this Report. 13 -------------------------------------------------------------------------------- OPERATING SEGMENT REVIEW PERSONAL AND COMMERCIAL CLIENT GROUP Net income for Personal and Commercial Client Group in the third quarter of 2002 was $33.6 million, up $13.7 million from the third quarter of 2001. Prior year quarter earnings were impacted by a special provision for loan losses of $10.0 million pre-tax. Total revenue in the current quarter was $165.4 million, an increase of $18.7 million or 13 percent from $146.7 million in the year-ago quarter. The increase was primarily due to volume growth in consumer, mortgage and small business lending as well as growth in retail deposits, and higher interest margins. Noninterest expense increased $7.0 million or 7 percent to $105.8 million in the current quarter from $98.8 million in third quarter 2001. The increase was primarily due to costs in support of increased volume as well as increased pension and other employee benefits. Income taxes increased $10.1 million during the current quarter, reflecting higher pretax income. INVESTMENT BANKING GROUP Investment Banking Group had net income for third quarter 2002 of $41.8 million, up from the net loss of $30.8 million a year ago. The prior year's quarterly earnings were impacted by a special provision for loan losses of $115.0 million pre-tax. Total revenue of $128.8 million decreased by $5.1 million or 4 percent from the third quarter of 2001. This decrease was primarily due to reduced loan volumes partially offset by higher security gains. Noninterest expense decreased $0.4 million to $47.4 million in the current quarter reflecting cost containment efforts. Income taxes increased by $47.8 million during the current quarter, reflecting higher pretax income. PRIVATE CLIENT GROUP Net income for Private Client Group was $5.9 million in third quarter 2002, reflecting a decrease of $1.2 million or 17 percent from $7.1 million in the year-ago quarter. This quarter's earnings were impacted by $2.0 million of incentive compensation and severance payments which reduced earnings by $1.2 million. Without this charge, net income would have been on par with the prior year despite the challenging market conditions. Total revenue of $49.0 million decreased by $3.5 million or 7 percent from $52.5 million in 2001. This decrease in revenue is a reflection of the current stock market conditions which have resulted in decreased asset values under management and a decline in new business opportunities. Noninterest expense decreased $1.4 million or 3 percent to $39.0 million in the current quarter. The quarter's expenses of $39.0 million included $2.0 million in incentive compensation and severance payments, which offset the expense reductions of $3.4 million that resulted from cost containment efforts. Income taxes decreased by $0.9 million during the quarter, reflecting lower pretax income. TECHNOLOGY AND SOLUTIONS/CORPORATE SUPPORT Technology and Solutions/Corporate Support has a net loss for the third quarter 2002 of $6.1 million compared to a net loss of $16.4 million a year ago. Total revenue increased $7.6 million primarily from the declining interest rate environment, which has lowered the funding cost of the segment's non-earning assets. The amount of the Corporation's overall provision for loan losses was determined so that the allowance for loan losses was maintained at a level sufficient to cover losses inherent in the consolidated loan portfolio. Provisions are allocated to the operating segments based on average historical losses over a complete economic cycle. The differences between the total of the Corporation's business line allocation of provisions and its total required provisions under generally accepted accounting principles are allocated to Corporate Support. Compared with the third quarter of the prior year, the current quarter's provision for loan losses in Corporate Support increased. In 2001, the excess of actual provisions over average historical losses was charged to the operating segments to which they related, rather than to Corporate Support. For further provision information, see the discussion in the Allowance for Possible Loan Losses section on page 21 of this Report. Noninterest expense increased $3.2 million in the current quarter, primarily due to costs associated with business initiatives. Income tax benefits increased by $4.0 million during the quarter. 14 -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL SUMMARY Harris Bankcorp, Inc. and Subsidiaries --------------------------------------------------------------------------------

1. FULLY TAXABLE EQUIVALENT ADJUSTMENT Tax-exempt income has been restated to a comparable taxable level. The Federal and state statutory tax rates used for this purpose were 35 percent and 4.8 percent, respectively, in 2002 and 2001. 2. AVERAGE RATE ON SECURITIES AVAILABLE-FOR-SALE Yields on securities classified as available-for-sale are based on amortized cost. 15 -------------------------------------------------------------------------------- NET INTEREST INCOME

Third quarter net interest income on a fully taxable equivalent (FTE) basis was $206.8 million, up 1 percent from $203.7 million in third quarter 2001. The change in net interest income is typically explained by analyzing its two principal components, net interest margin and average earning assets. Net interest margin is annualized net interest income on a FTE basis over average interest earning assets. Average earning assets represent the average volume of assets employed by the Corporation which generate interest income. Net interest margin rose from 3.15 percent in third quarter 2001 to 3.36 percent in the current quarter, reflecting the impact of a declining interest rate environment during 2001 and relatively higher levels of retail loans and deposits compared to wholesale positions. Average earning assets declined 5 percent to $24.50 billion from $25.73 billion in 2001. Average securities available-for-sale decreased $1.50 billion primarily due to declines in mortgage backed securities. Average loans rose $357 million, or 2 percent. Installment and real estate mortgage loans were the most significant contributors to the loan growth with respective increases of $879 million and $364 million, somewhat offset by a decline in commercial loans of $690 million compared to 2001 levels. Average supporting liabilities declined 5 percent due to short-term borrowings and foreign office time deposits declines of $1.65 billion and $1.03 billion, respectively, offset by an increase in savings deposits and certificates of $1.66 billion from 2001 levels. -------------------------------------------------------------------------------- AVERAGE EARNING ASSETS -- NET INTEREST MARGIN

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Noninterest income for the third quarter of 2002 was $134.7 million, an increase of $14.5 million or 12 percent from the third quarter of 2001. Growth in noninterest income primarily resulted from a $12.2 million increase in net gains from sales of investment securities, and higher service charges on deposits. --------------------------------------------------------------------------------

Third quarter 2002 noninterest expenses were $211.8 million compared to $203.4 million in third quarter a year ago, a 4% increase. Growth in noninterest expenses primarily resulted from higher levels of incentive compensation, severance payments and pension expense, offset by decreases in nonemployee-related costs. Income tax expense rose $53.7 million in the current quarter reflecting substantially higher pretax income. Included in the nine months ended September 30, 2002 is a one-time cost associated with disposition of the Corporation's New York trust subsidiary following sale of the corporate trust business in 2000. 17 -------------------------------------------------------------------------------- CAPITAL POSITION The Corporation's total equity capital at September 30, 2002 was $2.19 billion, compared with $2.20 billion and $2.21 billion at December 31, 2001 and September 30, 2001, respectively. Excluding adjustments for unrealized gains and losses from securities available-for-sale and cash flow hedges, total equity decreased $28.1 million from September 30, 2001. During the preceding twelve months, the Corporation declared common and preferred dividends of $296.0 million and $18.0 million, respectively. Common dividends reflect the Corporation's continued strong capital position in addition to declines in average assets, primarily investment portfolio securities and commercial loans. In February 1998, Harris Preferred Capital Corporation, a wholly-owned indirect subsidiary of HTSB, issued $250 million of noncumulative preferred stock in a public offering. The preferred stock qualifies as Tier 1 capital at both HTSB and the Corporation for U.S. banking regulatory purposes. U.S. banking regulators issued risk-based capital guidelines, based on the international "Basel 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 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 equal at least 50 percent of total capital. Tier 2 capital basically includes subordinated debt (less a discount factor during the five years prior to maturity), other types of preferred stock and the allowance for possible loan losses. The Corporation's Tier 1 and total risk-based capital ratios were 8.81 percent and 11.72 percent, respectively, at September 30, 2002. HTSB's Tier 1 and total risk-based capital ratios were 10.06 percent and 12.49 percent, respectively, at September 30, 2002. 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 4 percent for most holding companies. The Corporation's and HTSB's Tier 1 leverage ratios were 7.46 percent and 8.98 percent, respectively, for the third quarter of 2002. The Federal Deposit Insurance Corporation Improvement Act of 1991 contains several provisions that establish five capital categories for all FDIC-insured institutions ranging from "well capitalized" to "critically undercapitalized." Based on those regulations effective at September 30, 2002, all of the Corporation's subsidiary banks were designated as "well capitalized," the highest capital category. Capital adequacy guidelines generally restrict the inclusion of intangible assets in Tier 1 capital; however, servicing assets 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, 2002, the Corporation's intangible assets totaled $340 million, including approximately $306 million of intangibles excluded under capital guidelines. The Corporation's and HTSB's tangible Tier 1 leverage ratios (which exclude all intangibles) were 7.35 percent and 8.88 percent, respectively, for the third quarter of 2002. 18 -------------------------------------------------------------------------------- The following is a summary of the Corporation's capital ratios:

-------------------------------------------------------------------------------- NONPERFORMING ASSETS

Nonperforming assets consist of loans placed on nonaccrual status when collection of principal or interest is uncertain, 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 earning at rates comparable to earning assets. Nonperforming assets at September 30, 2002 totaled $191 million, or 1.16 percent of total loans, down from $196 million or 1.22 percent of total loans at June 30, 2002 and from $208 million or 1.28 percent of total loans a year ago. Interest shortfall for the quarter ended September 30, 2002 was $3.5 million compared to $4.8 million one year earlier. 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 Corporation 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. Interest income on nonaccrual loans is recognized only at the time cash is received and only if collection of the entire principal balance is expected. Interest income on restructured loans is accrued according to the most recently agreed-upon contractual terms. The average impaired loan balance for the quarter ended 19 -------------------------------------------------------------------------------- September 30, 2002 was $201 million up from $128 million for the quarter ended September 30, 2001. The average impaired loan balance for the nine months ended September 30, 2002 was $207 million compared to $147 million for the nine months ended September 30, 2001.

20 --------------------------------------------------------------------------------

The Corporation's provision for loan losses for the current quarter was $14.2 million, down $139.1 million from the $153.3 million reported for last year's third quarter, when the Corporation recognized a $125 million special provision due to the economic deterioration experienced in 2001, which was primarily centered in the Commercial and Industrial loan portfolios. Excluding the impact of the special charge, provisions for the current quarter declined by $14.1 million, or 50 percent, reflecting reduced charge-off activity. On a year-to-date basis, provisions totaled $73.6 million, representing a 5 percent increase over the $70.3 million reported for the first nine months of 2001 (excluding the $125.0 million special provision). When factoring in the special charge, provisions declined by $121.7 million on a year-over-year basis. The year-to-date total reflects increased net charge-off activity in the first quarter of 2002, which moderated into the second and third quarters, as the U.S. economy moved into a modest recovery. Net charge-offs for the current quarter totaled $18.6 million, or 0.46 percent of average loans annualized, compared to $30.4 million or 0.76 percent of average loans annualized a year ago. On a year-to-date basis, net charge-offs measured $80.4 million, up 6 percent over the amount reported for the first nine months of 2001. This increase was attributable to the commercial loan portfolio and, to a large extent, was experienced during the first two quarters of 2002. At September 30, 2002, the allowance for possible loan losses was $285 million, equal to 1.74 percent of loans outstanding, compared to $296 million, or 1.82 percent of total loans, one year ago. The allowance's coverage of nonperforming loans strengthened from 144 percent at September 30, 2001, to 152 percent at September 30, 2002. This improved coverage reflected a $17.4 million, or 8 percent, decline in non-performing loans as of the current quarter-end relative to a year ago, which more than offset the 4 percent contraction in the reserve balance. Nonperforming loans at September 30, 2002 totaled $187.9 million, as compared to $205.3 million at September 30, 2001. Management's assessment of the adequacy of the loan loss reserve continues to be based upon an ongoing review of the Corporation's loan portfolio, using both historical and prospective quantitative factors with certain qualitative adjustments. The economic recovery remains tentative, due primarily to continued weak business investment. Similarly, consumer confidence has shown signs of weakness which, when combined with 21 -------------------------------------------------------------------------------- continued volatility in the stock market, suggests that the economic recovery will not likely escalate until mid-2003. Based on this economic outlook and the predictable lag in its positive effect, the Corporation expects non-performing loans to remain relatively stable, with some fluctuation around a gradually declining trend line. Given the uncertainty in the current economic environment, management will continually assess trends in net charge-offs and non-performing loans in conjunction with its ongoing assessment of required provisioning. -------------------------------------------------------------------------------- LIQUIDITY AND SOURCES OF FUNDS Effective liquidity management allows a banking institution to accommodate the changing net funds flow requirements of customers who may deposit or withdraw funds, or modify their credit needs. The Corporation manages its liquidity position through continuous monitoring of profitability trends, asset quality, interest rate sensitivity, maturity schedules of earning assets and supporting liabilities, the composition of managed and other (primarily demand) liabilities, and prospective customer demand based upon knowledge of major customers and overall economic conditions. Appropriate responses to changes in these conditions preserve customer confidence in the ability of the Corporation to continually serve their credit and deposit withdrawal requirements. Some level of liquidity is provided by maintaining assets which mature within a short timeframe or could be sold quickly without significant loss. The Corporation's liquid assets include cash and demand balances due from banks, money market assets, securities available-for-sale and trading account assets. Liquid assets represented approximately 38 percent of the Corporation's total assets and amounted to $11.54 billion at September 30, 2002. However, the most important source of liquidity is the ability to raise funds, as required, in a variety of markets using multiple instruments. The Corporation, in connection with the issuance of commercial paper and for other corporate purposes, had a $150 million revolving credit agreement with five nonaffiliated banks and Bank of Montreal ("BMO") that terminated on December 8, 2001. At that time, the Corporation renewed the $150 million revolving credit agreement, which will expire on December 7, 2002. There were no borrowings under either credit facility in year-to-date 2002 or 2001. The Corporation's average volume of core deposits, consisting of domestic and foreign demand deposits, interest checking deposits, money market accounts, passbook and statement savings accounts, savings certificates and noninterest-bearing time deposits increased from $15.71 billion or 62 percent of total non-equity funding at September 30, 2001 to $16.64 billion or 70 percent of total non-equity funding at September 30, 2002. Passbook and savings accounts experienced the largest growth, up $1.49 billion or 74 percent over September 30, 2001 levels. Savings certificates and money market deposit accounts increased by $170 million or 4 percent and $368 million or 7 percent over second quarter 2001 levels, respectively. Interest checking deposits decreased by $103 million or 20 percent to $402 million. Domestic and foreign demand deposits decreased by $994 million or 26 percent to $2.82 billion. The quarterly average volume of wholesale deposits and short-term borrowings decreased from $9.65 billion or 38 percent of total non-equity funding at September 30, 2001 to $7.29 billion or 30 percent of total non-equity funding at September 30, 2002. Total deposits averaged $19.37 billion in the second quarter of 2002, an increase of $226 million compared to the same quarter last year. Average money market assets in the third quarter of 2002 decreased $64 million or 9 percent from the same quarter last year. These assets represented 3 percent of average earning assets in 2002. Average money market liabilities decreased 19 percent to $4.25 billion this quarter from $5.26 billion in the same quarter last year. HTSB offers to institutional investors, from time to time, unsecured short-term and medium-term bank notes in an aggregate principal amount of up to $1.50 billion outstanding at any time. The term of each note could range from 14 days to 15 years. The notes are subordinated to deposits and rank pari passu with all other senior unsecured indebtedness of HTSB. As of September 30, 2002, $100 million of senior notes were outstanding compared to $910 million at September 30, 2001. The decline reflects the availability of lower-cost sources of funds. 22 -------------------------------------------------------------------------------- FORWARD- LOOKING INFORMATION This Report contains certain forward-looking statements and information that are based on the beliefs of, and information currently available to, the Corporation's management, as well as estimates and assumptions made by the Corporation's management. Forward-looking statements, which describe future plans, strategies and expectations of the Corporation, are generally identifiable by use of words such as "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," "project," "target," and similar expressions. The Corporation's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: interest rates, general economic conditions, legislative or regulatory environment, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or securities portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation's market areas, unforeseen business risks and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements. The Corporation assumes no obligation to update any such forward-looking statements. -------------------------------------------------------------------------------- MARKET RISK MANAGEMENT As described in the Corporation's Form 10-K for the year ended December 31, 2001, the Corporation's market risk is composed primarily of interest rate risk. There have been no material changes in market risk or the manner in which the Corporation manages market risk since December 31, 2001. -------------------------------------------------------------------------------- HARRIS BANKCORP, INC. AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH 2001 The Corporation's earnings for the nine months ended September 30, 2002 were $217.2 million. Year-to-year comparative results were affected by a special loan loss provision of $125 million in third quarter 2001. Excluding the impact of the special provision, earnings grew 17 percent for the first nine months of 2002. Cash ROE was 18.31 percent, up from 15.65 percent last year, excluding the special loan loss provision. Excluding unrealized gains and losses on the securities portfolio recorded directly to equity and the special loan loss provision, cash ROE increased 304 basis points from last year. Cash ROA was 1.14 percent compared to 0.94 percent a year ago, excluding the special loan loss provision. Net interest income on a fully taxable equivalent basis was $623.7 million in the current period, an increase of $41.9 million or 7 percent from the 2001 year-to-date period. Net interest margin rose to 3.40 percent from 3.06 percent in the same period a year ago. Average earning assets declined 4 percent to $24.50 billion from $25.44 billion in 2001, primarily attributable to a decrease in average securities available for sale of $1.54 billion. Total loans increased $504 million or 3 percent, with strong growth in consumer, mortgage, and small business credits more than offsetting a decline in the commercial loan portfolio. The year-to-date 2002 provision for loan losses of $73.6 million was down from $195.3 million a year ago, which included the $125 million special provision. Net charge-offs were $80.4 million, an increase of $4.4 million from last year. Noninterest income of $394.5 million up $53.3 million or 16 percent from the same period last year. Most of this increase was the result of additional net gains of $29.4 million from securities sales and higher service charge fees of $23.9 million. Noninterest expenses of $611.9 million increased $42.4 million or 7 percent from a year ago. Excluding the impact of the Joliet acquisition in third quarter 2001, noninterest expenses rose 4 percent in the nine month period ended September 30, 2002. Income tax expense increased $68.5 million, reflecting substantially higher pretax income in the current year. 23 -------------------------------------------------------------------------------- OPERATING SEGMENT REVIEW PERSONAL AND COMMERCIAL CLIENT GROUP Net income for Personal and Commercial Client Group in the nine month period of 2002 was $96.1 million, up $40.6 million from the year-ago period. Prior year earnings were impacted by a special provision for loan losses of $10.0 million pre-tax. Total revenue was $483.4 million, an increase of $85.5 million or 21 percent from $397.9 million in 2001. The increase in revenue was primarily due to volume growth in consumer, mortgage and small business lending as well as growth in retail deposits, higher interest margins and the acquisition of Joliet. Noninterest expense of $312.9 million increased $31.0 million from 2001, as a result of the acquisition of Joliet and costs in support of increased volume. Income taxes increased by $26.7 million in the current year, reflecting higher pretax income. INVESTMENT BANKING GROUP Net income for Investment Banking Group was $118.9 million in 2002, an increase of $72.1 million from $46.8 million a year ago. Prior year earnings were impacted by a special provision for loan losses of $115.0 million pre-tax. Total revenue of $384.6 million decreased by $20.3 million or 5 percent from 2001 primarily due to reduced loan volumes partially offset by higher security gains. Noninterest expense decreased $5.4 million to $151.2 million in the current year reflecting cost containment efforts. Income taxes increased by $47.5 million during the year, reflecting higher pretax income. PRIVATE CLIENT GROUP Net income for Private Client Group was $17.7 million in 2002, a decrease of $1.6 million or 8 percent from $19.3 million a year ago. This year's results include severance payments of $2.0 million which impacted net income by $1.2 million. Excluding the severance payments, the results were $0.4 million below the prior year. Total revenue of $152.2 million decreased by $3.7 million from 2001. This decrease in revenue is attributable to the impact of current market conditions and a decline in new business opportunities. Noninterest expense decreased $0.4 million, including the $2.0 million in severance payments. Income taxes decreased by $1.8 million during the year, reflecting lower pretax income. TECHNOLOGY AND SOLUTIONS/CORPORATE SUPPORT Technology and Solutions/Corporate Support had a net loss for the nine month period of $15.5 million, compared to a net loss of $16.0 million in 2001. Total revenue increased $33.7 million from 2001. This increase in revenue is primarily reflective of the declining interest rate environment, which has lowered the funding cost on the segment's non-earning assets, as well as increased securities gains and higher death benefits from bank-owned insurance. Provision for loan losses increased $25.5 million due to the change to expected loss methodology. The Corporation's overall provision for loan losses was determined in order to maintain the allowance for loan losses at a level sufficient to cover losses inherent in the consolidated loan portfolio. Provisions are allocated to the operating segments based on average historical losses over a complete economic cycle. The differences between the total of the Corporation's business line allocation of provisions and its total required provisions under generally accepted accounting principles are allocated to Corporate Support. For further provision information, see the discussion of the Allowance for Possible Loan Losses section on page 21 of this Report. Noninterest expense increased $17.2 million to $25.3 million in the current year, primarily due to costs associated with business initiatives and the $5.5 million one-time cost associated with disposition of the Corporation's New York trust subsidiary following the sale of the corporate trust business in 2000. Income tax benefits increased $9.6 million in the current year. 24 -------------------------------------------------------------------------------- CONTROLS AND PROCEDURES Within 90 days prior to the filing of this Report, Frank J. Techar, President and Chief Executive Officer of the Corporation, Pamela C. Piarowski, the Chief Financial Officer of the Corporation, and Paul R. Skubic, the Chief Accounting Officer of the Corporation, evaluated the effectiveness of the disclosure controls and procedures of the Corporation and concluded that these disclosure controls and procedures are effective to ensure that material information required to be included in this Report has been made known to them in a timely fashion. There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their evaluation including any corrective action with regard to significant deficiencies and material weaknesses. 25 Harris Bankcorp, Inc. and Subsidiaries -------------------------------------------------------------------------------- HARRIS BANKCORP, INC. 111 West Monroe Street Chicago, Illinois 60603 ------------------------------ HARRIS BANKCORP, INC. EXECUTIVE OFFICERS Frank J. Techar President and Chief Executive Officer Edward W. Lyman Vice Chair of the Board ------------------------------ HARRIS BANKCORP, INC. BOARD OF DIRECTORS Alan G. McNally Chairman of the Board Frank J. Techar President and Chief Executive Officer Edward W. Lyman Vice Chair of the Board Pastora San Juan Cafferty Professor University of Chicago School of Social Services Administration Haven E. Cockerham Senior Vice President Human Resources R.R. Donnelley & Sons Company F. Anthony Comper Chairman and Chief Executive Officer Bank of Montreal Susan T. Congalton Chairman of the Board California AmForge Corporation William A. Downe Deputy Chairman Bank of Montreal Chief Executive Officer Bankmont Financial Corp. Wilbur H. Gantz Former Chairman of the Board and Chief Executive Officer PathoGenesis Corporation James J. Glasser Chairman Emeritus GATX Corporation Dr. Leo M. Henikoff President Emeritus Rush University Former President and Chief Executive Officer Rush-Presbyterian-St. Luke's Medical Center Richard M. Jaffee Chairman Oil-Dri Corporation of America Charles H. Shaw Chairman The Shaw Company Richard E. Terry Former Chairman and Chief Executive Officer Peoples Energy Corporation ------------------------------ HARRIS BANKCORP, INC. BANK SUBSIDIARIES HARRIS TRUST AND SAVINGS BANK Chicago, Illinois HARRIS BANK ARGO Summit, Illinois HARRIS BANK ARLINGTON-MEADOWS Rolling Meadows, Illinois HARRIS BANK AURORA, N.A. Aurora, Illinois HARRIS BANK BARRINGTON, N.A. Barrington, Illinois SUBURBAN BANK OF BARRINGTON Barrington, Illinois HARRIS BANK BARTLETT Bartlett, Illinois HARRIS BANK BATAVIA, N.A. Batavia, Illinois HARRIS BANK CARY-GROVE Cary, Illinois HARRIS BANK ELK GROVE, N.A. Elk Grove Village, Illinois HARRIS BANK FRANKFORT Frankfort, Illinois HARRIS BANK GLENCOE-NORTHBROOK, N.A. Glencoe, Illinois HARRIS BANK HINSDALE, N.A. Hinsdale, Illinois HARRIS BANK HOFFMAN-SCHAUMBURG Schaumburg, Illinois HARRIS BANK HUNTLEY Huntley, Illinois HARRIS BANK JOLIET, N.A. Joliet, Illinois HARRIS BANK LIBERTYVILLE Libertyville, Illinois HARRIS BANK MARENGO Marengo, Illinois HARRIS BANK NAPERVILLE Naperville, Illinois HARRIS BANK OAKBROOK TERRACE Oakbrook Terrace, Illinois HARRIS BANK PALATINE, N.A. Palatine, Illinois HARRIS BANK ROSELLE Roselle, Illinois HARRIS BANK ST. CHARLES St. Charles, Illinois HARRIS BANK WESTCHESTER Westchester, Illinois HARRIS BANK WILMETTE, N.A. Wilmette, Illinois HARRIS BANK WINNETKA, N.A. Winnetka, Illinois HARRIS BANK WOODSTOCK Woodstock, Illinois HARRIS TRUST BANK OF ARIZONA Scottsdale, Arizona HARRIS TRUST/BANK OF MONTREAL (FORMERLY HARRIS TRUST COMPANY OF FLORIDA) West Palm Beach, Florida ------------------------------ HARRIS BANKCORP, INC. NON-BANK SUBSIDIARIES HARRIS TRUST COMPANY OF NEW YORK New York, New York HARRIS TRUST COMPANY OF CALIFORNIA Los Angeles, California HARRIS LIFE INSURANCE COMPANY Scottsdale, Arizona HARRIS INVESTMENT MANAGEMENT, INC. Chicago, Illinois HARRIS BANK INTERNATIONAL CORPORATION New York, New York MIDWESTERN HOLDINGS, INC. Chicago, Illinois HARRIS TRADE SERVICES LIMITED Hong Kong HARRIS PREFERRED CAPITAL CORPORATION Chicago, Illinois HARRIS PROCESSING CORPORATION Chicago, Illinois HARRIS CAPITAL HOLDINGS, INC. Dover, Delaware

HARRIS BANKCORP INC 10-Q