-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ITgrnStCFnRBCQj+W1r3wfDg4cqEJrRqiItL8wsK8bCE0M1n9LtdsWP1irBQsdmZ 8c5rrp4So/XnnTgGUMhqvg== 0000950131-98-001754.txt : 19980318 0000950131-98-001754.hdr.sgml : 19980318 ACCESSION NUMBER: 0000950131-98-001754 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980317 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN TRUST CORP CENTRAL INDEX KEY: 0000073124 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 362723087 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05965 FILM NUMBER: 98567125 BUSINESS ADDRESS: STREET 1: 50 S LA SALLE ST CITY: CHICAGO STATE: IL ZIP: 60675 BUSINESS PHONE: 3126306000 FORMER COMPANY: FORMER CONFORMED NAME: NORTRUST CORP DATE OF NAME CHANGE: 19780525 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________to___________ Commission File Number 0-5965 Northern Trust Corporation (Exact name of registrant as specified in its charter) Delaware 36-2723087 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 South La Salle Street Chicago, Illinois 60675 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-6000 ----------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.66 2/3 Par Value ---------------- Preferred Stock Purchase Rights ---------------- Floating Rate Capital Securities, Series A of NTC Capital I, and Series B of NTC Capital II Fully and Unconditionally Guaranteed by the Registrant ----------------------------------------- Floating Rate Junior Subordinated Debentures, Series A and Series B of the Registrant (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At February 11, 1998, 111,518,024 shares of Common Stock, $1.66 2/3 par value, were outstanding, and the aggregate market value of the Common Stock (based upon the last sale price of the common stock at February 11, 1998, as reported by the Nasdaq Stock Market) held by non-affiliates was approximately $7,045,649,011. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose. Portions of the following documents are incorporated by reference: Annual Report to Stockholders for the Fiscal Year Ended December 31, 1997 - Part I and Part II 1998 Notice and Proxy Statement for the Annual Meeting of Stockholders to be held on April 21, 1998 - Part III - -------------------------------------------------------------------------------- 1 ----------------------------------------------------------------- [THIS PAGE INTENTIONALLY LEFT BLANK] ----------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- Northern Trust Corporation FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 INDEX Page PART I Item 1 Business............................................................ 4 Supplemental Item-Executive Officers of the Registrant..............22 Item 2 Properties..........................................................23 Item 3 Legal Proceedings...................................................23 Item 4 Submission of Matters to a Vote of Security Holders.................23 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.........................................24 Item 6 Selected Financial Data.............................................24 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................24 Item 7A Quantitative and Qualitative Disclosures About Market Risk..........24 Item 8 Financial Statements and Supplementary Data.........................24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................24 PART III Item 10 Directors and Executive Officers of the Registrant..................25 Item 11 Executive Compensation..............................................25 Item 12 Security Ownership of Certain Beneficial Owners and Management......25 Item 13 Certain Relationships and Related Transactions......................25 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....26 Signatures...................................................................27 Exhibit Index................................................................28
- -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- PART I Item 1--Business NORTHERN TRUST CORPORATION Northern Trust Corporation (Corporation) is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended. The Corporation was organized in Delaware in 1971 and that year became the owner of all of the outstanding capital stock, except directors' qualifying shares, of The Northern Trust Company (Bank), an Illinois banking corporation headquartered in the Chicago financial district and the Corporation's principal subsidiary. The Corporation also owns banking subsidiaries in Arizona, California, Florida and Texas, trust companies in Connecticut and New York and various other nonbank subsidiaries, including a securities brokerage firm, a retirement services company and a futures commission merchant. The Corporation expects that, although the operations of other subsidiaries will be of increasing significance, the Bank will in the foreseeable future continue to be the major source of the Corporation's assets, revenues and net income. Except where the context otherwise requires, the term "Northern Trust" refers to Northern Trust Corporation and its consolidated subsidiaries. At December 31, 1997, Northern Trust had consolidated total assets of approximately $25.3 billion and stockholders' equity of approximately $1.7 billion, and was the second largest bank holding company headquartered in Illinois and the thirty-second largest in the United States. THE NORTHERN TRUST COMPANY The Bank was founded by Byron L. Smith in 1889 to provide banking and trust services to the public. Currently in its 109th year, the Bank's growth has come primarily from internal sources rather than through merger or acquisition. At December 31, 1997, the Bank had consolidated assets of approximately $21.2 billion and common equity capital of approximately $1.3 billion. At September 30, 1997, the Bank was the third largest bank in Illinois and the thirty-third largest in the United States, based on consolidated total assets of approximately $23.3 billion on that date. The Bank currently has sixteen banking offices in the Chicago metropolitan area and nine active wholly-owned subsidiaries: The Northern Trust International Banking Corporation; Norlease, Inc.; MFC Company, Inc.; Nortrust Nominees Ltd.; The Northern Trust Company U.K. Pension Plan Limited; The Northern Trust Company, Canada; Northern Global Financial Services Limited; Northern Trust Trade Services Limited; and Northern Trust Fund Managers (Ireland) Limited. The Northern Trust International Banking Corporation, located in New York, was organized under the Edge Act for the purpose of conducting international business. Norlease, Inc. provides leasing and leasing-related lending activities. MFC Company, Inc. holds properties that are received from the Bank in connection with certain problem loans. Nortrust Nominees Ltd., located in London, is a U.K. trust corporation organized to hold U.K. real estate for fiduciary accounts. The Northern Trust Company U.K. Pension Plan Limited, located in London, was established in connection with the pension plan for the Bank's London Branch. The Northern Trust Company, Canada, located in Toronto, offers institutional trust products and services to Canadian entities. Northern Global Financial Services Limited, located in Hong Kong, provides securities lending and relationship servicing for large asset custody clients in Asia and the Pacific Rim. Northern Trust Trade Services Limited facilitates the issuance and processing of commercial letters of credit in Hong Kong. Northern Trust Fund Managers (Ireland) Limited was established to facilitate the offering of off-shore collective investment products to institutional clients. OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES The Corporation's Florida banking subsidiary, Northern Trust Bank of Florida N.A., headquartered in Miami, at December 31, 1997 had twenty-four offices located throughout Florida, with total assets of approximately $2.6 billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of Arizona N.A., is headquartered in Phoenix and at December 31, 1997 had total assets of approximately $475 million and served clients from seven office locations in Arizona. The Corporation's Texas banking subsidiary, Northern Trust Bank of Texas N.A., headquartered in Dallas, had seven office locations and total assets of approximately $566 million at December 31, 1997. The Corporation's California banking subsidiary, Northern Trust Bank of California N.A., is headquartered in Santa Barbara. At December 31, 1997, it had eight office locations and total assets of approximately $707 million. The Corporation has several nonbank subsidiaries. Among them are Northern Trust Securities, Inc. which provides full brokerage services to clients of the Bank and the Corporation's other banking and trust subsidiaries and selectively underwrites general obligation tax-exempt securities. Northern Futures Corporation is a futures commission merchant. Northern Investment Corporation holds certain investments, including a loan made to a developer of a property in which the Bank is the principal tenant. Berry, Hartell, Evers & Osborne, Inc. is an investment management firm in San Francisco, California. The Northern Trust Company of New York provides security clearance services for all nondepository eligible - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- securities held by trust, agency, and fiduciary accounts administered by the Corporation's subsidiaries. Northern Trust Cayman International, Ltd. provides fiduciary services to clients residing outside of the United States. Northern Trust Retirement Consulting, L.L.C. is a retirement benefit plan services company in Atlanta, Georgia. Northern Trust Global Advisors, Inc. in Stamford, Connecticut is an international provider of institutional investment management services, and the parent of The Northern Trust Company of Connecticut, and Northern Trust Quantitative Advisors, Inc. is a manager of index funds and quantitative investment products. INTERNAL ORGANIZATION Northern Trust, under Chairman and Chief Executive Officer William A. Osborn, organizes client services around three principal businesses: Corporate and Institutional Services, Personal Financial Services and Global Investments. In addition, the Worldwide Operations and Technology unit encompasses trust and banking operations and systems activities. These four business units report to President and Chief Operating Officer Barry G. Hastings. Also, a Risk Management unit focuses on financial and risk management. The following is a brief summary of each unit's business activities. Corporate and Institutional Services Headed by Sheila A. Penrose, President -- Corporate and Institutional Services (C&IS), C&IS provides trust, commercial banking and treasury management services to corporate and institutional clients. Trust activities encompass custody services for owners of securities in the United States and foreign markets, as well as securities lending and asset management services. Services with respect to securities traded in foreign markets are provided primarily through the Bank's London Branch. Related foreign exchange services are rendered at the London and Singapore Branches as well as in Chicago. As measured by assets administered and by number of clients, Northern Trust is a leading provider of Master Trust and Master Custody services to three defined market segments: retirement plans, institutional clients and international clients. Master Trust and Custody includes a full range of state-of-the-art capabilities including: worldwide custody settlement and reporting; cash management; securities lending; and performance analysis services. In addition to Master Trust and Master Custody, C&IS offers a comprehensive array of retirement consulting and recordkeeping services and investment products. At December 31, 1997, total assets under administration, excluding personal trust assets, were $974.1 billion. The Northern Trust Company of New York, The Northern Trust Company, Canada, Norlease, Inc., The Northern Trust International Banking Corporation, Northern Futures Corporation, and Northern Trust Retirement Consulting, L.L.C., are also included in C&IS. A full range of commercial banking services is offered through the Bank, which places special emphasis on developing institutional relationships in two target markets: large domestic corporations and financial institutions (both domestic and international). Treasury management services are provided to corporations and financial institutions and include a variety of other products and services to accelerate cash collections, control disbursement outflows and generate information to manage cash positions. Personal Financial Services Services to individuals is another major dimension of the trust business. Headed by Mark Stevens, President -- Personal Financial Services (PFS), PFS encompasses trust, investment management services, estate administration, banking, and residential real estate mortgage lending. The Bank's personal financial services strategy includes targeting high net worth individuals in the metropolitan Chicago market and, through its Wealth Management Group, nationally. The Bank is one of the largest bank managers of personal trust assets in the United States, with total assets under administration of $70.3 billion at December 31, 1997. PFS services are delivered through the Bank and a network of banking subsidiaries located in Arizona, California, Florida and Texas. PFS is one of the largest bank managers of personal trust assets in the United States, with total assets under administration of $105.2 billion at December 31, 1997. Northern Trust Securities, Inc. and Berry, Hartell, Evers & Osborne, Inc. are also part of PFS. Global Investments Global Investments, headed by Stephen B. Timbers, President -- Northern Trust Global Investments (NTGI), NTGI provides investment products and services to clients of C&IS and PFS. NTGI activities include equity and fixed income research and portfolio management services. NTGI also acts as the investment adviser to the Corporation's two families of mutual funds, the Northern Funds and The Benchmark Funds. Northern Trust Quantitative Advisors, Inc. and Northern Trust Global Advisors, Inc. are included in NTGI. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Worldwide Operations and Technology Supporting primarily all of Northern Trust's business activities is the Worldwide Operations and Technology Unit. Headed by James J. Mitchell, Executive Vice President of the Corporation and of the Bank, this unit focuses on supporting sales, relationship management, transaction processing and product management activities for C&IS and PFS. Risk Management The Risk Management Unit, headed by Senior Executive Vice President and Chief Financial Officer Perry R. Pero, includes the Credit Policy and Treasury functions. The Credit Policy function is described fully on page 16 of this Form 10-K. The Treasury Department is responsible for managing the Bank's wholesale funding and interest rate risk, as well as the portfolio of interest rate risk management instruments under the direction of the Corporate Asset and Liability Policy Committee. It is also responsible for the investment portfolios of the Corporation and the Bank and provides investment advice and management services to the subsidiary banks. The Risk Management Unit also includes Corporate Controller, Corporate Treasurer, Investor Relations and Economic Research functions. GOVERNMENT POLICIES The earnings of Northern Trust are affected by numerous external influences, principally general economic conditions, both domestic and international, and actions that the United States and foreign governments and their central banks take in managing their economies. These general conditions affect all of the Northern Trust's businesses, as well as the quality and volume of their loan and investment portfolios. The Board of Governors of the Federal Reserve System is an important regulator of domestic economic conditions and has the general objective of promoting orderly economic growth in the United States. Implementation of this objective is accomplished by its open market operations in United States Government securities, its setting of the discount rate at which member banks may borrow from Federal Reserve Banks and its changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve Board may strongly influence interest rates and hence what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Fiscal policies in the United States and abroad also affect the composition and use of Northern Trust's resources. COMPETITION Northern Trust's principal business strategy is to provide quality financial services to targeted market segments in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to deliver a level of service to its clients that distinguishes it from its competitors. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and is one of only a select group of major bank holding companies in the United States that generates more revenues from fee-based services than from net interest income. Northern Trust seeks to develop and expand its recurring fee-based revenue by identifying selected market niches and providing a high level of individualized service to its clients in such markets. Northern Trust also seeks to preserve its asset quality through established credit review procedures and by maintaining a conservative balance sheet. Finally, Northern Trust seeks to maintain a strong management team with senior officers having broad experience and long tenure. Active competition exists in all principal areas in which the subsidiaries are presently engaged. C&IS and PFS compete with domestic and foreign financial institutions, trust companies, financial companies, personal loan companies, mutual funds and investment advisers. Northern Trust is a leading provider of Master Trust and Master Custody services and has the leading market share in the Chicago area personal trust market. Commercial banking and treasury management services compete with domestic and foreign financial institutions, finance companies and leasing companies. These products also face increased competition due to the general trend among corporations and other institutions to rely more upon direct access to the credit and capital markets (such as through the direct issuance of commercial paper) and less upon commercial banks and other traditional financial intermediaries. The chief local competitors of the Bank for trust and banking business are Bank of America, First National Bank of Chicago and its affiliate American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, and LaSalle National Bank. Competitive pressures within the custody market have resulted in consolidation in the industry, and the chief national competitors of the Bank for Master Trust/Master Custody services are now Mellon Bank Corporation, State Street Boston Corporation, Bankers Trust New York Corporation, Chase Manhattan Corporation and Bank of New York Company, Inc. REGULATION AND SUPERVISION The Corporation is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (Act), and to regulation by the Board of Governors of the Federal Reserve System. The Act limits the activities which may be engaged in by the Corporation and its nonbanking subsidiaries to those so closely related to banking or managing or controlling banks as - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- to be a proper incident thereto. Also, under section 106 of the 1970 amendments to the Act and subject to certain exceptions, subsidiary banks are prohibited from engaging in certain tie-in arrangements with nonbanking affiliates in connection with any extension of credit or provision of any property or services. The Act also prohibits bank holding companies from acquiring substantially all the assets of or owning more than 5% of the voting shares of any bank or nonbanking company which is not already majority owned without prior approval of the Board of Governors. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) permits an adequately capitalized and adequately managed bank holding company to acquire, with Federal Reserve Board approval, a bank located in a state other than the bank holding company's home state, without regard to whether the transaction is permitted under any state law, except that a host state may establish by statute the minimum age of its banks (up to a maximum of 5 years) subject to acquisition by out-of-state bank holding companies. The Federal Reserve Board may not approve the acquisition if the applicant bank holding company, upon consummation, would control more than 10% of total U.S. insured depository institution deposits or more than 30% of the host state's total insured depository institution deposits except in certain cases. The Interstate Act also permits a bank, with the approval of the appropriate federal bank regulatory agency, to establish a de novo branch in a state, other than the bank's home state, in which the bank does not presently maintain a branch if the host state has enacted a law that applies equally to all banks and expressly permits all out-of-state banks to branch de novo into the host state. Banks having different home states may, with approval of the appropriate federal bank regulatory agency, merge across state lines, unless the home state of a participating bank opted-out of the Interstate Act prior to June 1, 1997. In addition, the Interstate Act permits any bank subsidiary of a bank holding company to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for a bank or certain grandfathered thrift affiliates, whether such banks or affiliates are located in a different state or in the same state. Under the Federal Deposit Insurance Act (FDIA), an insured depository institution which is commonly controlled with another insured depository institution shall generally be liable for any loss incurred, or reasonably anticipated to be incurred, by the Federal Deposit Insurance Corporation (FDIC) in connection with the default of such commonly controlled institution, or for any assistance provided by the FDIC to such commonly controlled institution, which is in danger of default. The term "default" is defined to mean the appointment of a conservator or receiver for such institution. Thus, any of the Corporation's banking subsidiaries could incur liability to the FDIC pursuant to this statutory provision in the event of a loss suffered by the FDIC in connection with any of the Corporation's other banking subsidiaries (whether due to a default or the provision of FDIC assistance). Such liability is subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability and any obligation subordinated to depositors or other general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions) and any obligations to shareholders in such capacity. Although neither the Corporation nor any of its nonbanking subsidiaries may be assessed for such loss under the FDIA, the Corporation has agreed to indemnify each of its banking subsidiaries, other than the Bank, for any payments a banking subsidiary may be liable to pay to the FDIC pursuant to these provisions of the FDIA. The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC, and it is subject to regulation by both these entities, as well as by the Illinois Office of Banks and Real Estate. The Bank is also a member of and subject to the rules of the Chicago Clearinghouse Association, and is registered as a government securities dealer in accordance with the Government Securities Act of 1986. As a government securities dealer its activities are subject to the rules and regulations of the Department of the Treasury. The Bank is registered as a transfer agent with the Federal Reserve and is therefore subject to the rules and regulations of the Federal Reserve in this area. State laws governing the Corporation's banking subsidiaries allow each bank to establish branches anywhere in its state. The national bank subsidiaries are members of the Federal Reserve System and the FDIC and are subject to regulation by the Comptroller of the Currency. The Corporation's nonbanking affiliates are all subject to examination by the Federal Reserve. In addition, The Northern Trust Company of New York is subject to regulation by the Banking Department of the State of New York. Northern Futures Corporation, which is registered as a futures commission merchant with the Commodity Futures Trading Commission, is a member of the National Futures Association, the Chicago Board of Trade and the Board of Trade Clearing Corporation, and is a clearing member of the Chicago Mercantile Exchange. Northern Trust Securities, Inc. is registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc., and, as such, is subject to the rules and regulations of both these bodies. Berry, Hartell, Evers & Osborne, Inc., Northern Trust Retirement Consulting, L.L.C., Northern Trust Global Advisors, Inc. and Northern Trust Quantitative Advisors, Inc. are each registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 and are subject to that Act and the rules and regulations of the Commission promulgated thereunder. In addition, Northern Trust Quantitative Advisors, Inc. is subject to regulation by the Illinois Office of Banks and Real Estate, and Northern Trust Retirement - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- Consulting, L.L.C. is registered as a transfer agent with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is subject to that Act and the rules and regulations of the Commission promulgated thereunder. The Northern Trust Company of Connecticut is subject to regulation by the Connecticut Department of Banking. Two families of mutual funds for which the Bank acts as investment adviser are subject to regulation by the Securities and Exchange Commission under the Investment Company Act. The Bank also acts as investment adviser of an investment company which is subject to regulation by the Central Bank of Ireland under the Companies Act, 1990. Various other subsidiaries and branches conduct business in other states and foreign countries and are subject to their regulations and restrictions. The Corporation and its subsidiaries are affiliates within the meaning of the Federal Reserve Act so that the banking subsidiaries are subject to certain restrictions with respect to loans to the Corporation or its nonbanking subsidiaries and certain other transactions with them or involving their securities. Information regarding these restrictions, and dividend restrictions on banking subsidiaries, is incorporated herein by reference to Note 15 titled "Restrictions on Subsidiary Dividends and Loans or Advances" on page 56 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997. Under the FDIC's risk-based insurance assessment system, each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information. Each insured bank's insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC. There is currently a twenty-seven basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject in 1998 to 0% assessment, and banks classified as weakest by the FDIC are subject to an assessment rate of .27%. In addition to its insurance assessment, each insured bank is subject in 1998 to a debt service assessment of .013%. The Federal bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk-weighted assets (including certain off-balance sheet items) (Total Capital Ratio) is 8%, and the minimum ratio of that portion of total capital that is comprised of common stock, related surplus, retained earnings, noncumulative perpetual preferred stock, minority interests and, for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less certain intangibles including goodwill (Tier 1 capital), to risk- weighted assets is 4%. The balance of total capital may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the loan and lease loss allowance. The Federal Reserve Board risk-based capital standards contemplate that evaluation of capital adequacy will take account of a wide range of other factors, including overall interest rate exposure; liquidity, funding and market risks; the quality and level of earnings; investment, loan portfolio, and other concentrations of credit; certain risks arising from non traditional activities; the quality of loans and investments; the effectiveness of loan and investment policies; and management's overall ability to monitor and control financial and operating risks including the risks presented by concentrations of credit and nontraditional activities. In addition, the Federal Reserve has established minimum Leverage Ratio (Tier 1 capital to quarterly average total assets) guidelines for bank holding companies and banks. These guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies and banks that meet certain specified criteria, including having the highest regulatory rating. All other banking organizations are required to maintain a Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory level, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to quarterly average total assets. As of December 31, 1997, the Federal Reserve had not advised the Corporation of any specific minimum Tangible Tier 1 Leverage Ratio applicable to it. At December 31, 1997, the Corporation had a Tangible Tier 1 Leverage Ratio of 6.8%. In addition to the effects of the provisions described above, the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) substantially revised the depository institution regulatory and funding provisions of the FDI Act and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect to FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. Under applicable regulations, an FDIC-insured bank is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a Total Capital Ratio of at least 10% and a Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets) of at least 6% and is not otherwise in a "troubled condition" as - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- specified by its appropriate federal regulatory agency. A bank is generally considered to be adequately capitalized if it is not defined to be well capitalized but meets all of its minimum capital requirements, i.e., if it has a Leverage Ratio of 4% or greater (or a Leverage Ratio of 3% or greater if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), a Total Capital Ratio of 8% or greater and a Tier 1 Capital Ratio of 4% or greater. A bank will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure and critically undercapitalized if it maintains a level of tangible equity capital equal to or less than 2% of total assets. A bank may be reclassified to be in a capitalization category that is next below that indicated by its actual capital position if it receives a less than satisfactory examination rating by its examiners with respect to its assets, management, earnings or liquidity that has not been corrected, or it is determined that the bank is in an unsafe or unsound condition or engaged in an unsafe or unsound practice. At December 31, 1997, the Bank and each of the Corporation's other subsidiary banks met or exceeded the minimum regulatory ratios that are one of the conditions for them to be considered to be well capitalized. For further discussion of regulatory capital requirements for the Corporation and the Bank, see pages 38 and 39 of "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 28, titled "Regulatory Capital Requirements" on page 67 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1997. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Under FDICIA, a bank that is not well capitalized is generally prohibited from accepting or renewing brokered deposits and offering interest rates on deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited); in addition, "pass-through" insurance coverage may not be available for certain employee benefit accounts. 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 depository institutions may be restricted from making payments of principal and interest on subordinated debt and are subject to appointment of a receiver or conservator. FDICIA also contains a variety of other provisions that affect the operations of a bank, including reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions and a requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. STAFF Northern Trust employed 7,553 full-time equivalent officers and staff members as of December 31, 1997, approximately 5,538 of whom were employed by the Bank. - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- STATISTICAL DISCLOSURES The following statistical disclosures, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, are incorporated herein by reference. 1997 Annual Report Schedule Page - ------------------------------------------------------------ --------------- Foreign Outstandings........................................ 33 Nonperforming Assets and 90 Day Past Due Loans.............. 34 Analysis of Reserve for Credit Losses....................... 35 Average Balance Sheet....................................... 72 Ratios...................................................... 72 Analysis of Net Interest Income............................. 74 - ------------------------------------------------------------ ---------------
- -------------------------------------------------------------------------------- Additional statistical information on a consolidated basis is set forth below. Remaining Maturity and Average Yield of Securities Held to Maturity and Available for Sale (Yield on a taxable equivalent basis giving effect of the federal and state tax rates)
December 31, 1997 ------------------------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- --------------- Average ($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity - -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ------ -------- Securities Held to Maturity U.S. Government $ 72.0 6.72% $ - -% $ - -% $ - -% 5 mos. Obligations of States and Political Subdivisions 38.9 10.99 113.8 11.02 93.6 10.07 30.4 8.50 59 mos. Federal Agency 8.3 6.00 6.0 7.12 - - - - 12 mos. Other--Fixed 4.5 4.19 7.2 5.40 2.9 2.76 19.9 6.00 86 mos. --Floating .2 8.00 .8 7.67 1.5 6.30 56.1 6.75 117 mos. - -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- -------- Total Securities Held to Maturity $ 123.9 7.92% $127.8 10.49% $ 98.0 9.79% $ 106.4 7.11% 58 mos. - -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- -------- Securities Available for Sale U.S. Government $ 207.6 6.15% $262.4 6.15% $ - -% $ - -% 11 mos. Obligations of States and Political Subdivisions - - .6 9.88 15.8 9.58 113.8 8.22 141 mos. Federal Agency 2,756.7 5.90 195.9 6.57 14.5 6.65 2.7 6.87 5 mos. Other--Fixed 13.4 5.66 - - - - - - 5 mos. --Floating 12.4 6.33 12.5 7.43 .8 6.22 124.2 6.00 105 mos. - -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- -------- Total Securities Available for Sale $2,990.1 5.92% $471.4 6.36% $ 31.1 8.13% $ 240.7 7.06% 14 mos. - -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- -------- December 31, 1996 ------------------------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years Over Ten Years ---------------- ----------------- ----------------- --------------- Average ($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity - -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ------ -------- Securities Held to Maturity U.S. Government $ 70.8 6.75% $ 2.6 5.27% $ - -% $ - -% 6 mos. Obligations of States and Political Subdivisions 44.0 11.15 128.4 11.01 109.9 10.51 33.6 8.64 59 mos. Federal Agency 2.0 7.14 16.2 6.32 - - - - 24 mos. Other--Fixed 9.8 5.04 2.7 3.31 - - 19.5 6.02 77 mos. --Floating 1.3 7.75 .8 7.75 .6 6.65 56.2 7.00 116 mos. - -------------------------------------- -------- ------ ------ ----- ------ ----- ------- ------ -------- Total Securities Held to Maturity $ 127.9 8.15% $150.7 10.25% $ 110.5 10.49% $ 109.3 7.33% 58 mos. - -------------------------------------- -------- ------ ------ ----- ------ ----- ------- ------ -------- Securities Available for Sale U.S. Government $ 809.0 5.90% $ 97.7 5.97% $ - -% $ - -% 7 mos. Obligations of States and Political Subdivisions - - .5 9.88 10.0 9.68 106.5 8.32 146 mos. Federal Agency 2,735.5 5.76 296.6 6.15 58.9 6.23 5.9 6.64 6 mos. Other--Fixed 17.2 5.69 12.8 5.66 - - - - 11 mos. --Floating 4.0 6.17 7.1 6.17 10.7 7.35 139.3 4.44 112 mos. - -------------------------------------- -------- ------ ------ ----- ------- ------ ------- ----- -------- Total Securities Available for Sale $3,565.7 5.79% $414.7 6.10% $ 79.6 6.81% $ 251.7 6.13% 14 mos. - -------------------------------------- -------- ------ ------ ----- ------- ------ ------- ----- --------
10 Securities Held to Maturity and Available for Sale
December 31 ---------------------------------------------------------------------- (In Millions) 1997 1996 1995 1994 1993 - ----------------------------------------------- --------- --------- -------- -------- -------- Securities Held to Maturity U.S. Government $ 72.0 $ 73.4 $ 116.1 $ 137.2 $2,343.7 Obligations of States and Political Subdivisions 276.7 315.9 366.9 474.5 493.5 Federal Agency 14.3 18.2 22.2 - 833.1 Other 93.1 90.9 29.9 29.6 120.5 - ----------------------------------------------- -------- -------- -------- -------- -------- Total Securities Held to Maturity $ 456.1 $ 498.4 $ 535.1 $ 641.3 $3,790.8 - ----------------------------------------------- -------- -------- -------- -------- -------- Securities Available for Sale U.S. Government $ 470.0 $ 906.7 $1,667.7 $ 801.3 $ - Obligations of States and Political Subdivisions 130.2 117.0 70.2 - - Federal Agency 2,969.8 3,096.9 3,152.8 3,251.5 40.9 Other 163.3 191.1 245.6 355.0 170.7 - ----------------------------------------------- -------- -------- -------- -------- -------- Total Securities Available for Sale $3,733.3 $4,311.7 $5,136.3 $4,407.8 $ 211.6 - ----------------------------------------------- -------- -------- -------- -------- -------- Average Total Securities $6,374.2 $6,363.8 $6,193.0 $5,000.9 $4,232.0 - ----------------------------------------------- -------- -------- -------- -------- -------- Total Securities at Year-End $4,198.2 $4,814.9 $5,760.3 $5,053.1 $4,038.7 - ----------------------------------------------- -------- -------- -------- -------- -------- ========================================================================================================================
Loans and Leases by Type
December 31 ---------------------------------------------------------------------- (In Millions) 1997 1996 1995 1994 1993 - ----------------------------------------------- --------- --------- -------- -------- -------- Domestic Residential Real Estate $ 5,186.7 $ 4,557.5 $3,896.4 $3,299.1 $2,883.3 Commercial 3,734.8 3,161.4 3,202.1 2,672.0 2,421.1 Broker 170.1 389.1 304.0 274.6 249.4 Commercial Real Estate 582.1 557.7 512.6 494.1 506.5 Personal 1,207.2 989.8 758.9 662.1 617.5 Other 890.1 632.1 625.5 642.1 453.5 Lease Financing 347.0 267.8 202.3 159.9 138.4 - ----------------------------------------------- --------- --------- -------- -------- -------- Total Domestic 12,118.0 10,555.4 9,501.8 8,203.9 7,269.7 International 470.2 382.0 404.2 386.7 353.3 - ----------------------------------------------- --------- --------- -------- -------- -------- Total Loans and Leases $12,588.2 $10,937.4 $9,906.0 $8,590.6 $7,623.0 - ----------------------------------------------- --------- --------- -------- -------- -------- Average Loans and Leases $11,812.9 $10,332.1 $9,136.0 $8,316.1 $7,297.1 - ----------------------------------------------- --------- --------- -------- -------- -------- ========================================================================================================================
Remaining Maturity of Selected Loans and Leases
December 31, 1997 --------------------------------------------------------- One Year One to Over Five (In Millions) Total or Less Five Years Years - ---------------------------------------------------------------- ------------ ------------ ------------ ------------ Domestic (Excluding Residential Real Estate and Personal Loans) Commercial $ 3,734.8 $ 2,900.7 $ 681.7 $ 152.4 Commercial Real Estate 582.1 203.5 289.5 89.1 Other 1,060.2 1,040.0 14.3 5.9 Lease Financing 347.0 24.8 76.8 245.4 - ---------------------------------------------------------------- ------------ ------------ ------------ ------------ Total Domestic 5,724.1 4,169.0 1,062.3 492.8 International 470.2 286.4 149.9 33.9 - ---------------------------------------------------------------- ------------ ------------ ------------ ------------ Total Selected Loans and Leases $ 6,194.3 $ 4,455.4 $ 1,212.2 $ 526.7 - ---------------------------------------------------------------- ------------ ------------ ------------ ------------ Interest Rate Sensitivity of Loans and Leases Fixed Rate $ 4,990.9 $ 3,643.0 $ 884.0 $ 463.9 Variable Rate 1,203.4 812.4 328.2 62.8 - ---------------------------------------------------------------- ------------ ------------ ------------ ------------ Total $ 6,194.3 $ 4,455.4 $ 1,212.2 $ 526.7 - ---------------------------------------------------------------- ------------ ------------ ------------ ------------ =============================================================================================================================
11 Average Deposits by Type
(In Millions) 1997 1996 1995 1994 1993 - -------------------------------------------------------------- -------- -------- -------- -------- -------- Domestic Offices Demand and Noninterest-Bearing Individuals, Partnerships and Corporations $ 1,754.6 $ 1,801.8 $ 1,651.1 $ 1,540.4 $ 1,487.5 Correspondent Banks 92.8 115.2 129.8 192.2 201.1 Other 1,116.5 815.9 966.4 859.9 866.3 - -------------------------------------------------------------- --------- --------- --------- --------- --------- Total $ 2,963.9 $ 2,732.9 $ 2,747.3 $ 2,592.5 $ 2,554.9 - -------------------------------------------------------------- --------- --------- --------- --------- --------- Time Savings and Money Market $ 3,895.4 $ 3,620.7 $ 3,312.4 $ 3,385.7 $ 3,432.1 Savings Certificates less than $100,000 1,076.5 1,169.6 1,160.8 699.9 668.6 Savings Certificates $100,000 and more 959.3 892.8 839.5 529.7 504.3 Other Time 717.3 549.2 542.7 412.8 404.7 - -------------------------------------------------------------- --------- --------- --------- --------- --------- Total $ 6,648.5 $ 6,232.3 $ 5,855.4 $ 5,028.1 $ 5,009.7 - -------------------------------------------------------------- --------- --------- --------- --------- --------- Total Domestic Offices $ 9,612.4 $ 8,965.2 $ 8,602.7 $ 7,620.6 $ 7,564.6 - -------------------------------------------------------------- --------- --------- --------- --------- --------- Foreign Offices Demand $ 486.4 $ 347.8 $ 299.1 $ 361.7 $ 65.3 Time 4,971.2 3,826.2 3,493.4 3,284.8 2,436.4 - -------------------------------------------------------------- --------- --------- --------- --------- --------- Total Foreign Offices $ 5,457.6 $ 4,174.0 $ 3,792.5 $ 3,646.5 $ 2,501.7 - -------------------------------------------------------------- --------- --------- --------- --------- --------- Total Deposits $15,070.0 $13,139.2 $12,395.2 $11,267.1 $10,066.3 - -------------------------------------------------------------- --------- --------- --------- --------- --------- ===========================================================================================================================
Average Rates Paid on Time Deposits by Type 1997 1996 1995 1994 1993 - -------------------------------------------------------------- -------- -------- -------- -------- -------- Time Deposits Savings and Money Market 3.23% 3.16% 3.29% 2.52% 2.30% Savings Certificates less than $100,000 5.86 5.85 6.08 4.77 4.61 Savings Certificates $100,000 and more 5.63 5.67 5.95 4.45 3.91 Other Time 5.50 5.44 5.81 4.50 3.88 - -------------------------------------------------------------- -------- -------- -------- -------- -------- Total Domestic Offices 4.25 4.23 4.46 3.20 2.89 - -------------------------------------------------------------- -------- -------- -------- -------- -------- Total Foreign Offices Time 4.82 4.82 5.21 4.18 3.71 - -------------------------------------------------------------- -------- -------- -------- -------- -------- Total Time Deposits 4.49% 4.45% 4.74% 3.58% 3.16% - -------------------------------------------------------------- -------- -------- -------- -------- -------- ===========================================================================================================================
Remaining Maturity of Time Deposits $100,000 and more
December 31, 1997 December 31, 1996 ------------------------------------- ----------------------------------- Domestic Offices Domestic Offices ----------------------- ---------------------- Certificates Other Foreign Certificates Other Foreign (In Millions) of Deposit Time Offices of Deposit Time Offices - ----------------------------------- ------------ ----- -------- ------------ ----- -------- 3 Months or Less $ 898.0 $ 2.0 $5,395.5 $ 738.6 $ 5.5 $3,466.1 Over 3 through 6 Months 265.9 3.2 50.0 277.5 2.2 30.4 Over 6 through 12 Months 239.5 5.4 5.6 223.1 4.7 8.2 Over 12 Months 234.0 2.4 4.3 205.7 5.6 5.0 - ----------------------------------- ------------ ----- -------- ------------ ----- -------- Total $1,637.4 $13.0 $5,455.4 $1,444.9 $18.0 $3,509.7 - ----------------------------------- ------------ ----- -------- ------------ ----- -------- ==================================================================================================================
12 Purchased Funds
Federal Funds Purchased (Overnight Borrowings) ($ in Millions) 1997 1996 1995 - -------------------------------------------------------------------------------- -------- -------- -------- Balance on December 31 $ 821.2 $ 653.0 $2,300.1 Highest Month-End Balance 2,765.9 2,715.2 3,620.1 Year--Average Balance 1,690.2 1,842.2 1,564.0 --Average Rate 5.47% 5.31% 5.83% Average Rate at Year-End 5.64 6.03 5.17 - -------------------------------------------------------------------------------- -------- -------- -------- Securities Sold under Agreements to Repurchase ($ in Millions) 1997 1996 1995 - -------------------------------------------------------------------------------- -------- -------- -------- Balance on December 31 $1,139.7 $ 966.1 $1,858.7 Highest Month-End Balance 3,708.9 2,922.2 2,283.0 Year--Average Balance 1,519.9 1,973.3 1,769.7 --Average Rate 5.38% 5.24% 5.80% Average Rate at Year-End 5.43 5.69 5.41 - -------------------------------------------------------------------------------- -------- -------- -------- Other Borrowings (Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased) ($ in Millions) 1997 1996 1995 - -------------------------------------------------------------------------------- -------- -------- -------- Balance on December 31 $2,876.6 $3,142.1 $ 875.9 Highest Month-End Balance 5,528.4 4,953.6 3,415.9 Year--Average Balance 2,120.9 1,274.1 1,034.5 --Average Rate 5.30% 5.07% 5.38% Average Rate at Year-End 5.01 5.82 3.61 - -------------------------------------------------------------------------------- -------- -------- -------- Total Purchased Funds ($ in Millions) 1997 1996 1995 - -------------------------------------------------------------------------------- -------- -------- -------- Balance on December 31 $4,837.5 $4,761.2 $5,034.7 Year--Average Balance 5,331.0 5,089.6 4,368.2 --Average Rate 5.38% 5.22% 5.71% - -------------------------------------------------------------------------------- -------- -------- -------- ============================================================================================================================= Commercial Paper ($ in Millions) 1997 1996 1995 - -------------------------------------------------------------------------------- -------- -------- -------- Balance on December 31 $ 146.8 $ 149.0 $ 146.7 Highest Month-End Balance 149.9 153.0 154.4 Year--Average Balance 142.7 143.7 146.0 --Average Rate 5.54% 5.40% 5.87% Average Rate at Year-End 5.81 5.65 5.80 - -------------------------------------------------------------------------------- -------- -------- -------- =============================================================================================================================
13 - -------------------------------------------------------------------------------- Changes in Net Interest Income
1997/96 1996/95 --------------------------------- --------------------------------- Change Due To Change Due To ------------------ -------------------- (Interest on a taxable equivalent basis) (In Millions) Volume Rate Total Volume Rate Total - ----------------------------------------------------- ------ ------- ------- ------- ------- ------- Increase (Decrease) In Interest Income Money Market Assets Federal Funds Sold and Resell Agreements $ 27.1 $ 0.5 $ 27.6 $ 7.1 $ (1.1) $ 6.0 Time Deposits with Banks 45.4 3.2 48.6 2.8 (10.0) (7.2) Other .1 (.1) -- 2.0 (.1) 1.9 Securities U.S. Government (52.2) 3.4 (48.8) 27.3 (.1) 27.2 Obligations of States and Political Subdivisions (.5) (2.2) (2.7) (2.0) (4.0) (6.0) Federal Agency 50.7 2.8 53.5 (6.5) (23.9) (30.4) Other .9 .3 1.2 (7.5) (.8) (8.3) Trading Account .1 -- .1 (3.2) -- (3.2) Loans and Leases 100.1 .8 100.9 80.8 (17.3) 63.5 - ----------------------------------------------------- ------ ------- ------- ------ ------- ------ Total $171.7 $ 8.7 $ 180.4 $100.8 $ (57.3) $ 43.5 - ----------------------------------------------------- ------ ------- ------- ------ ------- ------ Increase (Decrease) In Interest Expense Deposits Savings and Money Market $ 8.9 $ 2.6 $ 11.5 $ 9.7 $ (4.5) $ 5.2 Savings Certificates (1.5) (.4) (1.9) 3.6 (5.1) (1.5) Other Time 9.2 .3 9.5 .4 (2.0) (1.6) Foreign Offices Time 55.2 .1 55.3 16.1 (13.7) 2.4 Federal Funds Purchased (8.3) 2.8 (5.5) 14.7 (8.0) 6.7 Repurchase Agreements (24.4) 2.7 (21.7) 10.7 (9.9) .8 Commercial Paper (.1) .2 .1 (.1) (.7) (.8) Other Borrowings 44.9 3.0 47.9 12.1 (3.2) 8.9 Senior Notes 15.6 .9 16.5 (6.8) (2.5) (9.3) Long-term Debt 5.6 (.4) 5.2 6.8 (.8) 6.0 Floating Rate Capital Securities 14.5 -- 14.5 -- -- -- - ----------------------------------------------------- ------ ------- ------- ------ ------- ------ Total $119.6 $ 11.8 $ 131.4 $ 67.2 $ (50.4) $ 16.8 - ----------------------------------------------------- ------ ------- ------- ------ ------- ------ Increase (Decrease) In Net Interest Income $ 52.1 $ (3.1) $ 49.0 $ 33.6 $ (6.9) $ 26.7 - ----------------------------------------------------- ------ ------- ------- ------ ------- ------
Note: Changes not due only to volume changes or rate changes are included in the change due to rate column. - -------------------------------------------------------------------------------- International Operations (Based on Obligor's Domicile) See also Note 26 titled "International Operations" on page 65 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference. Selected Average Assets and Liabilities Attributable to International Operations
(In Millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------ -------- -------- -------- -------- -------- Total Assets $3,507.7 $2,365.5 $2,282.0 $2,820.5 $2,328.8 - ------------------------------------------------------------ -------- -------- -------- -------- -------- Time Deposits with Banks 2,574.5 1,699.3 1,643.7 2,063.1 1,956.7 Other Money Market Assets .1 .1 .1 .4 .9 Loans 537.9 380.5 344.3 445.5 279.9 Customers' Acceptance Liability .5 1.1 1.9 3.0 4.8 Foreign Investments 22.2 23.4 14.3 21.6 29.8 - ------------------------------------------------------------ -------- -------- -------- -------- -------- Total Liabilities $5,960.7 $4,551.2 $4,163.5 $4,089.4 $2,715.0 - ------------------------------------------------------------ -------- -------- -------- -------- -------- Deposits 5,747.2 4,435.7 3,992.2 4,010.6 2,706.2 Liability on Acceptances .5 1.1 1.9 3.0 4.8 - ------------------------------------------------------------ -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------------------
14 - -------------------------------------------------------------------------------- Percent of International Related Average Assets and Liabilities to Total Consolidated Average Assets
1997 1996 1995 1994 1993 - --------------------------------------- ---- ---- ---- ---- ---- Assets 15% 11% 12% 16% 15% - --------------------------------------- ---- ---- ---- ---- ---- Liabilities 25 22 21 23 17 - --------------------------------------- ---- ---- ---- ---- ----
================================================================================ Reserve for Credit Losses Relating to International Operations
(In Millions) 1997 1996 1995 1994 1993 - --------------------------------------- ---- ---- ---- ---- ---- Balance at Beginning of Year $3.6 $3.5 $4.7 $6.8 $5.3 Charge-Offs -- (.2) (.6) -- (.6) Recoveries .1 .5 .7 -- .2 Provision for Credit Losses 1.4 (.2) (1.3) (2.1) 1.9 - --------------------------------------- ---- ---- ---- ---- ---- Balance at End of Year $5.0 $3.6 $3.5 $4.7 $6.8 - --------------------------------------- ---- ---- ---- ---- ----
The Securities and Exchange Commission requires the disclosure of the reserve for credit losses that is applicable to international operations. The above table has been prepared in compliance with this disclosure requirement and is used in determining international operating performance. The amounts shown in the table should not be construed as being the only amounts that are available for international loan charge-offs, since the entire reserve for credit losses is available to absorb losses on both domestic and international loans. In addition, these amounts are not intended to be indicative of future charge-off trends. ================================================================================ Distribution of International Loans and Deposits by Type
December 31 ------------------------------------------------------------ Loans 1997 1996 1995 1994 1993 - -------------------------------------------------------- -------- -------- -------- -------- -------- Commercial $ 240.1 $226.6 $259.9 $233.8 $157.9 Foreign Governments and Official Institutions 115.2 118.3 103.7 72.8 47.1 Banks 51.2 22.8 37.3 77.0 145.9 Other 63.7 14.3 3.3 3.1 2.4 - -------------------------------------------------------- -------- -------- -------- -------- -------- Total $ 470.2 $382.0 $404.2 $386.7 $353.3 - -------------------------------------------------------- -------- -------- -------- -------- -------- December 31 ------------------------------------------------------------ Deposits 1997 1996 1995 - -------------------------------------------------------- -------- -------- -------- Commercial $4,473.3 $2,855.4 $2,557.2 Foreign Governments and Official Institutions 782.1 708.6 749.5 Banks 443.4 350.7 415.7 Other Time 490.6 276.2 224.7 Other Demand 11.8 10.7 7.8 - -------------------------------------------------------- -------- -------- -------- Total $6,201.2 $4,201.6 $3,954.9 - -------------------------------------------------------- -------- -------- --------
================================================================================ 15 - -------------------------------------------------------------------------------- CREDIT RISK MANAGEMENT Overview The Credit Policy function reports to the Corporation's Chief Financial Officer. Credit Policy provides a system of checks and balances for Northern Trust's diverse credit-related activities by establishing and monitoring all credit-related policies and practices and ensuring their uniform application. These activities are designed to ensure that credit exposure is diversified on an industry and client basis, thus lessening the overall credit risk. Individual credit authority for commercial loans and within Personal Financial Services is limited to specified amounts and maturities. Credit decisions involving commitment exposure in excess of the specified individual limits are submitted to the appropriate Credit Approval Committee (Committee). Each Committee is chaired by the executive in charge of the area and has a Credit Policy officer as a voting participant. Each Committee's credit approval authority is specified, based on commitment levels, credit ratings and maturities. Credits involving commitment exposure in excess of these group credit limits require the approval of the Senior Credit Committee or the business unit head. Credit Policy established the Counterparty Risk Management Committee in order to manage counterparty risk more effectively. This committee has sole credit authority for exposure to all foreign banks, certain domestic banks which Credit Policy deems to be counterparties and which do not have commercial credit relationships within the Corporation, and other organizations which Credit Policy deems to be counterparties. Under the auspices of Credit Policy, country exposure limits are reviewed and approved on a country-by-country basis. As part of the Northern Trust's ongoing credit granting process, internal credit ratings are assigned to each client and credit before credit is extended, based on creditworthiness. Credit Policy performs at least annually a review of selected significant credit exposures to identify at the earliest possible stages clients who might be facing financial difficulties. Internal credit ratings are also reviewed during this process. Above average risk loans, which will vary from time to time, receive special attention by both lending officers and Credit Policy. This approach allows management to take remedial action in an effort to deal with potential problems. An integral part of the Credit Policy function is a monthly formal review of all past due and potential problem loans to determine which credits, if any, need to be placed on nonaccrual status or charged off. The provision is reviewed quarterly to determine the amount necessary to maintain an adequate reserve for credit losses. Management of credit risk is reviewed by various bank regulatory agencies. Independent auditors also perform a review of credit-related procedures, the loan portfolio and other extensions of credit, and the reserve for credit losses as part of their examination of the consolidated financial statements. Allocation of the Reserve for Credit Losses Bank disclosure guidelines issued by the Securities and Exchange Commission request management to furnish a breakdown of the reserve for credit losses by loan category and provide the percentage of loans in each category to total loans. For this purpose, the reserve is allocated for credit losses associated with all loans, leases and commitments based on historical loss experience, loan volume, internal credit ratings and specific amounts designated for certain nonperforming loans. This allocation method should not be interpreted as an indication of expected losses within the next year or any specified time period. In practice, the reserve for credit losses is established and maintained on an overall basis and is not allocated to specific categories of the portfolio. - -------------------------------------------------------------------------------- 16 As required by the Securities and Exchange Commission, the following table breaks down the reserve for credit losses: Reserve for Credit Losses
(In Millions) 1997 1996 1995 1994 - ------------------------------------------------- ------ ------ ------ ------ Allocated Reserve Residential Real Estate $ 4.0 $ 7.0 $ 6.0 $ 5.0 Commercial 96.0 72.0 85.0 86.0 Commercial Real Estate 7.0 5.0 7.0 12.0 Personal 1.0 6.0 8.0 6.0 Other - - - - Lease Financing 3.0 3.0 3.0 3.0 International - 2.0 3.0 3.0 Unallocated Reserve 36.6 53.3 35.1 29.8 - ------------------------------------------------- ------ ------ ------ ------ Total Reserve $147.6 $148.3 $147.1 $144.8 - ------------------------------------------------- ------ ------ ------ ------
At December 31, 1993, $.2 million of the reserve was allocated based on an estimate of the amount that was necessary to provide for potential losses related to specific nonperforming loans only, while $145.3 million remained unallocated of the total $145.5 million reserve balance. - -------------------------------------------------------------------------------- Loan and lease categories as a percent of total loans and leases as of December 31, 1993 through 1997, are presented below. Loan and Lease Category to Total Loans and Leases
1997 1996 1995 1994 1993 - ------------------------------------------------- ------ ------ ------ ------ ------ Loan and Lease Category Residential Real Estate 41% 42% 39% 38% 38% Commercial 30 29 32 31 32 Commercial Real Estate 5 5 5 6 6 Personal 10 9 8 8 8 Other 7 9 10 11 9 Lease Financing 3 2 2 2 2 International 4 4 4 4 5 - ------------------------------------------------- ------ ------ ------ ------ ------ Total 100% 100% 100% 100% 100% - ------------------------------------------------- ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------------------------------------------
17 The information presented in the "Credit Risk Management" section should be read in conjunction with the following information that is incorporated herein by reference to the Corporation's Annual Report to Stockholders for the year ended December 31, 1997:
1997 Annual Report Notes to Consolidated Financial Statements Page(s) - ------------------------------------------------------------------------------------------------- --------------- 1. Accounting Policies F. Interest Risk Management Instruments..................................................... 46 G. Loans and Leases......................................................................... 47 H. Reserve for Credit Losses................................................................ 47 L. Other Real Estate Owned.................................................................. 48 5. Loans and Leases............................................................................ 50 6. Reserve for Credit Losses................................................................... 51 19. Contingent Liabilities...................................................................... 59 20. Off-Balance Sheet Financial Instruments..................................................... 59-62 - ------------------------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------------------------- Asset Quality and Credit Risk Management......................................................... 32-35 - ------------------------------------------------------------------------------------------------- ---------------
In addition, the following schedules on page 15 of this Form 10-K should be read in conjunction with the "Credit Risk Management" section: Reserve for Credit Losses Relating to International Operations Distribution of International Loans and Deposits by Type 18 INTEREST RATE SENSITIVITY ANALYSIS For the discussion of interest rate sensitivity, see the section entitled "Market Risk Management" on pages 35 to 38 of Management's Discussion and Analysis of Financial Condition and Results of Operations of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference. 19 The following unaudited Consolidated Balance Sheet and Consolidated Statement of Income for The Northern Trust Company were prepared in accordance with generally accepted accounting principles and are provided here for informational purposes. These consolidated financial statements should be read in conjunction with the footnotes accompanying the consolidated financial statements, included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, and incorporated herein by reference on page 24 of this Form 10-K. The Northern Trust Company Consolidated Balance Sheet (unaudited)
December 31 --------------------------- (In Millions) 1997 1996 - -------------------------------------------------------------------------------------------- --------- ---------- Assets Cash and Due from Banks $ 1,568.8 $ 1,090.4 Federal Funds Sold and Securities Purchased under Agreements to Resell 3,228.7 1,224.9 Time Deposits with Banks 2,282.4 2,059.7 Other Interest-Bearing 104.8 248.0 Securities Available for Sale 3,407.2 3,983.9 Held to Maturity (Fair Value -- $401.2 in 1997 and $436.1 in 1996) 385.5 416.9 - -------------------------------------------------------------------------------------------- --------- ---------- Total Securities 3,792.7 4,400.8 - -------------------------------------------------------------------------------------------- --------- ---------- Loans Commercial and Other 6,224.8 5,396.7 Residential Mortgages 2,810.9 2,589.5 - -------------------------------------------------------------------------------------------- --------- ---------- Total Loans and Leases (Net of unearned income - $149.8 in 1997 and $106.6 in 1996) 9,035.7 7,986.2 - -------------------------------------------------------------------------------------------- --------- ---------- Reserve for Credit Losses (118.2) (120.9) Buildings and Equipment 235.0 211.3 Customers' Acceptance Liability 29.6 42.3 Trust Security Settlement Receivables 291.4 362.3 Other Assets 734.1 621.9 - -------------------------------------------------------------------------------------------- --------- ---------- Total Assets $21,185.0 $18,126.9 - -------------------------------------------------------------------------------------------- --------- ---------- Liabilities Deposits Demand and Other Noninterest-Bearing $ 2,935.4 $ 3,010.5 Savings and Money Market Deposits 2,672.1 2,568.6 Savings Certificates 1,276.7 1,299.5 Other Time 399.6 335.0 Foreign Offices--Demand 451.1 411.1 --Time 5,619.5 3,518.6 - -------------------------------------------------------------------------------------------- --------- ---------- Total Deposits 13,354.4 11,143.3 - -------------------------------------------------------------------------------------------- --------- ---------- Federal Funds Purchased 929.1 759.6 Securities Sold under Agreements to Repurchase 1,057.2 883.4 Other Borrowings 2,745.0 3,028.9 Senior Notes 785.0 305.0 Long-Term Debt 354.2 333.9 Liability on Acceptances 29.6 42.3 Other Liabilities 648.1 527.5 - -------------------------------------------------------------------------------------------- --------- ---------- Total Liabilities 19,902.6 17,023.9 - -------------------------------------------------------------------------------------------- --------- ---------- Stockholder's Equity Capital Stock--Par Value $60 213.8 213.8 Surplus 245.3 245.3 Undivided Profits 821.8 642.6 Net Unrealized Gain on Securities Available for Sale 1.5 1.3 - -------------------------------------------------------------------------------------------- --------- ---------- Total Stockholder's Equity 1,282.4 1,103.0 - -------------------------------------------------------------------------------------------- --------- ---------- Total Liabilities and Stockholder's Equity $21,185.0 $18,126.9 - -------------------------------------------------------------------------------------------- --------- ----------
20
- ------------------------------------------------------------------------------------------------------------------------- The Northern Trust Company Consolidated Statement of Income (unaudited) For the Year Ended December 31 -------------------------------- (In Millions) 1997 1996 1995 - ------------------------------------------------------------------------------------- -------- ------ ------ Interest Income Loans and Leases $ 548.6 $489.3 $406.6 Securities - Available for Sale 310.0 303.7 275.7 - Held to Maturity 26.5 26.1 26.2 - Trading Account - .1 3.3 - ------------------------------------------------------------------------------------- -------- ------ ------ Total Securities 336.5 329.9 305.2 - ------------------------------------------------------------------------------------- -------- ------ ------ Time Deposits with Banks 133.5 84.8 92.1 Federal Funds Sold and Securities Purchased under Agreements to Resell and Other 71.9 36.7 17.4 - ------------------------------------------------------------------------------------- -------- ------ ------ Total Interest Income 1,090.5 940.7 821.3 - ------------------------------------------------------------------------------------- -------- ------ ------ Interest Expense Deposits 445.3 373.6 317.0 Federal Funds Purchased 93.3 99.0 94.9 Securities Sold under Agreements to Repurchase 77.4 99.1 94.4 Other Borrowings 107.8 60.9 51.7 Senior Notes 30.9 14.4 23.5 Long-Term Debt 24.4 19.5 17.0 - ------------------------------------------------------------------------------------- -------- ------ ------ Total Interest Expense 779.1 666.5 598.5 - ------------------------------------------------------------------------------------- -------- ------ ------ Net Interest Income 311.4 274.2 222.8 Provision for Credit Losses 5.6 7.4 4.8 - ------------------------------------------------------------------------------------- -------- ------ ------ Net Interest Income after Provision for Credit Losses 305.8 266.8 218.0 - ------------------------------------------------------------------------------------- -------- ------ ------ Noninterest Income Trust Fees 456.9 397.8 348.3 Treasury Management Fees 59.2 54.2 48.3 Foreign Exchange Trading Profits 104.7 58.7 55.1 Security Commissions and Trading Income .9 .9 .1 Other Operating Income 42.0 36.8 33.3 Investment Security Gains .7 .4 .6 - ------------------------------------------------------------------------------------- -------- ------ ------ Total Noninterest Income 664.4 548.8 485.7 - ------------------------------------------------------------------------------------- -------- ------ ------ Income before Noninterest Expenses 970.2 815.6 703.7 - ------------------------------------------------------------------------------------- -------- ------ ------ Noninterest Expenses Salaries 322.7 258.3 240.7 Pension and Other Employee Benefits 58.0 52.3 58.6 Occupancy Expense 45.8 45.9 40.2 Equipment Expense 51.3 45.3 39.7 Other Operating Expenses 143.4 131.3 108.9 - ------------------------------------------------------------------------------------- -------- ------ ------ Total Noninterest Expenses 621.2 533.1 488.1 - ------------------------------------------------------------------------------------- -------- ------ ------ Income before Income Taxes 349.0 282.5 215.6 Provision for Income Taxes 117.4 90.5 67.7 - ------------------------------------------------------------------------------------- -------- ------ ------ Net Income $ 231.6 $192.0 $147.9 - ------------------------------------------------------------------------------------- -------- ------ ------ Dividends Paid to the Corporation 50.0 80.0 89.0 - ------------------------------------------------------------------------------------- -------- ------ ------ - -------------------------------------------------------------------------------------------------------------------------
21 - ------------------------------------------------------------------------------- Supplemental Item--Executive Officers of the Registrant WILLIAM A. OSBORN Mr. Osborn became Chairman of the Board of the Corporation and the Bank in October 1995, and Chief Executive Officer of the Corporation and the Bank in June 1995. He held the title of President of the Corporation and the Bank from January 1994 to October 1995 and Chief Operating Officer from January 1994 through June 1995. He was a Senior Executive Vice President of the Corporation and the Bank from November 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1989. Mr. Osborn, 50, began his career with the Bank in 1970. BARRY G. HASTINGS Mr. Hastings became President of the Corporation and the Bank in October 1995, and Chief Operating Officer of the Corporation and the Bank in June 1995. He held the title of Vice Chairman of the Corporation and the Bank from January 1994 through June 1995. He was a Senior Executive Vice President of the Corporation and the Bank from November 1992 through 1993 and prior to that time had served as an Executive Vice President of the Bank since 1987, and of the Corporation since 1990. Mr. Hastings, 50, began his career with the Corporation in 1974. DAVID L. EDDY Mr. Eddy became a Senior Vice President of the Corporation and the Bank and Treasurer of the Corporation in 1986. Mr. Eddy, 61, joined the Bank in 1960. JAMES J. MITCHELL Mr. Mitchell was appointed an Executive Vice President of the Bank in December 1987 and of the Corporation in October 1994, and is currently head of the Worldwide Operations and Technology business unit. Mr. Mitchell, 55, joined the Bank in 1964. SHEILA A. PENROSE Ms. Penrose became President - C&IS of the Corporation and of the Bank in January 1998, and an Executive Vice President of the Bank in November 1993 and of the Corporation in November 1994. From 1986 until 1993, she had been a Senior Vice President of the Bank. Ms. Penrose, 52, began her career with the Corporation in 1977. PERRY R. PERO Mr. Pero is Chief Financial Officer of the Corporation and the Bank and Cashier of the Bank. Mr. Pero is also head of the Risk Management Unit and Chairman of the Corporate Asset and Liability Policy Committee. He became a Senior Executive Vice President of the Corporation and the Bank in 1992 after serving as an Executive Vice President of the Corporation and the Bank since 1987. Mr. Pero, 58, joined the Bank in 1964. PETER L. ROSSITER Mr. Rossiter serves as Executive Vice President and General Counsel of the Corporation and the Bank. He joined the Corporation and the Bank in 1992 as an Executive Vice President and Associate General Counsel. He held the title of Secretary of the Corporation and the Bank from April 1993 through November 1997 and has served as an Assistant Secretary since then. Mr. Rossiter, 49, had been a partner in the law firm of Schiff Hardin & Waite from 1979 to 1992. HARRY W. SHORT Mr. Short was appointed Senior Vice President and Controller of the Corporation and the Bank in October 1994. He joined the Corporation and the Bank in January 1990 and served as Senior Vice President and General Auditor. Mr. Short, 50, had been a partner in the accounting firm of KPMG Peat Marwick from 1982 to 1990. JAMES M. SNYDER Mr. Snyder was appointed Executive Vice President of the Corporation and the Bank in November 1996 and is currently the Chief Investment Officer. He had been a Senior Vice President of the Bank from 1991 to 1996. Mr. Snyder, 51, joined the Bank in 1969. - ------------------------------------------------------------------------------- 22 - ------------------------------------------------------------------------------- MARK STEVENS Mr. Stevens became President - PFS of the Corporation and the Bank in January 1998, and was appointed an Executive Vice President of the Corporation and the Bank in February 1996. He served as Chief Executive Officer of Northern Trust Bank of Florida N.A., from 1987 to 1996. Mr. Stevens, 50, joined the Corporation in 1979. STEPHEN B. TIMBERS Mr. Timbers joined Northern Trust in February 1998, when he was named President- NTGI and an Executive Vice President of the Corporation and the Bank. From January 1996 to December 1997, Mr.Timbers, 53, was President, Chief Executive Officer and Chief Investment Officer of Zurich Kemper Investments, Inc. (formerly Kemper Financial Services, Inc.), the investment advisor to the Kemper Funds and the parent organization of Zurich Investment Management, Inc. From January 1992 until January 1996, he served as President and Chief Operating Officer of Kemper Corporation. WILLIAM S. TRUKENBROD Mr. Trukenbrod was appointed an Executive Vice President of the Corporation and the Bank in February 1994, and is currently Chairman of the Credit Policy Committee. Previously, he served as head of the U.S. Corporate Group of Commercial Banking from 1987 to 1992. He had been a Senior Vice President of the Bank since 1980 and of the Corporation since 1992. Mr. Trukenbrod, 58, joined the Bank in 1962. The positions of Chairman of the Board, Chief Executive Officer, President and Vice Chairman are elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. The other officers are appointed annually by the Board. Officers continue to hold office until their successors are duly elected or until their death, resignation or removal by the Board. Item 2-Properties The executive offices of the Corporation and the Bank are located at 50 South LaSalle Street in the financial district of Chicago. This Bank-owned building is occupied by various divisions of Northern Trust's business units. Financial services are provided by the Bank at this location. Adjacent to this building are two office buildings in which the Bank leases approximately 332,000 square feet of space principally for staff divisions of the business units. The Bank also leases approximately 112,000 square feet of a building at 125 South Wacker Drive in Chicago for computer facilities, banking operations and personal banking services. Financial services are also provided by the Bank at fourteen other Chicago metropolitan area locations, five of which are owned and nine of which are leased. The Bank's trust and banking operations are located in a 465,000 square foot facility at 801 South Canal Street in Chicago. The building is leased by the Corporation under terms that qualify as a capital lease. In June 1997, the Bank entered into an agreement to purchase a building and adjacent land located across the street from the Chicago operations center in January 2000. The building, which is located at 840 South Canal Street and contains approximately 340,000 square feet of office space, will be used for future expansion and to relocate the computer data center and some personnel currently located in leased facilities in downtown Chicago. Prior to the purchase date, the Bank will lease, in phases beginning in November 1997, approximately two floors of this six-story building. Space for the Bank's London and Singapore Branches, Edge Act subsidiary and The Northern Trust Company, Canada are leased. The Corporation's other subsidiaries operate from sixty-one locations, fourteen of which are owned and forty-seven of which are leased. Detailed information regarding the addresses of all Northern Trust's locations can be found on pages 80 and 81 in the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference. The facilities which are owned or leased are suitable and adequate for business needs. For additional information relating to properties and lease commitments, refer to Note 8 titled "Buildings and Equipment" and Note 9 titled "Lease Commitments" on page 51 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, which information is incorporated herein by reference. Item 3-Legal Proceedings The information called for by this item is incorporated herein by reference to Note 19 titled "Contingent Liabilities" on page 59 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997. Item 4-Submission of Matters to a Vote of Security Holders None. - ------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- PART II Item 5--Market for Registrant's Common Equity and Related Stockholder Matters The information called for by this item is incorporated herein by reference to the section of the Consolidated Financial Statistics titled "Common Stock Dividend and Market Price" on pages 76 and 77 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997. Information regarding dividend restrictions of the Corporation's banking subsidiaries is incorporated herein by reference to Note 15 titled "Restrictions on Subsidiary Dividends and Loans or Advances" on page 56 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997. Item 6-Selected Financial Data The information called for by this item is incorporated herein by reference to the table titled "Summary of Selected Consolidated Financial Data" on page 22 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997. Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations The information called for by this item is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 22 through 41 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997. Item 7A-Quantitative and Qualitative Disclosures About Market Risk The information called for by this item is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 35 through 38 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997. Item 8-Financial Statements and Supplementary Data The following financial statements of the Corporation and its subsidiaries included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, are incorporated herein by reference.
1997 Annual Report For Northern Trust Corporation and Subsidiaries: Page(s) - --------------------------------------------------------------------------------------------------------- ------------- Consolidated Balance Sheet-December 31, 1997 and 1996.................................................... 42 Consolidated Statement of Income-Years Ended December 31, 1997, 1996 and 1995............................ 43 Consolidated Statement of Changes in Stockholders' Equity-Years Ended December 31, 1997, 1996 and 1995... 44 Consolidated Statement of Cash Flows-Years Ended December 31, 1997, 1996 and 1995........................ 45 - --------------------------------------------------------------------------------------------------------- ------------- For Northern Trust Corporation (Corporation Only) - --------------------------------------------------------------------------------------------------------- ------------- Condensed Balance Sheet-December 31, 1997 and 1996....................................................... 68 Condensed Statement of Income-Years Ended December 31, 1997, 1996 and 1995............................... 68 Consolidated Statement of Changes in Stockholders' Equity-Years Ended December 31, 1997, 1996 and 1995... 44 Condensed Statement of Cash Flows-Years Ended December 31, 1997, 1996 and 1995........................... 69 - --------------------------------------------------------------------------------------------------------- ------------- Notes to Consolidated Financial Statements............................................................... 46-69 - --------------------------------------------------------------------------------------------------------- ------------- Report of Independent Public Accountants................................................................. 70 - --------------------------------------------------------------------------------------------------------- -------------
The section titled "Quarterly Financial Data" on pages 76 and 77 of the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, is incorporated herein by reference. Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. - -------------------------------------------------------------------------------- 24 - -------------------------------------------------------------------------------- PART III Item 10--Directors and Executive Officers of the Registrant The information called for by Item 10 relating to Directors and Nominees for election to the Board of Directors is incorporated herein by reference to pages 2 through 5 of the Corporation's definitive 1998 Notice and Proxy Statement filed on March 16, 1998 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 21, 1998. The information called for by Item 10 relating to Executive Officers is set forth in Part I of this Annual Report on Form 10-K. The information called for by Item 10 relating to Item 405 disclosure of delinquent Form 3, 4 or 5 filers is incorporated by reference to page 9 of the Corporation's definitive 1998 Notice and Proxy Statement filed on March 16, 1998 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 21, 1998. Item 11--Executive Compensation The information called for by this item is incorporated herein by reference to pages 8 and 9 and pages 10 through 17 of the Corporation's definitive 1998 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 21, 1998. Item 12--Security Ownership of Certain Beneficial Owners and Management The information called for by this item is incorporated herein by reference to pages 6 and 7 of the Corporation's definitive 1998 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 21, 1998. Item 13--Certain Relationships and Related Transactions The information called for by this item is incorporated herein by reference to page 9 of the Corporation's definitive 1998 Notice and Proxy Statement filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held April 21, 1998. - -------------------------------------------------------------------------------- 25 PART IV Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K Item 14(a)(1) and (2)--Northern Trust Corporation and Subsidiaries List of Financial Statements and Financial Statement Schedules The following financial information is set forth in Item 1 for informational purposes only: Financial Information of The Northern Trust Company (Bank Only): Unaudited Consolidated Balance Sheet-December 31, 1997 and 1996. Unaudited Consolidated Statement of Income-Years Ended December 31, 1997, 1996 and 1995. The following consolidated financial statements of the Corporation and its subsidiaries are incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1997: Consolidated Financial Statements of Northern Trust Corporation and Subsidiaries: Consolidated Balance Sheet-December 31, 1997 and 1996. Consolidated Statement of Income-Years Ended December 31, 1997, 1996 and 1995. Consolidated Statement of Changes in Stockholders' Equity- Years Ended December 31, 1997, 1996 and 1995. Consolidated Statement of Cash Flows-Years Ended December 31, 1997, 1996 and 1995. The following financial information is incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1997: Financial Statements of Northern Trust Corporation (Corporation): Condensed Balance Sheet-December 31, 1997 and 1996. Condensed Statement of Income-Years Ended December 31, 1997, 1996 and 1995. Consolidated Statement of Changes in Stockholders' Equity- Years Ended December 31, 1997, 1996 and 1995. Condensed Statement of Cash Flows-Years Ended December 31, 1997, 1996 and 1995. The Notes to Consolidated Financial Statements as of December 31, 1997, incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1997, pertain to the Bank only information, consolidated financial statements and Corporation only information listed above. The Report of Independent Public Accountants incorporated by reference into Item 8 from the Corporation's Annual Report to Stockholders for the year ended December 31, 1997 pertains to the consolidated financial statements and Corporation only information listed above. Financial statement schedules have been omitted for the reason that they are not required or are not applicable. Item 14(a)3-Exhibits The exhibits listed on the Exhibit Index beginning on page 28 of this Form 10-K are filed herewith or are incorporated herein by reference to other filings. Item 14(b)-Reports on Form 8-K In a report on Form 8-K dated October 21, 1997, Northern Trust incorporated by reference in Item 5 its October 20, 1997 press release, reporting on its earnings for the third quarter and nine months of 1997. The press release, with summary financial information, was filed as an exhibit pursuant to Item 7 of the Form 8-K. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 17, 1998 Northern Trust Corporation (Registrant) By: William A. Osborn -------------------------------- William A. Osborn Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title --------- ----- William A. Osborn Chairman of the Board, - ---------------------------- William A. Osborn Chief Executive Officer and Director Perry R. Pero Senior Executive Vice President - ---------------------------- Perry R. Pero and Chief Financial Officer Harry W. Short Senior Vice President and Controller - ---------------------------- Harry W. Short (Chief Accounting Officer) ___ Duane L. Burnham Director | | Dolores E. Cross Director | | Susan Crown Director | | Robert S. Hamada Director | | Barry G. Hastings Director | | Robert A. Helman Director | By: Peter L. Rossiter ---- ---------------------------- Arthur L. Kelly Director | Peter L. Rossiter | Attorney-in-Fact Frederick A. Krehbiel Director | | William G. Mitchell Director | | Edward J. Mooney Director | | Harold B. Smith Director | | William D. Smithburg Director | | Bide L. Thomas Director ___| Date: March 17, 1998
27 EXHIBIT INDEX The following Exhibits are filed herewith or are incorporated herein by reference.
Exhibit Incorporated By Reference to Exhibit of Same Name Exhibit in Prior Filing* Number Description or Filed Herewith - -------- ----------------------------------------------------------------------- -------------------- (3) Articles of Incorporation and By-laws (i) Restated Certificate of Incorporation of Northern Trust Corporation as amended to date....................................... (13) (ii) By-laws as amended to date........................................... (8) (4) Instruments Defining the Rights of Security Holders (i) Form of The Northern Trust Company's Global Senior Bank Note (Fixed Rate)............................................... (1) (ii) Form of The Northern Trust Company's Global Senior Bank Note (Floating Rate)............................................ (14) (iii) Form of The Northern Trust Company's Global Subordinated Medium-Term Bank Note (Fixed Rate)...................... (1) (iv) Form of The Northern Trust Company's Global Subordinated Medium-Term Bank Note (Floating Rate)................... (14) (v) Junior Subordinated Indenture, dated as of January 1, 1997, between Northern Trust Corporation and The First National Bank of Chicago, as Debenture Trustee....................... (11) (10) Material Contracts (i) Northern Trust Corporation Amended Incentive Stock Plan, as amended May 20, 1986 **........................................... (2) (1) Amendment dated November 1, 1996................................. (10) (ii) Lease dated July 1, 1988 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated February 12, 1986 and known as Trust No. 66603 (Landlord) and Nortrust Realty Management, Inc. (Tenant)............................................................. (3) (iii) Restated Northern Trust Employee Stock Ownership Plan, dated January 1, 1989, as amended November 21, 1995 and April 26, 1996....................................................... (10) (1) Amendments effective January 1, 1996 to the Northern Trust Employee Stock Plan for former employees of Tanglewood Bank , N.A........................... (13) (2) Amendment effective September 30, 1996 to the Northern Trust Employee Stock Ownership Plan for certain former employees of First Chicago NBD Corporation.................................................. (13) (3) Amendments effective January 1, 1997 to the Northern Trust Employee Stock Ownership Plan for former employees of Bent Tree National Bank.................. (13) (iv) Trust Agreement between The Northern Trust Company and Citizens and Southern Trust Company (Georgia), N.A., (predecessor of NationsBank which, effective January 1, 1998, was succeeded by U.S. Trust Company of California, N.A.) dated January 26, 1989......................................... (4) (1) Amendment dated February 21, 1995............................ Filed Herewith (v) Form of Note Agreement dated January 26, 1989 between ESOP Trust and each of the institutional lenders, with respect to the 8.23% Notes of the ESOP Trust......................... (4)
28
(vi) Guaranty Agreement of Registrant with respect to the 8.23% Notes of the ESOP Trust, dated January 26, 1989......................... (4) (vii) Share Acquisition Agreement between Registrant and the ESOP Trust, dated January 26, 1989............................................ (4) (viii) Implementation Agreement dated June 26, 1996 between the Registrant, The Northern Trust Company, the ESOP Trust and NationsBank (South) N.A. as Trustee (effective January 1, 1998, U.S. Trust Company of California, N.A. as successor Trustee)......................................................... (9) (ix) Term Loan Agreement between the ESOP Trust and the Registrant dated June 28, 1996................................................ (9) (x) Restated Trust Agreement dated June 18, 1996, between The Northern Trust Company and Harris Trust and Savings Bank regarding the Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company, the Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company and the Supplemental Pension Plan for Employees of The Northern Trust Company**................................. (10) (xi) Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company as amended and restated as of April 30, 1996**........................................................... (10) (xii) Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company as amended and restated as of April 30, 1996**.............................................................. (10) (xiii) Supplemental Pension Plan for Employees of The Northern Trust Company as amended and restated as of April 30, 1996**........................................................................ (10) (xiv) Rights Agreement, dated as of October 17, 1989, between Northern Trust Corporation and Harris Trust and Savings Bank.......................................................................... (5) (1) First Amendment to Rights Agreement dated as of September 17, 1997.... (14) (2) Second Amendment to Rights Agreement dated as of November 18, 1997.... Filed Herewith (xv) Lease dated August 27, 1985 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated April 5, 1990 and known as Trust No. 110513-07 (Landlord) and The Northern Trust Company (Tenant), as amended.......................................................... (6) (1) First Amendment to Agreement of Lease dated August 15, 1986........... (7) (2) Second Amendment to Agreement of Lease dated August 6, 1987........... (7) (3) Third Amendment to Agreement of Lease dated May 20, 1988.............. (7) (4) Fourth Amendment to Agreement of Lease dated May 1, 1990.............. (7) (5) Fifth Amendment to Agreement of Lease dated January 12, 1995.......... (7) (6) Sixth Amendment to Agreement of Lease dated November 30, 1995......... (7) (xvi) Lease dated July 8, 1987 between American National Bank & Trust Company of Chicago as Trustee under Trust Agreement dated July 12, 1984 and known as Trust No. 61523 (Landlord) and The Northern Trust Company (Tenant), as amended.......................................................... (6) (1) First Amendment to Office Lease dated October 20, 1987................ (12) (xvii) Amended 1992 Incentive Stock Plan**........................................... (13) (xviii) Northern Trust Corporation (1997) Management Performance Plan**........................................................................ (13) (xix) Northern Trust Corporation (1997) Annual Performance Plan**................... (13) (xx) Form of Employment Security Agreement dated March 1, 1996 entered into between Northern Trust Corporation and each of 7 executive officers - as amended**................................... (9) (xxi) Form of Employment Security Agreement dated May 21, 1996 entered into between Northern Trust Corporation and each of 30 officers**.............................................................. (9) (xxii) Form of Employment Security Agreement dated May 21, 1996 entered into between Northern Trust Corporation and each of 14 officers**.............................................................. (9) (xxiii) Amended and Restated Trust Agreement of NTC Capital I, dated as of January 16, 1997, among Northern Trust Corporation, as Depositor, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee, and the Administrative Trustees named therein........................................................ (11) (xxiv) Guarantee Agreement, dated as of January 16, 1997, relating to NTC Capital I, by and between Northern Trust Corporation, as Guarantor, and The First National Bank of Chicago, as Guarantee Trustee.............................................. (11)
29
(xxv) Amended and Restated Trust Agreement of NTC Capital II, dated as of April 25, 1997, among Northern Trust Corporation, as Depositor, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee, and the Administrative Trustees named therein.......................................... (13) (xxvi) Guarantee Agreement, dated as of April 25 1997, relating to NTC Capital II, by and between Northern Trust Corporation, as Guarantor, and The First National Bank of Chicago, as Guarantee Trustee................... (13) (13) 1997 Annual Report to Stockholders..................................................... Filed Herewith (21) Subsidiaries of the Registrant......................................................... Filed Herewith (23) Consent of Independent Public Accountants.............................................. Filed Herewith (24) Powers of Attorney..................................................................... Filed Herewith (27) Financial Data Schedule................................................................ Filed Herewith
30 * Prior Filings (File No. 0-5965, except as noted) (1) Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (2) Quarterly Report on Form 10-Q for the quarter ended September 30, 1986 (3) Annual Report on Form 10-K for the year ended December 31, 1988 (4) Form 8-K dated January 26, 1989 (5) Form 8-A dated October 30, 1989 (6) Annual Report on Form 10-K for the year ended December 31, 1990 (7) Annual Report on Form 10-K for the year ended December 31, 1995 (8) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (9) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (10) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (11) Form 8-K dated January 22, 1997 (12) Annual Report on Form 10-K for the year ended December 31, 1996 (13) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (14) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 ** Denotes management contract or compensatory plan or arrangement ---------------------------------------------------------------
Upon written request to Rose A. Ellis, Secretary, Northern Trust Corporation, 50 South LaSalle Street, Chicago, Illinois 60675, copies of exhibits listed above are available to Northern Trust Corporation stockholders by specifically identifying each exhibit desired in the request. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Corporation hereby agrees to furnish the Commission, upon request, any instrument defining the rights of holders of long-term debt of the Corporation not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. 31 EX-10.(IV)(1) 2 MATERIAL CONTRACTS-AMEND. DATED 2-21-95 EXHIBIT NUMBER (10)(iv)(1) To 1997 FORM 10-K FIRST AMENDMENT TO NORTHERN TRUST COMPANY EMPLOYEE STOCK OWNERSHIP TRUST THIS AGREEMENT is made as of the 21st day of February 1995 by and between THE NORTHERN TRUST COMPANY, an Illinois state bank of Chicago, Illinois (the "Company"), and NATIONSBANK, as trustee (the "Trustee"); WHEREAS, the Company and the Trustee executed the NORTHERN TRUST COMPANY EMPLOYEE STOCK OWNERSHIP TRUST agreement (the "Trust") dated the 26th day of January, 1988; and WHEREAS, the Company and the Trustee desire to amend the Trust pursuant to Section 7.1; NOW, THEREFORE, the sections of the Trust set forth below are amended as follows, but all other sections of the Trust shall remain in full force and effect. 1. The second sentence of Section 1.2 is amended in its entirety to read as follows: The Company shall furnish to the Trustee at the time of its appointment and from time to time thereafter the name and specimen signature of each Committee member or agent of the Committee upon whose statement the Trustee is authorized to rely. 2. Section 3.1 is hereby amended by adding the following paragraph: Notwithstanding the foregoing, the committee may appoint a Paying Agent (including the Company) to make distributions from the Trust Fund through an account established by the Committee with such Paying Agent for such purpose after written notice to the Trustee that such an appointment has been made and that an account has been so established. The Trustee shall make such deposits from the Trust Fund to such an account as the Committee may from time to time direct. 3. Section 4.1 is amended by inserting the following language at the end thereof: Anything contained herein to the contrary notwithstanding, any part or all of the assets of the Trust Fund may be deposited with The Northern Trust Company, an Illinois corporation, of Chicago, Illinois, as Trustee under that certain "Declaration of Trust creating the Collective Employee Benefit Trust Fund of The Northern Trust Company" dated October 2, 1961, as the same may be amended from time to time, such funds to be held and invested by The Northern Trust Company as such Trustee pursuant to all the terms and conditions of such Declaration, which is hereby incorporated by reference. IN WITNESS WHEREOF, the Company and the Trustee have caused this Amendment to be executed and their respective corporate seals to be affixed and attested by their respective corporate officers on the day and year first written above. THE NORTHERN TRUST COMPANY By: Martin J. Joyce, Jr. -------------------------------- Its: Senior Vice President ------------------------------- ATTEST: Victoria Antoni - ------------------------------ Its: Assistant Secretary -------------------------- NATIONSBANK By: M. Carole Trizzino -------------------------------- Its: Vice President ------------------------------- ATTEST: T. Stuart Gaston - ------------------------------ Its: Assistant Secretary -------------------------- EX-10.(XIV)(2) 3 MATERIAL CONTRACTS-SECOND AMEND. TO RIGHTS AGMT. EXHIBIT NUMBER (10)(xiv)(2) TO 1997 FORM 10-K SECOND AMENDMENT TO RIGHTS AGREEMENT THIS SECOND AMENDMENT is made as of November 18, 1997 among Northern Trust Corporation, a Delaware corporation (the "Company"), and Norwest Bank Minnesota, National Association, a national banking association (the "Rights Agent"). WHEREAS, the Company and Harris Trust and Savings Bank ("Harris") entered into a Rights Agreement dated as of October 17, 1989 and a First Amendment thereto dated as of September 17, 1997 (collectively, the "Rights Agreement"); WHEREAS, effective as of November 10, 1997 Harris was removed as Rights Agent under the Rights Agreement and Norwest Bank Minnesota, National Association was appointed to serve as successor Rights Agent under the Rights Agreement; WHEREAS, the Company and the Rights Agent may from time to time supplement or amend the Rights Agreement pursuant to Section 27 of the Rights Agreement; WHEREAS, no Distribution Date (as defined in the Rights Agreement) has occurred; WHEREAS, an appropriate officer of the Company has delivered a certificate to the Rights Agent which states that this Second Amendment complies with the terms of Section 27 of the Rights Agreement; and WHEREAS, all acts and things necessary to make this Second Amendment a valid, legal and binding instrument of the Company and the Rights Agent have been duly done, performed and fulfilled, and the execution and delivery hereof by each of the Company and the Rights Agent have been in all respects duly authorized by the Company and the Rights Agent, respectively; NOW, THEREFORE, the Company and the Rights Agent hereby agree that: 1. Pursuant to Section 27 of the Rights Agreement, the stock legend set forth in Section 3(c) of the Rights Agreement is hereby amended by revising the first sentence thereof to read as follows: "This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between Northern Trust Corporation and the Rights Agent thereunder dated as of October 17, 1989, as the same may have been or may be amended, restated or supplemented from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Northern Trust Corporation." 2. The term "Agreement" as used in the Rights Agreement shall be deemed to refer to the Rights Agreement as amended hereby. 3. This Second Amendment may be executed in two or more counterparts, each of such counterparts shall for all purposes be deemed to be an original and all such counterparts shall together constitute but one and the same instrument. Terms not defined herein shall, unless the context otherwise requires, have the meanings assigned to such terms in the Rights Agreement. 4. In executing and delivering this Second Amendment, the Rights Agent shall be entitled to all of the privileges and immunities afforded to the Rights Agent under the terms and conditions of the Rights Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and attested, all as of the day and year first above written. NORTHERN TRUST CORPORATION Attest: By: /s/ Rose A. Ellis By: /s/ Peter L. Rossiter --------------------------- --------------------------- Name: Rose A. Ellis Name: Peter L. Rossiter Title: Secretary Title: Executive Vice President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Attest: By: /s/ Barabar M. Novak By: /s/ Nancy J. Rosengen --------------------------- --------------------------- Name: Barabar M. Novak Name: Nancy J. Rosengen Title: Vice President Title: Vice President EX-13 4 EXCERPTS FROM 1997 ANNUAL REPORT EXHIBIT NUMBER (13) To 1997 Form 10-K MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Northern Trust Corporation (Corporation) is a bank holding company organized in 1971 to hold all of the outstanding capital stock of The Northern Trust Company (Bank), an Illinois banking corporation with its headquarters located in the Chicago financial district. The Corporation also owns banks in Florida, California, Arizona and Texas, and various other nonbank subsidiaries, includ- ing a securities brokerage firm, a futures commission merchant, an interna- tional investment consulting firm and a retirement services company. Although the operations of other subsidiaries will be of increasing significance, it is expected that the Bank will continue to be the major source of the consoli- dated assets, revenues and net income in the foreseeable future. All references to "Northern Trust" refer to Northern Trust Corporation and its subsidiaries on a consolidated basis. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Northern Trust's Consolidated Financial Statements and Consolidated Financial Statistics included herein. RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- OVERVIEW. Net income for 1997 totaled a record $309.4 million, a 19.5% in- crease from the $258.8 million earned in 1996 which in turn was 17.6% greater than the $220.0 million earned in 1995. The record 1997 net income performance produced a return on average common stockholders' equity of 20.2% compared with 18.6% in 1996 and 17.6% in 1995. The return on average assets was 1.29% in 1997 compared with 1.23% in 1996 and 1.13% in 1995. Effective December 31, 1997, Northern Trust implemented Statement of Finan- cial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 requires the presentation of diluted net income per common share, which re- places the presentation of fully diluted net income per share computed pursu- ant to Accounting Principles Board Opinion No. 15. Diluted and fully diluted net income per share are computed in a similar manner. All prior period net income per share data throughout this report has been restated to conform to SFAS No. 128. Diluted net income per common share increased 20% to $2.66 in 1997, compared with $2.21 in 1996 and $1.86 in 1995. Over the past five years the compound growth rate in diluted net income per share has been 15%. Diluted net income per share for 1997 was $.03 greater than fully diluted net income per share. 1997 marks the tenth consecutive year of record earnings. Trust fees, net in- terest income, foreign exchange trading profits and treasury management fees were all at record levels, while trust assets under administration reached $1.08 trillion at December 31, 1997, up $300.4 billion from a year ago. Excel- lent growth in all of Northern Trust's diversified revenue sources produced a 17% increase in revenues while operating expenses increased by 16%, resulting in a productivity ratio of 158%. Primarily through the retention of earnings, offset in part by the repurchase of common stock pursuant to the Corporation's share buyback program, stock- holders' equity grew to $1.74 billion, as compared to $1.54 billion at Decem- ber 31, 1996 and $1.45 billion at December 31, 1995. The Board of Directors increased the quarterly dividend per common share 16.7% in November 1997, to $.21 from $.18, for a new annual rate of $.84. This is the eleventh consecutive year in which the dividend rate has been in- creased. The - ------------------------------------------------------------------------------- SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA - -------------------------------------------------------------------------------
(In Millions Except Per Share Information) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------- Net Interest Income $ 438.2 $ 388.3 $ 357.6 $ 334.6 $ 327.9 Provision for Credit Losses 9.0 12.0 6.0 6.0 19.5 Noninterest Income Trust Fees 689.2 594.4 505.3 453.4 404.8 Other Noninterest Income 245.3 185.6 173.1 180.0 149.0 Noninterest Expenses 891.8 768.9 709.5 700.5 628.2 Provision for Income Taxes 162.5 128.6 100.5 79.3 66.1 - ------------------------------------------------------------------------------------------------- NET INCOME $ 309.4 $ 258.8 $ 220.0 $ 182.2 $ 167.9 - ------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 304.4 $ 253.9 $ 211.5 $ 174.9 $ 161.6 - ------------------------------------------------------------------------------------------------- PER COMMON SHARE Net Income Basic $ 2.74 $ 2.27 $ 1.91 $ 1.62 $ 1.52 Diluted 2.66 2.21 1.86 1.58 1.48 Dividends Declared .75 .65 .55 .46 .39 - ------------------------------------------------------------------------------------------------- Average Total Assets $24,051.7 $20,964.3 $19,409.5 $17,885.8 $15,700.2 Senior Notes at Year-End 785.0 305.0 17.0 547.0 817.0 Long-Term Debt at Year-End 439.5 427.8 334.6 244.8 326.8 Floating Rate Capital Securities at Year-End 267.4 -- -- -- --
Note: Per common share data has been restated to conform with SFAS No. 128. NORTHERN TRUST CORPORATION -------------------------- 22 Board's action reflects a policy of increasing the dividend rate with in- creased profitability while retaining sufficient earnings to allow for strate- gic expansion and the maintenance of a strong balance sheet and capital ra- tios. Northern Trust's strategy will continue to focus on growing its two sharply defined businesses: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS). C&IS focuses on administering and managing domestic and global investment pools for corporate and institutional clients worldwide. PFS provides financial services to individuals and closely held businesses through a unique five-state personal financial services franchise. In execut- ing this strategy, Northern Trust emphasizes service quality through a high level of personal service complemented by the effective use of technology. Expense growth and capital expenditures are closely monitored to ensure that short- and long-term business strategies and performance objectives are effectively balanced. NONINTEREST INCOME. The success of Northern Trust's strategy of maintaining a diverse, fee-oriented revenue base is evidenced by the fact that noninterest income represented 66% of its total taxable equivalent revenue in 1997, com- pared with 65% one year ago. Noninterest income totaled $934.5 million in 1997, $780.0 million in 1996 and $678.4 million in 1995. TRUST FEES. Trust fees accounted for 74% of total noninterest income and 49% of total taxable equivalent revenue in 1997. Trust fees for 1997 increased 16% to $689.2 million from $594.4 million in 1996 which was up 18% from $505.3 million in 1995. Trust fees have increased at a compound growth rate of 13% for the last five years. The increase in 1997 trust fees is principally the result of record growth in business from new and existing clients, coupled with strong growth in security markets. The increase in 1996 fees compared to 1995 was also a result of growth in new business and strong security markets. Fees generated by Northern Trust Global Advisors, Inc. (NTGA), an asset man- agement subsidiary acquired in October 1995, and The Beach Bank of Vero Beach, Florida (Beach Bank), a March 1995 acquisition, contributed approximately $24.1 million of the trust fee growth in 1996. Total trust assets under admin- istration at December 31, 1997 were $1.08 trillion compared to $778.9 billion a year ago, an increase of 39%. Trust assets under management, included in the above, increased 51% to $196.6 billion, from $130.3 billion at the end of 1996. Fees are based on the market value of assets managed and administered, the volume of transactions, securities lending activity, and fees for other serv- ices rendered. Asset-based fees are typically determined on a sliding scale so that as the value of a client portfolio grows in size, Northern Trust receives a smaller percentage of the increasing value as fee income. This fact, to- gether with the non-asset based nature of certain fees, means that market value or other incremental changes in a portfolio's size do not typically have a proportionate impact on the level of trust fees. In addition, C&IS trust re- lationships are increasingly priced to reflect earnings from activities such as custody-related deposits and foreign exchange trading which are not in- cluded in trust fees. Custody-related deposits maintained with bank subsidiar- ies and foreign branches are primarily interest-bearing and averaged $5.4 bil- lion in 1997 and $4.3 billion in 1996. Northern Trust's fiduciary business encompasses Master Trust, Master Custody, investment management and retirement services for corporate and institutional asset pools, as well as a complete range of estate planning, fiduciary, and asset management services for individuals. Fees from these highly focused services are fairly evenly distributed between Northern Trust's two business units, C&IS and PFS. A discussion of trust activities in each of these busi- ness units follows. CORPORATE AND INSTITUTIONAL SERVICES. Northern Trust is a leading provider of Master Trust and Master Custody services to three defined market segments: re- tirement plans; institutional clients; and international clients. Master Trust and Master Custody includes a full range of state-of-the-art capabilities in- cluding: worldwide custody settlement and reporting; cash management; securi- ties lending; and performance analysis services. In addition to Master Trust and Master Custody, C&IS offers a comprehensive array of retirement consulting and recordkeeping services and investment products. At December 31, 1997 trust assets under administration in C&IS totaled $974.1 billion, an increase of 40% from $693.7 billion a year ago. Trust fees in C&IS increased 16% in 1997 to $349.6 million from $300.4 million in 1996 which was up 23% from $244.5 mil- lion in 1995. Excluding the incremental fee growth resulting from the 1995 NTGA acquisition, C&IS trust fees in 1996 increased 13% from the prior year. The increase in C&IS trust fees in 1997 reflects record new business with strong fee growth from all product lines including securities lending, invest- ment management, custody and retirement services. Retirement Plans. Trust fees from the retirement plans market segment, which includes the large U.S. corporate market and public and union retirement funds, totaled $207.5 million in 1997. Trust fees for this segment in 1996 and 1995 totaled $176.4 million and $156.4 million, respectively. Assets under ad- ministration totaled $557.4 billion at December 31, 1997 compared with $375.2 billion a year ago. Growth in this area has been driven by record new business from both new and existing clients. For example, during the third quarter of 1997, Northern Trust won a $60 billion relationship, its largest to date. U.S. demographic trends are expected to advance the growth of retirement services in future years. Much of the anticipated growth in retirement assets is ex- pected to come from defined contribution plans of U.S. corporations. Northern believes that it is well positioned to benefit from this trend given its long- term relationships with corporate sponsors, its family of institutional mutual funds, and recordkeeping services offered through Northern Trust Retirement Consulting, L.L.C. (NTRC). In addition, the 1997 acquisition of ANB IMC, an investment management firm NORTHERN TRUST CORPORATION -------------------------- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS with an array of funds that seek to replicate the performance of numerous mar- ket indices, positions Northern Trust to cross-sell its passive management ca- pabilities to defined contribution plan clients and prospects. The new subsidi- ary, renamed Northern Trust Quantitative Advisors, Inc. (NTQA), will also as- sist Northern Trust in continuing to develop its defined benefit plan business. Institutional. This market segment, which includes insurance companies, foun- dations and endowments and correspondent trust services, provides attractive growth opportunities for trust and banking services. The insurance industry continues to consolidate its relationships with providers who can meet its full range of banking and custody needs. Northern Trust seeks to maintain an array of products and services, a strong capital position and systems capabilities that position it to increase its share of this market. Northern Trust also pro- vides smaller bank trust departments with custody, systems, and investment services through its correspondent trust services offerings. Trust fees from the institutional market segment in 1997, 1996 and 1995 totaled $59.7 million, $53.2 million and $50.1 million, respectively. Assets under administration at December 31, 1997 increased to $202.0 billion from $164.2 billion at December 31, 1996. International. This segment is composed of non-U.S. clients and group trusts. When compared to the other C&IS market segments, International has had the highest compound growth rate for the last five years measured in terms of as- sets under administration and trust fees. At December 31, 1997 assets under ad- ministration totaled $156.8 billion, up 41% from $111.1 billion at year-end 1996, which in turn was up 65% over the previous year-end. Trust fees for 1997 increased 17% to $50.2 million. This compares with $43.0 million in 1996 which was up 27% from $33.9 million in 1995. Global Investment Services. Investment management, securities lending, and risk and performance analysis services are offered to C&IS clients in all mar- ket segments, and fees associated with these activities, with the exception of NTGA-related fees, are included within the market segments above. Total assets under management grew from $80.4 billion at year-end 1996 to $134.8 billion at year-end 1997; $76.9 billion was associated with direct asset management, in- cluding sweep and custom cash funds, while the remaining $57.9 billion repre- sented securities lending collateral. In 1997 Northern Trust accelerated its positioning as a global, multi-asset class manager with an expanded array of investment service and product capabilities. For example, Northern Trust has expanded its investment advisory service offerings to offshore clients through Northern Trust Fund Managers (Ireland) Limited with the addition of new off- shore sterling and U.S. dollar short-term investment funds. NTGA provides specialized U.S. and international multiple manager programs to complement the capabilities of Northern Trust in the fixed income, equity and short-term markets. Total assets under management at NTGA at December 31, 1997 were $6.6 billion versus $5.7 billion at year-end 1996. NTGA earned $32.2 million in trust fees in 1997 versus $27.8 million in 1996. Passive fund management capabilities were further strengthened with the acqui- sition of NTQA from First Chicago NBD Corporation. The new subsidiary was a pi- oneer in developing index funds for institutional investors. The firm manages approximately $30 billion in trust assets. Clients who utilize trust services may elect to have their securities lent to generate revenues, thereby improving their portfolio's total return. The cash and other assets that have been deposited by investment firms as collateral for securities they have borrowed from trust clients under the lending program are managed by Northern Trust and included in trust assets under management. Domes- tic and international securities lending fees totaled $68.3 million, up 31% over 1996, which in turn was up 49% over 1995. The growth was due primarily to an increase in the volume of securities loaned which was driven by new busi- ness, strong security markets and innovative technology which simplifies the security lending transactions for the participating brokers. The collateral to- taled $57.9 billion and $43.2 billion at December 31, 1997 and 1996, respec- tively. Global Custody. In terms of assets under administration, global custody is one of the fastest growing products within C&IS. This product entails custody, set- tlement and reporting of foreign assets that are held by U.S. and non-U.S. dom- iciled clients in all of the market segments described above. Northern Trust continues to strengthen global securities processing and invest in the required systems capabilities and subcustodial network in order to capitalize on the growth opportunities presented by the development of worldwide financial mar- kets. This investment includes the work under way to prepare for the European Monetary Union and the introduction of the Euro in January 1999. Through its worldwide network of subcustodians in 77 markets, Northern Trust had global as- sets of approximately $149 billion under administration at December 31, 1997, a 38% increase over last year. Several of the emerging nations, especially in Southeast Asia, began to experience economic difficulties in 1997. The vast ma- jority of Northern Trust's global custody assets are from industrialized na- tions. About 1.5% of global custody assets are from the world's emerging mar- kets, including those in Asia. Competition. Competition in the corporate and institutional business has been impacted by recent financial services mergers and acquisitions and further con- solidation in the industry as other providers exit the business. One indication of this phenomenon is that approximately 80% of the master trust/custody busi- ness involving U.S. tax-exempt assets is now served by just six institutions. Northern Trust currently ranks fourth on this list. This trend and Northern Trust's commitment to the business have created opportunities to win new cli- ents. For example, in late 1996, Northern Trust was named preferred provider of master trust and domestic institutional custody services for clients of First NORTHERN TRUST CORPORATION -------------------------- 24
- ----------------------------------------------------------------------------------------- CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION - ----------------------------------------------------------------------------------------- Five- Year Compound Percent Growth December 31 Change Rate - ------------------------------------------------------------------------------------------ ($ In Billions) 1997 1996 1995 1994 1993 1997/96 - ------------------------------------------------------------------------------------------ Corporate $ 134.8 $ 80.4 $ 64.4 $ 48.5 $ 43.4 68% 28% Personal 61.8 49.9 41.1 33.8 33.7 24 15 - ------------------------------------------------------------------------------------------ TOTAL MANAGED TRUST ASSETS $ 196.6 $130.3 $105.5 $ 82.3 $ 77.1 51% 23% - ------------------------------------------------------------------------------------------ Corporate $ 839.3 $613.3 $479.9 $393.2 $377.7 37% 21% Personal 43.4 35.3 28.5 23.1 21.7 23 15 - ------------------------------------------------------------------------------------------ TOTAL NON-MANAGED TRUST ASSETS $ 882.7 $648.6 $508.4 $416.3 $399.4 36% 21% - ------------------------------------------------------------------------------------------ CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION $1,079.3 $778.9 $613.9 $498.6 $476.5 39% 21% - ------------------------------------------------------------------------------------------
Chicago NBD as it exited the business. As a result of this agreement, clients with approximately $29.3 billion in trust assets and annualized fee revenues of approximately $8.8 million have selected Northern Trust. Competition has remained intense in the master trust/ master custody busi- ness, affecting the pricing of associated products and services. Northern Trust believes that it is positioned to deal with these pressures and maintain profitability because of its focus on individual client service, developing deeper client relationships that include a range of services, economies of scale and technological innovation. PERSONAL FINANCIAL SERVICES. Northern Trust has positioned itself in states having significant concentrations of wealth and growth potential. With the ad- dition of five new offices in 1997, Northern Trust's unique network of Per- sonal Financial Services offices includes 62 locations in Illinois, Florida, California, Arizona, and Texas. PFS also includes the Wealth Management Group which provides customized products and services to meet the complex financial needs of families throughout the country with assets typically exceeding $100 million. At December 31, 1997 trust assets under administration in PFS totaled $105.2 billion, an increase of 23% from $85.2 billion at December 31, 1996, reflecting record new business development in all five states and strong growth in security markets. Trust fees increased 16% in 1997 to $339.6 million while 1996 trust fees totaled $294.0 million, an increase of 13% from $260.8 million in 1995. Although all geographic markets contributed to the 1997 increase, the strongest fee growth occurred in the Wealth Management Group and the Illinois, Florida, Arizona and Texas markets. With an established presence and expanding network in growing markets, together with favorable demographic trends, Northern Trust is well positioned to continue to grow personal trust fees. Illinois. Personal trust fees in Illinois increased 10% to $142.9 million in 1997 from $130.2 million in 1996, which was up 10% from $118.5 million in 1995. Trust assets under administration totaled $42.8 billion at December 31, 1997 compared with $35.1 billion a year ago, further confirming Northern Trust's position as the largest provider of personal trust services in the state of Illinois. The breadth and quality of trust services along with the financial strength and stability of Northern Trust have provided a sound plat- form for growth in its personal trust business. It is expected that the Chi- cago area market will continue to be a significant contributor to personal trust revenues. Florida. Northern Trust continues to strengthen its position in the Florida marketplace. Trust fees for 1997 totaled $93.2 million, up 20% from $77.3 mil- lion in 1996 which was up 17% from $65.9 million in 1995. Trust assets under administration were $18.4 billion at December 31, 1997, and $15.3 billion at year-end 1996, making Northern Trust the second largest provider of personal trust services in Florida. The five-year compound growth rates for trust fees and trust assets have been 15% and 14%, respectively. With new offices opened in Tampa and Doral during 1997, Northern Trust now has 24 offices located in coastal communities encompassing the southern half of the state. Management believes that there remains significant opportunity for new and increased business given the continued population growth in Florida and Northern's expansion into key market areas. California. With the opening of offices in La Jolla and Montecito in 1997, Northern Trust's California subsidiary has eight offices strategically located throughout the state to reach the California trust market. Trust fees for 1997 increased 11% to $43.6 million from $39.5 million in 1996 which was up 7% from $37.0 million in 1995. Trust assets under administration totaled $9.6 billion at December 31, 1997 and $7.3 billion at December 31, 1996. Arizona. Northern Trust Bank of Arizona N.A. is one of the largest providers of personal trust services in the state. As in other markets, the strategy in Arizona includes providing private banking and trust services to targeted high net worth individuals. A new office was established during 1997 in the Cata- lina Foothills area of Northwest Tucson, bringing to seven the total number of offices in the growing Arizona market. Trust fees from this market were $18.8 million in NORTHERN TRUST CORPORATION -------------------------- 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1997, $15.4 million in 1996 and $13.7 million in 1995. Assets under adminis- tration at December 31, 1997 and 1996 totaled $3.9 billion and $2.6 billion, respectively. Texas. Northern Trust has expanded from one office to seven offices since its entry into the Texas market in 1989, serving the targeted wealth markets of the Dallas and Houston metropolitan areas. Trust fees for 1997, 1996 and 1995 were $10.4 million, $8.6 million and $6.9 million, respectively. Trust assets under administration were $2.9 billion at December 31, 1997 and $2.3 billion at December 31, 1996. Wealth Management. Trust fees in the rapidly growing national Wealth Manage- ment Group grew 34% to $30.7 million in 1997 from $23.0 million in 1996, which was up 22% from $18.8 million in 1995. This group had $27.6 billion of trust assets under administration at December 31, 1997, a 22% increase from a year ago. The 166 families served by this group benefit from Northern Trust's so- phisticated master trust and global custody services and the reporting capa- bilities of the Passport electronic delivery system. Expansion. A significant portion of PFS growth over the last few years has come from its expansion into attractive markets within its five-state network. These markets include approximately 20% of the nation's high net worth house- holds, defined as those with at least $1 million of investable assets. Over the next 10 years, Northern Trust will seek to continue this expansion and also to expand into markets with promising demographics in other states. The goal is to build the PFS national network to approximately 100 offices in targeted markets within as many as 15 states where approximately 40% of all U.S. high net worth households are located. INVESTMENT MANAGEMENT. Northern Trust's investment management business bene- fited significantly in 1997 from strong equity markets around the world, as well as from broader industry trends, including the increasing preference of investors to concentrate assets with fewer managers, the globalization of the financial markets and a greater focus on risk evaluation and management. Northern's competitive investment results, successful expansion of client re- lationships and new product offerings contributed to continued growth in as- sets under management. Northern Trust had $196.6 billion under management for personal and institutional clients, up 51% from year-end 1996, placing North- ern Trust among the largest, and fastest growing, investment managers world- wide. A composite of actively managed institutional equity accounts exceeded the S&P 500 benchmark and put Northern in the top 20% of professional active man- agers. The actively managed domestic equity market funds also performed well, with each placing within the top 30% of funds with comparable investment ob- jectives. Northern's actively managed institutional fixed income results con- tinue to place Northern among the top performing managers. Northern Funds, Northern's proprietary mutual funds for individuals, also posted strong re- sults. Several of the 24 portfolios, comprised of domestic and international, taxable and tax-exempt fixed income, and money market mutual funds, were rec- ognized as top performers in their categories by industry rating agencies. FOREIGN EXCHANGE TRADING PROFITS. Foreign exchange trading profits totaled a record $104.8 million, up 78% from $58.8 million reported a year ago, which was up from $55.3 million in 1995. The record profits reflect both increased cross-border trading volumes as Northern Trust's global custody assets con- tinue to grow and volatility in the currency markets, particularly in the southeastern Asia region. A substantial component of foreign exchange profits continued to result from transactions associated with the growing global cus- tody business. As custodian, Northern Trust provides foreign exchange services in the normal course of business. Active management of currency positions, within conservative limits, also contributes to trading profits. TREASURY MANAGEMENT FEES. The fee portion of treasury management revenues to- taled $60.2 million in 1997, a 9% increase from the $55.3 million reported in 1996 compared with $49.6 million in 1995. Total treasury management revenues, which, in addition to fees, include the computed value of compensating deposit balances increased 7% to $91.6 million from $86.0 million in 1996 compared to $77.5 million in 1995, reflecting the continued growth in new business in both paper- and electronic-based products. SECURITY COMMISSIONS AND TRADING INCOME. Security commissions and trading in- come totaled $26.1 million in 1997, compared with $23.9 million in 1996 and $21.7 million in 1995. This income is primarily generated from securities bro- kerage and futures contract services. Additional revenue is provided from un- derwriting selected general obligation tax-exempt securities and interest risk management activities with clients. The 1997 results reflect strong growth in security brokerage activities offset in part by a decline in the clearing vol- ume of futures contracts. OTHER OPERATING INCOME. Other operating income includes loan, letter of credit and deposit-related service fees and other miscellaneous income from asset sales. Other operating income in 1997 totaled $53.5 million compared with $47.2 million in 1996 and $45.5 million in 1995. Included in 1997 was $11.1 million resulting from settlements reached with Illinois banking regula- tors concerning the disposition of certain unclaimed balances accumulated over a number of years. Other operating income in 1996 reflects a $4.0 million gain from the sale of the Bank's merchant charge card business which was partially offset by a decrease in gains realized from the sale of lease residuals. INVESTMENT SECURITY GAINS AND LOSSES. Net security gains totaling $.7 million were realized in 1997. Of this total, $1.2 million resulted from securities that were called at a premium, offset by $.5 million of losses from the sale of securities classified as available for sale. This compares with net gains of $.4 million in 1996 and $1.0 million in 1995. NORTHERN TRUST CORPORATION -------------------------- 26
- -------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME (FTE) - -------------------------------------------------------------------------------- Percent Change ($ In Millions) 1997 1996 1995 1997/96 1996/95 - -------------------------------------------------------------------------------- Interest Income $ 1,332.8 $ 1,151.5 $ 1,104.0 15.7% 4.3% FTE Adjustment 32.7 33.6 37.6 (2.7) (10.8) - -------------------------------------------------------------------------------- Interest Income-FTE 1,365.5 1,185.1 1,141.6 15.2 3.8 Interest Expense 894.6 763.2 746.4 17.2 2.2 - -------------------------------------------------------------------------------- NET INTEREST INCOME-FTE $ 470.9 $ 421.9 $ 395.2 11.6% 6.8% - -------------------------------------------------------------------------------- AVERAGE VOLUME Earning Assets $21,629.7 $18,779.4 $17,193.7 15.2% 9.2% Interest-Related Funds 18,292.6 15,920.0 14,528.3 14.9 9.6 Noninterest-Related Funds 3,337.1 2,859.4 2,665.4 16.7 7.3 - -------------------------------------------------------------------------------- Change in Percentage - -------------------------------------------------------------------------------- AVERAGE RATE Earning Assets 6.32% 6.31% 6.64% .01 (.33) Interest-Related Funds 4.89 4.79 5.14 .10 (.35) Interest Rate Spread 1.43 1.52 1.50 (.09) .02 Total Source of Funds 4.14 4.06 4.34 .08 (.28) - -------------------------------------------------------------------------------- NET INTEREST MARGIN 2.18% 2.25% 2.30% (.07) (.05)
Refer to page 74 for detailed analysis of net interest income. NET INTEREST INCOME. Net interest income is defined as the total of interest income and amortized fees on earning assets less interest expense on deposits and borrowed funds, adjusted for the impact of off-balance sheet hedging ac- tivity. Earning assets, which consist of securities, loans and money market assets, are financed by a large base of interest-bearing funds, including re- tail deposits, wholesale deposits, short-term borrowings, senior notes and long-term debt. Earning assets are also funded by net noninterest-related funds. Net noninterest-related funds consist of demand deposits, the reserve for credit losses and stockholders' equity, reduced by nonearning assets in- cluding cash and due from banks, items in process of collection, buildings and equipment and other nonearning assets. Variations in the level and mix of earning assets, interest-bearing funds and net noninterest-related funds, and their relative sensitivity to interest rate movements, are the dominant fac- tors affecting net interest income. In addition, net interest income is im- pacted by the level of nonperforming assets and client use of compensating de- posit balances to pay for services. Net interest income for 1997 was a record $438.2 million, up 13% from $388.3 million in 1996, which was up 9% from $357.6 million in 1995. When adjusted to a fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and par- tially taxable assets are comparable, although the adjustment to a FTE basis has no impact on net income. Net interest income on a FTE basis for 1997 was a record $470.9 million, an increase of $49.0 million or 12% from $421.9 million in 1996 which in turn was up 7% from $395.2 million in 1995. Through steady asset growth and conservative interest rate risk management, Northern Trust has been successful in generating year over year improvement in net interest income as evidenced by the fact that 1997 represents the fourteenth consecu- tive year of record performance. The increase in FTE net interest income in 1997 was driven by a $478 million (17%) increase in non-interest related funds, and a $2.8 billion increase in average earning assets. The net interest margin declined to 2.18% from 2.25% last year. The decline in the margin is attributable to a higher proportion of low-spread money mar- ket assets and narrowing spreads earned on the federal agency securities port- folio due to the flattening of the yield curve. Earning assets averaged $21.6 billion, up 15% from the $18.8 billion reported in 1996, which was up from $17.2 billion in 1995. The growth in average earn- ing assets reflects a 14% or $1.5 billion increase in loans, and a 65% or $1.3 billion increase in money market assets. Loan volume for the year averaged $11.8 billion with most of the growth reflected in the domestic portfolio while international loans increased $158 million. The domestic growth came principally from residential mortgage activities, up $597 million, and commer- cial and industrial loans, up $326 million. Reflected in the total loan growth are non-interest bearing domestic and international overnight advances related to processing certain trust client investments, which averaged $708 million in 1997, up from $596 million a year ago. Money market assets averaged $3.4 bil- lion in 1997 versus $2.1 billion in 1996. The increase was principally driven by a higher level of foreign office time deposits resulting from growth in global custody activities, and more active short-term investment of non- interest-bearing balances previously held with global subcustodians. Securi- ties averaged $6.4 billion in 1997, unchanged from prior year levels. NORTHERN TRUST CORPORATION -------------------------- 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The increase in average earning assets of $2.8 billion was funded through growth in interest-bearing deposits, other interest-related funding sources, and noninterest-related funds. The deposit growth was concentrated primarily in foreign office time deposits, up $1.1 billion, resulting from increased global custody activity. Other interest-related funds averaged $6.7 billion, up $811 million, principally from other borrowings (up $847 million). Average net noninterest-related funds increased $478 million, mainly due to higher de- mand deposits, noninterest-bearing time and savings deposits, and stockhold- ers' equity. Stockholders' equity for the year averaged $1.6 billion, an in- crease of $144 million or 10% from 1996, principally due to the strong earn- ings performance, offset in part by the repurchase of common stock pursuant to the Corporation's share buyback program. PROVISION FOR CREDIT LOSSES. Asset quality remained strong as reflected by the low level of nonperforming assets which totaled $43.3 million at year-end. The provision for credit losses decreased to $9.0 million in 1997, down from $12.0 million in 1996 which was up from $6.0 million in 1995. For a discussion of the reserve for credit losses, refer to pages 34 and 35. NONINTEREST EXPENSES. Noninterest expenses for 1997 totaled $891.8 million, up $122.9 million or 16% from $768.9 million in 1996, which was up 8% from $709.5 million in 1995. Total expenses for 1997 included $10.1 million in charges relating to Year 2000 initiatives and $3.5 million in costs associated with the planned relocation of Northern Trust's computer data facility. Excluding these charges, noninterest expenses increased 14% over last year. Expense increases during 1997 re-flect a variety of growth initiatives, including investments in technology, PFS office expansion, and staff additions and higher operating expenses necessary to support new business and growing transaction volumes. Performance-based compensation also increased, resulting from excellent new business results, higher foreign exchange profits, improved investment management performance, strong corporate earnings and the price increase in Northern Trust Corporation common stock. The increase in 1996 noninterest expenses from 1995 reflects the impact of incremental expenses resulting from acquisitions, investments in technology, PFS office expansion, the opening of a Singapore office, higher performance- based compensation, and staff additions and related costs necessary to support new business and transaction volumes. The productivity ratio, defined as total revenue on a taxable equivalent ba- sis divided by noninterest expenses, was 158% for 1997 compared with 156% in 1996 and 151% in 1995. The improvement in the productivity ratio over the past two years was driven by Northern Trust's success in growing revenues while at the same time controlling expenses. SALARIES AND BENEFITS. Salaries and benefits, which represent 59% of total noninterest expenses, increased 19% to $527.3 million in 1997 from $441.3 mil- lion in 1996, which was up 5% from $419.1 million in 1995. Salary costs, the largest component of noninterest expenses, totaled $448.3 million, up $79.5 million or 22% from $368.8 million a year ago. The increase in 1997 was pri- marily attributable to higher performance-based compensation, merit increases and staff growth. Performance-based compensation expense was up $35.5 million in 1997 and $15.7 million in 1996 reflecting the impact of record corporate earnings, excellent new business results, client investment portfolio perfor- mance and the price increase in Northern Trust Corporation common stock. In- cluded in the 1995 results was $3.3 million in severance costs associated with staff reductions. Staff on a full-time equivalent basis averaged 7,198 compared with 6,665 in 1996 and 6,548 in 1995. The increase in staff levels during 1997 was required to support growth initiatives and strong new business in both PFS and C&IS. Including 58 employees from the year-end acquisition of NTQA, staff on a full- time equivalent basis at December 31, 1997, totaled 7,553, an increase of 9% from 6,933 at the end of last year. Employee benefit costs for 1997 totaled $79.0 million, up $6.5 million or 9% from $72.5 million in 1996 which was down 11% from $81.5 million in 1995. The increase in employee benefits primarily reflects higher payroll taxes and re- tirement plan benefits resulting from staff growth. These increases were par- tially offset by favorable medical plan experience as more employees elected coverage through managed care plans. The decrease in 1996 employee benefit costs was a result of changes, effective January 1, 1996, made to the pension, medical, Thrift Incentive and ESOP plans, to control expense growth. OCCUPANCY EXPENSE. Net occupancy expense totaled $66.7 million, up 10% or $6.0 million from $60.7 million in 1996, which was up 5% from $57.9 million in 1995. The principal components of the 1997 increase were higher rental costs, real estate taxes, and building depreciation expense primarily associated with business expansion. EQUIPMENT EXPENSE. Equipment expense, which includes depreciation, rental, and maintenance costs, totaled $62.2 million in 1997, 11% or $6.2 million higher than the $56.0 million in 1996, which was up 12% from the $50.0 million in 1995. The expense levels in each of the three years primarily reflect planned increases in equipment and computer depreciation and related costs to support trust and banking business expansion. OTHER OPERATING EXPENSES. Other operating expenses for 1997 totaled $235.6 million, up 12% from $210.9 million in 1996, which was up 16% from $182.5 mil- lion in 1995. The increase in the 1997 expense level was principally the re- sult of continued investment in technology, expansion of the personal trust and banking office network, and higher operating expenses necessary to support business growth. These initiatives resulted in increases in computer NORTHERN TRUST CORPORATION -------------------------- 28 software amortization, technical and consulting service fees and business de- velopment efforts. Investments in technology are designed principally to support and enhance the transaction processing and securities handling capability of the trust and banking businesses. Additional capital expenditures planned for systems tech- nology will result in future expenses for the depreciation of hardware and amortization of software. Depreciation and software amortization are charged to equipment and other operating expenses, respectively. PROVISION FOR INCOME TAXES. The provision for income taxes was $162.5 million in 1997 compared with $128.6 million in 1996 and $100.5 million in 1995. The effective tax rate was 34% for 1997 compared with 33% for 1996 and 31% for 1995. The higher tax provision in 1997 resulted from the growth in earnings for both federal and state income tax purposes while federally tax-exempt in- come declined. SUBSEQUENT IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS. The portions of Statement of Financial Accounting Standards (SFAS) No. 125, "Ac- counting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," that address the accounting treatment of repurchase agree- ments and securities lending transactions were implemented, as required, on January 1, 1998. The implementation of these portions of SFAS No. 125 did not have a material impact on Northern Trust's consolidated financial statements. FINANCIAL CONDITION - ------------------------------------------------------------------------------- Average earning assets in 1997 increased 15% to $21.6 billion. The growth was concentrated primarily in residential mortgages, commercial and industrial loans, and short-term money market assets. A high quality and liquid balance sheet is maintained with securities and money market assets averaging $9.8 billion or 45% of total earning assets. Loans averaged $11.8 billion in 1997 and increased 14% from the prior year. Average domestic loans increased 13% to $11.3 billion for the year while the average international portfolio increased to $538 million from $380 million in 1996. The increase in the domestic loan portfolio reflects substantial growth in residential mortgages which increased 14% on average and totaled $5.2 bil- lion at year-end. Commercial and industrial loans also contributed to the growth in the domestic portfolio, increasing 10% to average $3.6 billion for the year. Commercial real estate loans increased $24.4 million and at December 31, 1997, totaled $582.1 million representing 5% of domestic loans. The management strategy for investment securities is to maintain a very high quality portfolio with generally short-term maturities. To maximize after-tax income, investments in tax-exempt municipal securities are utilized but with somewhat longer maturities. Northern Trust utilizes short-term U.S. Government securities, federal agency securities and money market assets to manage li- quidity and to take advantage of short-term investment opportunities. The av- erage balance of the securities portfolio, which includes securities held to maturity and available for sale, was unchanged from last year at $6.4 billion. U.S. Government securities averaged $823 million in 1997, down from $1.7 bil- lion in 1996. U.S. Government securities had an average maturity of 11 months at December 31, 1997, compared with seven months at the prior year-end. Aver- age municipal securities declined slightly and averaged $409 million, provid- ing a fully taxable equivalent yield of 9.32%. The average maturity of munici- pal securities was 85 months, up from 82 months a year ago. Federal agency se- curities averaged $4.9 billion in 1997, up from $4.0 billion in 1996, and had an average maturity at December 31, 1997 and 1996 of five months and six months, respectively. Other securities, consisting primarily of preferred stock, Federal Home Loan Bank stock, and privately issued collateralized mort- gage obligations, averaged $243 million, up slightly from $228 million last year. Approximately $790 million of federal agency and other securities have variable rates that are reset at least every six months to reflect the level of short-term interest rates. At year-end 1997, the fair value of the securi- ties portfolio of $4.2 billion exceeded the book value of these securities by $17.3 million. Money market assets averaged $3.4 billion, up 65% from $2.1 billion last year, primarily the result of growth in global custody activities and the more active short-term investment of noninterest-bearing balances previously held with global subcustodians. Total interest-related funds averaged $18.3 billion in 1997, up $2.4 billion or 15% from 1996. Savings and money market deposits increased 8% and averaged $3.9 billion while foreign office time deposits increased $1.1 billion or 30%. The increase in foreign time deposits resulted primarily from greater global custody activity. Federal funds purchased, securities sold under agreements to repurchase, and other borrowings collectively increased $241 million on aver- age compared to the prior year. The balances within these classifications vary based upon funding requirements, interest rate levels, and the availability of collateral used to secure these borrowings. Balances in other borrowings pri- marily represent treasury, tax and loan note option balances which provide a funding source at an attractive rate relative to federal funds. Deposits re- lated to trust activities in the domestic banking subsidiaries, coupled with growth of the global custody business, continued to have a significant impact on the balance sheet as these deposits in 1997 averaged $5.4 billion repre- senting 47% of total deposits. In 1996, the Bank issued $100 million of 7.30% Subordinated Notes due 2006. The notes were issued under the terms of an Offering Circular allowing the Bank to offer subordinated bank notes and up to $1.7 billion aggregate princi- pal amount at any time outstanding of its senior bank notes (less certain se- nior bank notes issued prior to April 1993 and still outstanding), with matu- rities ranging from 30 days to 15 NORTHERN TRUST CORPORATION -------------------------- 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------- AVERAGE EARNING ASSETS AND SOURCE OF FUNDS - ---------------------------------------------------------------------------------------------------- Percent Change - ---------------------------------------------------------------------------------------------------- ($ In Millions) 1997 1996 1995 1997/96 1996/95 - ---------------------------------------------------------------------------------------------------- AVERAGE EARNING ASSETS Money Market Assets $ 3,442.6 $ 2,083.5 $ 1,864.7 65.2% 11.7% Securities U.S. Government 822.9 1,702.0 1,225.7 (51.7) 38.9 Obligations of States and Political Subdivisions 408.8 414.1 434.7 (1.3) (4.7) Federal Agency 4,890.1 4,010.7 4,124.8 21.9 (2.8) Other 243.4 228.2 353.4 6.7 (35.4) Trading Account 9.0 8.8 54.4 1.5 (83.7) - ---------------------------------------------------------------------------------------------------- Total Securities 6,374.2 6,363.8 6,193.0 .2 2.8 - ---------------------------------------------------------------------------------------------------- Loans and Leases-Domestic 11,275.1 9,951.6 8,791.8 13.3 13.2 -International 537.8 380.5 344.2 41.4 10.5 - ---------------------------------------------------------------------------------------------------- Total Loans and Leases 11,812.9 10,332.1 9,136.0 14.3 13.1 - ---------------------------------------------------------------------------------------------------- Total Earning Assets $21,629.7 $18,779.4 $17,193.7 15.2% 9.2% - ---------------------------------------------------------------------------------------------------- AVERAGE SOURCE OF FUNDS Deposits-Savings and Money Market $ 3,895.4 $ 3,620.7 $ 3,312.4 7.6% 9.3% -Savings Certificates 2,035.8 2,062.4 2,000.3 (1.3) 3.1 -Other Time 717.3 549.2 542.7 30.6 1.2 -Foreign Offices Time 4,971.2 3,826.2 3,493.4 29.9 9.5 - ---------------------------------------------------------------------------------------------------- Total Deposits 11,619.7 10,058.5 9,348.8 15.5 7.6 Federal Funds Purchased 1,690.2 1,842.2 1,564.0 (8.3) 17.8 Securities Sold under Agreements to Repurchase 1,519.9 1,973.3 1,769.7 (23.0) 11.5 Commercial Paper 142.7 143.7 146.0 (.7) (1.6) Other Borrowings 2,120.9 1,274.1 1,034.5 66.5 23.2 Senior Notes 539.3 267.5 394.0 101.6 (32.1) Long-Term Debt 435.8 360.7 271.3 20.8 32.9 Floating Rate Capital Securities 224.1 -- -- 100.0 -- - ---------------------------------------------------------------------------------------------------- Total Interest-Related Funds 18,292.6 15,920.0 14,528.3 14.9 9.6 Noninterest-Related Funds, net 3,337.1 2,859.4 2,665.4 16.7 7.3 - ---------------------------------------------------------------------------------------------------- Total Source of Funds $21,629.7 $18,779.4 $17,193.7 15.2% 9.2%
years. The senior notes are issued periodically and provide an additional fund- ing source for the Bank. At December 31, 1997, an additional $100 million of subordinated bank notes with maturities ranging from 5 years to 15 years can be issued under the terms of the current Offering Circular for this program. Se- nior notes issued under the terms of the program averaged $539 million, up $272 million from last year. On January 16, 1997, the Corporation issued $150 million of Floating Rate Cap- ital Securities, Series A, through a wholly-owned statutory business trust. These securities were issued at a discount to yield 60.5 basis points above the three-month London Interbank Offered Rate (LIBOR). On April 25, 1997, the Cor- poration issued an additional $120 million of Floating Rate Capital Securities, Series B, through a separate wholly-owned statutory business trust. These secu- rities were issued at a discount to yield 67.9 basis points above the three- month LIBOR. Series A and Series B securities mature in 2027 and qualify as tier 1 capital for regulatory purposes. CAPITAL EXPENDITURES - -------------------------------------------------------------------------------- Northern Trust's Management Committee reviews and approves proposed capital ex- penditures which exceed $500,000. This process assures that the major projects to which Northern Trust commits its resources produce benefits compatible with corporate strategic goals. During 1997, Northern Trust continued to improve its hardware and software ca- pabilities, especially related to trust activities. Such improvements help as- sure that Northern Trust offers state-of-the-art technology which enables cli- ents to obtain the highest level of quality service within a competitive cost structure, a characteristic which helps distinguish Northern Trust from its competitors. In this regard, having completed the development and installation of the base platform of its trust management system (supporting both the corpo- rate and personal business areas), major system development efforts in 1997 fo- cused on risk and performance tools and investment services. These applications build off the core product, providing various state-of-the-art processing and client-related delivery vehicles all under the umbrella of NORTHERN TRUST CORPORATION -------------------------- 30 Passport, Northern Trust's desktop delivery service first offered to clients in 1995. The next generation of rate of return and risk attribution perfor- mance tools was rolled out in 1997. Northern Trust introduced to its corporate clients Alerts, a sophisticated investment policy monitoring tool. The In- vestor Workstation was introduced internally in 1997. It is a state-of-the-art investment reporting tool used to support Northern Trust's growing portfolio of assets under management. The unamortized capitalized cost of corporate-wide software development projects at December 31, 1997 was $145.1 million, of which $65.1 million represented the book value of the trust management system. Northern Trust's 1998 technology plans include the continued development of analytical and delivery tools valuable to its corporate trust clients and var- ious initiatives in Personal Financial Services, including the extension of the Passport tools to serve personal clients and client relationship manage- ment desktop servicing functionality. Capital expenditures in 1997 also included the leasehold improvements and furnishings associated with the opening of new offices in Florida, California and Arizona, as well as expansion or remodeling in several existing offices. In addition, $20 million was capitalized as part of the agreement to purchase in 2000 a building and adjacent land located across the street from the Chi- cago operations center. Prior to the purchase date, the Bank will lease, in phases beginning in 1997, approximately two floors of this six story building. The building is expected to be used for future expansion and the relocation of the computer data center and some personnel currently located in leased facil- ities in downtown Chicago. Capital expenditures for 1997 totaled $129.2 million of which $36.9 million was for building and leasehold improvements, $4.9 million for furnishings, $35.4 million for hardware and machinery and $52.0 million for software. Dur- ing 1998, in addition to its technology initiatives, Northern Trust will con- tinue to invest in the expansion of the five-state network of Personal Finan- cial Services offices. YEAR 2000 PROJECT. Like every other business dependent upon computerized in- formation processing, Northern Trust must deal with "Year 2000" issues, which stem from using two digits to reflect the year in computer programs and data. Computer programmers and other designers of equipment that use microprocessors have long abbreviated dates by eliminating the first two digits of the year under the assumption that those two digits will always be 19. As the Year 2000 approaches, many systems may be unable to accurately process certain date- based information, which could cause a variety of operational problems for businesses. The magnitude and nature of the Year 2000 challenge is summarized by an ex- cerpt from a report made to Congress by the Securities and Exchange Commission (SEC) in June of 1997. "It is not, and will not, be possible for any single entity or collective enterprise to represent that it has achieved complete Year 2000 compliance and thus to guarantee its remediation efforts. The prob- lem is simply too complex for such a claim to have legitimacy. Efforts to solve Year 2000 problems are best described as "risk mitigation'. Success in the effort will have been achieved if the number and seriousness of any tech- nical failures is minimized, and they are quickly identified and repaired if they do occur." Northern Trust's data processing software and hardware provide essential sup- port to virtually all of its businesses, so successfully addressing Year 2000 issues is of the highest importance. Failure to complete renovation of the critical systems used by Northern Trust on a timely basis could have a materi- ally adverse effect on its operations and financial performance, as could Year 2000 problems experienced by others with whom Northern Trust does business. Although the nature of the problem is such that there can be no complete as- surance it will be successfully resolved, Northern Trust's renovation and "risk mitigation" program is well under way. Northern Trust has a dedicated Year 2000 Project Team whose members have significant systems development and maintenance experience on Northern Trust's many banking and trust applica- tions, which run on a variety of mainframe, mid-range and desktop platforms. Northern Trust has been developing systems using four digit years since the mid 1980's. All other critical systems have been systematically identified for renovation or replacement. Northern Trust licensed a number of software tools that help automate the renovation process, most notably on its mainframe com- puters. These tools reduce the amount of manual effort required and increase the integrity of the changes. Northern Trust's Year 2000 project also includes a comprehensive testing plan. Completion of work on Northern Trust's critical systems is expected by December 31, 1998, so that testing with outside parties may be conducted during 1999. Northern Trust has also established a Year 2000 Business Issues task force in order to systematically address issues that are not directly related to inter- nal systems. Part of the work of this task force includes monitoring programs to contact vendors, suppliers, utilities, federal and state agencies and oth- ers with which Northern Trust's systems interact in areas important to its businesses to determine their Year 2000 readiness. Northern Trust will conduct testing with other parties where possible and appropriate. For example, during 1998, Northern Trust will be reviewing the Year 2000 preparedness of its subcustodians during its normal discussions and due diligence visits. Northern Trust is also developing and implementing various methods for assessing Year 2000 issues as part of its credit review and investment analysis processes. Although Northern Trust is attempting to monitor and validate the efforts of other parties, it cannot control the success of those efforts. Contingency plans are being established where appropriate to provide Northern Trust with alternatives in case these entities experience significant Year 2000 difficul- ties which impact Northern Trust. Northern Trust is also contacting clients and customers to explain its Year 2000 program. The formats and protocols by NORTHERN TRUST CORPORATION -------------------------- 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS which data is exchanged with clients will not change as a result of Northern Trust's Year 2000 systems-related changes. The estimated expense for Northern Trust's Year 2000 renovation project from 1997 forward is approximately $25 million and includes the costs of purchasing licenses for software programming tools and the costs of the time of internal staff in Worldwide Technology and outside consultants. This estimate does not include the time that internal staff in user departments will devote to testing programming changes, although this testing is not expected to add significant incremental costs. All Year 2000 costs are expensed as incurred. As of December 31, 1997, $10.1 million of the project costs have been incurred. The majority of the remaining costs are expected to be incurred in 1998. RISK MANAGEMENT - -------------------------------------------------------------------------------- Asset Quality and Credit Risk Management SECURITIES. A high quality securities portfolio is maintained with 84% of the total portfolio comprised of U.S. Treasury or federal agency securities. The remainder of the portfolio is comprised of obligations of states and political subdivisions, preferred stock and other securities. At December 31, 1997, 78% of these securities were rated triple-A or double-A, 18% were rated single-A and 4% were below A or not rated by Standard and Poor's and/or Moody's Invest- ors Service. Other securities consist primarily of Federal Home Loan Bank stock and privately issued collateralized mortgage obligations, backed by federal agency securities or mortgage loans. Northern Trust is an active participant in the repurchase agreement market. This market provides a relatively low cost alternative for short-term funding. Securities sold under agreements to repurchase are held by the counterparty un- til the repurchase transaction matures. Increases in the fair value of these securities in excess of the repurchase liability could subject Northern Trust to credit risk in the event of default by the counterparty. To minimize this risk, collateral values are continuously monitored and Northern Trust sets lim- its on exposure with counterparties and regularly assesses their financial con- dition. LOANS AND OTHER EXTENSIONS OF CREDIT. A certain degree of credit risk is inher- ent in Northern Trust's various lending activities. Credit risk is managed through the Credit Policy function, which is designed to ensure adherence to a high level of credit standards. Credit Policy provides a system of checks and balances for Northern Trust's diverse credit-related activities by establishing and monitoring all credit-related policies and practices throughout Northern Trust and ensuring their uniform application. These activities are designed to ensure that credit exposure is diversified on an industry and client basis, thus lessening overall credit risk. These credit management activities also ap- ply to Northern Trust's use of derivative financial instruments, including for- eign exchange contracts and interest risk management instruments. A further way in which credit risk is managed is by requiring collateral. Man- agement's assessment of the borrower's creditworthiness determines whether col- lateral is obtained. The amount and type of collateral held varies but may in- clude deposits held in financial institutions, U.S. Treasury securities, other marketable securities, income-producing commercial properties, accounts receiv- able, property, plant and equipment, and inventory. Collateral values are moni- tored on a regular basis to ensure that they are maintained at an appropriate level. The largest component of credit risk relates to the loan portfolio. Although credit exposure is well-diversified, there are certain groups that meet the ac- counting definition under SFAS No. 105 of credit risk concentrations. According to this statement, group concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet con- tractual obligations to be similarly affected by changes in economic or other conditions. The fact that an extension of credit falls into one of these groups does not indicate that the credit has a higher than normal degree of credit risk. These groups are: residential real estate, middle market companies and small businesses, banks and bank holding companies and commercial real estate. RESIDENTIAL REAL ESTATE. The residential real estate loan portfolio totaled $5.2 billion or 43% of total domestic loans at December 31, 1997, compared with $4.6 billion or 43% at December 31, 1996. Residential real estate loans consist of conventional home mortgages and equity credit lines, which generally require a loan to collateral value of 75% to 80%. Of the total $5.2 billion in residen- tial real estate loans, $2.8 billion were in the greater Chicago area with the remainder distributed throughout the other geographic regions served by North- ern Trust. Legally binding commitments to extend credit, which are primarily equity credit lines, totaled $455.9 million and $405.8 million as of December 31, 1997 and 1996, respectively. MIDDLE MARKET COMPANIES AND SMALL BUSINESSES. Credit exposure to middle market companies and small businesses is primarily in the form of commercial loans, which totaled $1.6 billion at December 31, 1997 and $1.4 billion as of December 31, 1996. These loans are to a diversified group of borrowers that are predomi- nantly in the manufacturing, wholesaling, distribution and services industries, most of which have total annual sales of less than $500 million. The largest component of this group of borrowers is located in the midwestern areas served by the Bank. Middle market and small businesses have been an important focus of business development, and it is part of the strategic plan to continue to se- lectively grow the portfolio with such entities. The credit risk associated with middle market and small business lending is principally influenced by gen- eral economic conditions and the resulting impact on the borrower's operations. NORTHERN TRUST CORPORATION -------------------------- 32 Off-balance sheet credit exposure to middle market companies and small busi- nesses in the form of legally binding commitments to extend credit, standby letters of credit, and commercial letters of credit totaled $1.9 billion, $830.1 million, and $22.7 million, respectively, as of December 31, 1997, and $1.5 billion, $748.7 million, and $18.1 million, respectively, as of December 31, 1996. BANKS AND BANK HOLDING COMPANIES. On-balance sheet credit risk to banks and bank holding companies, both domestic and international, totaled $5.5 billion and $4.4 billion at December 31, 1997 and 1996, respectively. The majority of this exposure consisted of short-term money market assets, which totaled $4.0 billion and $3.1 billion as of December 31, 1997 and 1996, respectively, and noninterest-bearing demand balances maintained at correspondent banks which to- taled $1.1 billion as of December 31, 1997, compared to $896 million at year- end 1996. Commercial loans to banks totaled $232 million and $247 million, re- spectively, as of December 31, 1997 and 1996. The majority of these loans were to U.S. bank holding companies, primarily in the seventh Federal Reserve Dis- trict, for their acquisition purposes. Such lending activity is limited to en- tities which have a substantial business relationship with Northern Trust. Le- gally binding commitments to extend credit to banks and bank holding companies totaled $222 million and $178 million as of December 31, 1997 and 1996, respec- tively. COMMERCIAL REAL ESTATE. In managing its credit exposure, management has de- fined a commercial real estate loan as one where: (1) the borrower's principal business activity is the acquisition of or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for com- mercial purposes and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of interim loans and commercial mort- gages. The interim loans, which totaled $235.0 million and $236.3 million as of De- cember 31, 1997 and 1996, respectively, are composed primarily of loans to de- velopers that are highly experienced and well-known to Northern Trust. Short- term interim loans provide financing for the initial phases of the acquisition or development of commercial real estate, with the intent that the borrower will refinance the loan through another financial institution or sell the proj- ect upon its completion. The interim loans are primarily in the Chicago market in which Northern Trust has a strong presence and a thorough knowledge of the local economy. Commercial mortgage financing, which totaled $347.1 million and $321.4 million as of December 31, 1997 and 1996, respectively, is provided for the acquisition of income producing properties. Cash flows from the properties generally are sufficient to amortize the loan. These loans average less than $500,000 each and are primarily located in the suburban Chicago and Florida markets. At December 31, 1997, off-balance sheet credit exposure to commercial real es- tate developers in the form of legally binding commitments to extend credit and standby letters of credit totaled $73.7 million and $36.0 million, respective- ly. At December 31, 1996, legally binding commitments were $61.5 million and standby letters of credit were $22.5 million. FOREIGN OUTSTANDINGS. Short-term interbank time deposits with foreign banks represent the largest category of foreign outstandings. The Chicago head office and the London Branch actively participate in the interbank market with U.S. and foreign banks. In recent years, international commercial banking activities have been focused on import and export financing for U.S.-based clients. As used in this discussion, foreign outstandings are cross-border outstandings as defined by the Securities and Exchange Commission. They consist of loans, acceptances, interest-bearing deposits with financial institutions, accrued in- terest and other monetary assets. Not included are letters of credit, loan com- mitments, and foreign office local currency claims on residents funded by local currency liabilities. Foreign outstandings related to a specific country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral held outside the country. However, trans- actions with branches of foreign banks are included in these outstandings and are classified according to the country location of the foreign entities' head office. Risk related to foreign outstandings is continually monitored and internal limits are imposed on foreign exposure. The following table provides informa- tion on foreign outstandings by country that exceed 1.00% of Northern Trust's assets.
- -------------------------------------------------------------------------------- FOREIGN OUTSTANDINGS - -------------------------------------------------------------------------------- Commercial (In Millions) Banks and Other Total - -------------------------------------------------------------------------------- AT DECEMBER 31, 1997 Germany $502 $-- $502 Japan 394 -- 394 United Kingdom 251 71 322 - -------------------------------------------------------------------------------- At December 31, 1996 Japan $993 $-- $993 - -------------------------------------------------------------------------------- At December 31, 1995 Japan $259 $-- $259 - --------------------------------------------------------------------------------
Aggregate foreign outstandings by country falling between 0.75% and 1.00% of total assets at December 31, 1997 totaled $192 million to France. This compares with none at December 31, 1996 and 1995. NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS. Nonperforming assets consist of nonaccrual loans, restructured loans and Other Real Estate Owned (OREO). OREO is comprised of commercial and residential properties NORTHERN TRUST CORPORATION -------------------------- 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------- NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS - ------------------------------------------------------------------------------- December 31 - ----------------------------------------------------------------------------- (In Millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------- Nonaccrual Loans Domestic Residential Real Estate $ 5.3 $ 3.2 $ 2.4 $ 1.3 $ 1.5 Commercial 26.3 2.2 17.5 15.7 17.5 Commercial Real Estate 7.1 11.3 9.0 9.1 4.8 Personal .2 .2 .1 .3 .3 Other -- -- -- -- -- Lease Financing -- -- -- .1 1.9 - ----------------------------------------------------------------------------- Total Domestic 38.9 16.9 29.0 26.5 26.0 - ----------------------------------------------------------------------------- International -- -- .2 1.3 1.3 - ----------------------------------------------------------------------------- Total Nonaccrual Loans 38.9 16.9 29.2 27.8 27.3 - ----------------------------------------------------------------------------- Restructured Loans 2.5 2.6 2.7 -- -- Other Real Estate Owned 1.9 1.9 1.8 2.2 9.7 - ----------------------------------------------------------------------------- TOTAL NONPERFORMING ASSETS $43.3 $21.4 $33.7 $30.0 $37.0 - ----------------------------------------------------------------------------- TOTAL 90 DAY PAST DUE LOANS (STILL ACCRUING) $13.9 $15.2 $22.0 $17.3 $22.8 - -----------------------------------------------------------------------------
acquired in partial or total satisfaction of problem loans. Past due loans are loans that are delinquent 90 days or more and still accruing interest. The balance in this category at any reporting period can fluctuate widely based on the timing of cash collections, renegotiations and renewals. Maintaining a low level of nonperforming assets is important to the ongoing success of a financial institution. Northern Trust's comprehensive credit re- view and approval process is critical to the ability to minimize nonperforming assets on a long-term basis. In addition to the negative impact on both net interest income and credit losses, nonperforming assets also increase operat- ing costs due to the expense associated with collection efforts. The table above presents the nonperforming assets and past due loans for the current year and the prior years. Of the total loan portfolio of $12.6 billion at December 31, 1997, $41.4 million or .33% was nonperforming, an increase of $21.9 million from year-end 1996. Included in the portfolio of nonaccrual loans are those which meet the crite- ria as being "impaired" under the definition in SFAS No. 114. A loan is im- paired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contrac- tual terms of the loan agreement. As of December 31, 1997, impaired loans, which also have been classified as nonperforming, totaled $38.3 million, with $4.7 million of the reserve for credit losses allocated to these loans. RESERVE FOR CREDIT LOSSES. In evaluating the adequacy of the reserve for credit losses, management relies predominantly on a disciplined credit review process which is applicable to the full range of the credit exposures. The re- view process, directed by Credit Policy, is intended to identify as early as possible clients who might be facing financial difficulties. Once identified, the extent of the client's financial difficulty is carefully monitored by Credit Policy, which recommends to management the portion of any credits that need a specific reserve allocation or should be charged-off. Other factors considered by management in evaluating the adequacy of the reserve include: the relative size of the subsidiary banks' single loan lending limits; loan volume; historical net loan loss experience; level and composition of nonaccrual, past due and restructured loans; the condition of industries and geographic areas experiencing or expected to experience particular economic adversities; international developments; current and anticipated economic con- ditions; credit evaluations; and the liquidity and volatility of the markets. From time to time specific amounts of the reserve are designated for certain loans in connection with management's analysis of the adequacy of the reserve for credit losses, as well as its evaluation of impaired loans. The reserve balance is not a precise amount, but is derived from judgments based on the above factors. It represents management's best estimate of the reserve for credit losses necessary to adequately cover probable losses from current credit exposures. The provision for credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate reserve. The overall credit quality of the loan portfolio has remained strong as evi- denced by the relatively low level of nonperforming loans and net charge-offs. Management's assessment of the financial condition of specific clients facing financial difficulties, level of nonperforming loans and portfolio growth re- lating to low-risk residential lending, were among the factors impacting man- agement's analysis of the adequacy of the reserve. The combination of these factors NORTHERN TRUST CORPORATION -------------------------- 34
- ------------------------------------------------------------------------------- ANALYSIS OF RESERVE FOR CREDIT LOSSES - ------------------------------------------------------------------------------- ($ In Millions) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Balance at Beginning of Year $ 148.3 $ 147.1 $ 144.8 $ 145.5 $ 145.5 - -------------------------------------------------------------------------------- Charge-Offs Residential Real Estate .8 .2 .6 .1 .2 Commercial 11.4 6.2 5.5 5.3 11.2 Commercial Real Estate .7 7.4 3.6 4.1 7.8 Personal 1.3 1.5 1.2 1.2 2.1 Other .2 .1 .2 -- .2 Lease Financing -- -- -- -- 1.3 International -- .2 .6 -- .6 - -------------------------------------------------------------------------------- Total Charge-Offs 14.4 15.6 11.7 10.7 23.4 - -------------------------------------------------------------------------------- Recoveries Residential Real Estate .1 .2 -- -- .2 Commercial 2.3 .5 2.1 1.0 1.9 Commercial Real Estate 1.6 1.9 2.3 1.1 .7 Personal .6 .6 .5 1.2 .8 Other .1 .1 .2 .2 .1 Lease Financing -- -- -- .5 -- International -- .5 .7 -- .2 - -------------------------------------------------------------------------------- Total Recoveries 4.7 3.8 5.8 4.0 3.9 - -------------------------------------------------------------------------------- Net Charge-Offs 9.7 11.8 5.9 6.7 19.5 Provision for Credit Losses 9.0 12.0 6.0 6.0 19.5 Reserve Related to Acqui- sitions -- 1.0 2.2 -- -- - -------------------------------------------------------------------------------- Net Change in Reserve (.7) 1.2 2.3 (.7) -- - -------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 147.6 $ 148.3 $ 147.1 $ 144.8 $ 145.5 - -------------------------------------------------------------------------------- Loans and Leases at Year- End $12,588.2 $10,937.4 $9,906.0 $8,590.6 $7,623.0 - -------------------------------------------------------------------------------- Average Total Loans and Leases $11,812.9 $10,332.1 $9,136.0 $8,316.1 $7,297.1 - -------------------------------------------------------------------------------- As a Percent of Year-End Loans and Leases Net Loan Charge-Offs .08% .11% .06% .08% .26% Provision for Credit Losses .07 .11 .06 .07 .26 Reserve Balance at Year- End 1.17 1.36 1.49 1.69 1.91 - -------------------------------------------------------------------------------- As a Percent of Average Loans and Leases Net Loan Charge-Offs .08% .11% .06% .08% .27% Reserve Balance at Year- End 1.25 1.44 1.61 1.74 1.99 - --------------------------------------------------------------------------------
resulted in a reserve for credit losses of $147.6 million at December 31, 1997, compared with $148.3 million last year. The table above summarizes the changes in the reserve for credit losses for the current year and the prior years. Market Risk Management OVERVIEW. The Board of Directors has overall responsibility for Northern Trust's interest rate and foreign exchange risk management policies. To ensure adherence to these policies, the Corporate Asset and Liability Policy Commit- tee (ALCO) establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. The guidelines apply to both on- and off-balance sheet positions. ALCO also establishes and monitors limits for foreign exchange risk. The goal of the ALCO process is to maximize earnings while maintaining a high quality balance sheet and carefully controlling in- terest rate and foreign exchange risk. ASSET/LIABILITY MANAGEMENT. Asset/liability management activities include lending, accepting and placing deposits, investing in securities, issuing debt, and hedging interest rate risk with off-balance sheet instruments. The primary market risk associated with asset/liability management activities is interest rate risk. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed so that NORTHERN TRUST CORPORATION -------------------------- 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS movements of interest rates on assets and liabilities (adjusted for off-balance sheet hedges) are highly correlated and contribute to earnings even in periods of volatile interest rates. Northern Trust utilizes the following measurement techniques in the management of interest rate risk: simulation of earnings; simulation of the economic value of equity; and gap analysis. These three techniques are complementary and are used in concert to provide a comprehensive picture of interest rate risk man- agement capability. Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer modeling techniques, Northern Trust is able to measure the potential impact of different interest rate as- sumptions on pretax earnings. All on-balance sheet positions, as well as deriv- ative financial instruments (principally interest rate swaps) that are used to manage interest rate risk, are included in the model simulation. Northern Trust used model simulations to measure its earnings sensitivity rel- ative to management's most likely interest rate scenario as of December 31, 1997. This interest rate scenario assumed a steady interest rate environment during 1998. The interest sensitivity was tested by running alternative scena- rios above and below the most likely interest rate outcome. The table below shows the effect on 1998 pre-tax earnings of 100 and 200 basis point upward and downward movements in interest rates relative to management's interest rate as- sumptions. Each of the movements in interest rates was assumed to have occurred gradually over a one year period. The 100 basis point increase, for example, consisted of twelve consecutive monthly increases of 8.3 basis points. The following assumptions were also incorporated into the model simulations: . The balance sheet size was assumed to remain constant over the one year simulation horizon. . All maturing assets and liabilities were invested or deposited into identi- cal items with the same maturity. . Prepayments on mortgage loans were projected under each rate scenario using a mortgage analytics system that incorporated market prepayment assump- tions.
- -------------------------------------------------------------------------------- INTEREST RATE RISK SIMULATION OF INCOME BEFORE INCOME TAXES AS OF DECEMBER 31, 1997 - -------------------------------------------------------------------------------- Estimated Impact on 1998 Income Before Income Taxes (In Millions) Increase/(Decrease) - -------------------------------------------------------------------------------- INCREASE IN INTEREST RATES ABOVE MANAGEMENT'S - INTEREST RATE FORECAST 100 Basis Points $(12) 200 Basis Points (26) DECREASE IN INTEREST RATES BELOW MANAGEMENT'S INTEREST RATE FORECAST 100 Basis Points 5 200 Basis Points 10 - --------------------------------------------------------------------------------
. Changes in the spreads between retail deposit rates and asset yields were estimated based on historical patterns and current competitive trends. The simulations of earnings do not incorporate any management actions which might moderate the negative consequences of interest rate deviations. There- fore, they do not reflect likely actual results but serve as conservative esti- mates of interest rate risk. A second technique used to measure interest rate risk is simulation of the economic value of equity, which provides estimates of the potential future im- pact on equity of various changes in interest rates. The potential effect of interest rate changes on equity is derived from the impact of such changes on the market values of assets, liabilities and off-balance sheet instruments. Northern Trust limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The third technique that is used to measure interest rate risk is gap analy- sis. The calculation of the interest sensitivity gap is shown in the following table, which measures the timing mismatches between assets and liabilities. This interest sensitivity gap is determined by subtracting the amount of lia- bilities from the volume of assets that reprice in a particular time interval. A liability sensitive position results when more liabilities than assets reprice or mature within a given period. Under this scenario, as interest rates decline, increased net interest revenue will be generated. Conversely, an asset sensitive position results when more assets than liabilities reprice within a given period; in this instance, net interest revenue would benefit from an in- creasing interest rate environment. The economic impact of creating a liability or asset sensitive position depends on the magnitude of actual changes in in- terest rates relative to the current expectations of market participants. A variety of actions are used to implement interest risk management strate- gies, including: . purchases of securities; . sales of securities that are classified as available for sale; . issuance of senior notes; . placing and taking Eurodollar time deposits; and . hedging with various types of derivative financial instruments. Northern Trust strives to use the most effective instruments for implementing its interest risk management strategies, considering the costs, liquidity and capital requirements of the various alternatives. For more detail regarding how derivative financial instruments are used to implement interest risk management strategies, refer to Note 20 on page 59. FOREIGN EXCHANGE TRADING. Foreign exchange trading activities consist princi- pally of providing foreign exchange services to clients. Most of these services are provided in connection with Northern Trust's growing global custody NORTHERN TRUST CORPORATION -------------------------- 36
- ------------------------------------------------------------------------------------------------- Interest Rate Sensitivity Analysis - ------------------------------------------------------------------------------------------------- December 31, 1997 - ------------------------------------------------------------------------------------------------- 1-3 4-12 1-2 3-5 Over 5 (In Millions) Months Months Years Years Years Total - ------------------------------------------------------------------------------------------------- EARNING ASSETS Money Market Assets $ 5,267.2 $ 42.2 $ -- $ -- $ -- $ 5,309.4 Securities-Available for Sale 2,855.9 475.4 195.0 73.5 133.5 3,733.3 -Held to Maturity 69.4 115.8 52.8 68.0 150.1 456.1 -Trading Account 8.8 -- -- -- -- 8.8 Loans and Leases 5,336.9 1,454.3 937.9 2,116.7 2,742.4 12,588.2 - ------------------------------------------------------------------------------------------------- Total Earning Assets $13,538.2 $2,087.7 $1,185.7 $2,258.2 $ 3,026.0 $22,095.8 - ------------------------------------------------------------------------------------------------- SOURCE OF FUNDS Savings and NOW Accounts $ 2,682.0 $ -- $ -- $ -- $ 523.5 $ 3,205.5 Money Market Deposit Accounts and Savings Certificates 3,444.4 1,079.7 263.9 351.2 653.1 5,792.3 Other Time 3,373.8 27.3 -- -- -- 3,401.1 Senior Notes and Long-Term Debt 540.7 59.8 .5 48.4 575.1 1,224.5 Floating Rate Capital Securities 267.4 -- -- -- -- 267.4 Other Borrowings 4,842.2 140.7 1.0 .4 -- 4,984.3 Noninterest-Related Funds, net 453.2 49.3 90.0 -- 2,628.2 3,220.7 - ------------------------------------------------------------------------------------------------- Total Source of Funds $15,603.7 $1,356.8 $ 355.4 $ 400.0 $ 4,379.9 $22,095.8 - ------------------------------------------------------------------------------------------------- Interest Sensitive Gap $(2,065.5) $ 730.9 $ 830.3 $1,858.2 $(1,353.9) $ -- Off-Balance Sheet Hedges 1,140.7 414.3 (187.3) (718.3) (649.4) -- - ------------------------------------------------------------------------------------------------- Adjusted Interest Sensitive Gap $ (924.8) $1,145.2 $ 643.0 $1,139.9 $(2,003.3) $ -- - ------------------------------------------------------------------------------------------------- Cumulative Interest Sensitive Gap $ (924.8) $ 220.4 $ 863.4 $2,003.3 $ -- $ -- - -------------------------------------------------------------------------------------------------
- -Assets and liabilities whose rates are variable are reported based on their repricing dates. Those with fixed rates are reported based on their scheduled contractual repayment dates, except for certain investment securities and loans secured by 1-4 family residential properties that are based on anticipated pre- payments. - -The interest rate sensitivity assumptions presented for demand deposits, non- interest-bearing time deposits, savings accounts and NOW accounts are based on historical and current experiences regarding product portfolio retention and interest rate repricing behavior. The portion of these deposits which are con- sidered long-term and stable have been classified in the Over 5 Years category. business. However, in the normal course of business Northern also engages in proprietary trading of foreign currencies. The primary market risk associated with these activities is foreign exchange risk. Foreign currency positions exist when aggregate obligations to purchase and sell a currency other than the U.S. dollar do not offset each other, or offset each other in different time periods. Northern Trust mitigates the risk related to its foreign currency positions by establishing limits on the amounts of and durations of its positions. The limits on overnight inventory positions are generally lower than the limits established for intra-day trading activity. All positions are monitored by a risk management function, which is separate from the trading function, to ensure that the limits are not exceeded. Although po- sition limits are important in controlling foreign exchange risk, they are not a substitute for the experience or judgment of Northern Trust's senior manage- ment and its foreign currency traders, who have extensive knowledge of the for- eign currency markets. Foreign currency positions and strategies are adjusted as needed in response to changing market conditions. As part of its risk management activities, Northern Trust regularly measures the risk of loss associated with foreign currency positions using a value at risk model. This statistical model provides an estimate, based on a 95% confi- dence interval, of the potential loss in earnings that may be incurred if an adverse one-day shift in foreign currency exchange rates were to occur. The model, which is based on a variance/co-variance methodology, incorporates his- torical currency price data and historical correlations in price movement among the currencies. All foreign currency positions, including foreign denominated assets and liabilities that were not converted to U.S. dollars through the use of hedge contracts, are included in the model. Northern Trust's value at risk, based on foreign currency positions as of De- cember 31, 1997, was $91 thousand. This figure is an indication of the degree of risk inherent in the foreign exchange contract portfolio as of year-end. However, it is not a prediction of an expected loss. Actual future gains and losses will vary depending on market conditions and the size and duration of future foreign currency positions. NORTHERN TRUST CORPORATION -------------------------- 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER TRADING ACTIVITIES. Market risk associated with other trading activities is negligible. Northern Trust is a party to various interest risk management instruments, most of which consist of interest rate swaps entered into to meet clients' interest risk management needs. When Northern Trust enters into such swaps, its policy is to mitigate the resulting interest rate risk with an off- setting swap or with futures contracts. Northern Trust carries in its trading portfolio a small inventory of securities that are held for sale to its cli- ents. The interest rate risk associated with these securities is insignifi- cant. Liquidity Risk Management The objective of liquidity risk management is to ensure that Northern Trust can meet its cash flow requirements and to capitalize on business opportuni- ties on a timely and cost effective basis. Management monitors the liquidity position on a daily basis to ensure that funds are available at a minimum cost to meet loan and deposit cash flows. The liquidity profile is also structured to ensure that the capital needs of the Corporation and its banking subsidiar- ies are met. Management maintains a detailed liquidity contingency plan de- signed to adequately respond to dramatic changes in market conditions. Liquidity is secured by managing the mix of items on the balance sheet and expanding potential sources of liquidity. The balance sheet sources of liquid- ity include the short-term money market portfolio, unpledged available for sale securities, maturing loans, and the ability to securitize a portion of the loan portfolio. Further, liquidity arises from the diverse funding base and the fact that a significant portion of funding comes from clients that have other relationships with Northern Trust. A significant source of liquidity is the ability to draw funding from both domestic and international markets. The Bank's senior long-term debt is rated AA- by Standard & Poor's, Aa3 by Moody's Investors Service, AA+ by Thomson BankWatch, and AA by Fitch IBCA. These ratings put The Northern Trust Company in the top tier of United States banks. Northern Trust maintains a liquid balance sheet with loans representing only 50% of total assets. Further, at December 31, 1997, it had a significant li- quidity reserve on its balance sheet in the form of cash and due from banks, securities available for sale, and money market assets, which in aggregate to- taled $10.8 billion or 43% of total assets. The Corporation's uses of cash consist mainly of dividend payments to the Corporation's common and preferred stockholders, the payment of principal and interest to note holders, purchases of its common stock and acquisitions. These requirements are met largely by dividend payments from its subsidiaries, and by interest and dividends earned on investment securities and money market assets. Bank subsidiaries have the ability to pay dividends during 1998 equal to their 1998 eligible net profits plus $342.8 million. Bank subsidiary divi- dends are subject to certain restrictions that are explained in Note 15 on page 56. The Corporation's liquidity, defined as the amount of marketable as- sets in excess of commercial paper, was strong at $272 million at year-end 1997. The cash flows of the Corporation are shown in Note 29 on page 69. The Corporation also has a $50 million back-up line of credit for its commercial paper issuance. The Corporation's strong credit ratings allow it to access credit markets on favorable terms. Capital Management One of management's primary objectives is to maintain a strong capital posi- tion to merit the confidence of clients, the investing public, bank regulators and stockholders. A strong capital position helps Northern Trust withstand un- foreseen
- -------------------------------------------------------------------------------- CAPITAL ADEQUACY - -------------------------------------------------------------------------------- December 31 - -------------------------------------------------------------------------------- ($ In Millions) 1997 1996 - -------------------------------------------------------------------------------- TIER 1 CAPITAL Common Stockholders' Equity $ 1,619 $ 1,424 Floating Rate CapitalSecurities 267 -- Goodwill and Other Intangible Assets (122) (81) Net Unrealized Gain on Securities (2) (2) - -------------------------------------------------------------------------------- Total Tier 1 Capital 1,762 1,341 - -------------------------------------------------------------------------------- TIER 2 CAPITAL Auction Rate Preferred Stock 120 120 Reserve for Credit Losses 148 148 Long-Term Debt* 315 335 - -------------------------------------------------------------------------------- Total Tier 2 Capital 583 603 - -------------------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL 2,345 1,944 - -------------------------------------------------------------------------------- Risk-Weighted Assets** $18,342 $16,380 - -------------------------------------------------------------------------------- Total Assets End of Period (EOP) $25,315 $21,608 Average Fourth Quarter** 25,646 20,907 Total Loans-EOP 12,588 10,937 RATIOS Risk-Based Capital to Risk-Weighted Assets Tier 1 9.6% 8.2% Total (Tier 1 and Tier 2) 12.8 11.9 Leverage (Tier 1 to Fourth Quarter Average Assets) 6.9 6.4 - -------------------------------------------------------------------------------- Common Stockholders' Equity to Total Loans EOP 12.9% 13.0% Total Assets EOP 6.4 6.6 Stockholders' Equity to Total Loans EOP 13.8 14.1 Total Assets EOP 6.9 7.1 - --------------------------------------------------------------------------------
Notes: *Long-Term Debt that qualifies for risk-based capital amortizes for the pur- pose of inclusion in tier 2 capital during the five years before maturity. **Assets have been adjusted for goodwill and other intangible assets, net unrealized gain on securities and excess reserve for credit losses that have been excluded from tier 1 and tier 2 capital, if any. NORTHERN TRUST CORPORATION -------------------------- 38 adverse developments and take advantage of profitable investment opportunities when they arise. In 1997, common equity on average increased 11% or $148 mil- lion reaching a record $1.6 billion at year-end, while total risk-weighted as- sets rose 12%. Total equity as of December 31, 1997 was $1.7 billion including $120 million of auction rate preferred stock. The average dividend rate de- clared on the $120 million of auction rate preferred stock was 4.13% during 1997 versus 4.00% in 1996. In January 1996, the Corporation called for redemp- tion its $50 million Series E convertible preferred stock. Virtually all of the holders elected to convert rather than redeem their preferred stock, and in January 1996, the Corporation issued 2,396,744 shares of common stock in connection with the conversion. During 1997 the Corporation purchased 1,409,753 of its own shares as part of the buyback program authorized in 1994 and 1996. The Corporation may purchase, after December 31, 1997, up to 3.2 million additional shares under the current buyback program. The Board of Directors increased the quarterly dividend by 16.7% to $.21 per common share in November 1997. Over the last five years the common dividend has increased 127%. Northern Trust Corporation's risk-based capital ratios were strengthened by the issuance in January of $150 million Floating Rate Capital Securities, Se- ries A and in April by the issuance of $120 million Floating Rate Capital Se- curities, Series B, both of which qualify as tier 1 capital. Both series of the Floating Rate Capital Securities have a 30 year fixed maturity. The combi- nation of these Capital Securities and growth in retained earnings increased tier 1 capital by $421 million or 31%, much greater than the 12% increase in risk-weighted assets, resulting in significantly higher capital ratios com- pared to 1996. All of Northern Trust's capital ratios were well above the ra- tios that are a requirement for regulatory treatment as "well capitalized". At December 31, 1997, tier 1 capital was 9.6% and total capital was 12.8% of risk-weighted assets. These risk-based capital ratios are well above the mini- mum requirements of 4.0% for tier 1 and 8.0% for total risk-based capital ra- tios. Northern Trust's leverage ratio (tier 1 capital to fourth quarter aver- age assets) of 6.9% is also well above the regulatory requirement of 3.0%. In addition, each of the subsidiary banks had a ratio of at least 8.2% for tier 1 capital, 10.6% for total risk-based capital, and 5.7% for the leverage ratio. Operational and Fiduciary Risk Management In providing banking and trust services, Northern Trust, in addition to safe- keeping and managing trust and corporate assets, processes cash and securities transactions exceeding $125 billion on average each business day. These activ- ities expose Northern Trust to operational and fiduciary risk. Controls over such processing activities are closely monitored to safeguard the assets of Northern Trust and its clients. However, from time to time Northern Trust has suffered losses related to these risks and there can be no assurance that such losses will not occur in the future. Operational risk is the risk of unexpected losses attributable to human er- ror, systems failures, fraud, or inadequate internal controls and procedures. This risk is mitigated through a system of internal controls that are designed to keep operating risk at appropriate levels in view of Northern Trust's cor- porate standards and the risks inherent in the markets in which Northern Trust operates. The system of internal controls includes policies and procedures that require the proper authorization, approval, documentation and monitoring of transactions. Each business unit is responsible for complying with corpo- rate policies and external regulations applicable to the unit, and is respon- sible for establishing specific procedures to do so. Northern Trust's internal auditors monitor the overall effectiveness of the system of internal controls on an ongoing basis. Fiduciary risk is the risk of loss that may occur as a result of breaching a fiduciary duty to a client. To limit this risk, the Trust Investment Committee establishes corporate policies and procedures to ensure that obligations to clients are discharged faithfully and in compliance with applicable legal and regulatory requirements. These policies and procedures provide guidance and establish standards related to the creation, sale, and management of invest- ment products, trade execution, and counterparty selection. Business units have the primary responsibility for adhering to the policies and procedures applicable to their businesses. LINES OF BUSINESS - ------------------------------------------------------------------------------- The results for the major business units are presented in order to promote a greater understanding of their financial performance and strategic direction. The information, presented on an internal management reporting basis, is de- rived from internal accounting systems that support the strategic objectives and management structure. Consequently, Northern Trust's presentations are not necessarily comparable with similar information for other financial institu- tions. Management has developed accounting systems to allocate revenue and expenses related to each line of business, as well as certain corporate support servic- es, worldwide operations and systems development expenses. The systems also incorporate processes for allocating assets, liabilities and the applicable interest income and expense. Equity is primarily allocated using the federal regulatory risk-based capital guidelines, coupled with management's judgment of the operational risks inherent in the business. Allocations of capital and certain corporate expenses may not be representative of the levels that would be required if the businesses were independent entities. NORTHERN TRUST CORPORATION -------------------------- 39 CORPORATE AND INSTITUTIONAL SERVICES. Corporate and Institutional Services in- cludes corporate trust, investment management and securities lending services, certain commercial banking activities of the Bank, treasury management servic- es, foreign exchange activities, the London and Singapore branches of the Bank, NTRC and NTGA. PERSONAL FINANCIAL SERVICES. Personal Financial Services encompasses personal trust and investment management services, estate administration, personal bank- ing and mortgage and other lending to individuals and middle market companies. This business unit also includes the commercial banking activities of the af- filiate banks and the activities of Northern Trust Securities, Inc. CORPORATE AND OTHER. Corporate and Other includes the Bank's Treasury Depart- ment, Northern Futures Corporation and other corporate items, including the im- pact of long-term debt, preferred equity, holding company investments, and cor- porate operating expenses. The increase in noninterest expenses in 1997 is due to higher performance-based incentive plan expenses and certain special tech- nology-related charges associated with the Year 2000 project and planned relo- cation of Northern Trust's computer data facility. The decline in noninterest expenses from 1995 to 1996 reflects decreases in severance costs and pension settlement charges, and lower salary and benefit expenses resulting from staff reductions in corporate support areas. The following table reflects the earnings contribution of Northern Trust's lines of business for the years ended December 31, 1997, 1996 and 1995 on the basis described above. - ------------------------------------------------------------------------------------ Corporate and Institutional Serv- Personal Corporate ices Financial Services and Other - ------------------------------------------------------------------------------------ ($ In Millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------ Net Interest Income* $134.9 $112.9 $111.4 $319.8 $286.4 $260.4 $16.2 $22.6 $23.4 Provision for Credit Losses 8.6 (.6) 1.6 3.1 15.3 4.3 (2.7) (2.7) .1 Noninterest Income Trust Fees 349.6 300.4 244.5 339.6 294.0 260.8 -- -- -- Other 183.1 132.7 125.7 45.5 43.1 38.6 16.7 9.8 8.8 Noninterest Expenses 424.5 367.3 312.6 421.7 383.5 366.5 45.6 18.1 30.4 - ------------------------------------------------------------------------------------ Income be- fore Income Taxes* 234.5 179.3 167.4 280.1 224.7 189.0 (10.0) 17.0 1.7 Provision for Income Taxes* 92.4 70.8 65.6 111.4 89.6 75.1 (8.6) 1.8 (2.6) - ------------------------------------------------------------------------------------ NET INCOME $142.1 $108.5 $101.8 $168.7 $135.1 $113.9 $(1.4) $15.2 $ 4.3 - ------------------------------------------------------------------------------------ Percentage Contribution 46% 42% 46% 54% 52% 52% --% 6% 2% - ------------------------------------------------------------------------------------
*Stated on a fully taxable equivalent basis (FTE). Total includes $32.7 mil- lion, $33.6 million and $37.6 million of FTE adjustment for 1997, 1996 and 1995, respectively. Note: Certain reclassifications have been made to 1996 and 1995 financial in- formation to conform to the current year presentation. NORTHERN TRUST CORPORATION -------------------------- 40 FORWARD-LOOKING INFORMATION - -------------------------------------------------------------------------------- This annual report contains statements that may be considered forward-looking, such as the discussion of Northern Trust's financial goals, expansion and busi- ness development plans, business prospects and positioning with respect to mar- ket, demographic and pricing trends, credit quality and outlook, and antici- pated expenses for Year 2000 systems renovation. These statements speak of Northern Trust's plans, goals, beliefs or expectations, refer to estimates or use similar terms. Actual results could differ materially from the results in- dicated by these statements because the realization of those results is subject to many uncertainties including: . The future health of the U.S. and international economies and other eco- nomic factors that affect wealth creation, investment and savings patterns, and Northern Trust's interest rate risk exposure and credit risk. . Changes in U.S. and worldwide securities markets, with respect to the mar- ket values of financial assets and the level of volatility in certain mar- kets such as foreign exchange. . The impact of recent difficulties experienced in a number of economies, in- cluding those of many Southeast Asian countries, upon Northern Trust and its clients and borrowers. . Regulatory developments in the U.S. and other countries where Northern Trust has significant business. . Changes in the nature of Northern Trust's competition resulting from indus- try consolidation, regulatory change and other factors, as well as actions taken by particular competitors. . Northern Trust's success in continuing to generate significant levels of new business in its existing markets. . Northern Trust's success in identifying and penetrating targeted markets, through acquisition on financially acceptable terms or de novo entry, and generating a profit in those markets in a reasonable time. . Northern Trust's ability to continue to fund and accomplish technological innovation, improve processes and controls and attract and retain capable staff in order to deal with increasing volume and complexity in many of its businesses and technology challenges, such as Year 2000 systems renovation and the introduction of the Euro. . The ability of various vendors, clients and others with whom Northern Trust interacts to complete Year 2000 systems renovation efforts on a timely ba- sis and in a manner that allows them to continue normal business operations and furnish products, services or data to Northern Trust without disrup- tion. . The ability of each of Northern Trust's principal businesses to maintain a product mix that achieves satisfactory margins. . Changes in tax laws or other legislation that could affect Northern Trust's personal and institutional asset administration businesses. Some of these uncertainties that may affect future results are discussed in more detail in the sections of "Item 1--Business" of the Annual Report on Form 10-K captioned "Government Policies", "Competition" and "Regulation and Super- vision". All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update any forward-looking statement. NORTHERN TRUST CORPORATION -------------------------- 41 CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------- December 31 - ------------------------------------------------------------------------------- ($ In Millions) 1997 1996 - ------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,738.9 $ 1,292.5 Federal Funds Sold and Securities Purchased under Agreements to Resell (Note 4) 2,991.7 1,022.6 Time Deposits with Banks 2,283.2 2,060.0 Other Interest-Bearing 34.5 114.3 Securities (Note 3) Available for Sale 3,733.3 4,311.7 Held to Maturity (Fair value-$473.4 in 1997 and $518.9 in 1996) 456.1 498.4 Trading Account 8.8 4.8 - ------------------------------------------------------------------------------- Total Securities 4,198.2 4,814.9 - ------------------------------------------------------------------------------- Loans and Leases (Note 5) Commercial and Other 7,401.5 6,379.9 Residential Mortgages 5,186.7 4,557.5 - ------------------------------------------------------------------------------- Total Loans and Leases (Net of unearned income-$151.9 in 1997 and $109.1 in 1996) 12,588.2 10,937.4 - ------------------------------------------------------------------------------- Reserve for Credit Losses (Note 6) (147.6) (148.3) Buildings and Equipment (Notes 8 and 9) 316.4 291.5 Customers' Acceptance Liability 31.4 44.7 Trust Security Settlement Receivables 291.4 362.3 Other Assets (Note 17) 989.1 816.4 - ------------------------------------------------------------------------------- Total Assets $25,315.4 $21,608.3 - ------------------------------------------------------------------------------- LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 3,510.1 $ 3,476.7 Savings and Money Market 4,278.9 3,880.1 Savings Certificates 2,092.6 2,056.3 Other Time 572.0 462.7 Foreign Offices--Demand 451.0 410.7 --Time 5,455.4 3,509.7 - ------------------------------------------------------------------------------- Total Deposits 16,360.0 13,796.2 Federal Funds Purchased 821.2 653.0 Securities Sold under Agreements to Repurchase (Note 4) 1,139.7 966.1 Commercial Paper 146.8 149.0 Other Borrowings 2,876.6 3,142.1 Senior Notes (Note 10) 785.0 305.0 Long-Term Debt (Note 10) 439.5 427.8 Floating Rate Capital Securities (Note 11) 267.4 -- Liability on Acceptances 31.4 44.7 Other Liabilities 708.8 580.3 - ------------------------------------------------------------------------------- Total Liabilities 23,576.4 20,064.2 - ------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred Stock (Note 12) 120.0 120.0 Common Stock, $1.66 2/3 Par Value; Authorized 280,000,000 shares in 1997 and 140,000,000 shares in 1996; Outstanding 111,367,436 shares and 111,247,732 shares in 1997 and 1996, respectively (Notes 12 and 14) 189.9 189.9 Capital Surplus 225.5 231.7 Retained Earnings 1,330.8 1,110.2 Net Unrealized Gain on Securities Available for Sale (Note 3) 2.1 1.6 Common Stock Issuable-Performance Plan (Note 24) 11.7 10.4 Deferred Compensation-ESOP and Other (37.5) (35.5) Treasury Stock (at cost-2,593,326 shares in 1997 and 2,712,780 shares in 1996) (103.5) (84.2) - ------------------------------------------------------------------------------- Total Stockholders' Equity 1,739.0 1,544.1 - ------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $25,315.4 $21,608.3 - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 46-69. NORTHERN TRUST CORPORATION -------------------------- 42 CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------- For the Year Ended December 31 - ------------------------------------------------------------------------------- ($ In Millions Except Per Share Information) 1997 1996 1995 - ------------------------------------------------------------------------------- Interest Income Loans and Leases (Note 5) $ 793.1 $ 693.4 $ 630.9 Securities (Note 3) Available For Sale 326.0 318.9 324.0 Held to Maturity 30.7 32.5 40.0 Trading Account .6 .5 3.6 - ------------------------------------------------------------------------------- Total Securities 357.3 351.9 367.6 - ------------------------------------------------------------------------------- Time Deposits with Banks 133.5 84.9 92.1 Federal Funds Sold and Securities Purchased under Agreements to Resell and Other (Note 4) 48.9 21.3 13.4 - ------------------------------------------------------------------------------- Total Interest Income 1,332.8 1,151.5 1,104.0 - ------------------------------------------------------------------------------- Interest Expense Deposits 522.2 447.8 443.3 Federal Funds Purchased 92.4 97.9 91.2 Securities Sold under Agreements to Repurchase (Note 4) 81.7 103.4 102.6 Commercial Paper 7.9 7.8 8.6 Other Borrowings 112.4 64.5 55.6 Senior Notes (Note 10) 30.9 14.4 23.7 Long-Term Debt (Note 10) 32.6 27.4 21.4 Floating Rate Capital Securities (Note 11) 14.5 -- -- - ------------------------------------------------------------------------------- Total Interest Expense 894.6 763.2 746.4 - ------------------------------------------------------------------------------- Net Interest Income 438.2 388.3 357.6 Provision for Credit Losses (Note 6) 9.0 12.0 6.0 - ------------------------------------------------------------------------------- Net Interest Income after Provision for Credit Losses 429.2 376.3 351.6 - ------------------------------------------------------------------------------- Noninterest Income Trust Fees 689.2 594.4 505.3 Treasury Management Fees 60.2 55.3 49.6 Foreign Exchange Trading Profits 104.8 58.8 55.3 Security Commissions and Trading Income 26.1 23.9 21.7 Other Operating Income (Note 16) 53.5 47.2 45.5 Investment Security Gains (Note 3) .7 .4 1.0 - ------------------------------------------------------------------------------- Total Noninterest Income 934.5 780.0 678.4 - ------------------------------------------------------------------------------- Income before Noninterest Expenses 1,363.7 1,156.3 1,030.0 - ------------------------------------------------------------------------------- Noninterest Expenses Salaries (Notes 24 and 25) 448.3 368.8 337.6 Pension and Other Employee Benefits (Note 18) 79.0 72.5 81.5 Occupancy Expense (Notes 8 and 9) 66.7 60.7 57.9 Equipment Expense (Note 8) 62.2 56.0 50.0 Other Operating Expenses (Note 17) 235.6 210.9 182.5 - ------------------------------------------------------------------------------- Total Noninterest Expenses 891.8 768.9 709.5 - ------------------------------------------------------------------------------- Income before Income Taxes 471.9 387.4 320.5 Provision for Income Taxes (Note 13) 162.5 128.6 100.5 - ------------------------------------------------------------------------------- NET INCOME $ 309.4 $ 258.8 $ 220.0 - ------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 304.4 $ 253.9 $ 211.5 - ------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE (Note 14)--BASIC $ 2.74 $ 2.27 $ 1.91 --DILUTED 2.66 2.21 1.86 - ------------------------------------------------------------------------------- Average Number of Common Shares Out- standing--Basic 110,977,645 111,933,829 110,737,342 --Diluted 114,661,156 114,839,118 115,085,474 - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 46-69. NORTHERN TRUST CORPORATION -------------------------- 43 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------- For the Year Ended December 31 - ------------------------------------------------------------------------------- (In Millions) 1997 1996 1995 - ------------------------------------------------------------------------------- PREFERRED STOCK Balance at January 1 $ 120.0 $ 170.0 $ 170.0 Conversion of Preferred Stock, Series E -- (50.0) -- - ------------------------------------------------------------------------------- Balance at December 31 120.0 120.0 170.0 - ------------------------------------------------------------------------------- COMMON STOCK Balance at January 1 189.9 93.6 90.6 Stock Issued-Incentive Plan and Awards -- -- .3 Stock Issued-Acquisitions -- -- 2.7 Conversion of Preferred Stock, Series E -- 1.3 -- Transfer from Capital Surplus-Two-for- One Stock Split -- 95.0 -- - ------------------------------------------------------------------------------- Balance at December 31 189.9 189.9 93.6 - ------------------------------------------------------------------------------- CAPITAL SURPLUS Balance at January 1 231.7 306.1 302.2 Stock Issued-Incentive Plan and Awards (6.2) (8.6) (.2) Stock Issued-Acquisitions -- -- 4.1 Conversion of Preferred Stock, Series E -- 29.2 -- Transfer to Common Stock-Two-for-One Stock Split -- (95.0) -- - ------------------------------------------------------------------------------- Balance at December 31 225.5 231.7 306.1 - ------------------------------------------------------------------------------- RETAINED EARNINGS Balance at January 1 1,110.2 928.8 762.7 Net Income 309.4 258.8 220.0 Dividends Declared-Common Stock (83.8) (72.5) (60.4) Dividends Declared-Preferred Stock (5.0) (4.9) (8.6) Pooled Affiliates -- -- 15.1 - ------------------------------------------------------------------------------- Balance at December 31 1,330.8 1,110.2 928.8 - ------------------------------------------------------------------------------- NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE Balance at January 1 1.6 2.6 (15.8) Unrealized Gain (Loss), net .5 (1.0) 18.4 - ------------------------------------------------------------------------------- Balance at December 31 2.1 1.6 2.6 - ------------------------------------------------------------------------------- COMMON STOCK ISSUABLE-PERFORMANCE PLAN Balance at January 1 10.4 14.7 17.9 Stock Issuable, net of Stock Issued 1.3 (4.3) (3.2) - ------------------------------------------------------------------------------- Balance at December 31 11.7 10.4 14.7 - ------------------------------------------------------------------------------- DEFERRED COMPENSATION-ESOP AND OTHER Balance at January 1 (35.5) (39.4) (38.8) Compensation Deferred (8.9) (2.7) (11.8) Compensation Amortized 9.3 7.5 10.3 Unfunded Pension Liability, net (2.4) (.9) .9 - ------------------------------------------------------------------------------- Balance at December 31 (37.5) (35.5) (39.4) - ------------------------------------------------------------------------------- TREASURY STOCK Balance at January 1 (84.2) (23.8) (8.1) Stock Options and Awards 51.0 42.9 28.8 Stock Purchased (70.3) (122.5) (65.5) Stock Issued-Acquisitions -- -- 21.0 Conversion of Preferred Stock, Series E -- 19.2 -- - ------------------------------------------------------------------------------- Balance at December 31 (103.5) (84.2) (23.8) - ------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY AT DECEMBER 31 $1,739.0 $ 1,544.1 $ 1,452.6 - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 46-69. NORTHERN TRUST CORPORATION -------------------------- 44 CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------- For the Year Ended December 31 - ------------------------------------------------------------------------------- (In Millions) 1997 1996 1995 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 309.4 $ 258.8 $ 220.0 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 9.0 12.0 6.0 Depreciation on Buildings and Equipment 49.3 46.8 42.2 (Increase) Decrease in Interest Receivable (4.7) 17.7 (32.8) Increase in Interest Payable 20.6 9.4 .3 Amortization and Accretion of Securities and Unearned Income (190.0) (120.2) (153.5) Amortization of Software, Goodwill and Other Intangibles 51.0 42.3 35.8 Deferred Income Tax 38.0 29.5 17.7 Net (Increase) Decrease in Trading Account Securities (4.0) 84.1 (84.9) Other, net (77.5) (32.4) 91.0 - ------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 201.1 348.0 141.8 - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell (1,969.1) (860.5) 638.9 Net (Increase) Decrease in Time Deposits with Banks (223.2) (492.4) 297.3 Net (Increase) Decrease in Other Interest-Bearing Assets 79.8 (59.8) (45.0) Purchases of Securities-Held to Maturity (162.6) (2,068.7) (662.3) Proceeds from Maturity and Redemption of Securities-Held to Maturity 207.2 2,112.9 819.6 Purchases of Securities-Available for Sale (75,308.5) (31,666.5) (31,206.1) Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 76,121.5 32,611.3 30,828.7 Net Increase in Loans and Leases (1,708.0) (1,066.5) (1,155.3) Purchases of Buildings and Equipment (57.5) (56.8) (41.8) Proceeds from Sale of Buildings and Equipment 3.3 -- 4.5 Net (Increase) Decrease in Trust Security Settlement Receivables 70.9 (35.2) (21.4) Decrease in Cash Due to Acquisitions (53.0) (14.6) (43.5) Other, net (1.2) (10.6) 2.3 - ------------------------------------------------------------------------------- Net Cash Used in Investing Activities (3,000.4) (1,607.4) (584.1) - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Deposits 2,563.8 1,308.0 378.7 Net Increase (Decrease) in Federal Funds Purchased 168.2 (1,647.1) 1,328.1 Net Increase (Decrease) in Securities Sold under Agreements to Repurchase 173.6 (892.6) (374.0) Net Increase (Decrease) in Commercial Paper (2.2) 2.3 22.9 Net Increase (Decrease) in Short-Term Other Borrowings (157.0) 2,273.2 (56.1) Proceeds from Term Federal Funds Purchased 1,612.4 2,630.2 4,132.7 Repayments of Term Federal Funds Purchased (1,720.9) (2,637.2) (4,280.1) Proceeds from Senior Notes & Long-Term Debt 803.4 901.5 1,260.0 Repayments on Senior Notes & Long-Term Debt (331.7) (520.3) (1,700.2) Proceeds from Floating Rate Capital Securities 267.4 -- -- Treasury Stock Purchased (66.2) (118.2) (63.7) Net Proceeds from Stock Options 13.0 12.1 9.0 Cash Dividends Paid on Common and Preferred Stock (85.3) (74.7) (65.8) Other, net 7.2 5.8 (32.8) - ------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 3,245.7 1,243.0 558.7 - ------------------------------------------------------------------------------- Increase (Decrease) in Cash and Due from Banks 446.4 (16.4) 116.4 Cash and Due from Banks at Beginning of Year 1,292.5 1,308.9 1,192.5 - ------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $ 1,738.9 $ 1,292.5 $ 1,308.9 - ------------------------------------------------------------------------------- SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Building Purchase Obligation $ 20.0 $ -- $ -- Conversion of Preferred Stock, Series E to Common Stock -- 49.7 -- Acquisition of Affiliate for Stock, net -- -- 41.3 Transfer of Securities from Held to Maturity to Available for Sale -- -- 68.5 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid $ 874.1 $ 753.8 $ 745.0 Income Taxes Paid 102.5 82.7 76.4 - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements on pages 46-69. NORTHERN TRUST CORPORATION -------------------------- 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES--The consolidated financial statements have been pre- pared in conformity with generally accepted accounting principles and report- ing practices prescribed for the banking industry. A description of the sig- nificant accounting policies follows: A. BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its wholly-owned sub- sidiary The Northern Trust Company (Bank) and their wholly-owned subsidiaries. Throughout the notes, the term "Northern Trust" refers to Northern Trust Cor- poration and subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation. The consolidated statement of income includes results of acquired and pooled subsidiaries from the dates of acqui- sition. B. NATURE OF OPERATIONS. The Corporation is a bank holding company whose principal subsidiary is the Chicago-based Bank. The Corporation also owns banks in Florida, California, Arizona and Texas, and various other nonbank subsidiaries, including a brokerage firm, a futures commission merchant, an international investment consulting firm and a retirement services company. Northern Trust generates the majority of its revenues from its two primary business units, Corporate and Institutional Services (C&IS) and Personal Fi- nancial Services (PFS). The C&IS unit provides trust and custody-related services in the United States and foreign markets to corporations and institutions; a full range of commercial banking services to large domestic corporations and financial in- stitutions; treasury management services to meet the needs of major corpora- tions and financial institutions; and foreign exchange services for global custody clients and Northern Trust's own account. The PFS unit provides personal trust, investment management, estate adminis- tration, personal banking and mortgage lending services, and also provides commercial banking services to middle market companies. These services are de- livered through the Bank and the network of subsidiaries in Florida, Califor- nia, Arizona and Texas. C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The prepara- tion 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. D. FOREIGN CURRENCY TRANSLATION. Foreign currency asset and liability ac- counts of overseas branches and subsidiaries are translated at current rates of exchange, except for buildings and equipment which are translated at rates in effect at the date of acquisition. Income and expense accounts are trans- lated at month-end rates of exchange. Foreign exchange trading positions are valued daily at prevailing market rates. Gains and losses on trading positions and on positions entered into to hedge foreign denominated investments are recognized currently in other oper- ating income. Unrealized gains on trading positions are reported as other as- sets and unrealized losses are reported as other liabilities in the consoli- dated balance sheet. Gains and losses on foreign currency positions that were entered into to hedge specific, firm foreign currency obligations are deferred and recognized in income over the life of the underlying asset or liability or as the underlying expense or commitment is incurred. E. SECURITIES. Securities Available for Sale consist of debt and equity secu- rities that are not intended to be held to maturity and are not held for trad- ing. Securities available for sale are reported at fair value, with unrealized gains and losses credited or charged, net of the tax effect, directly to stockholders' equity. Realized gains and losses on securities available for sale are determined on a specific identification basis and are reported in the consolidated statement of income as investment security gains and losses. Securities Held to Maturity consist of debt securities that management in- tends to, and Northern Trust has the ability to, hold until maturity. Such se- curities are reported at cost, adjusted for amortization of premium and accre- tion of discount. Securities Held for Trading are stated at fair value. Realized and unrealized gains and losses on securities held for trading are reported in the consoli- dated statement of income under security commissions and trading income. F. INTEREST RISK MANAGEMENT INSTRUMENTS. Interest risk management instruments include interest rate swap contracts, futures contracts, options and similar contracts. Northern Trust is a party to various interest risk management in- struments to meet the interest risk management needs of its clients, as part of its trading activity for its own account and as part of its asset/liability management activities. Unrealized gains and receivables on interest risk man- agement instruments are reported as other assets and unrealized losses and payables are reported as other liabilities in the consolidated balance sheet. ASSET/LIABILITY MANAGEMENT INSTRUMENTS. Interest rate swaps are the primary interest risk management instrument used for asset/liability management pur- poses. Futures contracts, options, and similar contracts are also used for asset/liability management, but these contracts do not have a material impact on Northern Trust's financial condition or net income. Accrued interest income or expense on asset/liability management swaps is recognized as a component of the interest income or expense of the hedged items. Unrealized gains and losses on such swaps are recognized consistent with the method of accounting for the hedged items. For example, there is no recognition of unrealized gains and losses on swaps used to hedge items that are carried at their amortized cost. Unrealized gains and losses on interest rate swaps used to hedge avail- able for sale securities are reported in stockholders' equity, net of applica- ble taxes. NORTHERN TRUST CORPORATION -------------------------- 46 A swap that is classified in the asset/liability management category must be assigned to hedge a specific asset or liability and must reduce Northern Trust's interest rate risk. It must also achieve its intended objective of converting the yield on the hedged asset or liability to the desired rate. This criteria is assumed to have been met if the interest rate on the hedged asset or liability is identical to the offsetting interest rate on the swap. If the two rates are not identical, the correlation between the levels of the two rates since the inception of the swap must be measured to ensure that the swap is meeting its intended objective. In addition, the notional amount of the swap must be less than or equal to the par amount of the item being hedged. If a forward swap is entered into to hedge an anticipated transaction, the significant terms (e.g., the expected date, type of instrument, quantity, and maturity date) of the anticipated transaction must be identified, and it must be probable that the anticipated transaction will occur. If an asset/liability management swap is terminated or ceases to meet the criteria described above, any realized or unrealized gain or loss at the time is deferred and amortized over the remainder of the original hedge period. Any subsequent realized or unrealized gains or losses are reported as security commissions and trading income in the consolidated statement of income. If the item being hedged is sold, any deferred or unrealized gain or loss on the swap at the time of the transaction is considered in the calculation of the gain or loss on the sale. If the swap is not terminated, it must be marked to market on a prospective basis, with realized and unrealized gains and losses included in security commissions and trading income in the consolidated statement of income. CLIENT-RELATED AND TRADING INSTRUMENTS. Interest risk management instruments entered into to meet clients' interest risk management needs or for trading purposes are carried at fair value, with realized and unrealized gains and losses included in security commissions and trading income. Cash collected and disbursed in connection with interest risk management in- struments is reported in the consolidated statement of cash flows under the heading "Cash Flows From Operating Activities." G. LOANS AND LEASES. Loans that are held to maturity are reported at the principal amount outstanding, net of unearned income. Residential real estate loans classified as held for sale are reported at the lower of aggregate cost or market value. Interest income on loans is recorded on an accrual basis un- til, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the contract, or when interest or principal is more than 90 days past due and the loan is not well-secured and in the process of collection. At the time a loan is placed on nonaccrual status, interest ac- crued but not collected is reversed against interest income of the current pe- riod. Loans are returned to accrual status when factors indicating doubtful collectibility no longer exist. Interest collected on nonaccrual loans is ap- plied to principal unless, in the opinion of management, collectibility of principal is not in doubt. Premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. Commitment fees that are considered to be an adjustment to the loan yield, loan origina- tion fees and certain direct costs are deferred and accounted for as an ad- justment of the yield. Unearned lease income from direct financing and leveraged leases is recog- nized using the interest method. This method provides a constant rate of re- turn on the unrecovered investment over the life of the lease. H. RESERVE FOR CREDIT LOSSES. The reserve for credit losses is established through provisions for credit losses charged to income. Loans, leases and other extensions of credit deemed uncollectible are charged to the reserve. Subsequent recoveries, if any, are credited to the reserve. The loan and lease portfolio and other extensions of credit are regularly reviewed to evaluate the adequacy of the reserve for credit losses. The impact of economic condi- tions on the creditworthiness of borrowers is given major consideration in determining the adequacy of the reserve. Credit loss experience, changes in the character and size of the loan portfolio, the estimated value of impaired loans compared to their recorded investment, and management's judgment are other factors used in assessing the overall adequacy of the reserve for credit losses and the resulting provision for credit losses. Actual losses may vary from current estimates and the amount of the provision may be either greater than or less than actual net charge-offs. I. MORTGAGE SERVICING RIGHTS. Mortgage servicing rights are capitalized as a separate asset when purchased or when acquired through the origination of mortgage loans that are subsequently sold with the servicing rights retained. The servicing rights are included in other assets and are amortized as an off- set to other operating income over their estimated life. Servicing rights are evaluated for impairment based on their fair value. For purposes of measuring impairment, Northern Trust stratifies its servicing rights by loan type and interest rate. Fair value is determined considering market prices for similar assets. J. FEES ON STANDBY LETTERS OF CREDIT AND PARTICIPATIONS IN BANKERS ACCEPT- ANCES. Fees on standby letters of credit are recognized in other operating income on the straight-line method over the lives of the underlying agree- ments. Commissions on bankers acceptances are recognized in other operating income when received. K. BUILDINGS AND EQUIPMENT. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed on the straight-line method based on the following range of lives: buildings--10 to 30 years; equipment--4 to 10 years; and leasehold improve- ments--lease term to 15 years. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the lease period. NORTHERN TRUST CORPORATION -------------------------- 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS L. OTHER REAL ESTATE OWNED (OREO). OREO is comprised of commercial and resi- dential real estate properties acquired in partial or total satisfaction of problem loans. OREO assets are carried at the lower of cost or fair value. Losses identified at the time of acquisition of such properties are charged against the reserve for credit losses. Subsequent write-downs that may be required to the carrying value of these assets and losses realized from asset sales are charged to other operating expenses. Gains realized from the sale of OREO are included in other operating income. M. INTANGIBLE ASSETS. Goodwill, arising from the excess of purchase price over the fair value of net assets of acquired subsidiaries, is being amortized using the straight-line method primarily over fifteen years. Other purchased intangible assets arising from acquisitions are amortized us- ing various methods over the estimated lives of the assets. Software is being amortized using the straight-line method over the estimated useful life of the asset, ranging from 5 to 7 years. N.TRUST ASSETS AND FEES. Assets held in fiduciary or agency capacities are not included in the consolidated balance sheet, since such items are not assets of Northern Trust. Income from trust activities is recorded on the accrual basis. O.TRUST SECURITY SETTLEMENT RECEIVABLES. These receivables represent other items in the process of collection presented on behalf of trust clients. P.INCOME TAXES. In accordance with SFAS No. 109, "Accounting for Income Tax- es," an asset and liability approach to accounting for income taxes is fol- lowed. The objective is to recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities re- sulting from temporary differences between the amounts reported in the finan- cial statements and the tax bases of assets and liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. Q. CASH FLOW STATEMENTS. Cash and cash equivalents have been defined as those amounts included in the consolidated balance sheet as "Cash and Due from Banks." 2. RECLASSIFICATIONS--Certain reclassifications have been made to prior periods' consolidated financial statements to place them on a basis comparable with the current period's consolidated financial statements. 3. SECURITIES--SECURITIES AVAILABLE FOR SALE. The following tables summarize the amortized cost, fair values and remaining maturities of securities available for sale.
- ----------------------------------------------------------- RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES AVAILABLE FOR SALE - ----------------------------------------------------------- December 31, 1997 - ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In Millions) Cost Gains Losses Value - ----------------------------------------------------------- U.S. Government $ 469.3 $ .9 $ .2 $ 470.0 Obligations of States and Political Subdivisions 123.5 6.7 -- 130.2 Federal Agency 2,969.0 1.7 .9 2,969.8 Preferred Stock 128.5 .4 .1 128.8 Other 35.2 -- .7 34.5 - ----------------------------------------------------------- Total $3,725.5 $9.7 $1.9 $3,733.3 - -----------------------------------------------------------
Unrealized gains and losses on off-balance sheet financial instruments used to hedge available for sale securities totaled $.1 million and $4.6 million, re- spectively, as of December 31, 1997. Unrealized gains on these hedges are re- ported as other assets in the consolidated balance sheet; unrealized losses are reported as other liabilities. As of December 31, 1997, stockholders' equity included a credit of $2.1 million, net of tax, to recognize the appreciation on securities available for sale, net of the related hedges.
- ----------------------------------------------------------- December 31, 1996 - ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In Millions) Cost Gains Losses Value - ----------------------------------------------------------- U.S. Government $ 906.8 $ .9 $1.0 $ 906.7 Obligations of States and Political Subdivisions 114.5 2.9 .4 117.0 Federal Agency 3,095.0 2.7 .8 3,096.9 Preferred Stock 139.6 -- .2 139.4 Other 51.9 1.0 1.2 51.7 - ----------------------------------------------------------- Total $4,307.8 $7.5 $3.6 $4,311.7 - -----------------------------------------------------------
Unrealized gains and losses on off-balance sheet financial instruments used to hedge available for sale securities totaled $2.2 million and $3.5 million, re- spectively, as of December 31, 1996. Unrealized gains on these hedges are re- ported as other assets in the consolidated balance sheet; unrealized losses are reported as other liabilities. As of December 31, 1996, stockholders' equity included a credit of $1.6 million, net of tax, to recognize the appreciation on securities available for sale, net of the related hedges. NORTHERN TRUST CORPORATION -------------------------- 48
- --------------------------------------------- REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE - --------------------------------------------- December 31, 1997 - --------------------------------------------- Amortized Fair (In Millions) Cost Value - --------------------------------------------- Due in One Year or Less $2,990.5 $2,990.1 Due After One Year Through Five Years 469.6 471.4 Due After Five Years Through Ten Years 29.4 31.1 Due After Ten Years 236.0 240.7 - --------------------------------------------- Total $3,725.5 $3,733.3 - ---------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. SECURITIES HELD TO MATURITY. The following tables summarize the book values, fair values and remaining maturities of securities held to maturity.
- ------------------------------------------------------ RECONCILIATION OF BOOK VALUES TO FAIR VALUES OF SECURITIES HELD TO MATURITY - ------------------------------------------------------ December 31, 1997 - ------------------------------------------------------ Gross Gross Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value - ------------------------------------------------------ U.S. Government $ 72.0 $ -- $ -- $ 72.0 Obligations of States and Po- litical Subdivisions 276.7 18.4 -- 295.1 Federal Agency 14.3 -- -- 14.3 Other 93.1 -- 1.1 92.0 - ------------------------------------------------------ Total $456.1 $18.4 $1.1 $473.4 - ------------------------------------------------------ December 31, 1996 - ------------------------------------------------------ Gross Gross Book Unrealized Unrealized Fair (In Millions) Value Gains Losses Value - ------------------------------------------------------ U.S. Government $ 73.4 $ .1 $ -- $ 73.5 Obligations of States and Political Subdivisions 315.9 20.5 .1 336.3 Federal Agency 18.2 .1 .1 18.2 Other 90.9 -- -- 90.9 - ------------------------------------------------------ Total $498.4 $20.7 $ .2 $518.9 - ------------------------------------------------------
- --------------------------------------------- REMAINING MATURITY OF SECURITIES HELD TO MATURITY - --------------------------------------------- December 31, 1997 - --------------------------------------------- Book Fair (In Millions) Value Value - --------------------------------------------- Due in One Year or Less $123.9 $124.7 Due After One Year Through Five Years 127.8 135.7 Due After Five Years Through Ten Years 98.0 105.0 Due After Ten Years 106.4 108.0 - --------------------------------------------- Total $456.1 $473.4 - ---------------------------------------------
Asset-backed and mortgage-backed securities were included in the above table taking into account anticipated future prepayments. Income on obligations of states and political subdivisions totaled $25.3 mil- lion, $26.8 million and $30.7 million in 1997, 1996 and 1995, respectively. Dividends received on preferred stock totaled $4.2 million, $4.4 million and $8.0 million for 1997, 1996 and 1995, respectively. Refer to Note 20 for additional detail related to interest risk management in- struments used to hedge securities. INVESTMENT SECURITY GAINS AND LOSSES. Realized gross security gains and losses, which were included in the consolidated statement of income, totaled $1.2 mil- lion and $.5 million, respectively in 1997. The $1.2 million of gains in 1997 resulted when held to maturity and available for sale securities were called at a premium. Realized gross security losses in 1997 resulted entirely from the sale of securities classified as available for sale. Realized gross security gains and losses totaled $1.5 million and $1.1 million, respectively, in 1996. Of the $1.5 million in gains in 1996, $1.0 million was related to the sale of securities classified as available for sale. The remaining $.5 million resulted when held to maturity securities were called at a premium. Realized gross security losses in 1996 resulted entirely from the sale of securities classified as available for sale. Realized gross security gains and losses in 1995 totaled $1.0 million and none, respectively. 4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--Securities purchased under agreements to resell and securities sold under agreements to repurchase are recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is continuously monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust's policy to take possession of securi- ties purchased under agreements to resell. NORTHERN TRUST CORPORATION -------------------------- 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables summarize information related to securities purchased un- der agreements to resell and securities sold under agreements to repurchase.
- ----------------------------------------------- SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - ----------------------------------------------- December 31 - ----------------------------------------------- ($ In Millions) 1997 1996 - ----------------------------------------------- Average Balance During the Year $ 356.3 $ 131.2 Average Interest Rate Earned During the Year 5.56% 5.39% Maximum Month-End Bal- ance During the Year 2,435.5 554.5 - -----------------------------------------------
- ----------------------------------------------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - ----------------------------------------------- December 31 - ----------------------------------------------- ($ In Millions) 1997 1996 - ----------------------------------------------- Average Balance During the Year $1,519.9 $1,973.3 Average Interest Rate Paid During the Year 5.38% 5.24% Maximum Month-End Bal- ance During the Year 3,708.9 2,922.2 - -----------------------------------------------
5. LOANS AND LEASES--Amounts outstanding in selected loan categories are shown below.
- ------------------------------------------------ December 31 - ------------------------------------------------ (In Millions) 1997 1996 - ------------------------------------------------ Domestic Residential Real Estate $ 5,186.7 $ 4,557.5 Commercial 3,734.8 3,161.4 Broker 170.1 389.1 Commercial Real Estate 582.1 557.7 Personal 1,207.2 989.8 Other 890.1 632.1 Lease Financing 347.0 267.8 - ------------------------------------------------ Total Domestic 12,118.0 10,555.4 International 470.2 382.0 - ------------------------------------------------ Total Loans and Leases $12,588.2 $10,937.4 - ------------------------------------------------
Other domestic and international loans include $924.5 million at December 31, 1997, and $765.3 million at December 31, 1996 of overnight trust-related ad- vances in connection with next day security settlements. Lease financing in- cludes leveraged leases of $179.6 million at December 31, 1997, and $139.1 mil- lion at December 31, 1996. Residential real estate loans held for sale totaled $39.7 million and $3.7 million at December 31, 1997 and 1996, respectively. Refer to Note 20 for detail related to interest risk management instruments used to hedge loans. NONPERFORMING ASSETS. Presented below are outstanding amounts of nonaccrual loans, restructured loans and OREO.
- -------------------------------------------------- December 31 - -------------------------------------------------- (In Millions) 1997 1996 - -------------------------------------------------- Nonaccrual Loans Domestic--Commercial Real Estate $ 7.1 $11.3 --Other 31.8 5.6 International -- -- - -------------------------------------------------- Total Nonaccrual Loans 38.9 16.9 Restructured Loans 2.5 2.6 Other Real Estate Owned 1.9 1.9 - -------------------------------------------------- Total Nonperforming Assets $43.3 $21.4 - --------------------------------------------------
Included in nonperforming assets were loans with a recorded investment at De- cember 31, 1997 and December 31, 1996 of $38.3 million and $16.8 million, re- spectively, which were also classified as impaired. At December 31, 1997 and December 31, 1996 impaired loans totaling $7.9 million and $13.6 million, re- spectively, had no portion of the reserve for credit losses allocated to them, while $30.4 million at December 31, 1997 had an allocated reserve of $4.7 mil- lion and $3.2 million at December 31, 1996 had an allocated reserve of $.5 mil- lion. Total recorded investment in impaired loans averaged $34.4 million in 1997 and $27.6 million in 1996. Total interest income recognized on impaired loans was $191 thousand and $1.0 million in 1997 and 1996, respectively, most of which was recognized using the accrual method of accounting in 1997 and the cash-basis method in 1996. There were no unfunded loan commitments and standby letters of credit issued to borrowers whose loans were classified as nonaccrual at December 31, 1997, while there were $61 thousand at December 31, 1996. Interest income that would have been recorded on domestic nonaccrual loans in accordance with their original terms amounted to $3.6 million in 1997, $3.1 million in 1996 and $2.9 million in 1995, compared with amounts that were actually recorded of $1.2 million, $.9 million and $.7 million, respectively. Write-downs and realized losses on OREO of $.4 million in each of the three years presented were charged to other operating expenses. NORTHERN TRUST CORPORATION -------------------------- 50 6. RESERVE FOR CREDIT LOSSES--Changes in the reserve for credit losses were as follows:
- ----------------------------------------------- (In Millions) 1997 1996 1995 - ----------------------------------------------- Balance at Beginning of Year $148.3 $147.1 $144.8 - ----------------------------------------------- Charge-Offs Domestic Commercial Real Estate (.7) (7.4) (3.6) Other (13.7) (8.0) (7.5) International -- (.2) (.6) - ----------------------------------------------- Total Charge-Offs (14.4) (15.6) (11.7) Recoveries 4.7 3.8 5.8 - ----------------------------------------------- Net Charge-Offs (9.7) (11.8) (5.9) Provision for Credit Losses 9.0 12.0 6.0 Reserve Related to Acquisitions -- 1.0 2.2 - ----------------------------------------------- Balance at End of Year $147.6 $148.3 $147.1 - -----------------------------------------------
7. MORTGAGE SERVICING RIGHTS--Servicing rights capitalized as a result of orig- inating mortgage loans and selling the loans with the servicing rights retained totaled $723 thousand and $307 thousand during 1997 and 1996, respectively. Am- ortization of the servicing rights totaled $94 thousand during 1997 and $22 thousand during 1996, resulting in carrying values of $914 thousand and $285 thousand as of December 31, 1997 and 1996, respectively. There were no valua- tion allowances established to record impairment of mortgage servicing rights during 1997 or 1996. 8. BUILDINGS AND EQUIPMENT--Summary of buildings and equipment is presented be- low.
- ------------------------------------------------ December 31, 1997 - ------------------------------------------------ Net Original Accumulated Book (In Millions) Cost Depreciation Value - ------------------------------------------------ Land $ 39.1 $ -- $ 39.1 Buildings 102.2 35.8 66.4 Equipment 231.1 113.0 118.1 Leasehold Im- provements 65.4 32.9 32.5 Buildings Leased under Capital Leases (Note 9) 74.1 13.8 60.3 - ------------------------------------------------ Total Buildings and Equipment $511.9 $195.5 $316.4 - ------------------------------------------------ December 31, 1996 - ------------------------------------------------ Net Original Accumulated Book (In Millions) Cost Depreciation Value - ------------------------------------------------ Land $ 30.5 $ -- $ 30.5 Buildings 83.9 32.3 51.6 Equipment 228.0 114.0 114.0 Leasehold Im- provements 61.5 28.3 33.2 Buildings Leased Under Capital Leases (Note 9) 74.1 11.9 62.2 - ------------------------------------------------ Total Buildings and Equipment $478.0 $186.5 $291.5 - ------------------------------------------------
The charge for depreciation amounted to $49.3 million in 1997, $46.8 million in 1996 and $42.2 million in 1995. 9. LEASE COMMITMENTS--At December 31, 1997, Northern Trust was obligated under a number of noncancellable operating leases for premises and equipment. Certain leases contain rent escalation clauses, based on market indices or increases in real estate taxes and other operating expenses and renewal option clauses call- ing for increased rentals. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements. Minimum annual lease commitments as of December 31, 1997, for all noncancellable operating leases are as follows:
- ---------------------------------------------- Future Minimum (In Millions) Lease Payments - ---------------------------------------------- 1998 $ 31.3 1999 26.7 2000 25.2 2001 21.5 2002 19.1 Later Years 98.8 - ---------------------------------------------- Total Minimum Lease Payments $222.6 - ----------------------------------------------
Rental expense for all operating leases is included in occupancy expense and amounted to $27.8 million in 1997, $25.3 million in 1996 and $23.4 million in 1995. The building and land utilized at the Chicago operations center has been leased under an agreement which qualifies as a capital lease. The long-term fi- nancing for the property was provided by the Corporation and the Bank. In the event of sale or refinancing, the Bank will receive all proceeds except for 58% of any proceeds in excess of the original project costs which will be paid to the lessor. In June 1997, the Bank entered into an agreement to purchase a building and adjacent land located across the street from the Chicago operations center for $23.5 million in January 2000. The building, which contains approximately 340,000 square feet of rentable office space, will be used for future expansion and to relocate the computer data center and some personnel currently located in leased facilities in downtown Chicago. Prior to the purchase date, the Bank will lease, in phases beginning in 1997, approximately two floors of this six- story building. The present value of the land and building is reported in buildings and equipment, and the related purchase obligation appears in long- term debt in the consolidated balance sheet. NORTHERN TRUST CORPORATION -------------------------- 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below reflects the future minimum lease payments required under cap- ital leases, net of any payments received on the long-term financing, and the present value of net capital lease obligations at December 31, 1997.
- ---------------------------------------------- Future Minimum (In Millions) Lease Payments, Net - ---------------------------------------------- 1998 $ 1.3 1999 1.3 2000 1.4 2001 1.6 2002 1.6 Later Years 13.0 - ---------------------------------------------- Total Minimum Lease Payments, net 20.2 Less: Amount Represent- ing Interest 8.8 - ---------------------------------------------- Net Present Value under Capital Lease Obligations $11.4 - ----------------------------------------------
10. SENIOR NOTES, LONG-TERM DEBT AND LINES OF CREDIT--SENIOR NOTES. Summary of Bank senior notes outstanding at December 31 is presented below.
- ---------------------------------------------- ($ In Millions) Rate 1997 1996 - ---------------------------------------------- Due 1997 (a) (b) Fixed 5.10-5.65% $ -- $225.0 Fixed-Convert- ible to Floating 4.93-5.07 -- 75.0 Due 1998 (a) (b) Fixed 5.75-6.29 405.0 5.0 Floating 5.60-5.85 380.0 -- - ---------------------------------------------- Total Bank Senior Notes $785.0 $305.0 - ----------------------------------------------
Refer to bottom of next table for applicable notes. LONG-TERM DEBT. Summary of long-term debt outstanding at December 31 is pre- sented below.
- ------------------------------------------------------ ($ In Millions) 1997 1996 - ------------------------------------------------------ Corporation-Subordinated Debt 9.15% Notes due March 1998 (a) $ 10.0 $ 10.0 9.20% Notes due March 1998 (a) 13.0 13.0 9.00% Notes due May 1998 (a) 50.0 50.0 9.20% Notes due May 2001 (a) 25.0 25.0 Bank-Subordinated Debt 6.50% Notes due May 2003 (a) 100.0 100.0 6.70% Notes due Sept. 2005 (a) (b) 100.0 100.0 7.30% Notes due Sept. 2006 (a) (b) 100.0 100.0 - ------------------------------------------------------ Subordinated Long-Term Debt $398.0 $398.0 - ------------------------------------------------------ Corporation-Other Long-Term Debt 8.23% ESOP Installment Notes with Final Payment due December 1998 (c) $ 9.5 $ 18.2 Capital Lease Obligations (d) 11.4 11.6 Building Purchase Obligation (d) 20.6 -- - ------------------------------------------------------ Other Long-Term Debt $ 41.5 $ 29.8 - ------------------------------------------------------ Total Long-Term Debt $439.5 $427.8 - ------------------------------------------------------ Long-Term Debt Qualifying as Risk-Based Capital $315.0 $334.6 - ------------------------------------------------------
(a) Not redeemable prior to maturity. (b) Under the terms of its current Offering Circular, the Bank has the ability to offer from time to time its senior bank notes in an aggregate principal amount of up to $1.7 billion at any one time outstanding and up to an addi- tional $100 million of subordinated notes. Each senior note will mature from 30 days to fifteen years and each subordinated note will mature from five years to fifteen years, following its date of original issuance. Each note will mature on such date as selected by the initial purchaser and agreed to by the Bank. (c) Notes were issued directly by the ESOP trust to finance the purchase of 8,640,000 common shares. The Corporation unconditionally guarantees the payment of principal, premium, if any, and interest. The interest rate is subject to adjustment in the event of certain tax law changes affecting ESOP plans. Refer to Note 18. (d) Refer to Note 9. Refer to Note 20 for detail related to interest risk management instruments used to hedge notes. LINES OF CREDIT. The Corporation currently maintains commercial paper back-up facility lines of credit with three banks totaling $50 million. The termination date is November 2001. The commitment fee is determined by a pricing matrix that is based on the long-term senior debt ratings of the Corporation. Current- ly, the annual fee is one-tenth of 1% of the commitment. There were no borrowings under commercial paper back-up facilities during 1997 or 1996. NORTHERN TRUST CORPORATION -------------------------- 52 11. FLOATING RATE CAPITAL SECURITIES--The following table summarizes the book value of Floating Rate Capital Securities outstanding:
- --------------------------------------------- December 31 - --------------------------------------------- (In Millions) 1997 1996 - --------------------------------------------- $150 Million Series A due Jan- uary 15, 2027 $148.6 -- $120 Million Series B due April 15, 2027 118.8 -- - --------------------------------------------- Total Floating Rate Capital Securities $267.4 -- - ---------------------------------------------
On January 16, 1997, the Corporation issued $150 million of Floating Rate Cap- ital Securities, Series A, through a statutory business trust wholly-owned by the Corporation. On April 25, 1997, the Corporation also issued, through a sep- arate wholly-owned statutory business trust, $120 million of Floating Rate Cap- ital Securities, Series B. The sole assets of the trusts are Subordinated De- bentures of Northern Trust Corporation which have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. The Series A Securities were issued at a discount to yield 60.5 basis points above the three-month London Interbank Of- fered Rate (LIBOR), while the Series B Securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR. Both Series A and B Secu- rities qualify as tier 1 capital for regulatory purposes. The Corporation has fully, irrevocably and unconditionally guaranteed all pay- ments due on such Capital Securities. The holders of the Capital Securities are entitled to receive preferential cumulative cash distributions quarterly in ar- rears (based on the liquidation amount of $1,000 per Capital Security) at an interest rate equal to the rate on the corresponding Subordinated Debentures. The interest rate on the Series A and Series B securities is equal to three- month LIBOR plus 0.52% and 0.59%, respectively. Subject to certain exceptions, the Corporation has the right to defer payment of interest on the Subordinated Debentures at any time or from time to time for a period not exceeding 20 con- secutive quarterly periods provided that no extension period may extend beyond the stated maturity date. If interest is deferred on the Subordinated Deben- tures, distributions on the Capital Securities will also be deferred and the Corporation will not be permitted, subject to certain exceptions, to pay or de- clare any cash distributions with respect to the Corporation's capital stock or debt securities that rank the same as or junior to the Subordinated Debentures, until all past due distributions are paid. The Subordinated Debentures are unsecured and subordinated to substantially all of the Corporation's existing indebtedness. The Corporation has the right to redeem the Series A Subordinated Debentures on or after January 15, 2007 and the Series B Subordinated Debentures on or af- ter April 15, 2007, in each case in whole or in part. In addition, the Corpora- tion has the right to redeem the Subordinated Debentures held by either trust in whole but not in part at any time within 90 days following certain defined tax or regulatory capital treatment changes, at a price equal to the principal amount plus accrued and unpaid interest. 12. STOCKHOLDERS' EQUITY--PREFERRED STOCK. The Corporation is authorized to is- sue 10,000,000 shares of preferred stock without par value. The Board of Direc- tors of the Corporation is authorized to fix the particular preferences, rights, qualifications and restrictions for each series of preferred stock is- sued. Summary of preferred stock outstanding is presented below.
- --------------------------------------------- December 31 - --------------------------------------------- (In Millions) 1997 1996 - --------------------------------------------- Auction Rate Preferred Stock Series C 600 shares @ $100,000 per share $ 60.0 $ 60.0 Flexible Auction Rate Cumu- lative Preferred Stock Se- ries D 600 shares @ $100,000 per share 60.0 60.0 - --------------------------------------------- Total Preferred Stock $120.0 $120.0 - ---------------------------------------------
SERIES C--In 1987, 600 shares of Auction Rate Preferred Stock (APS) Series C were issued, with a $100,000 per share stated value. Dividends on the shares of APS are cumulative. Rates are determined every 49 days by Dutch auction unless the Corporation fails to pay a dividend or redeem any shares for which it has given notice of redemption, in which case the dividend rate will be set at 175% of the 60-day "AA" Composite Commercial Paper Rate. The dividend rate in any auction will not exceed a percentage determined by the prevailing credit rating of the APS. The current maximum dividend rate is 120% of the 60-day "AA" Com- posite Commercial Paper Rate. No dividends other than dividends payable in ju- nior stock, such as Common Stock, may be paid on Common Stock until full cumu- lative dividends on the APS have been paid. The average rate for this issue as declared during 1997 was 4.13%. The shares of APS are redeemable at the option of the Corporation, in whole or in part, on any Dividend Payment Date at $100,000 per share, plus accrued and unpaid dividends. SERIES D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred Stock Series D (FAPS) were issued with a $100,000 per share stated value. Each dividend period contains 49 days (the "Short-Term Dividend Period") or a number of days greater than 49 days (as selected by the Term Selection Agent) which is divisible by seven (the "Long-Term Dividend Period"). Rates for each dividend period are determined NORTHERN TRUST CORPORATION -------------------------- 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS by Dutch auction unless the Corporation fails to pay the full amount of any dividend or redemption. The dividend rate in any auction will not exceed a per- centage (currently 125%), determined by the prevailing credit rating of the FAPS, of the 60-day "AA" Composite Commercial Paper Rate or the Reference Rate, which rate is the Composite Commercial Paper Rate or the Treasury Rate, as ap- propriate for the length of each Short-Term or Long-Term Dividend Period, re- spectively. If the Corporation fails to pay the full amount of any dividend or redemption, each dividend period thereafter (until auctions are resumed) will be a Short-Term Dividend Period and the dividend rate will be 250% of the 60- day "AA" Composite Commercial Paper Rate; additional dividends will accrue for the balance of any Long-Term Dividend Period in which such a failure to pay oc- curs. No dividends other than dividends payable in junior stock, such as Common Stock, may be paid on Common Stock until full cumulative dividends on the FAPS have been paid. The average rate for this issue as declared during 1997 was 4.12%. The shares of FAPS are redeemable at the option of the Corporation, in whole or in part, at $100,000 per share plus accrued and unpaid dividends. SERIES E--On January 5, 1996, the Corporation called for redemption its out- standing 6.25% Cumulative Convertible Preferred Stock Series E. The Series E was sold to the public in the form of 1,000,000 Depositary Shares, each representing one-twentieth of a share of the Series E Preferred Stock (equal to 50,000 preferred shares). In January 1996, 994,737 of the total 1,000,000 De- positary Shares were converted at the option of the holders at a conversion price of $41.50 into 1,198,372 (2,396,744 shares on a post-split basis) shares of the Corporation's common stock. The conversion resulted in fractions of shares for which the Corporation paid cash. The remaining 5,263 Depositary Shares were redeemed on January 26, 1996, for cash at a redemption price of $52.8038 per Depositary Share. PREFERRED STOCK PURCHASE RIGHTS. In 1989, the Board of Directors of the Corpo- ration declared a dividend distribution of one Preferred Stock Purchase Right on each outstanding share of the Corporation's common stock to the stockholders of record on October 31, 1989. The Rights are subject to anti-dilution provi- sions, and each Right is now exercisable for one-sixth of one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $41.67 for each such fractional share. The Rights are evidenced by the common stock certificates and are not exercisable or transferable apart from the com- mon stock until twenty days after a person or group acquires 15 percent or more of the Corporation's voting power or announces a tender or exchange offer which could result in ownership of 25 percent or more of the voting power. Shares of the Participating Preferred Stock purchasable upon exercise of the Rights will not be redeemable. In the event that a person or group acquires 25 percent or more of the Corpo- ration voting power or if the Corporation merges or engages in certain self- dealing transactions with a 15 percent or more stockholder, each Right will en- title the holder, other than such person or group in certain circumstances, to purchase that number of shares of surviving company common stock which at the time of the transaction would have a market value of twice the exercise price of the Right. The Rights do not have voting rights and are redeemable at the option of the Corporation at a price of one cent per Right at any time prior to the close of business on the 20th day following publication of the acquisition of 15 percent or more of the voting power by a person or group. Unless earlier redeemed, the Rights will expire on October 31, 1999. COMMON STOCK. In November 1996, the Corporation declared a two-for-one split of its common stock, to be effected by means of a 100% stock distribution. One share for each share held by shareholders of record on December 2, 1996 was distributed on December 9, 1996. Also in November 1996, the Corporation announced that it increased its common stock buyback authorization by approximately 4.2 million shares. An additional 3.2 million shares may be purchased after December 31, 1997 under the current program. These shares may be repurchased from time to time in open market pur- chases, and the shares would be used primarily for management incentive plans and other corporate purposes. An analysis of changes in the number of shares of common stock outstanding follows:
- ---------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------- Balance at January 1 111,247,732 55,664,412 54,089,259 Distribution of Two-for-One Stock Split -- 55,664,412 -- Conversion of Preferred Stock, Series E -- 2,396,744 -- Employee Benefit Plans: Incentive Plan and Awards 315,147 377,086 406,084 Stock Options Exercised 1,214,310 1,242,034 640,229 Issued for Acquisitions -- -- 2,014,999 Treasury Stock Purchases (1,409,753) (4,096,956) (1,486,159) - ---------------------------------------------------------- Balance at December 31 111,367,436 111,247,732 55,664,412 - ----------------------------------------------------------
Note: 1996 share activity reflects the December 1996 two-for-one stock split. NORTHERN TRUST CORPORATION -------------------------- 54 13. INCOME TAXES--The table below reconciles the total provision for income taxes recorded in the consolidated statement of income with the amounts com- puted at the statutory federal tax rate of 35%.
- ------------------------------------------------------ (In Millions) 1997 1996 1995 - ------------------------------------------------------ Tax at Statutory Rate $165.2 $135.6 $112.2 Tax-Exempt Income (10.7) (11.6) (13.9) State Taxes, net 8.5 4.8 2.4 Other (.5) (.2) (.2) - ------------------------------------------------------ Provision for Income Taxes $162.5 $128.6 $100.5 - ------------------------------------------------------
The components of the consolidated provision for income taxes for each of the three years ended December 31, are as follows:
- -------------------------------------------- (In Millions) 1997 1996 1995 - -------------------------------------------- Current Tax Provision: Federal $102.4 $ 91.4 $ 75.7 State 6.8 3.8 2.9 Foreign 15.3 3.9 4.2 - -------------------------------------------- Total 124.5 99.1 82.8 - -------------------------------------------- Deferred Tax Provision: Federal 31.7 26.0 16.9 State 6.3 3.5 .8 - -------------------------------------------- Total 38.0 29.5 17.7 - -------------------------------------------- Provision for Income Taxes $162.5 $128.6 $100.5 - --------------------------------------------
In addition to the amounts shown in the above tables, tax liabilities or (ben- efits) have been recorded directly to stockholders' equity for the following items:
- ----------------------------------------------- (In Millions) 1997 1996 - ----------------------------------------------- Current Tax Benefit for Em- ployee Stock Options and Other Employee Benefit Plans $(15.6) $(8.7) Deferred Tax Effect of Unrealized Security Gains (Losses) .3 (.6) Deferred Tax Effect of Un- funded Pension Liabilities (1.4) (.5) - -----------------------------------------------
Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and lia- bilities. Deferred tax liabilities and assets have been computed based on the statutory federal tax rate of 35%, as follows:
December 31 - ------------------------------------------------ (In Millions) 1997 1996 - ------------------------------------------------ Deferred Tax Liabilities: Lease Financing $122.4 $ 88.3 Software Development 39.3 40.6 Accumulated Depreciation 9.2 6.5 Acquired Intangible Assets 7.5 6.5 Other Liabilities 21.0 16.7 - ------------------------------------------------ Gross Deferred Tax Liabilities 199.4 158.6 - ------------------------------------------------ Deferred Tax Assets: Reserve for Credit Losses 51.2 51.4 Leased Facilities 7.3 7.6 Other Assets 15.5 10.2 - ------------------------------------------------ Gross Deferred Tax Assets 74.0 69.2 Valuation Reserve -- -- - ------------------------------------------------ Deferred Tax Assets, net of Valuation Reserve 74.0 69.2 - ------------------------------------------------ Net Deferred Tax Liabilities $125.4 $ 89.4 - ------------------------------------------------
At December 31, 1997, Northern Trust had a federal net operating loss carryforward of $4.3 million resulting from a business acquisition, which is available to reduce future tax return liabilities. In addition, Northern Trust had a state net operating loss and tax credit carryforwards of $5.3 million and $2.0 million, respectively. The carryforwards are subject to various limita- tions imposed by tax law. 14. NET INCOME PER COMMON SHARE COMPUTATIONS--Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," established new standards for computing and presenting net income per common share. Northern Trust imple- mented SFAS No. 128 as of December 31, 1997. All prior period net income per common share data presented throughout these consolidated financial statements has been restated to conform to the requirements of SFAS No. 128. The computa- tion of net income per common share is presented on the following page. NORTHERN TRUST CORPORATION -------------------------- 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------- ($ In Millions Except Per Share Information) 1997 1996 1995 - ------------------------------------------------------------------------------- BASIC NET INCOME PER COMMON SHARE Net Income $309.4 $258.8 $220.0 Less: Dividends on Preferred Stock (5.0) (4.9) (8.5) - ------------------------------------------------------------------------------- Net Income Applicable to Common Stock $304.4 $253.9 $211.5 Average Number of Common Shares Outstanding 110,977,645 111,933,829 110,737,342 Basic Net Income Per Common Share $ 2.74 $ 2.27 $ 1.91 DILUTED NET INCOME PER COMMON SHARE Net Income Applicable to Common Stock $304.4 $253.9 $211.5 Add Back: Dividends on Series E Convertible Preferred Stock -- -- 3.1 - ------------------------------------------------------------------------------- Net Income Used to Compute Diluted Net Income Per Common Share $304.4 $253.9 $214.6 - ------------------------------------------------------------------------------- Average Number of Common Shares Outstanding 110,977,645 111,933,829 110,737,342 Plus: Dilutive Potential Common Shares Stock Options 2,846,992 1,968,038 1,218,508 Performance Shares 579,737 611,072 690,502 Series E Convertible Preferred Stock -- 190,928 2,409,640 Other 256,782 135,251 29,482 - ------------------------------------------------------------------------------- Average Common and Potential Common Shares 114,661,156 114,839,118 115,085,474 - ------------------------------------------------------------------------------- Diluted Net Income Per Common Share $ 2.66 $ 2.21 $ 1.86 - -------------------------------------------------------------------------------
15. RESTRICTIONS ON SUBSIDIARY DIVIDENDS AND LOANS OR ADVANCES--Provisions of state and federal banking laws restrict the amount of dividends that can be paid to the Corporation by its banking subsidiaries. Under applicable state and federal laws, no dividends may be paid in an amount greater than the net profits then on hand, subject to other applicable provisions of law. In addi- tion, prior approval of the relevant federal banking regulator is required if dividends declared by any of the Corporation's banking subsidiaries in any calendar year will exceed its net profits (as defined) for that year, combined with its retained net profits for the preceding two years. Based on these reg- ulations, the Corporation's banking subsidiaries, without regulatory approval, could declare dividends during 1998 equal to their 1998 eligible net profits (as defined) plus $342.8 million. The ability of each banking subsidiary to pay dividends to the Corporation may be further restricted as a result of reg- ulatory policies and guidelines relating to dividend payments and capital ade- quacy. State and federal laws limit the transfer of funds by a banking subsidiary to the Corporation and certain of its affiliates in the form of loans or exten- sions of credit, investments or purchases of assets. Transfers of this kind to the Corporation or a nonbanking subsidiary by a banking subsidiary are each limited to 10% of the banking subsidiary's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are also subject to certain collateral requirements. These transactions, as well as other transactions be- tween a banking subsidiary and the Corporation or its affiliates, must also be on terms substantially the same as, or at least as favorable as, those pre- vailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms, or under circumstances, including credit standards, that would be offered to, or would apply to, non- affiliated companies. 16. OTHER OPERATING INCOME--Included in the 1997 results is $11.1 million re- sulting from settlements reached with Illinois banking regulators concerning the disposition of certain unclaimed balances accumulated over a number of years. 17. OTHER OPERATING EXPENSES--The components of other operating expenses were as follows:
- -------------------------------------------- (In Millions) 1997 1996 1995 - -------------------------------------------- Business Development $ 32.0 $ 26.9 $ 23.0 Purchased Profes- sional Services 81.0 76.7 57.6 Telecommunications 13.2 11.4 10.8 Postage and Supplies 22.0 21.9 20.7 FDIC Premium 1.2 -- 8.5 Software Amortiza- tion 41.1 32.6 28.3 Goodwill and Other Intangibles Amorti- zation 9.9 9.7 7.5 Pension Settlement Charges -- .5 4.1 Other Expense 35.2 31.2 22.0 - -------------------------------------------- Total Other Operat- ing Expenses $235.6 $210.9 $182.5 - --------------------------------------------
Software, goodwill and other intangible assets are included in other assets in the consolidated balance sheet. Software totaled $145.1 million at December 31, 1997 and $133.8 million at December 31, 1996. Goodwill totaled $96.0 mil- lion at December 31, 1997 and $66.5 million at December 31, 1996. Other intan- gibles totaled $48.3 million at December 31, 1997 and $39.4 million at Decem- ber 31, 1996. NORTHERN TRUST CORPORATION -------------------------- 56 18. PENSION AND OTHER EMPLOYEE BENEFITS-- PENSION. A noncontributory qualified pension plan covers substantially all employees. The plan provides benefits for normal and early retirement, benefits for vested employees and, under certain circumstances, survivor benefits in the event of death. Benefits are based on the employees' years of service and their five highest consecutive years of compensation. The proportion of average compensation paid as a pension benefit is determined by length of service. Contributions to the plan satisfy or exceed the minimum funding requirements of ERISA. Certain retiree death benefits are funded through the pension and the related cost is included as pension expense. Assets held by the plan consist primarily of listed stocks and corporate bonds. Northern Trust also maintains a noncontributory nonqualified pension plan for participants whose retirement benefit payments under the qualified plan are ex- pected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a "Rabbi" Trust, to fund benefits in excess of those permitted in certain of its qualified plans. The primary purpose of the trust is to fund nonqualified retirement benefits. This arrangement offers certain officers a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. The assets remain subject to the claims of creditors and are not the property of the employees. Therefore, they are accounted for as corporate assets and are included in other assets in the consolidated balance sheet. The following tables set forth the status and the net periodic pension cost of the domestic qualified and nonqualified pension benefit plans for 1997 and 1996. Prior service costs and unrecognized net assets established at January 1, 1986 are being amortized on the straight-line basis over 13.2 years. PLAN STATUS - --------------------------------------------------------------------------------
Qualified Nonqualified Plan Plan - ------------------------------------------------------------- September 30 - ------------------------------------------------------------- ($ In Millions) 1997 1996 1997 1996 - ------------------------------------------------------------- Actuarial Present Value of Benefit Obligation: Vested Benefit Obligation $151.1 $140.1 $ 16.1 $ 12.3 Accumulated Benefit Obligation 167.5 155.6 17.4 13.2 - ------------------------------------------------------------- Projected Benefit Obligation for Service Rendered to Date 219.2 206.1 23.8 19.4 Plan Assets at Fair Value 288.2 229.0 -- -- - ------------------------------------------------------------- Plan Assets In Excess of (Less Than) Projected Benefit Obligation 69.0 22.9 (23.8) (19.4) Unrecognized Net Asset (Effective January 1, 1986) (2.2) (3.6) (.1) (.1) Unrecognized Net Loss 17.6 53.6 12.7 8.6 Unrecognized Prior Service Cost (7.3) (7.9) 2.0 2.4 Valuation Adjustment (.3) (.3) -- -- - ------------------------------------------------------------- Prepaid (Accrued) Pension Cost at September 30 76.8 64.7 (9.2) (8.5) Net (Expense) Funding October to December (1.9) (1.7) (.2) 1.0 Additional Minimum Liability at December 31 -- -- (7.3) (3.8) - ------------------------------------------------------------- Prepaid (Accrued) Pension Cost at December 31 $ 74.9 $ 63.0 $(16.7) $(11.3) - ------------------------------------------------------------- Assumptions: Discount Rates 7.25% 7.50% 6.75% 7.00% Rate of Increase in Compensation Level 5.90 5.80 5.90 5.80 Expected Long-Term Rate of Return on Assets 9.00 9.00 N/A N/A - -------------------------------------------------------------
- ----------------------------------------------- NET PERIODIC PENSION COST - ----------------------------------------------- Qualified Nonqualified Plan Plan - ----------------------------------------------- (In Millions) 1997 1996 1997 1996 - ----------------------------------------------- Service Cost $10.6 $10.4 $ 1.1 $ 1.1 Interest Cost 15.9 14.9 1.4 1.4 Actual Return on Plan Assets (56.9) (27.9) -- -- Net Amortization 37.8 10.0 .9 1.0 - ----------------------------------------------- Net Periodic Pension Cost $ 7.4 $ 7.4 $ 3.4 $ 3.5 - -----------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pension expense for 1995 was $8.3 million and $3.8 million for the qualified and nonqualified plans, respectively. In 1996, the service benefit formula and survivor annuity provisions were amended and the mortality assumptions were changed for the qualified and nonqualified plans. The changes reduced total 1996 pension expense by $1.1 million. Total assets in the "Rabbi" Trust related to the nonqualified pension plan at December 31, 1997 and 1996 amounted to $14.3 million, and $10.3 million, re- spectively. A pension plan is also maintained for the London Branch employees. At December 31, 1997, the fair value of assets and the projected benefit obligation totaled approximately $13.0 million and $11.0 million, respectively. At December 31, 1996, the fair value of assets and the projected benefit obligation were $7.8 million and $9.1 million, respectively. Pension expense for 1997 and 1996 was $1.4 million and $1.1 million, respectively. THRIFT INCENTIVE PLAN. The Corporation and its subsidiaries have a defined con- tribution Thrift Incentive Plan covering substantially all employees. The cor- porate contribution is contingent upon the level of employee contribution and meeting a predefined earnings target for the year. The maximum corporate con- tribution was equal to 4% of an employee's salary in 1997 and 1996, and 5% in 1995. The estimated contribution to this plan is charged to pension and other employee benefits and totaled $9.1 million in 1997, $8.0 million in 1996 and $11.3 million in 1995. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A leveraged ESOP in which substantially all employees of Northern Trust are eligible to participate was established in 1989. Under the original terms of the ESOP, the shares were to be allocated over ten years. In 1996, the terms of the ESOP were amended. The original matu- rity of the ESOP-related debt was effectively extended by an additional three years through financing provided by the Corporation and the remaining ESOP shares are being allocated over the six year period ending December 31, 2001. The Corporation will make an additional contribution of $5.4 million in cash or shares of common stock in each of the years 2002 and 2003. Dividends paid on unallocated shares held in the ESOP Trust are used for debt service on the ESOP notes. Compensation expense is accounted for based primar- ily on the amount of cash paid by Northern Trust to the ESOP for principal pay- ments on the ESOP notes. Of the original 9 million shares in the ESOP Trust, 7,200,370 shares have been allocated as of December 31, 1997. The ESOP shares not yet allocated to individual accounts are treated as deferred compensation and accounted for as a reduction of stockholders' equity. The following table presents information related to the ESOP.
- -------------------------------------------- (In Millions) 1997 1996 - -------------------------------------------- Total ESOP Compensation Expense $2.6 $2.3 Interest Incurred on ESOP- Related Debt 1.3 2.0 Amount Contributed to ESOP- Related Debt 3.4 3.6 Dividends and Interest on Unal- located ESOP Shares Used for Debt Service 1.8 1.9 - --------------------------------------------
OTHER POSTRETIREMENT BENEFITS. Northern Trust maintains an unfunded postretirement health care plan. Employees retiring under the provisions of The Northern Trust Pension Plan may be eligible for postretirement health care cov- erage. These benefits are provided either through an indemnity plan, subject to deductibles, co-payment provisions and other limitations or through health maintenance organizations. The provisions may be changed at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time. The following tables set forth the plan status at December 31 and the net pe- riodic postretirement benefit cost of the domestic postretirement health care plan for 1997 and 1996. The transition obligation at January 1, 1993 is being amortized to expense over a twenty year period.
- ---------------------------------------------- PLAN STATUS - ------------------------------------------------------ (In Millions) 1997 1996 - ------------------------------------------------------ Accumulated Postretirement Benefit Obligation (APBO) Measured at September 30: Retirees and Dependents $15.0 $15.9 Actives Eligible for Benefits 4.7 5.3 Actives Not Yet Eligible 8.7 12.1 - ------------------------------------------------------ Total APBO 28.4 33.3 Unamortized Transition Obligation (8.7) (11.3) Unrecognized Net Loss (3.2) (8.2) - ------------------------------------------------------ Net Postretirement Benefit Liability $16.5 $13.8 - ------------------------------------------------------
- -------------------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST - -------------------------------------------- (In Millions) 1997 1996 - -------------------------------------------- Service Cost $ .9 $ 1.3 Interest Cost 2.0 2.6 Net Amortization .6 1.2 - -------------------------------------------- Net Periodic Postretirement Benefit Cost $ 3.5 $ 5.1 - --------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 58 Postretirement health care expense for 1995 was $6.2 million. In 1996, the cost sharing provisions of the plan were amended and resulted in a reduction in 1996 expense of $1.8 million. For measurement purposes, a 9.0% annual increase in the cost of covered health care benefits was assumed for 1998. This rate is assumed to decrease gradually to 5.5% in 2002 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation for the postretirement health care plan as of December 31, 1997 by approximately $1.1 million, and the aggregate of the service and interest cost components of the 1997 net periodic postretirement benefit cost by $.1 million. The weighted av- erage discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at December 31, 1997 and 7.50% at December 31, 1996. 19. CONTINGENT LIABILITIES--Because of the nature of its activities, Northern Trust is subject to pending and threatened legal actions that arise in the nor- mal course of business. In the judgment of management, after consulta- tion with legal counsel, none of the litigation to which the Corporation or any of its subsidiaries is a party will have a material effect, either individually or in the aggregate, on the consolidated financial position or results of opera- tions. 20. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS--COMMITMENTS AND LETTERS OF CREDIT. Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the credit risk should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Commitments and letters of credit consist of the following: LEGALLY BINDING COMMITMENTS TO EXTEND CREDIT generally have fixed expiration dates or other termination clauses. Since a significant portion of the commit- ments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements. PARTICIPATIONS IN BANKERS ACCEPTANCES obligate Northern Trust, in the event of default by the counterparty, to reimburse the holder of the acceptance an amount equal to its participation in the acceptance. COMMERCIAL LETTERS OF CREDIT are instruments issued by Northern Trust on be- half of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement. Commercial letters of credit are issued primarily to facilitate international trade. STANDBY LETTERS OF CREDIT obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to sup- port public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and similar trans- actions. The following table shows the contractual amounts of commitments and letters of credit.
COMMITMENTS AND LETTERS OF CREDIT - ------------------------------------------------ December 31 - ------------------------------------------------ (In Millions) 1997 1996 - ------------------------------------------------- Legally Binding Com- mitments to Extend Credit $11,946.6 $10,299.3 Participations in Bankers Acceptances 7.8 20.6 Commercial Letters of Credit 98.6 117.8 Standby Letters of Credit: Corporate $ 401.9 $ 378.4 Industrial Revenue 843.0 724.5 Other 298.3 214.3 - ------------------------------------------------ Total Standby Letters of Credit* $ 1,543.2 $ 1,317.2 - ------------------------------------------------
*These amounts include $199.1 million and $165.3 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 1997 and 1996, respectively. The weighted average maturity of standby letters of credit was 24 months at December 31, 1997 and 28 months at December 31, 1996. RISK MANAGEMENT INSTRUMENTS. These instruments include foreign exchange con- tracts, foreign currency futures contracts, and various interest risk manage- ment instruments. Northern Trust is a party to various risk management instruments that are used in the normal course of business to meet the risk management needs of its cli- ents; as part of its trading activity for its own account; and as part of its asset/liability management activities. The major risk associated with these in- struments is that interest or foreign exchange rates could change in an unan- ticipated manner, resulting in higher interest costs or a loss in the under- lying value of the instrument. These risks are mitigated by establishing limits for risk management positions, monitoring the level of actual positions taken against such established limits, monitoring the level of any interest rate sen- sitivity gaps created by such positions, and by using hedging techniques. When establishing position limits, market liquidity and volatility, as well as expe- rience in each market, are all taken into account. NORTHERN TRUST CORPORATION -------------------------- 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated credit risk associated with these instruments relates to the failure of the counterparty to pay based on the contractual terms of the agree- ment, and is generally limited to the gross unrealized market value gains on these instruments. The amount of credit risk will increase or decrease during the lives of the instruments as interest and foreign exchange rates fluctuate. This risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Risk management instruments include: FOREIGN EXCHANGE CONTRACTS are agreements to exchange specific amounts of cur- rencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange risk manage- ment needs of clients. Foreign exchange contracts are also used for trading purposes and asset/liability management. FOREIGN CURRENCY AND INTEREST RATE FUTURES CONTRACTS are agreements for de- layed delivery of foreign currency, securities or money market instruments in which the buyer agrees to take delivery at a specified future date of a speci- fied currency, security, or instrument, at a specified price or yield. All of Northern Trust's futures contracts are traded on organized exchanges that re- quire the daily settlement of changes in the value of the contracts. Futures contracts are utilized in trading activities and asset/liability management to limit Northern Trust's exposure to unfavorable fluctuations in foreign exchange rates or interest rates. INTEREST RATE PROTECTION CONTRACTS are agreements which enable clients to transfer, modify or reduce their interest rate risk. As a seller of interest rate protection, Northern Trust receives a fee at the outset of the agreement and then assumes the risk of an unfavorable change in interest rates. Northern Trust also purchases interest rate protection contracts for asset/liability management. INTEREST RATE SWAP CONTRACTS involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts; these types of transactions constitute the majority of the interest rate swap portfolio. Northern Trust has also entered into a limited number of more complex interest rate swap transactions that were executed concurrently with the purchase of $24 million of structured agency notes. The structured notes are included in the available for sale portion of the securities portfo- lio. The interest rate swap contracts are used to hedge the nonstandard fea- tures of the structured notes thereby converting them to U.S. dollar denomi- nated floating rate notes indexed to LIBOR. FORWARD SALE CONTRACTS represent commitments to sell a specified amount of se- curities at an agreed upon date and price. Northern Trust utilizes forward sale contracts principally in connection with its sale of mortgage loans. EXCHANGE-TRADED OPTION CONTRACTS grant the buyer the right, but not the obli- gation, to purchase or sell at a specified price, a stated number of units of an underlying financial instrument, at a future date. The following table shows the contractual/notional amounts of risk management instruments. The notional amounts of risk management instruments do not repre- sent credit risk, and are not recorded in the consolidated balance sheet. They are used merely to express the volume of this activity.
RISK MANAGEMENT INSTRUMENTS - ------------------------------------------------------------ Contractual/Notional Amounts December 31 - ------------------------------------------------------------ (In Millions) 1997 1996 - ------------------------------------------------------------ Asset/Liability Management: Foreign Exchange Contracts $ 155.8 $ 46.0 Foreign Currency Futures Contracts 4.0 3.3 Interest Rate Futures Contracts Sold -- 101.7 Interest Rate Protection Contracts Purchased 85.0 25.0 Interest Rate Swap Contracts 2,812.7 2,571.4 Forward Sale Contracts 50.9 11.3 Exchange-Traded Option Contracts Purchased -- 2.8 Client-Related and Trading: Foreign Exchange Contracts 16,193.1 13,420.7 Interest Rate Futures Contracts Sold 10.0 15.0 Interest Rate Protection Contracts--Purchased 13.8 34.0 --Sold 24.9 43.2 Interest Rate Swap Contracts 63.5 328.9 - ------------------------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 60 RISK MANAGEMENT INSTRUMENTS USED FOR ASSET/LIABILITY MANAGEMENT. Northern Trust utilizes various types of risk management instruments, primarily interest rate swaps, as tools for managing interest rate and option risk related to its own balance sheet. The following table summarizes the expected maturities and weighted average interest rates to be paid and received on the asset/liability management swap portfolio at December 31, 1997. A key assumption in the preparation of the table is that floating rates remain constant at December 31, 1997 levels.
- ------------------------------------------------------------------------------- REMAINING MATURITY OF ASSET/LIABILITY MANAGEMENT INTEREST RATE SWAPS - ------------------------------------------------------------------------------- ($ In Millions) 1998 1999 2000 2001 2002 2003-2007 Total - ------------------------------------------------------------------------------- PAY FIXED Notional Amount $190.1 186.5 230.0 222.4 303.3 620.9 $1,753.2 Average Pay Rate 5.41% 6.56 6.37 6.89 5.84 6.80 6.41% Average Receive Rate 5.91 5.87 5.91 5.84 5.16 5.83 5.74 - ------------------------------------------------------------------------------- RECEIVE FIXED Notional Amount $400.0 -- 15.0 -- -- 100.0 $ 515.0 Average Pay Rate 5.79% -- 5.72 -- -- 5.75 5.78% Average Receive Rate 5.96 -- 5.99 -- -- 6.31 6.03 - ------------------------------------------------------------------------------- PAY AND RECEIVE VARIABLE (BASIS SWAPS) Notional Amount $544.5 -- -- -- -- -- $ 544.5 Average Pay Rate 5.56% -- -- -- -- -- 5.56% Average Receive Rate 5.70 -- -- -- -- -- 5.70 - -------------------------------------------------------------------------------
Some of the principal uses of risk management instruments, together with the notional amounts outstanding, are described as follows: CONVERT YIELDS ON SECURITIES TO AN EFFECTIVE LIBOR RATE. At December 31, 1997, interest rate swaps with a notional amount of $338 million were used to convert fixed and floating rate interest payments on securities (classified as available for sale) to floating rate payments indexed to LIBOR. Swaps with a notional amount of $174 million were combined with fixed rate securities, $140 million were combined with floating rate securities indexed to Treasury Bill rates, and $24 million were combined with structured notes, whose non-standard features were hedged. The swaps were executed simultaneously with the purchase of the notes. The securities were converted to an effective LIBOR rate to match LIBOR-based funding costs. REDUCE INTEREST RATE RISK FROM FIXED RATE LOANS FUNDED WITH VARIABLE RATE LI- ABILITIES. Northern Trust paid a fixed rate and received a floating rate on interest rate swaps with a notional amount of $1.5 billion at December 31, 1997 to hedge the interest rate risk from fixed rate loans. For accounting purposes these swaps were designated to either convert the fixed rate on the loan to an effective floating rate or to convert floating rate funding to a fixed rate. Interest rate floors with a notional amount of $85 million at De- cember 31, 1997 were used to hedge mortgage loan prepayment risk. SWAPS COMBINED WITH LIABILITIES TO OBTAIN FAVORABLE FUNDING COSTS. Interest rate swaps with a notional amount of $980 million at December 31, 1997 were used in conjunction with the issuance of senior notes and subordinated notes to obtain desired funding characteristics. Of these swaps, $500 million con- verted fixed rate notes to floating rate funding indexed to LIBOR, $380 mil- lion converted floating rate notes to a different floating rate index, and $100 million converted a floating rate note to a fixed rate. The use of swaps in combination with notes permitted Northern Trust to issue notes with rate and maturity features that were most desired by investors while converting the rate characteristics to meet its needs. HEDGING FOREIGN CURRENCY RISK. Forward foreign exchange contracts and foreign currency futures contracts were used to reduce exposure to fluctuations in the dollar value of capital investments in foreign subsidiaries and from foreign currency assets and obligations. The notional amounts of these contracts at year-end 1997 were $155.8 million of forward foreign exchange contracts and $4.0 million of short sales of foreign currency futures contracts. HEDGING MORTGAGES HELD FOR SALE. Northern Trust hedges the market risk of its portfolio of fixed rate commitments and mortgages held for sale with a combi- nation of derivative financial instruments. At December 31, 1997 the portfolio was hedged with $50.9 million of forward sales of mortgage-backed securities. No deferred gains or losses related to interest risk management instruments used for asset/liability management were included in the consolidated balance sheet at year-end 1997 or 1996. CLIENT AND TRADING-RELATED INTEREST RISK MANAGEMENT INSTRUMENTS. Net revenue associated with client and trading-related interest risk management activities totaled $.3 million, $.3 million, and $2.8 million during 1997, 1996, and 1995, respectively. The majority of these revenues are related to interest rate swaps, futures contracts, and interest rate protection agreements, and are reported as trading income in the consolidated statement of income. NORTHERN TRUST CORPORATION -------------------------- 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS However, the amount reported for 1995 also included interest income earned on U.S. Government securities that were classified as trading account securities and hedged with futures contracts. OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. As part of securities custody activities and at the direction of trust clients, Northern Trust lends securi- ties owned by clients to borrowers who are reviewed by the Credit Policy Credit Approval Committee. In connection with these activities, Northern Trust has is- sued certain indemnifications against loss resulting from the bankruptcy of the borrower of securities. The borrowing party is required to fully collateralize securities received with cash, marketable securities, or irrevocable standby letters of credit. As securities are loaned, collateral is maintained at a min- imum of 100 percent of the fair value of the securities plus accrued interest, with revaluation of the collateral on a daily basis. The amount of securities loaned as of December 31, 1997 and 1996 subject to indemnification was $29.5 billion and $15.7 billion, respectively. Because of the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is remote. The Bank is a participating member of various cash and securities clearing or- ganizations. It participates in these organizations on behalf of its clients and on behalf of itself as a result of its own investment and trading activi- ties. A wide variety of securities transactions are settled through these orga- nizations, including those involving obligations of states and political subdi- visions, asset-backed securities, commercial paper, Eurodollars and securities issued by the Government National Mortgage Association. As a result of its participation in cash and securities clearing organiza- tions, the Bank could be responsible for a pro rata share of certain credit-re- lated losses arising out of the clearing activities. The method in which such losses would be shared by the clearing members is stipulated in each clearing organization's membership agreement. Credit exposure related to these agree- ments varies from day to day, primarily as a result of fluctuations in the vol- ume of transactions cleared through the organizations. The estimated credit ex- posure at December 31, 1997 and 1996 was $73 million and $70 million, respec- tively, based on the clearing volume for those days. Controls related to these clearing transactions are closely monitored to protect the assets of Northern Trust. 21. FAIR VALUE OF FINANCIAL INSTRUMENTS--SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the estimated fair value of certain financial instruments. Considerable judgment is required to interpret market data when computing estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts Northern Trust could have realized in a market exchange. The information provided below should not be interpreted as an estimate of the fair value of Northern Trust since the disclosures, in accordance with SFAS No. 107, exclude the values of nonfinancial assets and liabilities, as well as a wide range of franchise, relationship, and intangible values, which are inte- gral to a full assessment of the consolidated financial position. The use of different assumptions and/or estimation methods may have a material effect on the computation of estimated fair values. Therefore, comparisons be- tween Northern Trust's disclosures and those of other financial institutions may not be meaningful. The following methods and assumptions were used in estimating the fair values of the financial instruments: SECURITIES. Fair values of securities were based on quoted market values, when available. If quoted market values were not available, fair values were based on quoted market values for comparable instruments. LOANS (NOT INCLUDING LEASE FINANCING RECEIVABLES). The fair values of one-to- four family residential mortgages were based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for dif- ferences in loan characteristics. The fair values of the remainder of the loan portfolio were estimated using a discounted cash flow method in which the dis- count rate used was the rate at which Northern Trust would have originated the loan had it been originated as of the financial statement date, giving effect to current economic conditions on loan collectibility. SAVINGS CERTIFICATES, OTHER TIME AND FOREIGN OFFICES TIME DEPOSITS. The fair values of these instruments were estimated using a discounted cash flow method that incorporated market interest rates. SENIOR NOTES, LONG-TERM DEBT, AND FLOATING RATE CAPITAL SECURITIES. Fair val- ues were based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted market prices for compara- ble instruments. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The fair values of commitments and letters of credit represent the amount of unamortized fees on these instru- ments. The fair values of all other off-balance sheet financial instruments were estimated using market prices, pricing models, or quoted market prices of financial instruments with similar characteristics. FINANCIAL INSTRUMENTS VALUED AT CARRYING VALUE. Due to their short maturity, the respective carrying values of certain on-balance sheet financial instru- ments approximated their fair values. These financial instruments include cash and due from banks; money market assets; customers' acceptance liability; trust security settlement receivables; federal funds purchased; securities sold under agreements to repurchase; commercial paper; other borrowings; and liability on acceptances. The fair values required to be disclosed for demand, savings, and money market deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the con- solidated balance sheet. NORTHERN TRUST CORPORATION -------------------------- 62 - -------------------------------------------------------------------------------- Fair Values of On-Balance Sheet Financial Instruments. The following table summarizes the fair values of on-balance sheet financial instruments.
- ------------------------------------------------------------------------------------------------------- December 31 - ------------------------------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------------------------------- Book Fair Book Fair (In Millions) Value Value Value Value - ------------------------------------------------------------------------------------------------------- Assets Cash and Due From Banks $ 1,738.9 $ 1,738.9 $ 1,292.5 $ 1,292.5 Money Market Assets 5,309.4 5,309.4 3,196.9 3,196.9 Securities: Available for Sale 3,733.3 3,733.3 4,311.7 4,311.7 Held to Maturity 456.1 473.4 498.4 518.9 Trading Account 8.8 8.8 4.8 4.8 Loans (excluding leases), net of credit loss reserve: Held to Maturity 12,053.9 12,114.9 10,517.6 10,507.6 Held for Sale 39.7 40.0 3.7 3.7 Acceptance Liability 31.4 31.4 44.7 44.7 Trust Security Settlement Receivables 291.4 291.4 362.3 362.3 Liabilities Deposits: Demand, Savings and Money Market 8,240.0 8,240.0 7,767.5 7,767.5 Savings Certificates, Other Time and Foreign Offices Time 8,120.0 8,138.1 6,028.7 6,047.9 Federal Funds Purchased 821.2 821.2 653.0 653.0 Repurchase Agreements 1,139.7 1,139.7 966.1 966.1 Commercial Paper 146.8 146.8 149.0 149.0 Other Borrowings 2,876.6 2,876.6 3,142.1 3,142.1 Senior Notes 785.0 784.9 305.0 304.7 Long-Term Debt 439.5 450.4 427.8 432.2 Floating Rate Capital Securities 267.4 267.7 -- -- Liabilities on Acceptances 31.4 31.4 44.7 44.7 - -------------------------------------------------------------------------------------------------------
FAIR VALUES OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The following tables summarize the fair values of off-balance sheet financial instruments.
- ------------------------------------------- December 31 - ------------------------------------------- 1997 1996 - ------------------------------------------- Book Fair Book Fair (In Millions) Value Value Value Value - ------------------------------------------- Commitments and Letters of Cred- it: Loan Commit- ments $ 2.1 $ 2.1 $ 2.1 $ 2.1 Letters of Credit 1.0 1.0 .7 .7 Asset/Liability Management: Foreign Ex- change Contracts Assets 1.9 1.9 2.9 2.9 Liabilities 1.7 1.7 -- -- Interest Rate Swap Contracts Assets 13.1 15.1 14.8 19.2 Liabilities 8.2 39.9 5.8 23.5 Other Financial Instruments Assets .3 .4 .1 .1 Liabilities .4 .4 -- -- - -------------------------------------------
- ---------------------------------------------- Fair Value - ---------------------------------------------- (In Millions) 1997 1996 - ---------------------------------------------- Client-Related and Trading:* Foreign Exchange Contracts Assets $215.9 $142.0 Liabilities 214.7 142.0 Interest Rate Swap Contracts Assets .7 7.6 Liabilities .6 7.5 Interest Rate Protection Contracts Assets -- .1 Liabilities -- .1 - ----------------------------------------------
*Assets and liabilities associated with foreign exchange contracts averaged $249.1 million and $249.9 million, respectively, during 1997. Assets and lia- bilities associated with other client-related and trading account instruments averaged $4.5 million and $4.3 million, respectively, during 1997. 22. CONCENTRATIONS OF CREDIT RISK--The information in the section titled Loans and Other Extensions of Credit found on pages 32 through 33 is incorporated by reference. 23. PLEDGED AND RESTRICTED ASSETS--Certain of Northern Trust's subsidiaries, as required or permitted by law, pledge assets to secure public and trust depos- its, repurchase agreements and for other purposes. On December 31, 1997, secu- rities and loans totaling $6.2 billion ($3.2 billion of U.S. Government and agency securities, $400 million of obligations of states and political subdivi- sions and $2.6 billion of loans and other securities), were pledged. Collateral required for these purposes totaled $4.5 billion. Deposits maintained NORTHERN TRUST CORPORATION -------------------------- 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS at the Federal Reserve Bank to meet reserve requirements averaged $259.6 million in 1997 and $247.8 million in 1996. 24. STOCK-BASED COMPENSATION PLANS--Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," establishes financial ac- counting and reporting standards for stock-based compensation plans. SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based method, or (2) an intrinsic-value-based method which is prescribed by Account- ing Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Both the accounting and disclosure re- quirements of SFAS No. 123 were effective in 1996. Northern Trust has elected to continue accounting for its stock-based incentive plans and awards under APB 25, and has adopted the disclosure requirements of SFAS No. 123. A description of Northern Trust's stock-based compensation is presented below. AMENDED INCENTIVE STOCK PLAN--AMENDED 1992 INCENTIVE STOCK PLAN (PLANS). The Amended Incentive Stock Plan was superseded by the Amended 1992 Incentive Stock Plan and terminated on December 31, 1994. Outstanding grants and awards under the Amended Incentive Stock Plan will remain in effect in accordance with their terms, but no further grants or awards will be made. The Amended 1992 Incentive Stock Plan (Plan) was adopted in 1992 and has been amended on several occasions. The Plan is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. Non-employee direc- tors and key officers of the Corporation or its subsidiaries are eligible to receive awards under the Plan. Awards under the Plan may be granted in any one or a combination of (a) incentive stock options and non-qualified stock op- tions, (b) stock appreciation rights, (c) stock awards, (d) performance shares, and (e) stock equivalents. The total number of shares of the Corporation's common stock authorized for distribution under the Plan is 16,000,000. As of December 31, 1997, shares available for future grants under the Plan totaled 7,334,438. STOCK OPTIONS. Stock options consist of options to purchase common stock at purchase prices not less than 100% of the fair market value thereof on the date the option is granted. Options have a maximum 10 year life and will vest and become exercisable in 2 years after the date of grant. In addition, the Plan provides that all options may become exercisable upon a change of control as defined in the Plan. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants. A summary of the status of stock options under the Plans at December 31, 1997, 1996 and 1995 and changes during the years then ended is presented in the table below.
- ------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------ Options Outstanding, January 1 7,494,612 $19.96 7,468,946 $16.52 7,574,804 $14.05 Granted ($56.63 to $59.94 per share) 1,178,500 56.63 1,315,700 33.16 1,259,600 23.41 Exercised ($6.96 to $23.50 per share) (1,214,310) 14.00 (1,242,034) 13.18 (1,280,458) 8.45 Cancelled (14,400) 27.67 (48,000) 21.77 (85,000) 19.97 - ------------------------------------------------------------------------------------------ Options Outstanding De- cember 31 ($6.96 to $59.94 per share) 7,444,402 $26.72 7,494,612 $19.96 7,468,946 $16.52 - ------------------------------------------------------------------------------------------ Options Exercisable, De- cember 31 4,958,202 $17.92 4,961,312 $15.62 5,120,346 $14.34 - ------------------------------------------------------------------------------------------
The following is a summary of outstanding and exercisable options under the Plans at December 31, 1997.
- ------------------------------------------------------------------- Options Outstanding - ------------------------------------------------------------------- Weighted Average Weighted Remaining Average Number Contractual Exercise Outstanding Life Price - ------------------------------------------------------------------- $6.96 to $15.50 per share 1,504,650* 2.5 Years $11.38 $18.63 to $23.50 per share 3,453,552* 6.5 Years 20.77 $26.78 to $59.94 per share 2,486,200 9.2 Years 44.28 - -------------------------------------------------------------------
*Exercisable NORTHERN TRUST CORPORATION -------------------------- 64 STOCK AWARDS. Under the Plans, stock awards or equivalents can be awarded by the Committee to participants which entitle them to receive a payment in cash or Northern Trust Corporation common stock based on such terms and conditions as the Committee deems appropriate. Total expense applicable to stock awards was $.9 million in 1997, $.5 million in 1996 and $.4 million in 1995. In 1997 and 1996, 49,750 shares and 12,000 shares, respectively, of restricted stock were awarded with a weighted average grant-date fair value of $56.63 and $26.78, respectively. No shares were awarded in 1995. As of December 31, 1997 restricted stock awards outstanding totaled 162,250 shares. These shares vest, subject to continuing employment, over a period of five to nine years. PERFORMANCE SHARES. Under the performance share provisions of the Plans, par- ticipants will be entitled to have each award credited to an account main- tained for them if established performance goals are achieved with distribu- tion after vesting. The value of shares earned but not yet distributed under the Plan is credited to performance share accounts and is shown in stockhold- ers' equity as common stock issuable-performance plan. Total salary expense for performance shares was $20.5 million in 1997, $9.7 million in 1996 and $5.6 million in 1995. In 1997, 1996 and 1995, 312,000 shares, 331,000 shares and 306,500 shares, respectively, were granted with a weighted average grant-date fair value of $44.25, $26.88 and $17.00, respec- tively. As of December 31, 1997, 436,778 shares of stock had been credited to performance share accounts subject to meeting vesting conditions and 1,006,944 shares had been granted, subject to meeting established performance goals and vesting conditions, for three-year performance periods ending in 1997 through 1999. DIRECTOR STOCK PLAN. Each non-employee director of the Corporation received or will receive a grant of 500 shares of common stock on the date of each annual meeting of stockholders in the years 1997, 1998 and 1999 under the Northern Trust Corporation 1997 Stock Plan for Non-Employee Directors adopted in Febru- ary 1997. OTHER STOCK-BASED COMPENSATION ARRANGEMENTS. The Corporation, in conjunction with an acquisition, awarded 432,280 restricted shares of the Corporation's common stock with a grant-date fair value of $23.75 to certain subsidiary em- ployee participants contingent upon continued employment, non-competition agreements and, in some cases, meeting predetermined performance goals. Total salary expense related to this arrangement totaled $2.9 million in 1997, $1.8 million in 1996 and $.3 million in 1995. PRO FORMA INFORMATION. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Cor- poration had accounted for its stock-based compensation under SFAS No. 123. For purposes of estimating the fair value of the Corporation's employee stock options at the grant-date, a Black-Scholes option pricing model was used with the following weighted average assumptions for 1997, 1996 and 1995, respec- tively: risk-free interest rates of 6.10%, 6.64% and 6.54%; dividend yields of 1.30%, 1.92% and 2.21%; volatility factors of the expected market price of the Corporation's common stock of 20.9%, 22.4% and 19.2%; and a weighted average expected life of the option of 6.0 years, 5.8 years and 5.8 years. The weighted average fair value of options granted in 1997, 1996 and 1995 was $17.20, $9.11 and $6.58, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the op- tions' two year vesting period. Under SFAS No. 123, options and awards granted prior to 1995 are not required to be included in the pro forma information. Because the SFAS No. 123 method of accounting has not been applied to options and other stock-based compensation granted prior to January 1, 1995, the re- sulting pro forma compensation cost may not be representative of that to be expected in future years. The Corporation's pro forma information follows:
- ---------------------------------------------- (In Millions Except Per Share Information) 1997 1996 1995 - ---------------------------------------------- Net Income as Re- ported $309.4 $258.8 $220.0 Pro Forma Adjust- ments Increase (Decrease) Due To: Stock Options (9.2) (4.8) (1.0) Performance Shares and Other Arrangements 8.1 1.4 .4 - ---------------------------------------------- Pro Forma Net Income $308.3 $255.4 $219.4 - ---------------------------------------------- Earnings Per Share as Reported: Basic $ 2.74 $ 2.27 $ 1.91 Diluted 2.66 2.21 1.86 Pro Forma Earnings Per Share: Basic $ 2.73 $ 2.24 $ 1.90 Diluted 2.64 2.18 1.86 - ----------------------------------------------
25. CASH-BASED COMPENSATION PLANS--Various incentive plans provide for cash incentives and bonuses to selected employees based upon accomplishment of cor- porate net income objectives, business unit goals and individual performance. The plans provide for acceleration of benefits in certain circumstances in- cluding a change in control. The estimated contributions to these plans are charged to salary expense and totaled $68.0 million in 1997, $45.3 million in 1996 and $35.7 million in 1995. 26. INTERNATIONAL OPERATIONS (BASED ON OBLIGOR'S DOMICILE)--Northern Trust's international activities are centered in the commercial banking, capital mar- kets and global custody businesses of the Bank, three overseas branches, one Edge Act subsidiary, the Hong Kong subsidiaries, NTGA, and Northern Trust of Florida. Total assets NORTHERN TRUST CORPORATION -------------------------- 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS employed in international operations were $3.3 billion on December 31, 1997, $2.8 billion on December 31, 1996 and $2.3 billion on December 31, 1995. Of these assets, $1.7 billion on December 31, 1997, $1.3 billion on December 31, 1996 and $1.1 billion on December 31, 1995 were employed in Europe. Net income from international operations includes the direct net income con- tributions of foreign branches, foreign subsidiaries and the Edge Act subsidi- ary. The Bank and Northern Trust of Florida international profit contributions reflect direct salary and other expenses of the business units, plus expense allocations for interest, occupancy, overhead and the provision for credit losses. The interest expense is allocated to international operations based on specifically matched or pooled funding. Allocations of indirect noninterest expenses related to international activities are not significant but, when made, are based on various methods such as time, space and number of employ- ees.
- ----------------------------------------------------------------------------------------------------- GEOGRAPHIC DISTRIBUTION OF SELECTED ASSETS - ----------------------------------------------------------------------------------------------------- December 31, 1997 December 31, 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------- Time Time Time Deposits Customers' Deposits Customers' Deposits Customers' with Acceptance with Acceptance with Acceptance (In Millions) Banks Loans Liability Banks Loans Liability Banks Loans Liability - ----------------------------------------------------------------------------------------------------- Europe $1,392.4 $ 92.2 $ -- $1,047.2 $ 97.1 $-- $ 849.6 $ 70.0 $ -- North America 454.4 85.6 -- 692.7 100.7 -- 323.6 123.4 -- Latin America -- 280.4* 1.5 -- 176.7* .2 236.7 170.7* 1.8 Asia-Pacific 436.3 12.0 .2 319.9 7.5 .3 158.1 40.1 .6 - ----------------------------------------------------------------------------------------------------- Total $2,283.1 $470.2 $1.7 $2,059.8 $382.0 $.5 $1,568.0 $404.2 $2.4 - -----------------------------------------------------------------------------------------------------
*Includes loans guaranteed by the Export-Import Bank of $148.0 million in 1997, $122.2 million in 1996 and $116.5 million in 1995. The majority of the remaining loans are trade-related.
- ----------------------------------------------------------------------------------------- GEOGRAPHIC DISTRIBUTION OF OPERATING PERFORMANCE - ----------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------- Gross Income Gross Income Gross Income Operating Before Net Operating Before Net Operating Before Net (In Millions) Income Taxes Income Income Taxes Income Income Taxes Income - ----------------------------------------------------------------------------------------- Europe $146.4 $30.7 $19.1 $ 73.5 $15.9 $ 9.9 $ 67.0 $14.9 $ 9.2 North America 258.7 26.3 16.4 187.1 19.7 12.2 113.8 15.4 9.5 Latin America 69.1 7.1 4.5 35.7 4.6 2.9 39.9 5.1 3.2 Asia-Pacific 123.1 22.7 14.1 97.5 15.7 9.8 105.8 20.3 12.6 - ----------------------------------------------------------------------------------------- Total $597.3 $86.8 $54.1 $393.8 $55.9 $34.8 $326.5 $55.7 $34.5 - -----------------------------------------------------------------------------------------
The table summarizes international performance based on the domicile of the primary obligor without regard to guarantors or the location of collateral. 27. ACQUISITIONS--On March 31, 1995, the Corporation completed the acquisition of Beach One Financial Services, Inc., parent company of The Beach Bank of Vero Beach, Florida. The acquisition was effected through a merger in which the Corporation issued 3,245,136 shares (adjusted for the two-for-one stock split payable to stockholders of record at December 2, 1996) of its common stock totaling $56.2 million. The Corporation accounted for the transaction as pooling-of-interests. Prior period consolidated financial statements were not restated due to the immateriality of the transaction. On July 31, 1995, the Corporation completed the acquisition of Tanglewood Bancshares, Inc., parent company of Tanglewood Bank N.A. of Houston, Texas for $32.5 million in cash. The transaction was recorded under the purchase method of accounting. Included in the acquisition cost were $14.4 million of goodwill and $5.8 million of other intangibles, which are being amortized over fifteen and ten years, respectively. On October 31, 1995, the Corporation completed the acquisition of RCB Inter- national Inc. (RCB), an international provider of institutional investment management services. RCB shareholders received at closing $11.0 million in cash, $.6 million in notes and 784,862 shares (adjusted for two-for-one split) of Corporation common stock. The transaction was recorded under the purchase method of accounting. In addition, 432,280 shares (adjusted for two-for-one stock split) of Corporation common stock and $2.6 million in cash were allo- cated for various deferred compensation plans and other deferred payment ar- rangements. Shares and cash available under these deferred payment arrange- ments are payable over one to seven years and are contingent upon continued employment, non-competition agreements and, in some cases, meeting predeter- mined performance goals. Included in the -- NORTHERN TRUST CORPORATION -------------------------- 66 acquisition cost of RCB were $18.8 million of goodwill and $8.0 million of other intangibles, both of which are being amortized over a fifteen year period. In August 1996, RCB's name was changed to Northern Trust Global Advisors, Inc. On November 15, 1996, the Corporation completed the acquisition of Metroplex Bancshares, Inc., parent company of Bent Tree National Bank (Bent Tree) in Dal- las, Texas for $14.6 million in cash. The transaction was recorded under the purchase method of accounting. Included in the acquisition cost were $6.0 mil- lion of goodwill and $2.1 million of other intangibles, which are being amor- tized over fifteen and ten years, respectively. Bent Tree was merged into Northern Trust Bank of Texas N.A. during the first quarter of 1997. On December 31, 1997, the Corporation completed the acquisition of ANB Invest- ment Management and Trust Company (ANB IMC) from First Chicago NBD Corporation for $53 million in cash. The transaction was recorded under the purchase method of accounting. Included in the acquisition cost were $36.0 million of goodwill and $10.0 million of other intangibles which will be amortized over 15 and 10 years, respectively. ANB IMC, whose name has been changed to Northern Trust Quantitative Advisors, Inc., is a leading manager of index funds with approxi- mately $30 billion of assets under management at December 31, 1997. 28. REGULATORY CAPITAL REQUIREMENTS--Northern Trust and its subsidiary banks are subject to various regulatory capital requirements administered by the fed- eral bank regulatory authorities. Under these requirements, banks must maintain specific ratios of total and tier I capital to risk-weighted assets and of tier I capital to average assets in order to be classified as "well capitalized." The regulatory capital requirements impose certain restrictions upon banks that meet minimum capital requirements but are not "well capitalized" and obligate the federal bank regulatory authorities to take "prompt corrective action" with respect to banks that do not maintain such minimum ratios. Such prompt correc- tive action could have a direct material effect on a bank's financial state- ments. As of December 31, 1997, each of Northern's subsidiary banks had capital ra- tios above the level required for classification as a "well capitalized" insti- tution and had not received any regulatory notification of a lower classifica- tion. There are no conditions or events since that date that management be- lieves have adversely affected the capital categorization of any subsidiary bank for these purposes. The following table summarizes the risk-based capital amounts and ratios for Northern Trust and for each of its subsidiary banks whose net income for 1997 exceeded 10% of the consolidated total.
- ---------------------------------------------------------------------------------- Minimum to Qualify as Well Actual Capitalized - ---------------------------------------------------------------------------------- ($ In Millions) Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------- AS OF DECEMBER 31, 1997: Total Capital to Risk-Weighted Assets Consolidated $2,345 12.8% $1,834 10.0% The Northern Trust Company 1,687 10.9 1,549 10.0 Northern Trust Bank of Florida N.A. 191 11.1 173 10.0 Tier 1 Capital to Risk-Weighted Assets Consolidated 1,762 9.6 1,101 6.0 The Northern Trust Company 1,269 8.2 929 6.0 Northern Trust Bank of Florida N.A. 174 10.1 104 6.0 Tier 1 Capital (to Fourth Quarter Average Assets) Consolidated 1,762 6.9 1,282 5.0 The Northern Trust Company 1,269 5.7 1,104 5.0 Northern Trust Bank of Florida N.A. 174 7.3 119 5.0 As of December 31, 1996: Total Capital to Risk-Weighted Assets Consolidated $1,944 11.9% $1,638 10.0% The Northern Trust Company 1,512 10.8 1,399 10.0 Northern Trust Bank of Florida N.A. 170 11.1 153 10.0 Tier 1 Capital to Risk-Weighted Assets Consolidated 1,341 8.2 983 6.0 The Northern Trust Company 1,091 7.8 839 6.0 Northern Trust Bank of Florida N.A. 154 10.0 92 6.0 Tier 1 Capital (to Fourth Quarter Average Assets) Consolidated 1,341 6.4 1,045 5.0 The Northern Trust Company 1,091 6.1 888 5.0 Northern Trust Bank of Florida N.A. 154 7.4 104 5.0 - ----------------------------------------------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29. NORTHERN TRUST CORPORATION (CORPORATION ONLY)--Condensed financial infor- mation is presented below. Investments in wholly-owned subsidiaries are carried on the equity method of accounting.
- ------------------------------------------------------------ CONDENSED BALANCE SHEET - ------------------------------------------------------------ December 31 - ------------------------------------------------------------ (In Millions) 1997 1996 - ------------------------------------------------------------ ASSETS Cash on Deposit with Subsidiary Bank $ .6 $ -- Time Deposits with International Banks 279.4 101.0 Securities 139.8 149.6 Investments in Wholly-Owned Subsidiaries--Bank Subsidiaries 1,633.1 1,415.3 --Nonbank Subsidiaries 92.4 44.1 Loans--Nonbank Subsidiaries 8.3 16.2 --Other 1.4 27.6 Buildings and Equipment 7.6 7.8 Other Assets 180.1 96.1 - ------------------------------------------------------------ Total Assets $2,342.7 $1,857.7 - ------------------------------------------------------------ LIABILITIES Commercial Paper $ 146.8 $ 149.0 Long-Term Debt 383.5 116.6 Other Liabilities 73.4 48.0 - ------------------------------------------------------------ Total Liabilities 603.7 313.6 STOCKHOLDERS' EQUITY 1,739.0 1,544.1 - ------------------------------------------------------------ Total Liabilities and Stockholders' Equity $2,342.7 $1,857.7 - ------------------------------------------------------------
- ------------------------------------------------------------------ CONDENSED STATEMENT OF INCOME - ------------------------------------------------------------------ For the Year Ended December 31 (In Millions) 1997 1996 1995 - ------------------------------------------------------------------ Operating Income Dividends-Bank Subsidiaries $ 85.5 $113.9 $134.3 -Nonbank Subsidiaries 5.6 1.6 1.6 Intercompany Interest and Other Charges 20.0 10.2 11.4 Interest and Other Income 7.2 8.0 11.3 - ------------------------------------------------------------------ Total Operating Income 118.3 133.7 158.6 - ------------------------------------------------------------------ Operating Expenses Interest Expense 33.3 18.9 20.6 Other Operating Expenses 13.1 6.9 7.2 - ------------------------------------------------------------------ Total Operating Expenses 46.4 25.8 27.8 - ------------------------------------------------------------------ Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 71.9 107.9 130.8 Benefit for Income Taxes (10.3) (5.1) (6.1) - ------------------------------------------------------------------ Income before Equity in Undistributed Net Income of Subsidiaries 82.2 113.0 136.9 Equity in Undistributed Net Income of Subsidiaries Bank Subsidiaries 219.9 137.9 76.1 Nonbank Subsidiaries 7.3 7.9 7.0 - ------------------------------------------------------------------ NET INCOME $309.4 $258.8 $220.0 - ------------------------------------------------------------------ Net Income Applicable to Common Stock $304.4 $253.9 $211.5 - ------------------------------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 68
- ----------------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------- For the Year Ended December 31 - ----------------------------------------------------------------------------------------- (In Millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 309.4 $ 258.8 $ 220.0 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Net Income of Subsidiaries (227.2) (145.8) (83.1) (Increase) Decrease in Accrued Income (1.2) .9 .6 Increase in Prepaid Expenses (3.0) (.3) (.1) Other, net 8.7 11.0 (6.8) - ----------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 86.7 124.6 130.6 - ----------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Net Increase in Time Deposits with Banks (178.4) (5.4) (53.6) Purchases of Securities (392.1) (354.4) (279.4) Sales of Securities 369.6 361.3 173.7 Proceeds from Maturity and Redemption of Securities 32.8 19.2 142.0 Capital Investments in Subsidiaries (61.2) (14.6) (43.5) Net Decrease in Loans to Subsidiaries 7.9 47.2 25.0 Net Decrease in Other Loans .2 .2 .3 Other, net (.2) (.5) (2.6) - ----------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities (221.4) 53.0 (38.1) - ----------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net Increase (Decrease) in Commercial Paper (2.2) 2.3 22.9 Repayment of Long-Term Debt (8.8) (10.2) (10.2) Proceeds from Long-Term Debt Issued to Subsidiaries 275.6 -- -- Treasury Stock Purchased (66.2) (118.2) (63.7) Cash Dividends Paid on Common and Preferred Stock (85.3) (74.7) (65.8) Net Proceeds from Stock Options 13.0 12.1 9.0 Other, net 9.2 10.9 13.2 - ----------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 135.3 (177.8) (94.6) - ----------------------------------------------------------------------------------------- Net Change in Cash on Deposit with Subsidiary Bank .6 (.2) (2.1) Cash on Deposit with Subsidiary Bank at Beginning of Year -- .2 2.3 - ----------------------------------------------------------------------------------------- CASH ON DEPOSIT WITH SUBSIDIARY BANK AT END OF YEAR $ .6 $ -- $ .2 - -----------------------------------------------------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 69 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS, NORTHERN TRUST CORPORATION: - -------------------------------------------------------------------------------- We have audited the accompanying consolidated balance sheet of Northern Trust Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stock- holders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting 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 financial statements referred to above present fairly, in all material respects, the financial position of Northern Trust Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their opera- tions and their cash flows for each of the three years in the period ended De- cember 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois, January 20, 1998 NORTHERN TRUST CORPORATION -------------------------- 70 CONSOLIDATED FINANCIAL STATISTICS
- --------------------------------------------------------------------------------- AVERAGE BALANCE SHEET - --------------------------------------------------------------------------------- ($ In Millions) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 1,095.4 $ 1,072.9 $ 1,178.7 $ 1,206.6 $ 1,025.3 Federal Funds Sold and Securities Purchased under Agreements to Resell 815.3 333.3 204.2 237.0 171.3 Time Deposits with Banks 2,574.7 1,699.5 1,643.9 2,063.3 1,956.8 Other Interest-Bearing 52.6 50.7 16.6 119.9 73.5 Securities U.S. Government and Other 5,956.4 5,940.9 5,703.9 4,482.0 3,700.2 Obligations of States and Political Subdivisions 408.8 414.1 434.7 465.1 502.3 Trading Account 9.0 8.8 54.4 53.8 29.5 - --------------------------------------------------------------------------------- Total Securities 6,374.2 6,363.8 6,193.0 5,000.9 4,232.0 - --------------------------------------------------------------------------------- Loans and Leases Commercial and Other 6,967.7 6,084.0 5,556.3 5,183.1 4,704.9 Residential Mortgages 4,845.2 4,248.1 3,579.7 3,133.0 2,592.2 - --------------------------------------------------------------------------------- Total Loans and Leases 11,812.9 10,332.1 9,136.0 8,316.1 7,297.1 - --------------------------------------------------------------------------------- Reserve for Credit Losses (148.1) (147.5) (146.2) (145.2) (145.5) Other Assets 1,474.7 1,259.5 1,183.3 1,087.2 1,089.7 - --------------------------------------------------------------------------------- Total Assets $24,051.7 $20,964.3 $19,409.5 $17,885.8 $15,700.2 - --------------------------------------------------------------------------------- LIABILITIES Deposits Demand and Other Noninterest-Bearing $ 2,963.9 $ 2,732.9 $ 2,747.3 $ 2,592.5 $ 2,554.9 Savings and Money Market 3,895.4 3,620.7 3,312.4 3,385.7 3,432.1 Savings Certificates 2,035.8 2,062.4 2,000.3 1,229.6 1,172.9 Other Time 717.3 549.2 542.7 412.8 404.7 Foreign Offices-Demand 486.4 347.8 299.1 361.7 65.3 -Time 4,971.2 3,826.2 3,493.4 3,284.8 2,436.4 - --------------------------------------------------------------------------------- Total Deposits 15,070.0 13,139.2 12,395.2 11,267.1 10,066.3 - --------------------------------------------------------------------------------- Federal Funds Purchased 1,690.2 1,842.2 1,564.0 1,350.7 1,692.5 Securities Sold under Agreements to Repurchase 1,519.9 1,973.3 1,769.7 1,444.3 664.4 Commercial Paper 142.7 143.7 146.0 138.1 131.5 Other Borrowings 2,120.9 1,274.1 1,034.5 1,007.5 940.8 Senior Notes 539.3 267.5 394.0 781.8 554.1 Long-Term Debt 435.8 360.7 271.3 293.6 297.9 Floating Rate Capital Securities 224.1 -- -- -- -- Other Liabilities 679.3 477.9 462.1 377.2 279.6 - --------------------------------------------------------------------------------- Total Liabilities 22,422.2 19,478.6 18,036.8 16,660.3 14,627.1 - --------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY 1,629.5 1,485.7 1,372.7 1,225.5 1,073.1 - --------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $24,051.7 $20,964.3 $19,409.5 $17,885.8 $15,700.2 - --------------------------------------------------------------------------------- RATIOS Dividend Payout Ratio 27.5% 28.5% 28.6% 28.4% 25.6% Return on Average Assets 1.29 1.23 1.13 1.02 1.07 Return on Average Common Equity 20.17 18.64 17.58 16.57 17.89 Tier 1 Capital to Risk- Weighted Assets-End of Period 9.61 8.19 8.82 8.95 9.31 Total Capital to Risk- Weighted Assets-End of Period 12.78 11.87 12.49 12.36 13.41 Leverage Ratio 6.87 6.42 6.19 6.22 6.24 Average Stockholders' Equity to Average Assets 6.78 7.09 7.07 6.85 6.83 Average Loans and Leases Times Average Stockholders' Equity 7.2X 7.0x 6.7x 6.8x 6.8x - --------------------------------------------------------------------------------- Stockholders-End of Period 3,380 3,335 3,331 2,962 2,922 Staff-End of Period (Full-time equivalent) 7,553 6,933 6,531 6,608 6,259 - ---------------------------------------------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 72 CONSOLIDATED FINANCIAL STATISTICS
- ------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME - ------------------------------------------------------------------------------- (Interest and Rate on a Taxable Equivalent Basis) 1997 1996 - ------------------------------------------------------------------------------- ($ In Millions) Interest Volume Rate Interest Volume Rate - ------------------------------------------------------------------------------- AVERAGE EARNING ASSETS Money Market Assets Federal Funds Sold and Resell Agreements $ 45.9 $ 815.3 5.63% $ 18.3 $ 333.3 5.49% Time Deposits with Banks 133.5 2,574.7 5.18 84.9 1,699.5 5.00 Other 3.0 52.6 5.68 3.0 50.7 5.91 - ------------------------------------------------------------------------------- Total Money Market Assets 182.4 3,442.6 5.30 106.2 2,083.5 5.10 - ------------------------------------------------------------------------------- Securities U.S. Government 48.8 822.9 5.94 97.6 1,702.0 5.73 Obligations of States and Political Subdivisions 38.1 408.8 9.32 40.8 414.1 9.86 Federal Agency 281.9 4,890.1 5.77 228.4 4,010.7 5.69 Other 14.9 243.4 6.11 13.7 228.2 6.00 Trading Account .7 9.0 7.33 .6 8.8 7.09 - ------------------------------------------------------------------------------- Total Securities 384.4 6,374.2 6.03 381.1 6,363.8 5.99 - ------------------------------------------------------------------------------- Loans and Leases 798.7 11,812.9 6.76 697.8 10,332.1 6.75 - ------------------------------------------------------------------------------- Total Earning Assets $1,365.5 $21,629.7 6.32% $1,185.1 $18,779.4 6.31% - ------------------------------------------------------------------------------- AVERAGE SOURCE OF FUNDS Deposits Savings and Money Market $ 125.8 $ 3,895.4 3.23% $ 114.3 $ 3,620.7 3.16% Savings Certificates 117.2 2,035.8 5.76 119.1 2,062.4 5.78 Other Time 39.4 717.3 5.50 29.9 549.2 5.44 Foreign Offices Time 239.8 4,971.2 4.82 184.5 3,826.2 4.82 - ------------------------------------------------------------------------------- Total Deposits 522.2 11,619.7 4.49 447.8 10,058.5 4.45 Federal Funds Purchased 92.4 1,690.2 5.47 97.9 1,842.2 5.31 Securities Sold Under Agreements to Repurchase 81.7 1,519.9 5.38 103.4 1,973.3 5.24 Commercial Paper 7.9 142.7 5.54 7.8 143.7 5.40 Other Borrowings 112.4 2,120.9 5.30 64.5 1,274.1 5.07 Senior Notes 30.9 539.3 5.75 14.4 267.5 5.37 Long-Term Debt 32.6 435.8 7.48 27.4 360.7 7.59 Floating Rate Capital Securities 14.5 224.1 6.49 -- -- -- - ------------------------------------------------------------------------------- Total Interest-Related Funds 894.6 18,292.6 4.89 763.2 15,920.0 4.79 - ------------------------------------------------------------------------------- Interest Rate Spread -- -- 1.43% -- -- 1.52% - ------------------------------------------------------------------------------- Noninterest-Related Funds -- 3,337.1 -- -- 2,859.4 -- - ------------------------------------------------------------------------------- Total Source of Funds $ 894.6 $21,629.7 4.14% $ 763.2 $18,779.4 4.06% - ------------------------------------------------------------------------------- Net Interest Income/Margin $ 470.9 -- 2.18% $ 421.9 -- 2.25% - ------------------------------------------------------------------------------- NET INTEREST INCOME/MARGIN COMPONENTS Domestic $ 466.0 $18,492.2 2.52% $ 420.6 $16,678.5 2.52% International 4.9 3,137.5 .16 1.3 2,100.9 .06 - ------------------------------------------------------------------------------- Consolidated $ 470.9 $21,629.7 2.18% $ 421.9 $18,779.4 2.25%
Notes-Average volume includes nonaccrual loans. -Interest on loans and money market assets includes fees of $3.9 million in 1997, $4.3 million in 1996, $5.1 million in 1995, $6.8 million in 1994 and $13.9 million in 1993. -Total interest income includes adjustments on loans and securities (primarily obligations of states and political subdivisions) to a taxable equivalent basis. Such adjustments are based on the U.S. federal income tax rate (35%) and State of Illinois income tax rate (7.18%) before giving effect to the deductibility of state taxes for federal income tax purposes. Lease financing receivable balances are reduced by deferred income. Total taxable equivalent interest adjustments amounted to $32.7 million in 1997, $33.6 million in 1996, $37.6 million in 1995, $33.4 million in 1994 and $34.1 million in 1993. -Yields on the portion of the securities portfolio classified as available for sale are based on amortized cost. NORTHERN TRUST CORPORATION -------------------------- 74
- --------------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------- Interest Volume Rate Interest Volume Rate Interest Volume Rate - --------------------------------------------------------------------------------- $ 12.3 $ 204.2 6.02% $ 10.9 $ 237.0 4.59% $ 5.5 $ 171.3 3.24% 92.1 1,643.9 5.60 97.8 2,063.3 4.74 86.5 1,956.8 4.42 1.1 16.6 6.88 5.2 119.9 4.31 2.6 73.5 3.53 - --------------------------------------------------------------------------------- 105.5 1,864.7 5.66 113.9 2,420.2 4.71 94.6 2,201.6 4.30 - --------------------------------------------------------------------------------- 70.4 1,225.7 5.74 73.8 1,779.6 4.15 102.5 2,646.6 3.87 46.8 434.7 10.75 52.8 465.1 11.35 58.6 502.3 11.66 258.8 4,124.8 6.28 114.2 2,333.6 4.90 29.7 773.9 3.84 22.0 353.4 6.21 19.6 368.8 5.31 13.6 279.7 4.88 3.8 54.4 7.04 4.3 53.8 7.91 2.2 29.5 7.52 - --------------------------------------------------------------------------------- 401.8 6,193.0 6.49 264.7 5,000.9 5.29 206.6 4,232.0 4.88 - --------------------------------------------------------------------------------- 634.3 9,136.0 6.94 503.5 8,316.1 6.05 439.3 7,297.1 6.02 - --------------------------------------------------------------------------------- $1,141.6 $17,193.7 6.64% $882.1 $15,737.2 5.61% $740.5 $13,730.7 5.39% - --------------------------------------------------------------------------------- $ 109.1 $ 3,312.4 3.29% $ 85.3 $ 3,385.7 2.52% $ 78.8 $ 3,432.1 2.30% 120.6 2,000.3 6.03 56.9 1,229.6 4.63 50.5 1,172.9 4.31 31.5 542.7 5.81 18.6 412.8 4.50 15.7 404.7 3.88 182.1 3,493.4 5.21 137.2 3,284.8 4.18 90.4 2,436.4 3.71 - --------------------------------------------------------------------------------- 443.3 9,348.8 4.74 298.0 8,312.9 3.58 235.4 7,446.1 3.16 91.2 1,564.0 5.83 55.5 1,350.7 4.11 51.1 1,692.5 3.02 102.6 1,769.7 5.80 61.9 1,444.3 4.28 20.0 664.4 3.00 8.6 146.0 5.87 5.9 138.1 4.31 4.3 131.5 3.23 55.6 1,034.5 5.38 36.0 1,007.5 3.57 26.0 940.8 2.76 23.7 394.0 6.00 33.8 781.8 4.32 18.4 554.1 3.33 21.4 271.3 7.88 23.0 293.6 7.84 23.3 297.9 7.84 -- -- -- -- -- -- -- -- -- - --------------------------------------------------------------------------------- 746.4 14,528.3 5.14 514.1 13,328.9 3.86 378.5 11,727.3 3.22 - --------------------------------------------------------------------------------- -- -- 1.50% -- -- 1.75% -- -- 2.17% - --------------------------------------------------------------------------------- -- 2,665.4 -- -- 2,408.3 -- -- 2,003.4 -- - --------------------------------------------------------------------------------- $ 746.4 $17,193.7 4.34% $514.1 $15,737.2 3.27% $378.5 $13,730.7 2.75% - --------------------------------------------------------------------------------- $ 395.2 -- 2.30% $368.0 -- 2.34% $362.0 -- 2.64% - --------------------------------------------------------------------------------- $ 392.6 $15,193.7 2.58% $357.3 $12,890.4 2.77% $344.2 $11,491.0 3.00% 2.6 2,000.0 .13 10.7 2,846.8 .38 17.8 2,239.7 .79 - --------------------------------------------------------------------------------- $ 395.2 $17,193.7 2.30% $368.0 $15,737.2 2.34% $362.0 $13,730.7 2.64% - ---------------------------------------------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 75 CONSOLIDATED FINANCIAL STATISTICS
- ------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA - ------------------------------------------------------------------------------- STATEMENT OF INCOME 1997 - ------------------------------------------------------------------------------- (In Millions Except Per Entire Fourth Third Second First Share Information) Year Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------- Interest Income $ 1,332.8 361.8 339.2 331.8 300.0 Interest Expense 894.6 248.5 229.6 222.6 193.9 - ------------------------------------------------------------------------------- Net Interest Income 438.2 113.3 109.6 109.2 106.1 Provision for Credit Losses 9.0 3.0 5.0 .5 .5 Trust Fees 689.2 185.2 177.4 168.3 158.3 Other Noninterest Income 245.3 62.1 77.3 54.9 51.0 Noninterest Expenses 891.8 233.6 234.7 217.0 206.5 Provision for Income Taxes 162.5 42.7 43.6 39.5 36.7 - ------------------------------------------------------------------------------- NET INCOME $ 309.4 81.3 81.0 75.4 71.7 - ------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 304.4 80.0 79.7 74.2 70.5 - ------------------------------------------------------------------------------- PER COMMON SHARE Net Income-Basic $ 2.74 .72 .72 .67 .64 -Diluted 2.66 .70 .70 .65 .62 - ------------------------------------------------------------------------------- AVERAGE BALANCE SHEET (In Millions) ASSETS Cash and Due from Banks $ 1,095.4 1,094.5 1,056.2 1,073.9 1,158.0 Money Market Assets 3,442.6 3,938.4 3,553.1 3,371.1 2,895.1 Securities 6,374.2 6,879.2 6,232.1 6,514.5 5,861.1 Loans and Leases 11,812.9 12,502.5 12,001.2 11,610.4 11,120.5 Reserve for Credit Losses (148.1) (147.8) (148.2) (148.4) (148.3) Other Assets 1,474.7 1,501.7 1,469.0 1,438.2 1,490.5 - ------------------------------------------------------------------------------- Total Assets $24,051.7 25,768.5 24,163.4 23,859.7 22,376.9 - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand and Other Noninterest-Bearing $ 2,963.9 3,003.7 2,934.0 2,880.7 3,037.8 Savings and Other Interest-Bearing 5,931.2 5,993.2 5,840.6 5,918.7 5,973.2 Other Time 717.3 709.4 771.0 772.6 614.6 Foreign Offices 5,457.6 6,526.4 5,749.8 4,993.4 4,535.5 - ------------------------------------------------------------------------------- Total Deposits 15,070.0 16,232.7 15,295.4 14,565.4 14,161.1 Purchased Funds 5,473.7 5,648.5 4,961.0 6,132.0 5,153.3 Senior Notes 539.3 793.7 844.0 245.1 265.0 Long-Term Debt 435.8 443.7 443.6 427.9 427.8 Floating Rate Capital Securities 224.1 267.4 267.3 236.0 123.8 Other Liabilities 679.3 679.1 702.1 647.6 688.6 Stockholders' Equity 1,629.5 1,703.4 1,650.0 1,605.7 1,557.3 - ------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $24,051.7 25,768.5 24,163.4 23,859.7 22,376.9 - ------------------------------------------------------------------------------- ANALYSIS OF NET INTEREST INCOME ($ In Millions) Earning Assets $21,629.7 23,320.1 21,786.4 21,496.0 19,876.7 Interest-Related Funds 18,292.6 19,870.2 18,388.5 18,235.5 16,639.6 Noninterest-Related Funds 3,337.1 3,449.9 3,397.9 3,260.5 3,237.1 Net Interest Income (Taxable equivalent) 470.9 121.5 117.6 117.7 114.1 Net Interest Margin (Taxable equivalent) 2.18% 2.07 2.14 2.20 2.33 - ------------------------------------------------------------------------------- COMMON STOCK DIVIDEND AND MARKET PRICE Dividends $ .75 .21 .18 .18 .18 Market Price Range-High 71.50 71.50 59.50 51.875 45.25 -Low 34.00 54.625 47.25 35.875 34.00 - -------------------------------------------------------------------------------
Note: Per common share data has been restated to reflect the two-for-one stock split effected through a 100% stock distribution on December 9, 1996. The common stock of Northern Trust Corporation is traded on the Nasdaq National Market under the symbol NTRS. NORTHERN TRUST CORPORATION -------------------------- 76
- ----------------------------------------------------------- 1996 - ----------------------------------------------------------- Entire Fourth Third Second First Year Quarter Quarter Quarter Quarter - ----------------------------------------------------------- $ 1,151.5 290.6 289.9 286.1 284.9 763.2 190.0 191.1 190.6 191.5 - ----------------------------------------------------------- 388.3 100.6 98.8 95.5 93.4 12.0 .5 2.5 4.0 5.0 594.4 152.6 148.2 149.2 144.4 185.6 48.7 46.6 46.5 43.8 768.9 200.5 191.8 192.1 184.5 128.6 33.5 32.8 31.7 30.6 - ----------------------------------------------------------- $ 258.8 67.4 66.5 63.4 61.5 - ----------------------------------------------------------- $ 253.9 66.2 65.3 62.2 60.2 - ----------------------------------------------------------- $ 2.27 .60 . 58 .55 .54 2.21 .58 . 57 .54 .52 - ----------------------------------------------------------- $ 1,072.9 1,074.7 972.6 1,047.6 1,197.8 2,083.5 2,197.1 2,082.6 1,987.2 2,065.9 6,363.8 5,715.7 6,257.1 6,755.7 6,734.9 10,332.1 10,832.7 10,533.9 10,176.7 9,777.3 (147.5) (147.9) (147.4) (147.3) (147.2) 1,259.5 1,315.8 1,291.5 1,208.2 1,221.3 - ----------------------------------------------------------- $20,964.3 20,988.1 20,990.3 21,028.1 20,850.0 - ----------------------------------------------------------- $ 2,732.9 2,773.7 2,620.4 2,686.0 2,852.5 5,683.1 5,735.3 5,596.4 5,713.2 5,687.8 549.2 599.4 523.0 462.6 611.4 4,174.0 4,270.0 4,375.0 4,146.7 3,901.2 - ----------------------------------------------------------- 13,139.2 13,378.4 13,114.8 13,008.5 13,052.9 5,233.3 4,847.2 5,317.0 5,530.2 5,242.4 267.5 296.3 205.0 254.5 314.4 360.7 431.9 339.7 335.9 334.8 -- -- -- -- -- 477.9 512.8 523.3 424.5 449.7 1,485.7 1,521.5 1,490.5 1,474.5 1,455.8 - ----------------------------------------------------------- $20,964.3 20,988.1 20,990.3 21,028.1 20,850.0 - ----------------------------------------------------------- $18,779.4 18,745.5 18,873.6 18,919.6 18,578.1 15,920.0 15,786.9 16,021.7 16,103.6 15,768.2 2,859.4 2,958.6 2,851.9 2,816.0 2,809.9 421.9 108.4 107.2 104.3 102.0 2.25% 2.30 2.26 2.22 2.21 - ----------------------------------------------------------- $ .645 .18 .155 .155 .155 37.75 37.75 34.00 29.00 28.125 24.625 32.00 28.375 25.375 24.625 - -----------------------------------------------------------
NORTHERN TRUST CORPORATION -------------------------- 77 Corporate Structure Northern Trust Corporation 50 South LaSalle Street, Chicago, Illinois 60675 (312) 630-6000 Principal Subsidiary The Northern Trust Company 50 South LaSalle Street, Chicago, Illinois 60675 120 East Oak Street, Chicago, Illinois 60611 125 South Wacker Drive, Chicago, Illinois 60675 7801 South State Street, Chicago, Illinois 60619 8501 West Higgins Road, Chicago, Illinois 60631 6401 North Harlem Avenue, Chicago, Illinois 60631 826 S. Northwest Highway, Barrington, Illinois 60010 579 Central Avenue, Highland Park, Illinois 60035 120 East Scranton Avenue, Lake Bluff, Illinois 60044 265 Deerpath Road, Lake Forest, Illinois 60045 959 South Waukegan Road, Lake Forest, Illinois 60045 701 South McKinley Road, Lake Forest, Illinois 60045 400 East Diehl Road, Naperville, Illinois 60563 One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181 1501 Woodfield Road, Schaumburg, Illinois 60173 62 Green Bay Road, Winnetka, Illinois 60093 London Branch 155 Bishopsgate, London EC2M 3XS, England Cayman Islands Branch P.O. Box 501, Georgetown, Cayman Islands, British West Indies Singapore Branch 80 Raffles Place, #46-02, UOB Plaza 1, Singapore 048624 Subsidiaries of The Northern Trust Company The Northern Trust International Banking Corporation One World Trade Center, New York, New York 10048 Northern Global Financial Services Limited 18 Harbour Road, Wanchai Hong Kong Northern Trust Trade Services Limited Asia Pacific Tower, 17th Floor, 3 Garden Road, Central, Hong Kong Northern Trust Fund Managers (Ireland) Limited George's Dock House International Financial Services Centre Dublin 1, Ireland NorLease, Inc. 50 South LaSalle Street, Chicago, Illinois 60675 The Northern Trust Company, Canada 161 Bay Street, Suite 4540, Canada Trust Tower, B.C.E. Place Toronto, Ontario, Canada M5J 2S1 International Affiliate Transatlantic Trust Corporation 75 Rochford Street, P.O. Box 429 Charlottetown, Prince Edward Island, Canada C1A 7K7 Other Subsidiaries of the Corporation Northern Trust Bank of Florida N.A. 700 Brickell Avenue, Miami, Florida 33131 595 Biltmore Way, Coral Gables, Florida 33134 328 Crandon Boulevard, Suite 101, Key Biscayne, Florida 33149 3001 Aventura Boulevard, Aventura, Florida 33180 8600 NW 17th Street, Suite 120, Miami, Florida 33126 1100 East Las Olas Boulevard, Fort Lauderdale, Florida 33301 2601 East Oakland Park Boulevard, Fort Lauderdale, Florida 33306 301 Yamato Road, Boca Raton, Florida 33431 770 East Atlantic Avenue, Delray Beach, Florida 33483 440 Royal Palm Way, Palm Beach, Florida 33480 11780 U.S. Highway 1, Suite 100, North Palm Beach, Florida 33408 2201 S.E. Kingswood Terrace, Monterey Commons, Stuart, Florida 34996 755 Beachland Boulevard, Vero Beach, Florida 32963 1440 A1A, Vero Beach, Florida 32963 4001 Tamiami Trail North, Naples, Florida 34103 530 Fifth Avenue South, Naples, Florida 34102 26790 South Tamiami Trail, Bonita Springs, Florida 34134 8060 College Parkway S.W., Fort Myers, Florida 33919 1515 Ringling Boulevard, Sarasota, Florida 34236 901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292 540 Bay Isles Road, Longboat Key, Florida 34228 233 15th Street West, Bradenton, Florida 34205 100 Second Avenue South, St. Petersburg, Florida 33701 425 North Florida Avenue, Tampa, Florida 33602 NORTHERN TRUST CORPORATION -------------------------- 80 CORPORATE STRUCTURE - -------------------------------------------------------------------------------- Other Subsidiaries of the Corporation continued Northern Trust Bank of Arizona N.A. 2398 East Camelback Road, Phoenix, Arizona 85016 6373 East Tanque Verde Road, Tucson, Arizona 85715 10220 West Bell Road, Sun City, Arizona 85351 10015 West Royal Oak Road, Sun City, Arizona 85351 7001 North Scottsdale Road, Scottsdale, Arizona 85253 19432 R. H. Johnson Boulevard, Sun City West, Arizona 85375 1525 South Greenfield Road, Mesa, Arizona 85206 3450 E. Sunrise Drive, Tucson, Arizona 85718 Northern Trust Bank of California N.A. 355 South Grand Avenue, Suite 2600, Los Angeles, California 90071 620 Newport Center Drive, Suite 200, Newport Beach, California 92660 4370 LaJolla Village Drive, Suite 1000, San Diego, California 92122 1125 Wall Street, La Jolla, California 92037 206 East Anapamu Street, Santa Barbara, California 93101 1485 East Valley Road, (Montecito), Santa Barbara, California 93108 580 California Street, Suite 1800, San Francisco, California 94104 10877 Wilshire Boulevard (Westwood), Suite 100, Los Angeles, California 90024 74--900 Highway 111, Suite 221, Indian Wells, California 92210 Northern Trust Bank of Texas N.A. 2020 Ross Avenue, Dallas, Texas 75201 5540 Preston Road, Dallas, Texas 75205 16475 Dallas Parkway, Dallas, Texas 75248 2701 Kirby Drive, Houston, Texas 77098 600 Bering Drive, Houston, Texas 77057 10000 Memorial Drive, Houston, Texas 77024 700 Rusk Street, Houston, Texas 77002 Northern Trust Global Advisors, Inc. 300 Atlantic Street, Suite 400, Stamford, Connecticut 06901 The Northern Trust Company of Connecticut 300 Atlantic Street, Suite 400, Stamford, Connecticut 06901 NT Global Advisors, Inc. 161 Bay Street, Suite 4540, Canada Trust Tower, B.C.E. Place, Toronto, Ontario, Canada M5J 2S1 NT Fund Advisors of Quebec, Inc. 770 Sherbrooke Street West, Suite 1420, Montreal, Quebec, Canada H3A 1G1 Northern Trust Global Advisors, Limited One Gloster Court, Whittle Avenue, Segensworth West, Fareham, Hampshire PO15 5SH, England Northern Trust Quantitative Advisors, Inc. 50 South LaSalle Street, Chicago, Illinois 60675 The Northern Trust Company of New York 40 Broad Street, New York, New York 10004 Northern Trust Cayman International, Ltd. P.O. Box 1586, Grand Cayman, Cayman Islands, British West Indies Northern Trust Securities, Inc. 50 South LaSalle Street, Chicago, Illinois 60675 Berry, Hartell, Evers & Osborne, Inc. 580 California Street, Suite 1900, San Francisco, California 94104 Northern Trust Retirement Consulting, L.L.C. 400 Perimeter Center Terrace, Suite 850, Atlanta, Georgia 30346 19119 North Creek Parkway, Suite 200, Bothell, Washington 98011 Northern Futures Corporation 50 South LaSalle Street, Chicago, Illinois 60675 ================================================================================ NORTHERN TRUST CORPORATION -------------------------- 81 EX-21 5 SUBSIDIARIES EXHIBIT NUMBER (21) TO 1997 FORM 10-K NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1998
Percent Jurisdiction of Owned Incorporation ------- --------------- The Northern Trust Company 100% Illinois NorLease, Inc. 100% Delaware MFC Company, Inc. 100% Delaware The Northern Trust Company, Canada 100% Ontario, Canada Nortrust Nominees Ltd. 100% London The Northern Trust Company U.K. Pension Plan Limited 100% London The Northern Trust International Banking Corporation 100% Edge Act Nortrust International Finance (Hong Kong) Ltd. 100% Hong Kong Northern Global Financial Services Ltd. 100% Hong Kong Northern Trust Trade Services Limited 100% Hong Kong Northern Trust Fund Managers (Ireland) Limited 100% Ireland Northern Trust of Florida Corporation 100% Florida Northern Trust Cayman International, Ltd. 100% Cayman Islands, BWI Northern Trust Bank of Florida N.A. 100% National Bank Realnor Properties, Inc. 100% Florida Realnor Special Properties, Inc. 100% Florida Realnor 1177, Inc. 100% Florida Realnor Hallandale, Inc. 100% Florida Nortrust of Arizona Holding Corporation 100% Arizona Northern Trust Bank of Arizona N.A. 100% National Bank Northern Trust of California Corporation 100% Delaware Northern Trust Bank of California N.A. 100% National Bank Berry, Hartell, Evers & Osborne, Inc. 100% Delaware Metroplex Bancshares, Inc. 100% Texas Metroplex Delaware Financial Corporation 100% Delaware Northern Trust Bank of Texas N.A. 75.5% National Bank Fiduciary Services Inc. 100% Texas Tanglewood Bancshares, Inc. 100% Texas Northern Trust Bank of Texas N.A. 24.5% National Bank Northern Futures Corporation 100% Delaware
NORTHERN TRUST CORPORATION SUBSIDIARIES AS OF MARCH 1, 1998 (continued)
Percent State of Owned Incorporation ------- ------------- Northern Trust Holdings L.L.C. 100% Delaware Northern Investment Corporation 100% Delaware Northern Investment Management Company 100% Delaware Northern Trust Securities, Inc. 100% Delaware Northern Trust Services, Inc. 100% Illinois Nortrust Realty Management, Inc. 100% Illinois The Northern Trust Company of New York 100% New York Northern Trust Retirement Consulting, L.L.C. 100% Delaware Northern Trust Global Advisors, Inc. 100% Delaware NT Global Advisors, Inc. 100% Ontario, Canada Northern Trust Global Advisors Limited 100% England The Northern Trust Company of Connecticut 100% Connecticut NT Fund Advisors of Quebec, Inc. 100% Quebec, Canada Northern Trust Quantitative Advisors, Inc. 100% Illinois NTC Capital I 100% Delaware NTC Capital II 100% Delaware
EX-23 6 CONSENT OF ACCOUNTANTS EXHIBIT NUMBER (23) TO 1997 FORM 10-K CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 20, 1998, incorporated by reference in Northern Trust Corporation's Annual Report on Form 10-K for the year ended December 31, 1997, into the Corporation's previously filed Form S-8 Registration Statements File Nos. 33-22546, 33-47597, 33-51971, 33-63843, 333-00809, 333-25135, 333- 25283 and 333-35685; and the Corporation's previously filed Form S-3 Nos. 333- 18951, 333-45203 and 333-25649. ARTHUR ANDERSEN LLP Chicago, Illinois March 13, 1998 EX-24 7 POWERS OF ATTORNEY EXHIBIT NUMBER (24) TO 1997 FORM 10-K POWER OF ATTORNEY - ----------------- KNOW ALL MEN BY THESE PRESENTS: That the undersigned officers and directors of Northern Trust Corporation hereby severally constitute and appoint William A. Osborn, Perry R. Pero and Peter L. Rossiter, and each of them singly, our true and lawful attorneys and agents with full power to them and each of them singly, to sign for us in our names, in the capacities indicated below, Form 10-K, annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 1997, and to file such Form, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to such attorneys and agents, and each of them, full power of substitution and revocation in the premises, and generally to do all such things in our name and behalf in our capacities as officers and directors to enable Northern Trust Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming our signatures as they may be signed by our attorneys, or any one of them, to such Form, and all that our attorneys and agents, or any of them, may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned have hereunto executed this Power of Attorney this 17th day of February, 1998. ------- William A. Osborn Barry G. Hastings - ---------------------------- ---------------------------- William A. Osborn Barry G. Hastings Chairman of the Board, Chief President, Chief Operating Executive Officer and Director Officer and Director Perry R. Pero Harry W. Short - ---------------------------- ---------------------------- Perry R. Pero Harry W. Short Senior Executive Vice President Senior Vice President and Controller and Chief Financial Officer (Chief Accounting Officer) Duane L. Burnham Delores E. Cross - ---------------------------- ---------------------------- Duane L. Burnham Delores E. Cross Director Director Susan Crown Robert S. Hamada - ---------------------------- ---------------------------- Susan Crown Robert S. Hamada Director Director Robert A. Helman Arthur L. Kelly - ---------------------------- ---------------------------- Robert A. Helman Arthur L. Kelly Director Director Frederick A. Krehbiel William G. Mitchell - ---------------------------- ---------------------------- Frederick A. Krehbiel William G. Mitchell Director Director Edward J. Mooney Harold B. Smith - ---------------------------- ---------------------------- Edward J. Mooney Harold B. Smith Director Director William D. Smithburg Bide L. Thomas - ---------------------------- ---------------------------- William D. Smithburg Bide L. Thomas Director Director STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) I, Victoria Antoni, a Notary Public, DO HEREBY CERTIFY that the above named directors and officers of Northern Trust Corporation, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person, and severally acknowledged that they signed and delivered the instrument as their free and voluntary act, for the uses and purposes therein set forth. GIVEN under my hand and notarial seal this 17th day of February, 1998. -------- Victoria Antoni ---------------------- Notary Public My Commission Expires: 7/25/99 - ---------------------------- EX-27 8 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheet and the Consolidated Statement of Income and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,738,860 2,283,200 2,991,741 8,814 3,733,301 456,129 473,402 12,588,223 147,638 25,315,380 16,359,942 5,612,467 740,189 863,761 189,935 120,000 0 1,429,086 25,315,380 793,113 356,785 182,916 1,332,814 522,243 894,666 438,148 9,000 720 891,800 471,909 309,393 0 0 309,393 2.74 2.66 2.18 38,923 13,857 2,505 0 148,327 14,409 4,719 147,638 110,125 28 37,485
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