<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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
----------------------
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
--- ---
111,679,056 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on June 30, 1997)
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item.1 Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
June 30 December 31 June 30
---------- ----------- -------
($ In Millions) 1997 1996 1996
- ------------------------------------------------------------------------------------- ---------- ----------- -------
<S> <C> <C> <C>
Assets
Cash and Due from Banks $ 1,791.6 $ 1,292.5 $ 1,232.9
Federal Funds Sold and Securities Purchased under Agreements to Resell 1,919.9 1,022.6 361.3
Time Deposits with Banks 1,945.8 2,060.0 1,905.4
Other Interest-Bearing 75.6 114.3 78.5
Securities
Available for Sale 6,556.1 4,311.7 5,795.9
Held to Maturity (Fair value - $491.8 at June 1997, $518.9 at
December 1996, $523.9 at June 1996) 474.0 498.4 504.1
Trading Account 5.8 4.8 3.3
- ------------------------------------------------------------------------------------- --------- --------- ---------
Total Securities 7,035.9 4,814.9 6,303.3
- ------------------------------------------------------------------------------------- --------- --------- ---------
Loans and Leases
Commercial and Other 7,097.0 6,379.9 6,104.4
Residential Mortgages 4,861.1 4,557.5 4,300.8
- ------------------------------------------------------------------------------------- --------- --------- ---------
Total Loans and Leases (Net of unearned income - $126.4 at June 1997, $109.1 at
December 1996, $91.1 at June 1996) 11,958.1 10,937.4 10,405.2
- ------------------------------------------------------------------------------------- --------- --------- ---------
Reserve for Credit Losses (148.4) (148.3) (147.4)
Buildings and Equipment 312.0 291.5 289.2
Customers' Acceptance Liability 41.3 44.7 34.0
Trust Security Settlement Receivables 254.9 362.3 382.8
Other Assets 864.3 816.4 906.0
- ------------------------------------------------------------------------------------- --------- --------- ---------
Total Assets $26,051.0 $21,608.3 $21,751.2
- ------------------------------------------------------------------------------------- --------- --------- ---------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 3,809.6 $ 3,476.7 $ 2,892.6
Savings and Money Market Deposits 3,918.1 3,880.1 3,689.6
Savings Certificates 2,034.8 2,056.3 2,063.6
Other Time 857.6 462.7 456.7
Foreign Offices - Demand 543.3 410.7 382.4
- Time 4,727.7 3,509.7 3,782.9
- ------------------------------------------------------------------------------------- --------- --------- ---------
Total Deposits 15,891.1 13,796.2 13,267.8
Federal Funds Purchased 621.1 653.0 1,096.0
Securities Sold Under Agreements to Repurchase 1,059.2 966.1 1,699.0
Commercial Paper 149.4 149.0 144.2
Other Borrowings 4,654.4 3,142.1 3,077.2
Senior Notes 655.0 305.0 205.0
Long-Term Debt (Qualifying as risk-based capital-$315.0 at June 1997, $334.6 at
December 1996, $234.6 at June 1996) 443.5 427.8 332.1
Floating Rate Capital Securities (Qualifies as risk-based capital) 267.3 - -
Liability on Acceptances 41.3 44.7 34.0
Other Liabilities 619.8 580.3 402.2
- ------------------------------------------------------------------------------------- --------- --------- ---------
Total Liabilities 24,402.1 20,064.2 20,257.5
- ------------------------------------------------------------------------------------- --------- --------- ---------
Stockholders' Equity
Preferred Stock 120.0 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized 280,000,000 shares at June 1997, and
140,000,000 shares at December 1996 and June 1996; Outstanding 111,679,056 at
June 1997, 111,247,732 at December 1996 and 56,272,053 at June 1996 189.9 189.9 95.0
Capital Surplus 224.5 231.7 329.5
Retained Earnings 1,214.4 1,110.2 1,016.4
Net Unrealized Gain (Loss) on Securities Available for Sale 2.2 1.6 (1.1)
Common Stock Issuable - Performance Plan 11.7 10.4 10.4
Deferred Compensation - ESOP and Other (35.7) (35.5) (37.7)
Treasury Stock - (at cost, 2,281,706 shares at June 1997, 2,712,780 shares at
December 1996, and 707,526 shares at June 1996) (78.1) (84.2) (38.8)
- ------------------------------------------------------------------------------------- --------- --------- ---------
Total Stockholders' Equity 1,648.9 1,544.1 1,493.7
- ------------------------------------------------------------------------------------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $26,051.0 $21,608.3 $21,751.2
- ------------------------------------------------------------------------------------- --------- --------- ---------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
Second Quarter Six Months
Ended June 30 Ended June 30
------------------------ -------------------------
($ In Millions Except Per Share Information) 1997 1996 1997 1996
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income
Loans and Leases $195.9 $169.3 $379.5 $333.2
Securities
Available For Sale 83.6 83.5 155.7 168.5
Held to Maturity 7.8 8.1 15.7 16.5
Trading Account .2 .1 .3 .3
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Total Securities 91.6 91.7 171.7 185.3
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Time Deposits with Banks 31.5 20.9 58.7 43.7
Federal Funds Sold and Securities Purchased under Agreements to Resell
and Other Interest-Bearing 12.8 4.2 21.9 8.8
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Total Interest Income 331.8 286.1 631.8 571.0
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Interest Expense
Deposits 124.4 109.6 238.6 221.1
Federal Funds Purchased 19.0 22.5 38.6 51.2
Securities Sold under Agreements to Repurchase 17.6 28.0 39.3 54.1
Commercial Paper 1.9 2.0 3.8 3.9
Other Borrowings 44.3 18.7 67.2 31.5
Senior Notes 3.5 3.4 7.2 7.5
Long-Term Debt 8.0 6.4 16.0 12.8
Floating Rate Capital Securities 3.9 - 5.8 -
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Total Interest Expense 222.6 190.6 416.5 382.1
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net Interest Income 109.2 95.5 215.3 188.9
Provision for Credit Losses .5 4.0 1.0 9.0
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net Interest Income after Provision for Credit Losses 108.7 91.5 214.3 179.9
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Noninterest Income
Trust Fees 168.3 149.2 326.6 293.6
Treasury Management Fees 15.0 14.5 29.6 27.5
Foreign Exchange Trading Profits 23.9 15.1 44.3 27.6
Security Commissions and Trading Income 6.6 6.4 12.5 12.7
Other Operating Income 9.4 10.4 18.9 22.1
Investment Security Gains - .1 .6 .4
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Total Noninterest Income 223.2 195.7 432.5 383.9
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Income before Noninterest Expenses 331.9 287.2 646.8 563.8
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Noninterest Expenses
Salaries 107.6 90.0 209.0 177.7
Pension and Other Employee Benefits 20.5 18.4 41.6 38.8
Occupancy Expense 16.4 14.9 32.5 30.0
Equipment Expense 14.9 14.1 29.8 28.1
Other Operating Expenses 57.6 54.7 110.6 102.0
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Total Noninterest Expenses 217.0 192.1 423.5 376.6
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Income before Income Taxes 114.9 95.1 223.3 187.2
Provision for Income Taxes 39.5 31.7 76.2 62.3
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net Income $ 75.4 $ 63.4 $147.1 $124.9
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net Income Applicable to Common Stock $ 74.2 $ 62.2 $144.7 $122.4
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net Income Per Common Share - Primary $ .65 $ .54 $ 1.26 $ 1.07
- Fully Diluted .65 .54 1.26 1.06
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Average Number of Common Shares Outstanding - Primary 114,483,841 114,889,434 114,566,949 114,935,654
- Fully Diluted 114,790,430 115,171,150 114,837,949 115,609,548
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST CORPORATION
Six Months
Ended June 30
----------------------
(In Millions) 1997 1996
- --------------------------------------------------------------------- -------- --------
<S> <C> <C>
Preferred Stock
Balance at January 1 $ 120.0 $ 170.0
Conversion of Preferred Stock, Series E - (50.0)
- --------------------------------------------------------------------- -------- --------
Balance at June 30 120.0 120.0
- --------------------------------------------------------------------- -------- --------
Common Stock
Balance at January 1 189.9 93.6
Conversion of Preferred Stock, Series E - 1.4
- --------------------------------------------------------------------- -------- --------
Balance at June 30 189.9 95.0
- --------------------------------------------------------------------- -------- --------
Capital Surplus
Balance at January 1 231.7 306.1
Stock Issued - Incentive Plan and Awards (7.2) (5.8)
Conversion of Preferred Stock, Series E - 29.2
- --------------------------------------------------------------------- -------- --------
Balance at June 30 224.5 329.5
- --------------------------------------------------------------------- -------- --------
Retained Earnings
Balance at January 1 1,110.2 928.8
Net Income 147.1 124.9
Dividends Declared on Common Stock (40.2) (35.0)
Dividends Declared on Preferred Stock (2.7) (2.3)
- --------------------------------------------------------------------- -------- --------
Balance at June 30 1,214.4 1,016.4
- --------------------------------------------------------------------- -------- --------
Net Unrealized Gain (Loss) on Securities Available for Sale
Balance at January 1 1.6 2.6
Unrealized Gain (Loss), net .6 (3.7)
- --------------------------------------------------------------------- -------- --------
Balance at June 30 2.2 (1.1)
- --------------------------------------------------------------------- -------- --------
Common Stock Issuable - Performance Plan
Balance at January 1 10.4 14.7
Stock Issuable, net of Stock Issued 1.3 (4.3)
- --------------------------------------------------------------------- -------- --------
Balance at June 30 11.7 10.4
- --------------------------------------------------------------------- -------- --------
Deferred Compensation - ESOP and Other
Balance at January 1 (35.5) (39.4)
Compensation Deferred (4.6) (1.9)
Compensation Amortized 4.4 3.6
- --------------------------------------------------------------------- -------- --------
Balance at June 30 (35.7) (37.7)
- --------------------------------------------------------------------- -------- --------
Treasury Stock
Balance at January 1 (84.2) (23.8)
Stock Options and Awards 38.0 28.9
Stock Purchased (31.9) (63.1)
Conversion of Preferred Stock, Series E - 19.2
- --------------------------------------------------------------------- -------- --------
Balance at June 30 (78.1) (38.8)
- --------------------------------------------------------------------- -------- --------
Total Stockholders' Equity at June 30 $1,648.9 $1,493.7
- --------------------------------------------------------------------- -------- --------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION
Six Months
Ended June 30
------------------------------
(In Millions) 1997 1996
- ---------------------------------------------------------------------------------------- --------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 147.1 $ 124.9
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 1.0 9.0
Depreciation on Buildings and Equipment 24.7 23.7
Decrease in Interest Receivable 7.3 -
Increase in Interest Payable 10.0 3.0
Amortization and Accretion of Securities and Unearned Income (92.8) (55.7)
Amortization of Software, Goodwill and Other Intangibles 23.4 21.9
Net (Increase) Decrease in Trading Account Securities (1.0) 85.6
Other Noncash, net (26.1) (237.9)
- ---------------------------------------------------------------------------------------- --------------- --------------
Net Cash Provided by (Used in) Operating Activities 93.6 (25.5)
- ---------------------------------------------------------------------------------------- --------------- --------------
Cash Flows From Investing Activities:
Net Increase in Federal Funds Sold and Securities Purchased under Agreements to Resell (897.3) (199.2)
Net (Increase) Decrease in Time Deposits with Banks 114.2 (337.8)
Net (Increase) Decrease in Other Interest-Bearing Assets 38.7 (24.0)
Purchases of Securities-Held to Maturity (67.1) (141.5)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 92.3 175.9
Purchases of Securities-Available for Sale (29,308.7) (20,717.9)
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 27,173.2 20,092.8
Net Increase in Loans and Leases (1,041.0) (510.5)
Purchases of Buildings and Equipment (25.2) (31.4)
Net (Increase) Decrease in Trust Security Settlement Receivables 107.4 (55.7)
Other, net (3.4) (13.4)
- ---------------------------------------------------------------------------------------- ---------------- -------------
Net Cash Used in Investing Activities (3,816.9) (1,762.7)
- ---------------------------------------------------------------------------------------- ---------------- -------------
Cash Flows From Financing Activities:
Net Increase in Deposits 2,094.9 779.6
Net Decrease in Federal Funds Purchased (31.9) (1,204.1)
Net Increase (Decrease) in Securities Sold under Agreements to Repurchase 93.1 (159.7)
Net Increase (Decrease) in Commercial Paper .4 (2.5)
Net Increase in Short-Term Other Borrowings 1,526.4 2,358.2
Proceeds from Term Federal Funds Purchased 260.4 1,340.9
Repayments of Term Federal Funds Purchased (274.5) (1,497.8)
Proceeds from Senior Notes & Long-Term Debt 552.8 701.5
Repayments of Senior Notes & Long-Term Debt (207.1) (516.0)
Proceeds from Floating Rate Capital Securities 267.3 -
Treasury Stock Purchased (28.6) (58.8)
Net Proceeds from Stock Options 8.6 5.2
Cash Dividends Paid on Common and Preferred Stock (42.7) (37.3)
Other, net 3.3 3.0
- ---------------------------------------------------------------------------------------- ---------------- -------------
Net Cash Provided by Financing Activities 4,222.4 1,712.2
- ---------------------------------------------------------------------------------------- ---------------- -------------
Increase (Decrease) in Cash and Due from Banks 499.1 (76.0)
Cash and Due from Banks at Beginning of Year 1,292.5 1,308.9
- ---------------------------------------------------------------------------------------- ---------------- -------------
Cash and Due from Banks at June 30 $ 1,791.6 $ 1,232.9
- ---------------------------------------------------------------------------------------- ---------------- -------------
Schedule of Noncash Investing and Financing Activities:
Conversion of Preferred Stock, Series E to Common Stock $ - $ 49.7
Building and Capital lease Obligation 20.0 -
Supplemental Disclosures of Cash Flow Information:
Interest Paid on Deposits and Short- and Long-Term Borrowings $ 406.6 $ 379.1
Income Taxes Paid 40.1 34.9
- ---------------------------------------------------------------------------------------- ---------------- -------------
</TABLE>
5
<PAGE>
Notes to Consolidated Financial Statements
1. Accounting Policies
A. Basis of Presentation - The consolidated financial statements include the
accounts of Northern Trust Corporation and its subsidiaries ("Northern
Trust"), all of which are wholly owned. Significant intercompany balances
and transactions have been eliminated. The consolidated financial
statements as of June 30, 1997 and 1996 have not been audited by
independent public accountants. In the opinion of management, all
adjustments necessary for a fair presentation of the financial position and
the results of operations for the interim periods have been made. All such
adjustments are of a normal recurring nature. 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. For a description of Northern Trust's significant accounting
policies, refer to the Notes to Consolidated Financial Statements in the
1996 Annual Report to Stockholders.
Per share data and average shares outstanding for 1996 have been restated
to give effect to the two-for-one stock split effected by means of a 100%
stock distribution on December 9, 1996.
B. Interest Risk Management Instruments - The Securities and Exchange
Commission recently adopted new rules that require more detailed disclosure
of accounting policies for derivative financial instruments. The following
accounting policy disclosures supplement the disclosures included in Note
1f of the Notes to Consolidated Financial Statements in the 1996 Annual
Report to Stockholders and are presented below in response to the new
rules.
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.
Asset/Liability Management Instruments. Interest rate swaps are the primary
interest risk management instrument used for asset/liability management
purposes. 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. The hedge
accounting method is applied to interest rate swaps that meet the hedge
criteria listed on the following page. Under this method, the accrued
interest income or expense on the swap is recognized as a component of the
interest income or expense of the hedged item. 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
available for sale securities are reported in stockholders' equity, net of
applicable taxes.
6
<PAGE>
1. Accounting Policies (continued)
Hedge Criteria for Interest Rate Swaps:
1) The swap must reduce Northern Trust's interest rate risk.
2) The swap must 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.
3) The notional amount of the swap must be less than or equal to the par
amount of the item being hedged.
4) 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 interest risk management instrument is terminated or ceases to qualify
for hedge accounting treatment, 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 on instruments
that no longer meet the hedge criteria 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 interest risk
management instrument at the time of the transaction is considered in the
calculation of the gain or loss on the sale. If the interest risk management
instrument 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.
Cash collected and disbursed in connection with interest risk management
instruments is reported in the consolidated statement of cash flows under the
heading "Cash Flows From Operating Activities".
7
<PAGE>
2. Securities - The following table summarizes the book and fair values of
securities:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 June 30, 1996
---------------------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Government $ 66.1 $ 66.1 $ 73.4 $ 73.5 $ 114.2 $ 114.1
Obligations of States and
Political Subdivisions 298.0 316.8 315.9 336.3 341.3 361.2
Federal Agency 16.2 16.2 18.2 18.2 18.2 18.2
Other 93.7 92.7 90.9 90.9 30.4 30.4
- -----------------------------------------------------------------------------------------------------------------------
Subtotal 474.0 491.8 498.4 518.9 504.1 523.9
- -----------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 739.6 739.6 906.7 906.7 1,763.9 1,763.9
Obligations of States and
Political Subdivisions 118.4 118.4 117.0 117.0 79.5 79.5
Federal Agency 5,523.8 5,523.8 3,096.9 3,096.9 3,779.9 3,779.9
Preferred Stock 137.0 137.0 139.4 139.4 110.7 110.7
Other 37.3 37.3 51.7 51.7 61.9 61.9
- -----------------------------------------------------------------------------------------------------------------------
Subtotal 6,556.1 6,556.1 4,311.7 4,311.7 5,795.9 5,795.9
- -----------------------------------------------------------------------------------------------------------------------
Trading Account 5.8 5.8 4.8 4.8 3.3 3.3
- -----------------------------------------------------------------------------------------------------------------------
Total Securities $7,035.9 $7,053.7 $4,814.9 $4,835.4 $6,303.3 $6,323.1
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity June 30, 1997
- -----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Book ----------------- Fair
(In Millions) Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 66.1 $ -- $ -- $ 66.1
Obligations of States and Political Subdivisions 298.0 18.8 -- 316.8
Federal Agency 16.2 .1 .1 16.2
Other 93.7 -- 1.0 92.7
- -----------------------------------------------------------------------------------------------------------------
Total $ 474.0 $18.9 $1.1 $491.8
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale June 30, 1997
- -----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized ----------------- Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 739.4 $ .8 $ .6 $ 739.6
Obligations of States and Political Subdivisions 114.5 3.9 -- 118.4
Federal Agency 5,523.7 2.0 1.9 5,523.8
Preferred Stock 137.1 -- .1 137.0
Other 38.2 -- .9 37.3
- -----------------------------------------------------------------------------------------------------------------
Total $6,552.9 $6.7 $3.5 $6,556.1
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $2.7 million and $2.4 million,
respectively, as of June 30, 1997. At June 30, 1997, stockholders' equity
included a credit of $2.2 million, net of tax, to recognize the appreciation on
securities available for sale and the related hedges.
3. Pledged Assets - Securities and loans pledged to secure public and trust
deposits, repurchase agreements and for other purposes as required or permitted
by law were $8.2 billion on June 30, 1997, $5.5 billion on December 31, 1996 and
$6.3 billion on June 30, 1996.
4. Contingent Liabilities - Standby letters of credit outstanding were $1.4
billion on June 30, 1997, $1.3 billion on December 31, 1996 and $1.3 billion on
June 30, 1996.
5. Loans and Leases - The following table summarizes amounts outstanding in
selected loan categories:
<TABLE>
<CAPTION>
(In Millions) June 30, December 31, June 30,
1997 1996 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Residential Real Estate $ 4,861.1 $ 4,557.5 $ 4,300.8
Commercial and Industrial 3,463.2 3,161.4 3,293.8
Broker 334.0 389.1 284.2
Commercial Real Estate 602.2 557.7 577.9
Consumer 1,104.0 989.8 803.4
Other 643.2 632.1 468.0
Lease Financing 295.3 267.8 209.3
- ------------------------------------------------------------------------------
Total Domestic 11,303.0 10,555.4 9,937.4
International 655.1 382.0 467.8
Total Loans and Leases $11,958.1 $10,937.4 $10,405.2
- ------------------------------------------------------------------------------
</TABLE>
At June 30, 1997, other domestic and international loans included $847.0 million
of overnight trust-related advances primarily in connection with next day
security settlements, compared with $765.3 million at December 31, 1996 and
$588.6 million at June 30, 1996.
At June 30, 1997, nonperforming loans totaled $55.3 million. Included in this
amount were loans with a recorded investment of $52.7 million which were also
classified as impaired. A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans
totaling $12.0 million had no portion of the reserve for credit losses allocated
to them, while $40.7 million had an allocated reserve of $3.4 million. For the
second quarter of 1997, the total recorded investment in impaired loans averaged
$28.0 million. Total interest income recorded on impaired loans for the quarter
ended June 30,1997 was $26 thousand, recognized on the accrual-basis method of
accounting.
9
<PAGE>
At June 30, 1996, nonperforming loans totaled $38.9 million and included $35.4
million of impaired loans. Of these impaired loans, $14.6 million had no reserve
allocation while $20.8 million had an allocated reserve of $1.0 million.
Impaired loans for the second quarter of 1996 averaged $27.8 million with $166
thousand of interest income recognized principally on the cash-basis method of
accounting.
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as
follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30
----------------
(In Millions) 1997 1996
- -------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $148.3 $147.1
Charge-Offs
Commercial Real Estate (.6) (3.9)
Other (2.4) (5.7)
International - (.2)
- -------------------------------------------------
Total Charge-Offs (3.0) (9.8)
- -------------------------------------------------
Recoveries 2.1 1.1
- -------------------------------------------------
Net Charge-Offs (.9) (8.7)
Provision for Credit Losses 1.0 9.0
- -------------------------------------------------
Balance at End of Period $148.4 $147.4
- -------------------------------------------------
</TABLE>
7. Floating Rate Capital Securities - On April 25, 1997, the Corporation
issued, through a separate wholly owned statutory business trust, $120 million
of Floating Rate Capital Securities, Series B, which qualify as tier 1 capital.
These securities were issued at a discount to yield 67.9 basis points above the
three-month London Interbank Offered Rate (LIBOR) and mature on April 15, 2027.
8. Earnings Per Share - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard (SFAS) No. 128,
"Earnings Per Share". This new statement establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS is
computed by dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period. This approach
differs from the current methodology for calculating primary net income per
share which also considers common stock equivalents, such as stock options and
stock awards. SFAS No. 128 also requires the presentation of diluted EPS, which
is computed similarly to fully diluted EPS pursuant to Accounting Principles
Board Opinion No. 15.
10
<PAGE>
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. It requires the restatement of all prior period EPS data presented.
The following data, which is presented for comparative purposes only, shows the
pro forma effect on EPS of adopting SFAS No. 128:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30 June 30
--------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings Per Share (as reported)
Primary $.65 $.54 $1.26 $1.07
Fully Diluted .65 .54 1.26 1.06
- ----------------------------------------------------------------------------------------
Pro Forma Earnings Per Share
(computed according to SFAS No. 128)
Basic $.67 $.55 $1.30 $1.09
Diluted .65 .54 1.26 1.06
- ----------------------------------------------------------------------------------------
</TABLE>
9. Lease/Purchase Commitment - In June 1997, The Northern Trust Company (the
Bank) entered into an agreement to purchase a building and adjacent land located
across the street from the Bank's 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,
approximately two floors of this six-story building.
The transaction is being accounted for as a capital lease obligation. The
present value of the land and building is reported in buildings and equipment,
and the lease obligation appears in long-term debt in the consolidated balance
sheet.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER EARNINGS HIGHLIGHTS
Net income per common share on a fully diluted basis increased 20% to a record
$.65 for the second quarter, up from $.54 earned a year ago. Net income
increased 19% to a record $75.4 million from the $63.4 million earned in the
second quarter of last year. This earnings performance produced an annualized
return on average common equity (ROE) of 20.01% versus 18.47% reported last
year, and an annualized return on average assets (ROA) of 1.27% versus 1.21% in
1996. Total revenues stated on a fully taxable equivalent basis increased 14% in
the quarter to $340.9 million. Trust fees, foreign exchange trading profits and
net interest income all registered double-digit growth, while noninterest
expenses increased 13%.
The 20% earnings per share growth significantly exceeded Northern Trust's
strategic financial target for this measure and return on common equity was at
the upper end of its 18-20% strategic target. The productivity ratio, which is
derived by dividing total taxable equivalent revenue by noninterest expenses,
was 157%. Northern Trust's recently increased target for this measure is 160%.
NONINTEREST INCOME
Noninterest income increased 14% and totaled $223.2 million for the quarter,
accounting for 65% of total taxable equivalent revenue. Trust fees of $168.3
million increased 13% or $19.1 million over the like period of 1996, and
represented 75% of noninterest income and 49% of total taxable equivalent
revenue. This fee growth was driven by new business, increased transaction
volumes and higher market values of trust assets administered. Trust assets
under administration at June 30, 1997 increased 30% and totaled $898.4 billion
compared to $692.9 billion a year ago and $823.0 billion at March 31, 1997.
Trust fees from Personal Financial Services (PFS) increased 12% from the prior
year level of $72.3 million and totaled $81.1 million for the second quarter,
reflecting strong growth throughout Northern Trust's five-state network of PFS
offices. PFS trust fee growth resulted primarily from exceptionally strong new
business, with the ratio of new business to lost or terminated business
continuing to exceed the Corporation's 4:1 goal, and from favorable equity
markets. The PFS Wealth Management Group, which administers significant family-
asset pools nationwide, continued to achieve excellent performance, with trust
fees increasing 31% to $7.2 million, and now administers $25.6 billion of trust
assets. Total personal trust assets under administration increased $19.0 billion
from the prior year and $8.1 billion since March 31, 1997, and totaled $95.7
billion at June 30, 1997. Of this amount, $56.4 billion was under management
compared to $45.1 billion one year ago and $52.1 billion at March 31, 1997.
12
<PAGE>
NONINTEREST INCOME (continued)
During the second quarter of 1997, Northern Trust expanded its Florida presence
by opening the Doral office in Dade County, the 24th office in that state. With
the addition of this new office, Northern Trust's national network of PFS
offices consists of 61 locations in Illinois, Florida, California, Arizona and
Texas. Trust fees generated outside of Illinois now comprise approximately one-
half of total PFS trust fees.
Trust fees from Corporate and Institutional Services (C&IS) increased 13% to
$87.2 million from $76.9 million in the year-ago quarter. These fees are derived
from a full range of custody, investment and advisory services rendered to
retirement and other asset pools of corporate and institutional clients
worldwide, and all of these services contributed to the second quarter fee
growth. Securities lending, which generally benefits in the second quarter from
strong seasonal demand for international equity securities, continued to achieve
outstanding results, with fees increasing 35% from the prior year quarter to
$19.2 million. Fees from investment management services, including the
activities of Northern Trust Global Advisors, Inc., were also strong, increasing
25% from last year's second quarter. The overall increase in C&IS trust fees
reflects net new business, moderated by the effect of changing pricing
structures for client relationships which focus on total client revenues. These
revenues increasingly include earnings from custody-related deposits and foreign
exchange trading profits which are not reflected in trust fees. Approximately
two-thirds of net annualized fees on C&IS trust services sold in the quarter
came from new clients, reflecting continuing industry consolidation. C&IS trust
assets under administration grew $186.5 billion or 30% over last year and $67.3
billion since March 31, 1997, and now total $802.7 billion. Of this amount,
$102.0 billion is managed by Northern Trust, compared to $74.8 billion one year
ago and $91.4 billion at March 31, 1997. Trust assets under administration
included approximately $123 billion of global custody assets.
Foreign exchange trading profits established a record, increasing 58% to $23.9
million from $15.1 million in the year-ago quarter. The record profits resulted
from a combination of higher volumes and significant rate volatility. Factors
impacting foreign exchange rates during the quarter included the continued
uncertainty surrounding the viability of the proposed European monetary union,
the strengthening of the Japanese yen in relation to the U.S. dollar, and
increased volatility in several of the secondary Asian currencies.
Fees generated from treasury management services were $15.0 million, also a new
high, up from $14.5 million in the comparable quarter last year. Total treasury
management revenues from both fees and the computed value of compensating
deposit balances increased 5% from the second quarter of 1996 to $23.0 million,
reflecting the continued growth in new business from both new and existing
clients. The growth was concentrated primarily within the electronic-based
products.
13
<PAGE>
NONINTEREST INCOME (continued)
Security commissions and trading income totaled $6.6 million compared with $6.4
million reported in the second quarter of 1996. The slight increase was due
primarily to higher commission revenues at Northern Futures Corporation.
Other operating income primarily includes loan, letter of credit and deposit-
related service fees, and totaled $9.4 million for the quarter compared with
$10.4 million in the prior year. The decline from the prior year was due
primarily to lower balances held at banks serving as global subcustodians
resulting in a reduction in compensation received. The lower balances partially
reflect a more aggressive approach to investing these otherwise idle funds in
money market assets with the related benefit recognized in net interest income.
On July 15, 1997, The Northern Trust Company (Bank) reached a settlement with
Illinois banking regulators concerning the disposition of certain unclaimed
balances accumulated over a number of years. Based on the resolution of this
matter, the Bank will record approximately $10.0 million of other operating
income during the third quarter of this year.
NET INTEREST INCOME
Net interest income for the quarter totaled a record $109.2 million, 14% higher
than the $95.5 million reported in the second quarter of 1996. 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 activity. When net interest income is
adjusted to a fully taxable equivalent (FTE) basis, yields on taxable,
nontaxable and partially 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 the second quarter was $117.7 million, up 13% from the $104.3 million
reported in 1996. The increase in net interest income reflects growth in earning
assets and higher levels of noninterest-related funds, driven by increases in
both demand deposits and common equity. The net interest margin fell slightly to
2.20% from 2.22% reported in the year-ago quarter.
Earning assets for the second quarter averaged $21.5 billion, up 14% from the
$18.9 billion average for the same quarter of 1996. The $2.6 billion growth in
average earning assets was concentrated in the loan portfolio which increased
14% to average $11.6 billion and in money market assets which increased $1.4
billion on average from the prior year level. Securities declined $241 million
on average, concentrated within the short-term U.S. Government portfolio.
14
<PAGE>
NET INTEREST INCOME (continued)
The loan growth was concentrated primarily in the domestic portfolio.
Residential mortgage loans continued to account for the largest portion of the
domestic growth, increasing 14% to average $4.8 billion, comprising 41% of the
total loan portfolio. Commercial and industrial loans averaged $3.6 billion
during the second quarter compared to $3.3 billion in the prior year quarter.
Money market assets increased $1.4 billion to average $3.4 billion in the
quarter, principally driven by a higher level of foreign office time deposits
resulting from growth in global custody activities and the more active
investment of noninterest-bearing balances held with global subcustodians. The
securities portfolio declined 4% to average $6.5 billion as short-term U.S.
Government securities either matured or were sold.
Funding for the growth in earning assets came from several sources. Total
interest-bearing deposits averaged $11.2 billion, up 12% or $1.2 billion from
the second quarter of 1996. This growth came principally from foreign office
time deposits (up $696 million), savings and money market deposits (up $242
million), and other time deposits (up $310 million). The increase in foreign
office time deposits resulted primarily from growth in global custody activity.
The growth in other interest-related funds resulted from higher Treasury Tax and
Loan borrowings and the issuance of $270 million of Floating Rate Capital
Securities during the first half of 1997. Noninterest-related funds increased
16% to average $3.3 billion, due to strong demand deposit growth and a $131
million increase in common stockholders' equity resulting from retained
earnings.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $.5 million was down from $4.0 million
reported in the second quarter of 1996. For a discussion of the provision and
reserve for credit losses, refer to the Asset Quality section.
NONINTEREST EXPENSES
Noninterest expenses totaled $217.0 million for the quarter, up $24.9 million or
13% from the year-ago quarter. The expense growth resulted primarily from staff
growth, salary adjustments and higher costs for performance-based compensation.
In addition, expense growth was also driven by the continuing investments in
technology, PFS office expansion, the opening of a Singapore office, the
expansion of the global custody network and operating costs associated with the
growth in trust assets under administration.
Salaries and benefits, which represent 59% of total noninterest expenses,
increased to $128.1 million from $108.4 million in the year-ago quarter. The
increase in salaries and benefits resulted from salary adjustments and an 8%
increase in staff levels from
15
<PAGE>
NONINTEREST EXPENSES (continued)
one year ago required to support new office expansion, growth initiatives and
record volumes of new business generated by both PFS and C&IS. In addition,
excellent new business development results, record foreign exchange profits,
strong corporate earnings, and the price increase in Northern Trust Corporation
stock all contributed to higher performance-based compensation expenses. The 29%
increase in Northern Trust's stock price from March 31, 1997 alone resulted in
an additional $3.5 million in compensation expense. Staff on a full-time
equivalent basis at June 30, 1997 totaled 7,254, up 5% from 6,933 at the end of
1996 and 8% higher than the 6,698 at June 30, 1996.
Net occupancy expense totaled $16.4 million, up 10% from $14.9 million in the
second quarter of 1996, due in large part to the opening of six additional
private banking and trust offices over the past twelve months, as well as the
opening of the Singapore office. The principal components of the increase were
higher net rental costs, real estate taxes and maintenance expense.
Equipment expense, which includes depreciation, rental and maintenance costs,
totaled $14.9 million, up $.8 million or 6% from the second quarter of 1996. The
principal components of the increase were higher levels of depreciation and
maintenance of computer hardware, personal computers and equipment.
Other operating expenses in the quarter totaled $57.6 million compared to $54.7
million last year. The increase in the 1997 expense level was primarily the
result of continued investment in technology, expansion of the personal trust
and banking office network, and higher operating expenses necessary to support
business growth. The expense categories affected were computer software
amortization, technical and consulting services, employee hiring and relocation
costs, and business promotional expenses, partially offset by lower costs
associated with processing errors.
The components of other operating expenses were as follows:
<TABLE>
<CAPTION>
Second Quarter
Ended June 30
-----------------
(In Millions) 1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Business Development $ 8.4 $ 6.7
Purchased Professional Services 21.0 18.3
Telecommunications 3.0 3.0
Postage and Supplies 4.9 5.3
Software Amortization 9.2 8.6
Goodwill and Other Intangibles 2.5 2.4
Amortization
Other Expense 8.6 10.4
- ----------------------------------------------------------
Total Other Operating Expenses $57.6 $54.7
- ----------------------------------------------------------
</TABLE>
16
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes was $39.5 million for the second quarter compared
with $31.7 million in the year-ago quarter. The higher tax provision in 1997
resulted primarily from the growth in taxable earnings for both federal and
state income tax purposes. The effective tax rate was 34% for 1997 versus 33% in
1996.
SIX MONTH EARNINGS HIGHLIGHTS
Net income per common share on a fully diluted basis was $1.26 compared to $1.06
last year, an increase of 19%. Net income increased 18% to $147.1 million, up
from $124.9 million in the same period of 1996. The ROE for the six month period
was 19.96% versus 18.41% one year ago, while the ROA improved to 1.28% from
1.20% in the same period last year.
Total revenues stated on a FTE basis increased 13% from 1996 levels. Trust fees
totaled $326.6 million, up 11% from $293.6 million last year. The fee portion of
treasury management revenues totaled $29.6 million, up 8% from the $27.5 million
reported in 1996. Total treasury management revenues, which in addition to fees,
includes the computed value of compensating deposit balances, increased 7% to
$45.4 million. These compensating deposit balances contributed to the
improvement in net interest income. Foreign exchange trading profits totaled
$44.3 million, up 61% from the prior year's performance. Security commissions
and trading income totaled $12.5 million, essentially unchanged from the prior
year. Other operating income totaled $18.9 million for the period compared with
$22.1 million in 1996. The decline from the prior year was due to lower balances
held at banks serving as global subcustodians resulting in a reduction in
compensation received. The lower balances reflect a more aggressive approach to
investing these otherwise idle funds in money market assets with the related
benefit recognized in net interest income. In addition, the elimination of
float-related compensation resulting from the Depository Trust Company's first
quarter 1996 conversion to a same-day settlement basis for security transactions
also reduced other operating income.
Net interest income stated on a FTE basis totaled $231.8 million, up 12% from
the $206.3 million in the same period of 1996. The provision for credit losses
decreased $8.0 million to $1.0 million in 1997. Net loan charge-offs decreased
to $.9 million from $8.7 million in the prior year. Noninterest expenses were up
12% and totaled $423.5 million compared to $376.6 million a year ago.
17
<PAGE>
BALANCE SHEET
Total assets at June 30, 1997 were $26.1 billion and averaged $23.9 billion for
the second quarter, up 13% from last year's average of $21.0 billion. Due to
increased lending activity, loans and leases grew to $12.0 billion at June 30,
1997, and averaged $11.6 billion for the quarter. This compares with $10.4
billion in total loans and leases at June 30, 1996 and $10.2 billion on average
for the second quarter of last year.
Driven by continued strong earnings growth, offset in part by Northern Trust's
stock buyback program, common stockholders' equity increased to $1.5 billion at
June 30, 1997 and averaged $1.5 billion for the quarter, up 10% from the $1.4
billion average in last year's second quarter. Total stockholders' equity
averaged $1.6 billion for the second quarter compared with $1.5 billion in 1996.
During the quarter, Northern Trust Corporation acquired a total of 305,083 of
its own common shares at a cost of $14.0 million pursuant to the stock buyback
program authorized by the Board of Directors. An additional 3.9 million shares
may be purchased after June 30, 1997 under the buyback program.
Northern Trust's risk-based capital ratios were further strengthened by the
issuance of $120 million of Floating Rate Capital Securities, Series B, which
qualify as tier 1 capital for risk-based capital purposes. The securities were
issued in April, 1997 at a discount to yield 67.9 basis points above three-month
LIBOR. Tier 1 and total capital ratios were 9.6% and 12.9%, respectively, at
June 30, 1997. These capital ratios are well above the minimum regulatory
requirements of 4% for tier 1 and 8% for total risk-based capital ratios. The
leverage ratio (tier 1 capital to second quarter average assets) of 7.2% at June
30, 1997, also exceeded the minimum regulatory requirement of 3%. In addition,
each of Northern Trust's subsidiary banks had a ratio above 7.8% for tier 1
capital, 10.6% for total risk-based capital, and 5.9% for the leverage ratio.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans, restructured loans and other
real estate owned (OREO). Nonperforming assets at June 30, 1997 totaled $58.5
million, compared with $21.4 million at December 31, 1996 and $40.5 million at
June 30, 1996. Domestic nonaccrual loans and leases, consisting primarily of
commercial loans, totaled $52.7 million, or .47% of total domestic loans and
leases at June 30, 1997. The increase is principally a result of one borrower's
Chapter 11 reorganization filing. Northern Trust's portion of the affected
syndicated bank loan is $35.0 million. At December 31, 1996 and June 30, 1996,
domestic nonaccrual loans and leases totaled $16.9 million and $36.2 million,
respectively.
18
<PAGE>
ASSET QUALITY (continued)
The following Nonperforming Asset table presents the outstanding amounts of
nonaccrual loans and leases, restructured loans and OREO. Also shown are loans
that have interest or principal payments that are delinquent 90 days or more and
are still accruing interest. The balance in this category at any quarter end can
fluctuate widely based on the timing of cash collections, renegotiations and
renewals.
<TABLE>
<CAPTION>
June 30 March 31 December 31 June 30
----------------------------------------
(In Millions) 1997 1997 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans and Leases
Domestic
Residential Real Estate $ 5.1 $ 5.3 $ 3.2 $ 1.9
Commercial & Industrial 40.5 6.0 2.2 3.0
Commercial Real Estate 6.6 7.6 11.3 29.3
Consumer .5 .2 .2 2.0
- -------------------------------------------------------------------------------
Total Domestic 52.7 19.1 16.9 36.2
International - - - -
- -------------------------------------------------------------------------------
Total Nonaccrual Loans and Leases 52.7 19.1 16.9 36.2
Restructured Loans 2.6 2.6 2.6 2.7
Other Real Estate Owned 3.2 2.2 1.9 1.6
- -------------------------------------------------------------------------------
Total Nonperforming Assets $58.5 $23.9 $21.4 $40.5
- -------------------------------------------------------------------------------
Total 90 Day Past Due Loans (still
accruing) $28.8 $28.1 $15.2 $14.6
- -------------------------------------------------------------------------------
</TABLE>
Provision and Reserve for Credit Losses. The provision for credit losses is the
charge against current earnings that is determined by management through a
disciplined credit review process, as the amount needed to maintain a reserve
that is sufficient to absorb credit losses inherent in Northern Trust's loan and
lease portfolios and other credit undertakings. While the largest portion of
this reserve is intended to cover loan and lease losses, it is considered a
general reserve that is available to cover all credit-related exposures.
The 1997 second quarter provision for credit losses was $.5 million, compared
with $4.0 million in the second quarter of 1996. Net charge-offs totaled $.5
million in the second quarter of 1997, versus $3.8 million last year. The
reserve for credit losses was $148.4 million or 1.24% of outstanding loans at
June 30, 1997. This compares with $148.3 million or 1.36% of outstanding loans
at December 31, 1996 and $147.4 million or 1.42% of outstanding loans at June
30, 1996. The lower reserve to outstanding loans ratio at June 30, 1997 is
attributable to loan growth, a significant portion of which is in low-risk
residential mortgage lending.
The overall quality of the loan portfolio remains strong. Management continues
to monitor closely the financial condition of borrowers currently experiencing
financial difficulty. Worsening operating results of these borrowers and other
economic conditions could unfavorably impact the level of future charge-offs and
the related provision for credit losses.
19
<PAGE>
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking, such as
the discussion of Northern Trust's financial goals, business outlook and credit
quality. These statements speak of Northern Trust's plans, goals or
expectations, refer to estimates, or use similar terms. Actual results could
differ materially from the results indicated 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 economic
factors that affect wealth creation, investment and savings patterns, and
Northern Trust's interest rate risk exposure and credit risk.
. 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 industry
consolidation, regulatory change and other factors, as well as actions taken
by particular competitors.
. Northern Trust's success in identifying and penetrating targeted markets 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.
. 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.
. Changes in U.S. and worldwide securities markets, with respect to the market
values of financial assets and the level of volatility in certain markets
such as foreign exchange.
Some of these uncertainties that may affect future results are discussed in more
detail in the section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" captioned "Risk Management" in the 1996
Annual Report to Stockholders (pp. 27-34) and in the sections of "Item 1 -
Business" of the 1996 Annual Report on Form 10-K captioned "Government
Policies", "Competition" and "Regulation and Supervision" (pp. 6-9). 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.
20
<PAGE>
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Second Quarter
--------------------------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 1997 1996
---------------------------------- -----------------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 12.0 $ 853.7 5.66% $ 3.4 $ 254.4 5.51%
Time Deposits with Banks 31.5 2,460.5 5.13 20.9 1,678.2 4.99
Other Interest-Bearing .8 56.9 5.84 .8 54.6 5.80
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Total Money Market Assets 44.3 3,371.1 5.27 25.1 1,987.2 5.08
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Securities
U.S. Government 13.3 893.8 5.98 29.8 2,123.9 5.64
Obligations of States and Political Subdivisions 9.9 415.6 9.53 10.4 419.7 9.88
Federal Agency 71.5 4,947.4 5.79 55.5 3,975.4 5.62
Other 3.8 248.3 6.21 3.4 227.6 5.93
Trading Account .2 9.4 7.87 .1 9.1 7.60
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Total Securities 98.7 6,514.5 6.08 99.2 6,755.7 5.90
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Loans and Leases 197.3 11,610.4 6.82 170.6 10,176.7 6.74
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Total Earning Assets $340.3 $21,496.0 6.35% $294.9 $18,919.6 6.27%
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Average Source of Funds
Deposits
Savings and Money Market Deposits $ 31.4 $ 3,901.8 3.23% $ 28.6 $ 3,659.6 3.14%
Savings Certificates 28.9 2,016.9 5.75 29.3 2,053.6 5.75
Other Time 10.7 772.6 5.55 6.2 462.6 5.40
Foreign Offices Time 53.4 4,503.2 4.76 45.5 3,807.2 4.81
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Total Deposits 124.4 11,194.5 4.46 109.6 9,983.0 4.42
Federal Funds Purchased 19.0 1,386.6 5.50 22.5 1,717.9 5.27
Repurchase Agreements 17.6 1,323.5 5.34 28.0 2,153.1 5.23
Commercial Paper 1.9 137.3 5.55 2.0 142.9 5.38
Other Borrowings 44.3 3,284.6 5.41 18.7 1,516.3 4.97
Senior Notes 3.5 245.1 5.72 3.4 254.5 5.26
Long-Term Debt 8.0 427.9 7.53 6.4 335.9 7.67
Floating Rate Capital Securities 3.9 236.0 6.53 -- -- --
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Total Interest-Related Funds 222.6 18,235.5 4.90 190.6 16,103.6 4.76
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Interest Rate Spread -- -- 1.45% -- -- 1.51%
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Noninterest-Related Funds -- 3,260.5 -- -- 2,816.0 --
- ------------------------------------------------------- ---------- ----------- -------- ---------- ----------- -------
Total Source of Funds $222.6 $21,496.0 4.15% $190.6 $18,919.6 4.05%
- ------------------------------------------------------- ---------- ----------- -------- -------- ----------- -------
Net Interest Income/Margin $117.7 -- 2.20% $104.3 -- 2.22%
- ------------------------------------------------------- ---------- ------------ -------- -------- ----------- -------
</TABLE>
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
<TABLE>
<CAPTION>
Second Quarter 1997/96 Six Months 1997/96
---------------------------------- -------------------------------------
Change Due To Change Due To
------------------------ -------------------------
(In Millions) Volume Rate Total Volume Rate Total
- ------------------------------------------------------- ---------- ----------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets $38.3 $7.1 $45.4 $58.2 $ 1.7 $59.9
Interest-Related Funds 27.9 4.1 32.0 37.2 (2.8) 34.4
- ------------------------------------------------------- ---------- ----------- --------- ----------- ---------- ---------
Net Interest Income $10.4 $3.0 $13.4 $21.0 $ 4.5 $25.5
- ------------------------------------------------------- ---------- ----------- --------- ----------- ---------- --------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NORTHERN TRUST CORPORATION
Six Months
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 20.5 $ 747.2 5.55% $ 7.2 $ 260.8 5.59%
Time Deposits with Banks 58.7 2,338.7 5.06 43.7 1,711.7 5.13
Other Interest-Bearing 1.4 48.5 5.77 1.6 54.0 5.93
- ----------------------------------------------------------------------------------------- ----------- ----------------------------
Total Money Market Assets 80.6 3,134.4 5.19 52.5 2,026.5 5.21
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Securities
U.S. Government 26.6 912.4 5.89 59.4 2,104.2 5.67
Obligations of States and Political Subdivisions 19.9 418.1 9.53 20.9 420.9 9.94
Federal Agency 131.1 4,605.8 5.74 112.7 3,966.0 5.71
Other 7.5 245.0 6.20 7.3 245.0 5.98
Trading Account .3 8.3 7.62 .3 9.3 7.42
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Total Securities 185.4 6,189.6 6.04 200.6 6,745.4 5.98
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Loans and Leases 382.3 11,366.8 6.78 335.3 9,977.0 6.76
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Total Earning Assets $648.3 $20,690.8 6.32% $588.4 $18,748.9 6.31%
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Average Source of Funds
Deposits
Savings and Money Market Deposits $ 62.1 $ 3,926.4 3.19% $ 56.7 $ 3,618.6 3.15%
Savings Certificates 57.3 2,019.3 5.72 60.2 2,081.9 5.82
Other Time 18.8 694.1 5.46 14.6 537.0 5.47
Foreign Offices Time 100.4 4,293.7 4.72 89.6 3,692.3 4.88
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Total Deposits 238.6 10,933.5 4.40 221.1 9,929.8 4.48
Federal Funds Purchased 38.6 1,451.7 5.37 51.2 1,930.7 5.34
Repurchase Agreements 39.3 1,501.5 5.29 54.1 2,065.1 5.27
Commercial Paper 3.8 141.5 5.47 3.9 143.3 5.42
Other Borrowings 67.2 2,550.7 5.31 31.5 1,247.2 5.08
Senior Notes 7.2 255.0 5.63 7.5 284.4 5.25
Long-Term Debt 16.0 427.9 7.55 12.8 335.4 7.65
Floating Rate Capital Securities 5.8 180.2 6.45 - - -
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Total Interest-Related Funds 416.5 17,442.0 4.81 382.1 15,935.9 4.82
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Interest Rate Spread - - 1.51% - - 1.49%
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Noninterest-Related Funds 3,248.8 - - 2,813.0 -
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Total Source of Funds $ 416.5 $20,690.8 4.06% $ 382.1 $18,748.9 4.10%
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
Net Interest Income/Margin $ 231.8 - 2.26% $ 206.3 - 2.21%
- ------------------------------------------------------- ---------- -------------- ---------- ----------- -------------------------
22
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
--------
Exhibit (11) Computation of Per Share Earnings.
Exhibit (27) Financial Data Schedule.
(b.) Reports on Form 8-K
-------------------
In a report on Form 8-K the Corporation incorporated in Item 5
its April 14, 1997 press release, reporting its earnings for the
first quarter of 1997. The press release, with summary financial
information, was filed pursuant to Item 7.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
Date: August 13, 1997 By: Perry R. Pero
-------------
Perry R. Pero
Senior Executive Vice President
and Chief Financial Officer
Date: August 13, 1997 By: Harry W. Short
--------------
Harry W. Short
Senior Vice President and
Controller
(Chief Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
The following exhibits have been filed herewith:
Exhibit
Number Description
- ------ -----------
(11) Computation of Per Share Earnings.
(27) Financial Data Schedule.
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER (11)
TO 6/30/97 FORM 10-Q
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
Second Quarter Ended June 30 Six Months Ended June 30
---------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Computations Required by
- ---------------------------
Regulation S-K
- --------------
Primary Earnings Per Share
- ---------------------------
Net Income Applicable to
Common Shares $ 74,133,239 $ 62,198,882 $144,701,157 $122,444,451
================ =============== ================ ==============
Weighted Average Number of Common
and Common Equivalent Shares Outstanding
Common Shares 111,029,616 112,409,954 110,979,939 112,463,160
Dilutive Effect of Common
Equivalent Shares (A)
Stock Options 2,670,631 1,778,748 2,761,095 1,813,646
Long Term Performance Stock Plan 540,984 587,468 581,752 557,432
Other 242,610 113,264 244,163 101,416
---------------- --------------- ---------------- --------------
114,483,841 114,889,434 114,566,949 114,935,654
================ =============== ================ ==============
Net Income Per Common and
Common Equivalent Share $0.65 $0.54 $1.26 $1.07
================ =============== ================ ==============
(A) Determined by application of the treasury stock method.
</TABLE>
<PAGE>
EXHIBIT NUMBER (11)
TO 6/30/97 FORM 10-Q
NORTHERN TRUST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Second Quarter Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
1997 1996 1997 1996
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Computations Required by
- ------------------------
Regulation S-K
- ---------------
Fully Diluted Earnings Per Share
- --------------------------------
Net Income Applicable to
Common Shares $74,133,239 $62,198,882 $144,701,157 $122,444,451
Add Back: Dividend on Series E Convertible 14,756
Preferred Stock ----------- ----------- ------------ ------------
$74,133,239 $62,198,882 $144,701,157 $122,459,207
=========== =========== ============ ============
Weighted Average Number of Common
and Common Equivalent Shares Outstanding
Common Shares 111,029,616 112,409,954 110,979,939 112,463,160
Dilutive Effect of Common
Equivalent Shares (A)
Stock Options 2,907,179 2,001,912 2,997,074 2,064,710
Long Term Performance Stock Plan 593,903 627,454 608,212 583,948
Other 259,732 131,830 252,724 113,776
Other Potentially Dilutive Securities
Equivalent Shares Assuming Conversions of
Series E convertible Preferred Stock 383,954
------------ ----------- ------------ ------------
114,790,430 115,171,150 114,837,949 115,609,548
============ =========== ============ ============
Net Income Per Common and
Common Equivalent Share $0.65 $0.54 $1.26 $1.06
============ =========== ============ ============
(A) Determined by application of the treasury stock method.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,791,584
<INT-BEARING-DEPOSITS> 1,945,803
<FED-FUNDS-SOLD> 1,919,918
<TRADING-ASSETS> 5,760
<INVESTMENTS-HELD-FOR-SALE> 6,556,106
<INVESTMENTS-CARRYING> 474,032
<INVESTMENTS-MARKET> 491,852
<LOANS> 11,958,078
<ALLOWANCE> 148,371
<TOTAL-ASSETS> 26,051,000
<DEPOSITS> 15,891,066
<SHORT-TERM> 6,981,276
<LIABILITIES-OTHER> 661,092
<LONG-TERM> 868,690
<COMMON> 189,935
0
120,000
<OTHER-SE> 1,338,941
<TOTAL-LIABILITIES-AND-EQUITY> 26,051,000
<INTEREST-LOAN> 379,467
<INTEREST-INVEST> 171,439
<INTEREST-OTHER> 80,933
<INTEREST-TOTAL> 631,839
<INTEREST-DEPOSIT> 238,559
<INTEREST-EXPENSE> 416,518
<INTEREST-INCOME-NET> 215,321
<LOAN-LOSSES> 1,000
<SECURITIES-GAINS> 599
<EXPENSE-OTHER> 423,472
<INCOME-PRETAX> 223,301
<INCOME-PRE-EXTRAORDINARY> 147,118
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 147,118
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
<YIELD-ACTUAL> 2.26
<LOANS-NON> 52,705
<LOANS-PAST> 28,760
<LOANS-TROUBLED> 2,536
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 148,361
<CHARGE-OFFS> 3,089
<RECOVERIES> 2,133
<ALLOWANCE-CLOSE> 148,371
<ALLOWANCE-DOMESTIC> 96,545
<ALLOWANCE-FOREIGN> 2,283
<ALLOWANCE-UNALLOCATED> 49,543
</TABLE>
