<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 March 31, 1998
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 (Zip Code)
executive offices)
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 [_]
111,518,993 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 1998)
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
March 31 December 31 March 31
--------- ----------- ---------
($ In Millions) 1998 1997 1997
- ------------------------------------------ --------- ----------- ---------
<S> <C> <C> <C>
Assets
Cash and Due from Banks $ 1,124.0 $ 1,738.9 $ 948.6
Federal Funds Sold and Securities
Purchased under Agreements to Resell 1,622.1 2,991.7 1,219.5
Time Deposits with Banks 1,844.3 2,283.2 2,354.9
Other Interest-Bearing 67.6 34.5 41.0
Securities
Available for Sale 4,652.0 3,733.3 5,328.8
Held to Maturity (Fair value - $500.0
at March 1998, $473.4 at December
1997, $499.3 at March 1997) 485.3 456.1 481.7
Trading Account 14.2 8.8 13.7
- ------------------------------------------ --------- --------- ---------
Total Securities 5,151.5 4,198.2 5,824.2
- ------------------------------------------ --------- --------- ---------
Loans and Leases
Commercial and Other 7,554.5 7,401.5 6,750.9
Residential Mortgages 5,397.7 5,186.7 4,666.4
- ------------------------------------------ --------- --------- ---------
Total Loans and Leases (Net of unearned
income - $147.1 at March 1998, $151.9
at December 1997, $113.4 at March 1997) 12,952.2 12,588.2 11,417.3
- ------------------------------------------ --------- --------- ---------
Reserve for Credit Losses (147.7) (147.6) (148.3)
Buildings and Equipment 327.8 316.4 291.7
Customers' Acceptance Liability 25.4 31.4 45.7
Trust Security Settlement Receivables 357.3 291.4 323.0
Other Assets 927.3 989.1 914.2
- ------------------------------------------ --------- --------- ---------
Total Assets $24,251.8 $25,315.4 $23,231.8
- ------------------------------------------ --------- --------- ---------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 3,626.9 $ 3,510.1 $ 3,951.8
Savings and Money Market 4,305.2 4,278.9 3,597.9
Savings Certificates 2,125.9 2,092.6 2,003.8
Other Time 470.5 572.0 683.9
Foreign Offices - Demand 445.1 451.0 415.6
- Time 5,192.6 5,455.4 4,560.9
- ------------------------------------------ --------- --------- ---------
Total Deposits 16,166.2 16,360.0 15,213.9
Federal Funds Purchased 1,312.1 821.2 1,197.7
Securities Sold Under Agreements
to Repurchase 875.8 1,139.7 1,685.4
Commercial Paper 128.8 146.8 145.2
Other Borrowings 1,909.3 2,876.6 1,943.1
Senior Notes 680.0 785.0 205.0
Long-Term Debt 416.8 439.5 427.8
Floating Rate Capital Securities 267.4 267.4 148.5
Liability on Acceptances 25.4 31.4 45.7
Other Liabilities 669.5 708.8 626.3
- ------------------------------------------ --------- --------- ---------
Total Liabilities 22,451.3 23,576.4 21,638.6
- ------------------------------------------ --------- --------- ---------
Stockholders' Equity
Preferred Stock 120.0 120.0 120.0
Common Stock, $1.66 2/3 Par Value;
Authorized 280,000,000 shares
at March 1998 and December 1997 and
140,000,000 shares at March 1997;
Outstanding 111,518,993 at March 1998,
111,367,436 at December 1997 and
111,496,349 at March 1997 189.9 189.9 189.9
Capital Surplus 225.9 225.5 228.3
Retained Earnings 1,391.2 1,330.8 1,160.6
Net Unrealized Gain on Securities
Available for Sale 1.9 2.1 .2
Common Stock Issuable - Performance Plan 31.5 11.7 12.8
Deferred Compensation - ESOP and Other (50.8) (37.5) (38.3)
Treasury Stock - (at cost, 2,441,769
shares at March 1998, 2,593,326 shares
at December 1997, and 2,464,413 shares
at March 1997) (109.1) (103.5) (80.3)
- ------------------------------------------ --------- --------- ---------
Total Stockholders' Equity 1,800.5 1,739.0 1,593.2
- ------------------------------------------ --------- --------- ---------
Total Liabilities and Stockholders' Equity $24,251.8 $25,315.4 $23,231.8
- ------------------------------------------ --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
First Quarter
Ended March 31
------------------------
($ In Millions Except Per Share Information) 1998 1997
- ----------------------------------------------------- ----------- -----------
<S> <C> <C>
Interest Income
Loans and Leases $211.0 $183.6
Securities
Available For Sale 91.5 72.1
Held to Maturity 7.2 7.9
Trading Account .2 .1
- ----------------------------------------------------- ----------- -----------
Total Securities 98.9 80.1
- ----------------------------------------------------- ----------- -----------
Time Deposits with Banks 34.1 27.2
Federal Funds Sold and Securities Purchased
under Agreements to Resell and Other 13.3 9.1
- ----------------------------------------------------- ----------- -----------
Total Interest Income 357.3 300.0
- ----------------------------------------------------- ----------- -----------
Interest Expense
Deposits 139.8 114.2
Federal Funds Purchased 36.3 19.6
Securities Sold under Agreements to Repurchase 20.9 21.7
Commercial Paper 2.0 1.9
Other Borrowings 21.8 22.9
Senior Notes 10.6 3.7
Long-Term Debt 8.1 8.0
Floating Rate Capital Securities 4.2 1.9
- ----------------------------------------------------- ----------- -----------
Total Interest Expense 243.7 193.9
- ----------------------------------------------------- ----------- -----------
Net Interest Income 113.6 106.1
Provision for Credit Losses 4.0 .5
- ----------------------------------------------------- ----------- -----------
Net Interest Income after Provision for Credit Losses 109.6 105.6
- ----------------------------------------------------- ----------- -----------
Noninterest Income
Trust Fees 193.7 158.3
Treasury Management Fees 15.9 14.6
Foreign Exchange Trading Profits 28.1 20.4
Security Commissions and Trading Income 7.2 5.9
Other Operating Income 11.0 9.5
Investment Security Gains .7 .6
- ----------------------------------------------------- ----------- -----------
Total Noninterest Income 256.6 209.3
- ----------------------------------------------------- ----------- -----------
Income before Noninterest Expenses 366.2 314.9
- ----------------------------------------------------- ----------- -----------
Noninterest Expenses
Salaries 121.7 101.4
Pension and Other Employee Benefits 23.5 21.1
Occupancy Expense 16.9 16.1
Equipment Expense 16.5 14.9
Other Operating Expenses 57.6 53.0
- ----------------------------------------------------- ----------- -----------
Total Noninterest Expenses 236.2 206.5
- ----------------------------------------------------- ----------- -----------
Income before Income Taxes 130.0 108.4
Provision for Income Taxes 45.1 36.7
- ----------------------------------------------------- ----------- -----------
Net Income $ 84.9 $ 71.7
- ----------------------------------------------------- ----------- -----------
Net Income Applicable to Common Stock $ 83.6 $ 70.5
- ----------------------------------------------------- ----------- -----------
Net Income Per Common Share - Basic $ .75 $ .64
- Diluted .73 .62
- ----------------------------------------------------- ----------- -----------
Average Number of Common Shares Outstanding - Basic 110,902,111 110,929,710
- Diluted 115,055,796 114,649,493
- ----------------------------------------------------- ----------- -----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NORTHERN TRUST CORPORATION
First Quarter
Ended March 31
------------------------
($ In Millions) 1998 1997
- ----------------------------------------------------- ----------- -----------
<S> <C> <C>
Net Income $ 84.9 $ 71.7
Other Comprehensive Income (net of tax)
Unrealized Gains (Losses) on Securities Available
for Sale
Unrealized Holding Gains (Losses) Arising
During Period
(Net of tax (provision) benefit - $(.1)
million in 1998 and $.6 million in 1997) .2 (1.0)
Less: Reclassification Adjustments for Gains
Included in Net Income
(Net of tax - $.2 million in 1998 and $.2
million in 1997) (.4) (.4)
- ----------------------------------------------------- ----------- -----------
Other Comprehensive Income (.2) (1.4)
- ----------------------------------------------------- ----------- -----------
Comprehensive Income $ 84.7 $ 70.3
- ----------------------------------------------------- ----------- -----------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST
CORPORATION
First Quarter
Ended March 31
---------------------
<S> <C> <C>
(In Millions) 1998 1997
- ----------------------------------------------------------------- ---------------------
Preferred Stock
Balance at January 1 and March 31 $ 120.0 $ 120.0
- ----------------------------------------------------------------- ---------------------
Common Stock
Balance at January 1 and March 31 189.9 189.9
- ----------------------------------------------------------------- ---------------------
Capital Surplus
Balance at January 1 225.5 231.7
Stock Issued - Incentive Plan and Awards .4 (3.4)
- ----------------------------------------------------------------- ---------------------
Balance at March 31 225.9 228.3
- ----------------------------------------------------------------- ---------------------
Retained Earnings
Balance at January 1 1,330.8 1,110.2
Net Income 84.9 71.7
Dividend Declared - Common Stock (23.4) (20.1)
Dividends Declared - Preferred Stock (1.1) (1.2)
- ----------------------------------------------------------------- ---------------------
Balance at March 31 1,391.2 1,160.6
- ----------------------------------------------------------------- ---------------------
Net Unrealized Gain on Securities Available for Sale
Balance at January 1 2.1 1.6
Unrealized Loss, net (.2) (1.4)
- ----------------------------------------------------------------- ---------------------
Balance at March 31 1.9 .2
- ----------------------------------------------------------------- ---------------------
Common Stock Issuable - Performance Plan
Balance at January 1 11.7 10.4
Stock Issuable, net of Stock Issued 19.8 2.4
- ----------------------------------------------------------------- ---------------------
Balance at March 31 31.5 12.8
- ----------------------------------------------------------------- ---------------------
Deferred Compensation - ESOP and Other
Balance at January 1 (37.5) (35.5)
Compensation Deferred (15.4) (3.9)
Compensation Amortized 2.1 1.1
- ----------------------------------------------------------------- ---------------------
Balance at March 31 (50.8) (38.3)
- ----------------------------------------------------------------- ---------------------
Treasury Stock
Balance at January 1 (103.5) (84.2)
Stock Options and Awards 22.7 21.8
Stock Purchased (28.3) (17.9)
- ----------------------------------------------------------------- ---------------------
Balance at March 31 (109.1) (80.3)
- ----------------------------------------------------------------- ---------------------
Total Stockholders' Equity at March 31 $1,800.5 $1,593.2
- ----------------------------------------------------------------- ---------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION
First Quarter
Ended March 31
------------- -----------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 84.9 $ 71.7
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 4.0 .5
Depreciation on Buildings and Equipment 13.3 12.3
Decrease in Interest Receivable 8.9 6.7
Decrease in Interest Payable (4.9) (1.7)
Amortization and Accretion of Securities and Unearned Income (75.8) (38.6)
Amortization of Software, Goodwill and Other Intangibles 13.3 11.7
Net Increase in Trading Account Securities (5.4) (8.9)
Other Noncash, net 23.9 (51.9)
- --------------------------------------------------------------------------------------------------- ------------- -----------
Net Cash Provided by Operating Activities 62.2 1.8
- --------------------------------------------------------------------------------------------------- ------------- -----------
Cash Flows from Investing Activities:
Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell 1,369.6 (196.9)
Net (Increase) Decrease in Time Deposits with Banks 438.9 (294.9)
Net (Increase) Decrease in Other Interest-Bearing Assets (33.1) 73.3
Purchases of Securities-Held to Maturity (106.0) (46.2)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 82.7 64.6
Purchases of Securities-Available for Sale (22,089.6) (10,567.5)
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 21,242.3 9,586.1
Net Increase in Loans and Leases (363.9) (486.3)
Purchases of Buildings and Equipment (24.7) (12.5)
Net (Increase) Decrease in Trust Security Settlement Receivables (65.9) 39.3
Other, net (2.4) (2.0)
- --------------------------------------------------------------------------------------------------- ------------- -----------
Net Cash (Used in) Provided by Investing Activities 447.9 (1,843.0)
- --------------------------------------------------------------------------------------------------- ------------- -----------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Deposits (193.8) 1,417.7
Net Increase in Federal Funds Purchased 490.9 544.7
Net Increase (Decrease) in Securities Sold under Agreements to Repurchase (263.9) 719.3
Net Decrease in Commercial Paper (18.0) (3.8)
Net Decrease in Short-Term Other Borrowings (939.4) (1,203.3)
Proceeds from Term Federal Funds Purchased 184.0 254.2
Repayments of Term Federal Funds Purchased (211.9) (249.9)
Proceeds from Senior Notes & Long-Term Debt - 250.0
Repayments on Senior Notes & Long-Term Debt (128.0) (201.5)
Treasury Stock Purchased (28.3) (15.0)
Net Proceeds from Stock Options 4.9 3.5
Cash Dividends Paid on Common and Preferred Stock (24.4) (21.3)
Other, net 2.9 2.7
- --------------------------------------------------------------------------------------------------- ------------- -----------
Net Cash Provided by (Used in) Financing Activities (1,125.0) 1,497.3
- --------------------------------------------------------------------------------------------------- ------------- -----------
Decrease in Cash and Due from Banks (614.9) (343.9)
Cash and Due from Banks at Beginning of Year 1,738.9 1,292.5
- --------------------------------------------------------------------------------------------------- ------------- -----------
Cash and Due from Banks at March 31 $ 1,124.0 $ 948.6
- --------------------------------------------------------------------------------------------------- ------------- -----------
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 248.6 $ 195.6
Income Taxes Received (3.1) (3.1)
- --------------------------------------------------------------------------------------------------- ------------- -----------
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements
1. 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 March 31, 1998 and 1997 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 1997 Annual Report to Stockholders.
2. Securities - The following table summarizes the book and fair values of
securities:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997 March 31, 1997
------------------------------------------------------------------------------------
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 $ 83.1 $ 83.1 $ 72.0 $ 72.0 $ 68.2 $ 68.1
Obligations of States
and Political Subdivisions 263.9 280.5 276.7 295.1 303.6 321.3
Federal Agency 8.0 8.0 14.3 14.3 18.2 18.2
Other 130.3 128.4 93.1 92.0 91.7 91.7
- ----------------------------------------------------------------------------------------------------------------
Subtotal 485.3 500.0 456.1 473.4 481.7 499.3
- ----------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 312.6 312.6 470.0 470.0 841.0 841.0
Obligations of States
and Political Subdivisions 169.7 169.7 130.2 130.2 115.9 115.9
Federal Agency 4,027.3 4,027.3 2,969.8 2,969.8 4,255.8 4,255.8
Preferred Stock 112.5 112.5 128.8 128.8 74.8 74.8
Other 29.9 29.9 34.5 34.5 41.3 41.3
- ----------------------------------------------------------------------------------------------------------------
Subtotal 4,652.0 4,652.0 3,733.3 3,733.3 5,328.8 5,328.8
- ----------------------------------------------------------------------------------------------------------------
Trading Account 14.2 14.2 8.8 8.8 13.7 13.7
- ----------------------------------------------------------------------------------------------------------------
Total Securities $5,151.5 $5,166.2 $4,198.2 $4,215.5 $5,824.2 $5,841.8
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity March 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Book ------------------------- Fair
(In Millions) Value Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 83.1 $ -- $ -- $ 83.1
Obligations of States and Political Subdivisions 263.9 16.7 .1 280.5
Federal Agency 8.0 -- -- 8.0
Other 130.3 -- 1.9 128.4
- ----------------------------------------------------------------------------------------------------------------
Total $485.3 $16.7 $2.0 $500.0
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale March 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized ------------------------ Fair
(In Millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 311.8 $ .9 $.1 $ 312.6
Obligations of States and Political Subdivisions 163.9 5.8 -- 169.7
Federal Agency 4,026.3 1.3 .3 4,027.3
Preferred Stock 112.1 .4 -- 112.5
Other 30.4 -- .5 29.9
- --------------------------------------------------------------------------------------------------------------
Total $4,644.5 $8.4 $.9 $4,652.0
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $.2 million and $4.7 million,
respectively, as of March 31, 1998. At March 31, 1998, stockholders' equity
included a credit of $1.9 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 $5.2 billion on March 31, 1998, $6.2 billion on December 31, 1997
and $5.3 billion on March 31, 1997.
4. Contingent Liabilities - Standby letters of credit outstanding were $1.6
billion on March 31, 1998, $1.5 billion on December 31, 1997 and $1.3 billion on
March 31, 1997.
8
<PAGE>
5. Loans and Leases - Amounts outstanding in selected loan categories are shown
below:
<TABLE>
<CAPTION>
(In Millions) March 31, 1998 December 31, 1997 March 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Residential Real Estate $ 5,397.7 $ 5,186.7 $ 4,666.4
Commercial 3,750.7 3,734.8 3,335.3
Broker 238.2 170.1 395.0
Commercial Real Estate 588.1 582.1 592.9
Personal 1,183.5 1,207.2 972.5
Other 802.7 890.1 744.0
Lease Financing 342.5 347.0 267.6
- -------------------------------------------------------------------------------------------------
Total Domestic 12,303.4 12,118.0 10,973.7
International 648.8 470.2 443.6
- -------------------------------------------------------------------------------------------------
Total Loans and Leases $12,952.2 $12,588.2 $11,417.3
- -------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1998, other domestic and international loans included $946.8
million of overnight trust-related advances primarily in connection with next
day security settlements, compared with $924.5 million at December 31, 1997 and
$883.4 million at March 31, 1997.
At March 31, 1998, nonperforming loans totaled $36.2 million. Included in this
amount were loans with a recorded investment of $32.7 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 $6.5 million had no portion of the reserve for credit losses allocated
to them, while $26.2 million had an allocated reserve of $4.4 million. For the
first quarter of 1998, the total recorded investment in impaired loans averaged
$36.9 million. Total interest income recorded on impaired loans for the quarter
ended March 31, 1998 was $25 thousand.
At March 31, 1997, nonperforming loans totaled $21.7 million and included $19.8
million of impaired loans. Of these impaired loans, $16.9 million had no reserve
allocation while $2.9 million had an allocated reserve of $.2 million. Impaired
loans for the first quarter of 1997 averaged $19.7 million with $96 thousand of
interest income recognized.
9
<PAGE>
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as
follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
-------------------------------------
(In Millions) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $147.6 $148.3
Charge-Offs
Commercial Real Estate (.2)
Other (4.5) (2.2)
International
- -------------------------------------------------------------------------------------------------------
Total Charge-Offs (4.7) (2.2)
- -------------------------------------------------------------------------------------------------------
Recoveries .8 1.7
- -------------------------------------------------------------------------------------------------------
Net Charge-Offs (3.9) ( .5)
Provision for Credit Losses 4.0 .5
- -------------------------------------------------------------------------------------------------------
Balance at End of Period $147.7 $148.3
- -------------------------------------------------------------------------------------------------------
</TABLE>
7. Floating Rate Capital Securities - The following table summarizes the book
value of Floating Rate Capital Securities outstanding:
<TABLE>
<CAPTION>
March 31 December 31 March 31
------------------------------------------------------------
(In Millions) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$150 Million Series A due January 15, 2027 $148.6 $148.6 $148.5
$120 Million Series B due April 15, 2027 118.8 118.8 --
- ----------------------------------------------------------------------------------------------------------
Total $267.4 $267.4 $148.5
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Floating Rate Capital Securities were issued through wholly-owned statutory
business trusts. The sole asset of the trusts are Subordinated Debentures of
Northern Trust Corporation which have the same interest rates and maturity dates
as the corresponding distribution rates and redemption dates of the Floating
Rate Capital Securities. The Series A Securities were issued at a discount to
yield 60.5 basis points above the three-month London Interbank Offered Rate
(LIBOR), while the Series B Securities were issued at a discount to yield 67.9
basis points above the three-month LIBOR. Both Series A and B Securities
qualify as tier 1 capital for regulatory purposes.
10
<PAGE>
8. Net Income Per Common Share Computations - The computation of net income per
common share is presented in the following table:
<TABLE>
<CAPTION>
First Quarter
Ended March 31
--------------------------------------------------
($ In Millions Except Per Share Information) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic Net Income Per Common Share:
Net Income $ 84.9 $ 71.7
Less Dividends on Preferred Stock (1.3) (1.2)
- ------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 83.6 $ 70.5
Average Number of Common Shares Outstanding 110,902,111 110,929,710
Basic Net Income Per Common Share $ 0.75 $ 0.64
Diluted Net Income Per Common Share:
Net Income Applicable to Common Stock $ 83.6 $ 70.5
Average Number of Common Shares Outstanding 110,902,111 110,929,710
Plus Dilutive Potential Common Shares:
Stock Options 3,305,992 2,851,558
Performance Shares 537,505 622,522
Other 310,188 245,703
- ------------------------------------------------------------------------------------------------------------
Average Common and Potential Common Shares 115,055,796 114,649,493
Diluted Net Income Per Common Share $ 0.73 $ 0.62
- ------------------------------------------------------------------------------------------------------------
</TABLE>
9. Accounting Standards Pronouncements - Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," was implemented as
of January 1, 1998. SFAS No. 130 established the requirements for reporting
comprehensive income in the financial statements. Because it imposes only
additional reporting requirements, SFAS No. 130 did not affect Northern Trust's
financial condition or net income. Comprehensive income includes net income plus
"other comprehensive income", which in the first quarter consists of after-tax
unrealized gains and losses on available for sale securities. Northern Trust's
consolidated statement of comprehensive income is included on page 4 of this
report.
In March, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires the capitalization of certain
external and internal costs of computer software developed or obtained for
internal use. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998, with early adoption permitted.
11
<PAGE>
Northern Trust's current accounting policy is to expense internal costs of
computer software developed for internal use as incurred. Northern Trust is in
the process of identifying the amount of salary and related costs which would be
eligible for capitalization in 1998 based on SOP 98-1, however, it is not
expected that the amount would be material to Northern Trust's results of
operations.
In April, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
all nongovernmental entities to expense costs of start-up activities as those
costs are incurred. The term "start-up" is broadly defined and includes pre-
operating, pre-opening and organization activities. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998, with
early adoption permitted.
Northern Trust will adopt SOP 98-5 effective January 1, 1999. Northern Trust has
typically expensed such costs as incurred and, therefore, adoption of this SOP
is not expected to have a material effect on Northern Trust's results of
operations.
10. Acquisition - In February, 1998, Northern Trust entered into an agreement
to acquire Trustbank Financial Corp., parent company of Trust Bank of Colorado,
for approximately $15 million in cash. Trust Bank of Colorado, located in
Denver, reported $37 million in assets at year-end 1997 and stockholders' equity
of $5.2 million. The transaction will be accounted for as a purchase and is
expected to close in the second quarter of 1998.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER EARNINGS HIGHLIGHTS
Net income per common share on a diluted basis increased 18% to a record $.73
for the first quarter, up from $.62 earned a year ago. Net income also increased
18% to a record $84.9 million from the $71.7 million earned in the first quarter
of last year. This earnings performance produced an annualized return on average
common equity (ROE) of 20.73% versus 19.91% reported last year, and an
annualized return on average assets (ROA) of 1.32% versus 1.30% in 1997. Total
revenues stated on a fully taxable equivalent basis increased 17% in the
quarter, driven by record corporate trust fees, personal trust fees, and net
interest income, along with continued strong results from foreign exchange. The
quarter also highlighted Northern Trust's continued success in generating
positive operating leverage as the 17% growth in revenues was well above the 14%
increase in noninterest expenses.
The 18% earnings per share growth for the quarter, a 20.73% ROE and a
productivity ratio of 160% met or exceeded each of Northern Trust's strategic
financial targets.
Noninterest Income
Noninterest income increased 23% and totaled $256.6 million for the quarter,
accounting for 68% of total taxable equivalent revenue. Trust fees of $193.7
million increased 22% or $35.4 million over the like period of 1997, and
represented 75% of noninterest income and 51% 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 increased 41% or $339.0 billion from a year ago and totaled
$1.16 trillion at March 31, 1998. Trust assets under the management of Northern
Trust grew 51% to $216.5 billion from March 31, 1997. At December 31, 1997,
trust assets under administration totaled $1.08 trillion with $196.6 billion
under management.
Trust fees are based on the market value of assets managed and administered, the
volume of transactions, securities lending volume and spreads, and fees for
other services 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. Therefore,
market value or other changes in a portfolio's size do not typically have a
proportionate impact on the level of trust fees. In addition, Corporate and
Institutional Services (C&IS) trust relationships are increasingly priced to
reflect earnings from activities such as custody-related deposits and foreign
exchange trading which are not included in trust fees.
13
<PAGE>
Noninterest Income (continued)
Effective January 1, 1998, the trust activities for Middle Market clients
transferred to C&IS from Personal Financial Services business unit (PFS). Trust
assets and fees for all periods presented have been restated.
Trust fees from PFS increased 22% from the prior year level of $75.5 million and
totaled $91.8 million for the first quarter, reflecting strong growth in new
business throughout Northern Trust's five-state network of PFS offices and
favorable equity markets. Trust fees in each state increased 15% or more with
growth especially strong in Florida, Arizona and Texas. The PFS Wealth
Management Group, which administers significant family-asset pools nationwide,
continued to achieve excellent performance, with trust fees increasing 22% to
$8.5 million. The Group now administers $31.1 billion of trust assets. Total
personal trust assets under administration increased $26.1 billion from the
prior year and $9.6 billion since December 31, 1997, and totaled $105.5 billion
at March 31, 1998. Of this amount, $64.9 billion was under management compared
to $48.8 billion one year ago and $58.5 billion at December 31, 1997. Net
recurring new business sold for the quarter was $9.8 million in annualized fees,
up 31% from the first quarter of 1997.
Northern Trust expects to close the acquisition of Trust Bank of Colorado for
$15.0 million in cash during the second quarter. With the addition of this new
office, which marks Northern Trust's entry into Colorado, Northern Trust's
national network of Personal Financial Services offices will include 63
locations in six states.
Trust fees from C&IS increased 23% to $101.9 million from $82.8 million in the
year-ago quarter, reflecting strong new business. Excluding $3.5 million in fees
generated by Northern Trust Quantitative Advisors, Inc. (NTQA), a December, 1997
acquisition, C&IS trust fees increased 19% from the prior year. 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 first quarter fee
growth. Securities lending continued to achieve excellent results, with fees
increasing 24% or $3.5 million from the prior year quarter to $17.9 million.
Investment management revenues were very strong and contributed approximately
40% of the growth in C&IS trust fees, excluding the fees generated by NTQA. C&IS
trust assets under administration increased 42% or $312.9 billion from the prior
year and now total $1.06 trillion, of which $151.6 billion is managed by
Northern Trust. Trust assets under administration included approximately $173
billion of global custody assets. For the quarter, net new annualized fees sold
were $9.4 million, a 7% increase over the same period last year.
Foreign exchange trading profits continued to be outstanding, increasing 37% to
$28.1 million from $20.4 million in the same quarter last year. The strong
performance compared to last year reflects both increased trade volumes as
global custody assets continue to grow and volatility in the currency markets,
especially early in the quarter.
14
<PAGE>
Noninterest Income (continued)
Foreign exchange trading profits for the first quarter were second only to the
record $33.5 million in the third quarter of 1997, when volatility in the
southeastern Asia currency markets and transaction levels involving those
currencies were particularly high. Total treasury management revenues from both
fees and the computed value of compensating deposit balances increased 5% from
the first quarter of 1997 to $23.5 million, reflecting the continued growth in
business from both new and existing clients. The fee portion of these revenues
accrued in the quarter was $15.9 million, up from $14.6 million in the
comparable quarter last year.
Security commissions and trading income totaled $7.2 million compared with $5.9
million reported in the first quarter of 1997. The increase primarily reflects
growth in security brokerage activities resulting from the continued strength in
the equity markets.
Other operating income primarily includes loan, letter of credit and deposit-
related service fees, and totaled $11.0 million for the quarter compared with
$9.5 million reported in the first quarter of 1997. The increase over last year
was primarily the result of higher banking and trust deposit-related fees.
Net Interest Income
Net interest income for the quarter totaled $113.6 million, 7% higher than the
$106.1 million reported in the first quarter of 1997. 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 quarter
was $122.0 million, up 7% from the $114.1 million reported in 1997. The increase
in net interest income reflects growth in earning assets and higher levels of
noninterest-related funds, driven by increases in both demand and noninterest-
bearing deposits and common equity. The net interest margin declined to 2.11%
from 2.33% reported in the year-ago quarter. The decline in the net interest
margin is attributable to the flattening yield curve which has compressed
interest rate spreads and a higher proportion of lower spread short-term
securities and money market assets.
Earning assets for the first quarter averaged $23.4 billion, up 18% from the
$19.9 billion average for the same quarter of 1997. The $3.5 billion growth in
average earning assets was concentrated in the loan portfolio which increased
15% to average $12.7 billion, in securities which increased 22% to $7.2 billion,
and in money market assets which increased 21% to $3.5 billion on average from
the prior year level.
15
<PAGE>
Net Interest Income (continued)
The loan growth was concentrated predominantly in the domestic portfolio which
increased $1.4 billion to average $12.1 billion. Residential mortgage loans
accounted for nearly one-half of the domestic growth, increasing 14% to average
$5.3 billion for the quarter, comprising 41% of the total loan portfolio.
Commercial and industrial loans averaged $3.9 billion during the first quarter
compared to $3.3 billion in the prior year quarter. The securities portfolio
increased $1.3 billion or 22% reflecting a higher level of investments in short-
term U.S. agency securities. The increase in money market assets of 21% to $3.5
billion on average was principally the result of growth in global custody
activities and the more active short-term investment of noninterest-bearing
balances previously held with global subcustodians.
Funding for the growth in earning assets came from several sources. Total
interest-bearing deposits averaged $12.4 billion, up 16% or $1.7 billion from
the first quarter of 1997. This growth came principally from foreign office time
deposits (up $1.5 billion), and savings and money market deposits (up $307
million). The increase in foreign office time deposits resulted primarily from
growth in global custody activity. Other interest-related funds grew 26% or $1.5
billion resulting from higher levels of federal funds purchased, the issuance of
senior bank notes and $120 million of Floating Rate Capital Securities.
Noninterest-related funds increased 10% to average $3.6 billion, due to strong
demand and noninterest-bearing deposit growth and a $199 million increase in
common stockholders' equity resulting from retained earnings.
Provision for Credit Losses
The provision for credit losses of $4.0 million increased $3.5 million from the
first quarter of 1997 and essentially maintained the reserve for credit losses
at the year-end 1997 level. For a discussion of the provision and reserve for
credit losses, refer to the Asset Quality section.
Noninterest Expenses
Noninterest expenses totaled $236.2 million for the quarter, an increase of 14%
or $29.7 million from the $206.5 million in the year-ago quarter. Approximately
75% of this increase is related to salaries and employee benefits resulting from
staff growth, merit increases and higher performance-based compensation. In
addition, the noninterest expense increase in the first quarter reflects $3.1
million of incremental expenses resulting from the NTQA acquisition, new private
banking and trust offices, and continuing investments in technology.
16
<PAGE>
Noninterest Expenses (continued)
Salaries and benefits, which represent 61% of total noninterest expenses,
increased to $145.2 million from $122.5 million in the year-ago quarter. The
increase was primarily attributable to staff growth, merit increases and higher
performance-based compensation. Staff levels increased from one year ago to
support new business in both PFS and C&IS. Staff on a full-time equivalent basis
at March 31, 1998 totaled 7,672, up 8% from 7,081 at March 31, 1997. Excellent
new business results, higher foreign exchange profits, strong corporate earnings
and the price increase in Northern Trust Corporation stock increased
performance-based compensation expenses by $8.8 million from the first quarter
of last year.
Net occupancy expense totaled $16.9 million, up 4% from $16.1 million in the
first quarter of 1997, due in large part to the opening of additional private
banking and trust offices over the past twelve months, as well as additional
space leased to support business growth. The principal components of the
increase were higher net rental costs and lease operating expenses, building
maintenance and depreciation.
Equipment expense, comprised of depreciation, rental and maintenance costs,
totaled $16.5 million, up $1.6 million or 11% from the first quarter of 1997.
The principal components of the increase were higher levels of depreciation and
maintenance for computer hardware, personal computers and equipment.
Other operating expenses in the quarter totaled $57.6 million compared to $53.0
million last year. The increase in the 1998 expense level was primarily the
result of continued investment in technology, expansion of the personal trust
and banking office network, and the higher operating expenses necessary to
support business growth. The expense categories most affected were computer
software amortization, technical and consulting services, and business
promotional expenses, partially offset by lower costs associated with processing
errors and legal claims.
The components of other operating expenses were as follows:
<TABLE>
<CAPTION>
First Quarter
Ended March 31
--------------
(In Millions) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Business Development $ 8.1 $ 7.0
Purchased Professional Services 20.2 18.2
Telecommunications 3.4 3.0
Postage and Supplies 6.1 5.7
Software Amortization 10.0 9.3
Goodwill and Other Intangibles Amortization 3.3 2.4
Other Expense 6.5 7.4
- -------------------------------------------------------------------------------
Total Other Operating Expenses $57.6 $53.0
- -------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Noninterest Expenses (continued)
During the quarter Northern Trust made a strategic decision to exit the futures
brokerage business by June 30, 1998 with the transfer of the business of
Northern Futures Corporation (NFC) to Spear, Leeds & Kellogg. This decision will
allow Northern Trust to focus on its core businesses of trust, investments and
banking for individuals, corporations and institutions. It is expected that most
NFC employees will join Spear, Leeds and Kellogg or find other positions within
Northern Trust. Severance costs of $.2 million associated with this decision
were recorded in the quarter. The transfer of this business will not have a
material effect on Northern Trust's operating results.
Year 2000 Projects
Northern Trust's Year 2000 renovation and risk mitigation program which is fully
described in the Capital Expenditures section of the Management's Discussion and
Analysis included in the 1997 Annual Report to Shareholders, has proceeded on
schedule during the first quarter of 1998. During the quarter, Northern Trust
expensed $3.2 million in costs associated with this project. To date, $13.3
million of the $25 million estimated project costs have been incurred. This
estimate 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.
Northern Trust's 1997 Annual Report also describes the Year 2000 Business Issues
task force, part of whose work includes monitoring programs to contact vendors,
suppliers, utilities, federal and state agencies and others with which Northern
Trust's systems interact in areas important to its businesses to determine their
Year 2000 readiness. This program will involve some additional expense that is
not reflected in the above estimate but is not expected to be material.
Provision for Income taxes
The provision for income taxes was $45.1 million for the first quarter compared
with $36.7 million in the year-ago quarter. The higher tax provision in 1998
resulted primarily from the growth in taxable earnings for both federal and
state income tax purposes. The effective tax rate was 35% for 1998 versus 34% in
1997.
BALANCE SHEET
Total assets at March 31, 1998 were $24.3 billion and averaged $26.0 billion for
the first quarter, up 16% from last year's average of $22.4 billion. Due to
continued strong demand for credit, loans and leases grew to $13.0 billion at
March 31, 1998, and averaged $12.7 billion for the quarter. This compares with
$11.4 billion in total loans and leases at March 31, 1997 and $11.1 billion on
average for the first quarter of last year.
18
<PAGE>
BALANCE SHEET (continued)
Driven by continued strong earnings growth, offset in part by Northern Trust's
stock buyback program, common stockholders' equity increased to $1.7 billion at
March 31, 1998 and averaged $1.6 billion for the quarter, up 14% from the $1.4
billion average in last year's first quarter. Total stockholders' equity
averaged $1.8 billion for the first quarter compared with $1.6 billion in 1997.
During the quarter, Northern Trust acquired a total of 397,888 of its common
shares at a cost of $28.3 million pursuant to the stock buyback program
authorized by the Board of Directors. An additional 2.8 million shares may be
purchased after March 31, 1998 under the buyback program.
Northern Trust's risk-based capital ratios remained strong at 9.8% for tier 1
capital and 13.0% for total capital at March 31, 1998. 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 first
quarter average assets) of 7.0% at March 31, 1998, also exceeded the minimum
regulatory requirement of 3%. In addition, each of Northern Trust's subsidiary
banks had a ratio above 8.4% for tier 1 capital, 11.1% for total risk-based
capital, and 6.0% for the leverage ratio.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans, restructured loans and other
real estate owned (OREO). Nonperforming assets at March 31, 1998 totaled $39.2
million, compared with $43.3 million at December 31, 1997 and $23.9 million at
March 31, 1997. Domestic nonaccrual loans and leases, consisting primarily of
commercial loans, totaled $33.7 million, or .27% of total domestic loans and
leases at March 31, 1998. At December 31, 1997 and March 31, 1997, domestic
nonaccrual loans and leases totaled $38.9 million and $19.1 million,
respectively.
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.
19
<PAGE>
ASSET QUALITY (continued)
<TABLE>
<CAPTION>
March 31 December 31 March 31
---------------------------------------------------
(In Millions) 1998 1997 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual Loans
Domestic
Residential Real Estate $ 4.1 $ 5.3 $ 5.3
Commercial 22.4 26.3 6.0
Commercial Real Estate 6.8 7.1 7.6
Personal .4 .2 .2
- ------------------------------------------------------------------------------------------------
Total Domestic 33.7 38.9 19.1
International - - -
- ------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 33.7 38.9 19.1
Restructured Loans 2.5 2.5 2.6
Other Real Estate Owned 3.0 1.9 2.2
- ------------------------------------------------------------------------------------------------
Total Nonperforming Assets $39.2 $43.3 $23.9
- ------------------------------------------------------------------------------------------------
Total 90 Day Past Due Loans (still accruing) $16.1 $13.9 $28.1
- ------------------------------------------------------------------------------------------------
</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 1998 first quarter provision for credit losses was $4.0 million, compared
with $.5 million in the first quarter of 1997. Net charge-offs totaled $3.9
million in the first quarter of 1998, versus $.5 million last year. The reserve
for credit losses was $147.7 million or 1.14% of outstanding loans at March 31,
1998. This compares with $147.6 million or 1.17% of outstanding loans at
December 31, 1997 and $148.3 million or 1.30% of outstanding loans at March 31,
1997. The lower reserve to outstanding loans ratio at March 31, 1998 is
attributable to loan growth, a significant portion of which was 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.
20
<PAGE>
MARKET RISK MANAGEMENT
As described in the 1997 Annual Report to Shareholders, Northern manages its
interest rate risk through measurement techniques which include simulation of
earnings, simulation of the economic value of equity, and gap analysis. Also as
part of its risk management activities, it regularly measures the risk of loss
associated with foreign currency positions using a value at risk model.
Based on this continuing evaluation process, the Corporation's interest rate
risk position and the value-at-risk associated with the foreign exchange trading
portfolio have not changed significantly since December 31, 1997.
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking, such as
the discussion of Northern Trust's pricing trends, credit quality and outlook,
new business results, expansion plans and anticipated expenses for Year 2000
systems renovation and readiness evaluations. 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.
. 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.
. 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,
through acquisitions or otherwise, 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 renovation and the
introduction of the Euro.
21
<PAGE>
FORWARD-LOOKING INFORMATION (continued)
. The ability of various vendors and clients to complete Year 2000 systems
renovation efforts on a timely basis and in a manner that allows them to
continue normal business operations and furnish products, services or data to
Northern Trust without disruption, as well as Northern Trust's ability to
accurately evaluate their readiness in this regard.
. 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 section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" captioned "Risk Management" in the 1997
Annual Report to Stockholders (pp. 32-39) and in the sections of "Item 1 -
Business" of the 1997 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.
22
<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.
<TABLE>
<CAPTION>
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME NORTHERN TRUST CORPORATION
First Quarter
----------------------------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 1998 1997
-------------------------------------- -----------------------------------
($ 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 $ 12.5 $ 897.9 5.66% $ 8.5 $ 639.6 5.41%
Time Deposits with Banks 34.1 2,562.9 5.40 27.2 2,215.5 4.99
Other Interest-Bearing .8 45.6 6.81 .6 40.0 5.67
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Total Money Market Assets 47.4 3,506.4 5.49 36.3 2,895.1 5.09
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Securities
U.S. Government 7.0 465.3 6.06 13.3 931.1 5.80
Obligations of States and Political Subdivisions 9.0 398.2 9.04 10.0 420.7 9.52
Federal Agency 86.5 6,081.7 5.77 59.6 4,260.5 5.67
Other 3.2 223.4 5.87 3.7 241.7 6.19
Trading Account .2 8.9 7.17 .1 7.1 7.29
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Total Securities 105.9 7,177.5 5.98 86.7 5,861.1 5.99
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Loans and Leases 212.4 12,735.0 6.76 185.0 11,120.5 6.75
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Total Earning Assets $365.7 $23,418.9 6.33% $308.0 $19,876.7 6.28%
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Average Source of Funds
Deposits
Savings and Money Market $ 33.7 $ 4,155.7 3.29% $ 30.7 $ 3,951.4 3.15%
Savings Certificates 30.3 2,124.4 5.79 28.4 2,021.8 5.70
Other Time 7.1 525.6 5.47 8.1 614.6 5.35
Foreign Offices Time 68.7 5,553.1 5.02 47.0 4,081.9 4.67
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Total Deposits 139.8 12,358.8 4.59 114.2 10,669.7 4.34
Federal Funds Purchased 36.3 2,673.6 5.50 19.6 1,517.4 5.24
Repurchase Agreements 20.9 1,538.9 5.51 21.7 1,681.5 5.24
Commercial Paper 2.0 144.9 5.64 1.9 145.7 5.40
Other Borrowings 21.8 1,685.0 5.25 22.9 1,808.7 5.13
Senior Notes 10.6 750.0 5.68 3.7 265.0 5.54
Long-Term Debt 8.1 434.5 7.44 8.0 427.8 7.47
Floating Rate Capital Securities 4.2 267.4 6.26 1.9 123.8 6.21
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Total Interest-Related Funds 243.7 19,853.1 4.97 193.9 16,639.6 4.72
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Interest Rate Spread - - 1.36% - - 1.56%
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Noninterest-Related Funds - 3,565.8 - - 3,237.1 -
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Total Source of Funds $243.7 $23,418.9 4.22% $193.9 $19,876.7 3.95%
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
Net Interest Income/Margin $122.0 - 2.11% $114.1 - 2.33%
- ------------------------------------------------------- ---------- ----------- ----------- ----------- ------------ --------
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
First Quarter 1998/97
-------------------------------------
Change Due To
--------------------------
(In Millions) Volume Rate Total
- ---------------------------------------------------------------------------------------------- ----------- ------------ ---------
Earning Assets $52.5 $ 5.2 $57.7
Interest-Related Funds 41.5 8.3 49.8
- ---------------------------------------------------------------------------------------------- ----------- ------------ ---------
Net Interest Income $11.0 $ (3.1) $ 7.9
- ---------------------------------------------------------------------------------------------- ----------- ------------ ---------
</TABLE>
23
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The annual meeting of the stockholders of Northern Trust Corporation was held
on April 21, 1998 for the purpose of electing fourteen Directors to hold office
until the next annual meeting of stockholders. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and
there was no solicitation in opposition to management's nominees. All of the
management's nominees for Directors as listed in the proxy statement were
elected by the following votes set forth below. There were no broker non-votes
for any candidates.
<TABLE>
<CAPTION>
Candidates "FOR" "WITHHELD"
---------- ---------- ----------
<S> <C> <C>
Duane L. Burnham 96,829,717 445,613
Dolores E. Cross 97,051,259 445,613
Susan Crown 96,973,189 445,613
Robert S. Hamada 97,115,219 445,613
Barry G. Hastings 97,100,087 445,613
Robert A. Helman 97,067,323 445,613
Arthur L. Kelly 97,104,857 445,613
Frederick A. Krehbiel 96,288,198 445,613
William G. Mitchell 97,012,653 445,613
Edward J. Mooney 97,109,439 445,613
William A. Osborn 97,141,525 445,613
Harold B. Smith 97,127,401 445,613
William D. Smithburg 96,777,949 445,613
Bide L. Thomas 97,030,907 445,613
</TABLE>
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
--------
Exhibit (10) Material Contracts:
(i) Northern Trust Corporation (1998) Annual Performance Plan.
(ii) Amendment dated January 2, 1998 to 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 as trustee by U.S.
Trust Company of California, N.A.) dated January 26, 1989,
as amended.
(iii) Amendment dated March 25, 1998 to the Northern Trust
Employee Stock Ownership Plan (Section 5 of the Amendment
supersedes Exhibit (10)(v) filed with the Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997).
(iv) Seventh Amendment dated February 24, 1998 to 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.
(v) Second Amendment dated January 16, 1998 to 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.
Exhibit (27) Financial Data Schedule.
Exhibit (99) Edited version of remarks delivered by Mr. William A.
Osborn at the Annual Meeting of Stockholders of Northern
Trust Corporation held on April 21, 1998.
(b.) Reports on Form 8-K
-------------------
In a report on Form 8-K, Northern Trust Corporation incorporated in
Item 5 its January 20, 1998 press release, reporting on its earnings
for the fourth quarter of 1997 and for its 1997 fiscal year. The press
release, with summary financial information, was filed pursuant to
Item 7.
25
<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: May 14, 1998 By: Perry R. Pero
-------------
Perry R. Pero
Senior Executive Vice President
and Chief Financial Officer
Date: May 14, 1998 By: Harry W. Short
--------------
Harry W. Short
Senior Vice President and
Controller
(Chief Accounting Officer)
26
<PAGE>
EXHIBIT INDEX
The following exhibits have been filed herewith.
Exhibit
Number Description
- ------ -----------
(10) Material Contracts:
(i) Northern Trust Corporation (1998) Annual Performance Plan.
(ii) Amendment dated January 2, 1998 to 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 as trustee by U.S. Trust Company
of California, N.A.) dated January 26, 1989, as amended.
(iii) Amendment dated March 25, 1998 to the Northern Trust Employee
Stock Ownership Plan (Section 5 of the Amendment supersedes
Exhibit (10)(v) filed with the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997).
(iv) Seventh Amendment dated February 24, 1998 to 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.
(v) Second Amendment dated January 16, 1998 to 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.
(27) Financial Data Schedule
(99) Edited version of remarks delivered by Mr. William A. Osborn at the
Annual Meeting of Stockholders of Northern Trust Corporation held on
April 21, 1998.
27
<PAGE>
Exhibit Number (10)(i)
To 3/31/98 Form 10-Q
NORTHERN TRUST CORPORATION
ANNUAL PERFORMANCE PLAN
1998
I. Purpose of Plan
---------------
The purpose of the Annual Performance Plan (the "Plan") is to promote the
achievement of superior financial and operating performance of the Northern
Trust Corporation and its subsidiaries (hereinafter referred to as the
"Corporation"), and further the objective of delivering unrivaled service
quality to its clients and partners through the awarding of cash incentive
payments to selected officers.
II. Plan Year
--------
The Plan is effective from January 1, 1998 to December 31, 1998.
III. Eligibility and Participation
-----------------------------
Eligibility to participate in the Plan is restricted to officers with the
title of Vice President and above and who are not eligible for
participation in a Specialized Incentive Plan. Plan participation is
reviewed each year, and participation in one year does not automatically
indicate participation in subsequent Plan years. Participation in the Plan
is based upon recommendation from the respective Business Unit Head.
IV. Award Funding and Determination
-------------------------------
At the beginning of the Plan year, the Compensation and Benefits Committee
of the Board of Directors of the Corporation will determine a Corporate
Earnings Target and profit plan funding for awards under the Annual
Performance Plan. The allocation of the plan award funding to each
respective Business Unit will be based on the salaries of the eligible
officers within the Business Unit. Within each Business Unit, one-half of
the available funding for awards under the Plan will be based on the
Corporation's financial achievement versus the Corporate Earnings Target.
The other half of the award funding is based on the financial achievement
of the Business Unit versus the Business Unit's earnings target. For staff
support personnel, the available funding for awards will be based entirely
on the financial achievement of the Corporation versus the Corporate
Earnings Target. The formula determining the pool level funding based on
Corporate and Business Unit performance is described in Attachment I.
V. Individual Award Determination
------------------------------
<PAGE>
Individual participant awards will be discretionary. They will be
determined by Business Unit Management based on an assessment of individual
performance, relative to performance expectations, contribution,
competitive level of total compensation, and available award pool funding.
2
<PAGE>
VI. Payment of Awards
Awards will be paid in cash as soon as practicable following the completion
of the Plan year. Awards payable because of a Change in Control of the
Corporation pursuant to Paragraph VIII (h) shall be paid in cash as soon as
practicable following such Change in Control.
VII. Administration
The Plan shall be administered by the Management Committee of the
Corporation (the "Committee"). Subject to the provisions of the Plan, the
Committee shall be authorized to interpret the Plan, to establish, amend,
and rescind any rules and regulations relating to the Plan, and to make all
other determinations necessary or advisable for the administration of the
Plan. The determinations of the Committee in the effective administration
of the Plan, as described herein, shall be final and conclusive.
The Board of Directors of the Corporation, by written resolution, may
amend, suspend, or terminate any or all provisions of the Plan at any time.
VIII. Other Provisions
The following miscellaneous provisions are applicable to the Plan:
(a) Awards paid under the provisions of the Plan are considered
pensionable earnings when paid.
(b) Termination of employment by a participant during the Plan year,
either voluntary or involuntary with case, and for reasons other than
death, disability, or retirement shall result in immediate exclusion
from the Plan.
(c) Except in the event of the death of a participant, the rights and
interests of a participant under the Plan shall not be assigned,
encumbered, or transferred.
(d) No employee or other person shall have any claim or right to be
granted an award under the Plan. Neither the Plan, nor any action
taken thereunder, shall be construed as giving any employee or other
person any right to be retained in the employ of the Corporation.
(e) The Corporation shall have the right to deduct from all payments made
under the Plan any taxes required by law to be withheld with respect
to such payment.
(f) All questions pertaining to the validity, construction and
administration of the Plan and any award hereunder shall be determined
in conformity with the laws of the State of Illinois.
3
<PAGE>
(g) Each participant shall designate a beneficiary (the "Designated
Beneficiary") to receive the award, if any, allocated to a
participant, in the event of such participant's death. If no
Designated Beneficiary survives the participant, it shall be the
surviving spouse of the participant or, if there is no surviving
spouse, it shall be the participant's estate.
(h) Notwithstanding any other terms contained herein, in the event of a
Change in Control of the Corporation, discretionary awards shall be
paid to participants in accordance with the last sentence of Section
VI of this Plan and as if the Corporation and Business Units had
achieved the respective earnings targets, as described in Section IV.
For purposes of this paragraph, a "Change in Control" of the
Corporation shall be deemed to occur on the earliest of:
(i) The receipt by the Corporation of a Schedule 13D or other
statement filed under Section 13(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), indicating that
any entity, person, or group has acquired beneficial ownership,
as that term is defined in Rule 13d-3 under the Exchange Act, or
more than 30% of the outstanding capital stock of the
Corporation entitled to vote for the election of directors
("voting stock");
(ii) The commencement by an entity, person or group (other than the
Corporation or a subsidiary of the Corporation) of a tender
offer or an exchange offer for more than 20% of the outstanding
voting stock of the Corporation;
(iii) The effective time of (A) a merger or consolidation of the
Corporation with one or more other corporations as a result of
which the holders of the outstanding voting stock of the
Corporation immediately prior to such merger or consolidation
hold less than 60% of the voting stock of the surviving or
resulting corporation, or (B) a transfer of substantially all of
the property of the Corporation other than to an entity of which
the Corporation owns at least 80% of the voting stock; or
(iv) The election of the Board of Directors of the Corporation,
without the recommendation or approval of the incumbent Board of
Directors of the Corporation, or the lesser of (A) three
directors or (B) directors constituting a majority of the number
of directors of the Corporation then in office.
4
<PAGE>
Exhibit Number (10)(ii)
To 3/31/98 Form 10-Q
THIRD AMENDMENT
TO
THE NORTHERN TRUST COMPANY
EMPLOYEE STOCK OWNERSHIP TRUST
THIS AGREEMENT is made as of the 2nd day of January 1998 by and between THE
NORTHERN TRUST COMPANY, an Illinois state bank of Chicago, Illinois (the
"Company"), and U.S. TRUST COMPANY OF CALIFORNIA, N.A., as trustee (the
"Trustee").
WHEREAS, on January 2, 1998, the Trustee became successor trustee under the
THE NORTHERN TRUST COMPANY EMPLOYEE STOCK OWNERSHIP TRUST agreement dated the
26th day of January, 1988; and
WHEREAS, the Company and the Trustee desire to amend the Trust pursuant to
Section 7.1 to reflect recent changes in the law and other agreed upon
revisions.
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. Section 4.1 is hereby amended by adding a new second sentence to read
as follows
Subject to the provisions of the Plan, the Trustee is expressly authorized
to hold 100% of the assets of the Trust Fund in shares of Company Stock.
2. The third sentence of Section 4.3(a) is amended in its entirety to read
as follows:
Upon timely receipt of such directions, the Trustee shall on each such
matter vote as directed the number of shares (including fractional shares) of
Company Stock allocated to such Participant's Account, and the Trustee shall
have no discretion in such matter, except to the extent such directions are
contrary to ERISA.
3. The last sentence of Section 4.3(a) is amended in its entirety to read
as follows:
The Trustee shall vote allocated shares for which it has not received
direction and unallocated shares of Company Stock in the same proportion as
directed shares are voted, provided that Participants (or Beneficiaries) have
been informed that they are named fiduciaries with respect to those undirected
and unallocated shares and that their votes will be applied proportionately, and
except to the extent such directions are contrary to ERISA.
4. The first sentence of Section 4.3(b)(ii) is amended in its entirety to
read as follows:
All Company Stock held by the Trustee in Accounts shall be tendered or not
tendered by the Trustee in accordance with directions it receives from
Participants (or Beneficiaries), except to the extent such directions are
contrary to ERISA.
<PAGE>
5. Section 4.3(b)(iii) is amended in its entirety to read as follows:
The Trustee shall not tender Company Stock allocated to Accounts with
respect to which directions by Participants (or Beneficiaries) are not received,
provided that Participants (or Beneficiaries) have been informed that failure to
provide directions will constitute a direction not to tender, or Company Stock
held by the Trustee that is not allocated to Accounts, except as otherwise
provided in accordance with ERISA.
6. The first and second sentences of Section 6.1 are amended in their
entirety to read as follows:
The Trustee may at any time resign upon 30 days prior written notice to the
Company. The Trustee may be removed by the Company upon 30 days prior written
notice to the Trustee.
7. The last sentence of Section 6.3 is amended in its entirety to ready as
follows:
Except to the extent, if any, otherwise provided by ERISA, no successor
Trustee shall be liable for any act or omission which occurred prior to the time
it became a Trustee.
8. A new Section 8.7 shall be added to read as follows:
8.7 Indemnification.
(a) The Company and its successors shall indemnify and hold harmless
the Trustee from all loss or liability (including expenses and reasonable
attorneys' fees) to which the Trustee may be subject by reason of its execution
of its duties under this Trust Agreement, or by reason of any acts taken in good
faith in accordance with directions, or acts omitted in good faith due to
absence of directions, from the Committee unless such loss or liability is due
to the Trustee's negligence or willful misconduct. The Trustee is entitled to
collect on the indemnity provided by this Section 8.7 only from the Company, and
is not entitled to any direct or indirect indemnity payment from assets of the
Trust Fund.
(b) In the event that the Trustee is named as a defendant in a
lawsuit or proceeding involving the Plan or the Trust Fund, the Trustee shall be
entitled to receive on a current basis the indemnity payments provided for in
this Section. If, however, the final judgment or determination entered in the
lawsuit or proceeding holds or finds that the Trustee is guilty of negligence or
willful misconduct with respect to one or more counts alleged against it, the
Trustee shall immediately refund the portion of the indemnity payments that are
reasonably allocable to the defense of those counts with respect to which the
Trustee has been found to have committed acts of negligence or willful
misconduct.
<PAGE>
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: /s/ Martin J. Joyce, Jr.
---------------------------
Martin J. Joyce, Jr.
Its: Senior Vice President
---------------------
ATTEST:
/s/ Gerald P. Cleary
- --------------------
Gerald P. Cleary
Its:
U.S. TRUST OF COMPANY OF CALIFORNIA, N.A.
By: /s/ Dennis Kunisaki
-------------------
Dennis Kunisaki
Its: Vice President
--------------
ATTEST:
/s/ Dominica Amendola
- ----------------------
Dominica Amendola
Its:
<PAGE>
Exhibit Number (10)(iii)
to 3/31/98 Form 10-Q
AMENDMENT NUMBER FOUR
TO
NORTHERN TRUST
EMPLOYEE STOCK OWNERSHIP PLAN
WHEREAS, The Northern Trust Company (the "Company") maintains the Northern Trust
Employee Stock Ownership Plan, as amended and restated effective January 1, 1989
(the "Plan");
WHEREAS, amendment of the Plan is deemed desirable;
NOW, THEREFORE, by virtue and in exercise of the amending power reserved to the
Company under Section 13.1 of the Plan, and pursuant to the authority delegated
to the undersigned officer by resolutions of the Board of Directors dated
November 19, 1996, May 20, 1997, September 16, 1997, November 18, 1997, and
January 20, 1998, the Plan is hereby amended in the following particulars:
1. Effective April 1, 1998, Section 2.1 is amended by adding the following new
paragraph at the end of subsection (p) thereof:
"A person who is classified by the Company or an Affiliate as an
independent contractor shall not be considered an Employee for purposes of
the Plan, regardless of whether such person is characterized as an
"employee" by a governmental agency, judicial body, or under applicable
law."
2. Effective January 1, 1989, Section 2.1 is amended by adding the following
new sentence at the end of subsection (qq):
"The Trust forms a part of the Plan."
3. Effective January 1, 1989, Section 2.1 is amended by replacing subsection
(tt) thereof with the following:
"(tt) "Trustee" means the entity named by the Company to act as trustee of
the Trust pursuant to the Trust Agreement."
4. Effective September 30, 1997, the portion of Schedule A that references
FCNBD is amended to specify that the enhanced eligibility and vesting rules will
apply to FCNBD Employees hired by Northern from 9/30/96 through 9/30/97 pursuant
to the 10/03/96 Agreement with FCNBD.
5. Effective January 1, 1997, Schedule A is amended by adding "Bent Tree
National Bank Acquired 11/15/96" to the Affiliate Name column, and by adding
"DOH w/Bent Tree (before or after acquisition)" to the ESOP Earliest Vesting
Date Column.
<PAGE>
6. Effective December 31, 1997, Schedule A is amended to add "ANB Investment
Management and Trust Company ("ANB IMC") Acquired: 12/31/97" to the Affiliate
Name Column and "First Chicago NBD Service Date (before or after acquisition)"
to the ESOP Earliest Vesting Date Column.
IN WITNESS WHEREOF, the Company has caused this amendment to be executed on its
behalf by the undersigned officer this 25th day of March, 1998.
/s/ Martin J. Joyce, Jr.
- ------------------------
Martin J. Joyce, Jr.
Senior Vice President
<PAGE>
Exhibit Number (10)(iv)
To 3/31/98 Form 10-Q
SEVENTH AMENDMENT
This Seventh Amendment (the "Seventh Amendment") is made and entered
into as of February 24, 1998 by and between AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, not individually, but solely and only as Trustee under a
certain Trust Agreement dated the 5th day of April, 1990 and known as Trust No.
110513-07 (the "Landlord") and THE NORTHERN TRUST COMPANY, an Illinois banking
corporation (the "Tenant").
R E C I T A L S:
----------------
A. American National Bank and Trust Company of Chicago Trust No.
65287 (the "Prior Landlord") as landlord and Tenant as tenant have previously
executed a written lease dated as of August 27, 1985 (the "Original Lease"), a
written first amendment to agreement to lease dated as of August 15, 1986 (the
"First Amendment"), a written second amendment to agreement to lease dated as of
August 6, 1987 (the "Second Amendment") and a written third amendment to
agreement to lease dated as of May 20, 1988 (the "third Amendment").
B. The Original Lease as amended by the First Amendment, Second
Amendment and Third Amendment was assigned by Prior Landlord to Landlord by an
assignment dated April 6, 1990.
C. Landlord as landlord and Tenant as tenant have previously executed
a written fourth amendment to agreement to lease dated as of May 1, 1990 (the
"Fourth Amendment"), a written fifth amendment to agreement dated as of January
12, 1995 (the "Fifth Amendment") and a written sixth amendment to agreement to
lease dated as of November 30, 1995 (the "Sixth Amendment"), leasing certain
premises (the "Premises") in a building (the "Building") located on the real
estate with the street address of 181 West Madison Street, Chicago, Illinois.
The Original Lease, as amended by the First Amendment, Second Amendment, Third
Amendment, Fourth Amendment, Fifth Amendment and Sixth Amendment is hereinafter
referred to as the "Lease".
D. Landlord and Tenant desire to temporarily expand the size of the
Premises described in the Lease by an additional 8,245 rentable square feet (the
"Seventh Expansion Space") for a term (the "Seventh Term") commencing on that
date (the Seventh Trigger Date"), which is the later of: (i) the date Landlord
tenders possession of the Seventh Expansion Space to Tenant in the condition
required by Section 6 hereof; or (ii) March 15, 1998 and ending on that date
(the "Seventh Ending Date") which is the earlier of: (i) March 14, 2001; or (ii)
the date set forth in a termination notice delivered by Tenant to Landlord
pursuant to Section 7 of this Seventh Amendment. The Seventh Expansion Space is
located on the 15th floor of the Building. The
<PAGE>
location of the Seventh Expansion Space is indicated on Exhibit AE-7 attached
hereto and incorporated herein by reference.
E. Landlord and Tenant desire to modify and amend some of the
provisions of the Lease by the terms and provisions of this Seventh Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the parties
hereto contained in the Lease and this Seventh Amendment, Landlord and Tenant do
hereby mutually agree as follows:
1. CONTROLLING LANGUAGE. Insofar as the specific terms and provisions of
this Seventh Amendment purport to amend or modify or are in conflict with the
specific terms and provisions of the Lease, the terms and provisions of this
Seventh Amendment shall govern and control; in all other respects, the terms and
provisions (and definitions) of the Lease shall remain in full force and effect
and unmodified. The Recitals set forth above are incorporated herein by
reference as if fully set forth.
2. PREMISES. Effective as of the Seventh Trigger Date, Paragraph 1A of the
Lease shall, subject to future lease amendments affecting the size of the
Premises, be deemed automatically amended by adding thereto the description and
size of the Seventh Expansion Space contained in Recital D above and the
Premises shall be deemed to contain, in the aggregate approximately 240,688 RSF.
Effective as of the Seventh Ending Date, the size of the Premises shall,
automatically revert back to the RSF contained therein immediately prior to this
Seventh Amendment, subject to future lease amendments affecting the size of the
Premises. Tenant shall vacate and return the Seventh Expansion Space to the
Landlord, in the condition required by Paragraph 15 of the Lease, subject to the
condition Tenant received it in pursuant to Section 6 hereof, no later than the
Seventh Ending Date.
3. COMMENCEMENT DATE. Notwithstanding the provisions contained in
Paragraph 3 of the Lease, the "Commencement Date" with respect to the Seventh
Expansion Space shall be the Seventh Trigger Date. Tenant's obligations to pay
Rent and Operating Expenses allocable to the Seventh Expansion Space shall
commence as of the Seventh Trigger Date.
4. SEVENTH EXPANSION SPACE BASE RENT. Effective as of the Seventh Trigger
Date, in addition to all other payments of Rent required under the Lease
(including, but not limited to the Base Rental amounts set forth in Paragraph 4
of the Lease), and constituting an additional component of Rent under the Lease,
Tenant shall pay to Landlord the following sums during the Seventh Term as and
for Seventh Expansion Space Base Rent:
2
<PAGE>
<TABLE>
<CAPTION>
==========================================================================
RATE PERIODS OF PER MONTHLY SEVENTH ANNUAL SEVENTH
THE SEVENTH SQ/FT EXPANSION SPACE EXPANSION SPACE
TERM RENTAL BASE RENT BASE RENT
- --------------------------------------------------------------------------
<S> <C> <C> <C>
3/15/98 - 3/14/99 $ 9.50 6,527.29 78,327.50
- --------------------------------------------------------------------------
3/15/99 - 3/14/2000 $10.00 6,870.83 82,450.00
- --------------------------------------------------------------------------
3/15/2000 - 3/14/2001 $10.50 7,214.38 86,572.50
==========================================================================
</TABLE>
Each installment of Monthly Seventh Expansion Space Base
Rent shall be paid promptly on the first day of each and
every calendar month during of the Seventh Term. It is
the intent of Landlord and Tenant that the installments
of Monthly Seventh Expansion Space Base Rent for each
March during the Seventh Term be prorated to take into
account the fact that the Seventh Term and the Rate
Periods of the Seventh Term, begin and end during the
middle of March. The prorated amounts of Monthly Seventh
Expansion Space Base Rent, for each month of March
occurring during the Seventh Term shall be: (i) for March
1998, the sum of $3,579.48; (ii) for March 1999, the sum
of $6,715.68; (iii) for March 2000, the sum of $7,059.23;
and (iv) for March 2001, the sum of $3,258.11.
5. RENT ADJUSTMENTS. Notwithstanding any provision of the Lease to the
contrary, including but not limited to the provisions contained in Paragraph 5B
of the Lease, the Tenant shall not be liable for or required to pay any Rent
Adjustments or Rent Adjustment Deposits for or in relation to the Seventh
Expansion Space Base Rent.
6. CONDITION OF THE SEVENTH EXPANSION SPACE. Tenant does hereby
acknowledge that it has examined the Seventh Expansion Space and that the same
has been previously built out and is currently occupied by another tenant of the
Building. Tenant accepts the Seventh Expansion Space in its current "as is"
condition, subject to the vacation thereof by the current tenant without causing
any material damage thereto, and the delivery of possession thereof by Landlord
to Tenant, in a broom swept condition. Landlord has not promised and shall not
be required to make any improvements or alterations in or to the Seventh
Expansion Space.
7. TERMINATION RIGHT. Tenant shall have the right (the "Termination
Right") to end the Seventh Term effective any time after December 14, 2000, upon
not less than 6 months prior written notice to Landlord (the "Termination
Notice"). Together with the Termination Notice, Tenant shall pay to the Landlord
the sum of $10,000.00 (the "Termination Payment"). The Termination Notice shall
state the date of termination (the "Termination Date"), which shall be the last
day of a calendar month, and which shall not be less than 6 months subsequent to
the
3
<PAGE>
date of Tenant's delivery of the Termination Notice and Termination Payment to
Landlord. If Tenant shall exercise the Termination Right as aforesaid: (i) the
Tenant shall vacate the Seventh Expansion Space by the Termination Date and
return it to the Landlord in the condition required by Paragraph 15 of the
Lease; and (ii) the Seventh Term shall automatically end as of the Termination
Date. Except for Tenant's obligation to vacate and return the Seventh Expansion
Space as aforesaid and the obligation to pay Landlord the Termination Payment
and any Rent relating to the Seventh Expansion Space which has accrued through,
but remains unpaid as of the Termination Date, Tenant shall have no further
rights or obligations in relation to the Seventh Expansion Space after the
Termination Date.
8. NO OPTION TO EXTEND. Landlord and Tenant do hereby acknowledge that the
options to extend the Lease, as set forth in Section 33 thereof, shall not apply
to the Seventh Expansion Space.
9. RIGHT OF FIRST REFUSAL. Landlord and Tenant do hereby acknowledge that
after the Seventh Ending Date, the Seventh Expansion Space shall again be
subject to the right of first refusal contained in Paragraph 31 of the Lease.
10. BROKERS. Tenant represents that except for MIGLIN-BEITLER MANAGEMENT
CORPORATION, it has not dealt with any real estate brokers in connection with
this Seventh Amendment and, to its knowledge, no broker other than MIGLIN-
BEITLER MANAGEMENT CORPORATION, initiated or participated in the negotiation of
this Seventh Amendment, submitted or showed the Seventh Expansion Space or any
other space in the Building to Tenant or is entitled to any commission or fee in
connection with this Seventh Amendment. Tenant hereby agrees to indemnify,
defend, and hold Landlord harmless from and against any and all claims of any
other party for broker commissions or fees in connection with this Seventh
Amendment who claim to have dealt with the Tenant.
Landlord represents that except for MIGLIN-BEITLER MANAGEMENT CORPORATION,
it has not dealt with any real estate brokers in connection with this Seventh
Amendment and, to its knowledge, no broker other that MIGLIN-BEITLER MANAGEMENT
CORPORATION, initiated or participated in the negotiation of this Seventh
Amendment, submitted or showed the Seventh Expansion Space or any other space in
the Building, on behalf of Landlord, to Tenant or is entitled to any commission
or fee in connection with this Seventh Amendment. Landlord hereby agrees to
indemnify, defend, and hold Tenant harmless from and against any and all claims
of MIGLIN-BEITLER MANAGEMENT CORPORATION and any other party for broker
commissions or fees in connection with this Seventh Amendment who claim to have
dealt with the Landlord.
11. MERGER. All negotiations, considerations, representations and
understandings between Landlord and Tenant relating to this Seventh Amendment
are incorporated herein and may be modified or altered only by agreement, in
writing, between Landlord and Tenant. No modification, termination, or surrender
of the Lease, as modified by this Seventh Amendment, or surrender of the
Premises (including the Seventh Expansion Space) or any part thereof or of
4
<PAGE>
any interest therein by Tenant shall be valid or effective unless agreed to and
accepted, in writing, by Landlord and no act by any representative or agent of
Landlord other than delivery of such a written agreement and acceptance by
Landlord shall constitute agreement to and acceptance thereof. Any prior
negotiations or intentions of the parties relating to this Seventh Amendment,
whether oral or evidenced by written documentation dated prior to the date of
this Seventh Amendment, are null and void, unless specifically incorporated
herein by reference.
12. EXONERATION CLAUSE. This Seventh Amendment is executed by the
undersigned, American National Bank and Trust Company of Chicago, not
personally, but as Trustee in the exercise of the power and authority conferred
upon and vested in it as such Trustee and under the express direction of the
beneficiaries of the said Trust. It is expressly understood and agreed that all
of the warranties, indemnities, representations, covenants, undertakings and
agreements herein made on the part of the Trustee are undertaken by it solely in
its capacity as Trustee and not personally. No personal liability or personal
responsibility is assumed by or shall at any time be asserted or enforceable
against the Trustee on account of any warranty, indemnity, representation,
covenant, undertaking or agreement of the Trustee in this instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
LANDLORD: AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, not individually, but
solely as Trustee under Trust Agreement dated April
5, 1990 and known as Trust No. 110513-07
/s/ J. Michael Whelan
By:_______________________________
Title: Vice President
/s/ Greg Kasprzyk
By:_______________________________
Assistant Secretary
TENANT: THE NORTHERN TRUST COMPANY
/s/ Diane Menza
By:________________________________
Title: Vice President
5
<PAGE>
EXHIBIT AE-7
SEVENTH EXPANSION SPACE
[CHART APPEARS HERE]
THE NORTHERN TRUST
8,245 RSF
LEVEL 15
TOTAL RSF: 21,227
<PAGE>
Exhibit Number (10)(v)
to 3/31/98 Form 10-Q
SECOND AMENDMENT TO OFFICE LEASE
--------------------------------
THIS SECOND AMENDMENT TO OFFICE LEASE (the "Amendment") is made as of
this 16th day of January, 1998, by and between Metropolitan Life Insurance
Company, a New York corporation, as successor to American National Bank and
Trust Company of Chicago, as Trustee under Trust Agreement No. 61523
("Landlord") and The Northern Trust Company, a national banking corporation,
("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into that certain Office Lease
dated July 8, 1987, as amended by that certain First Amendment to Office Lease
dated October 20, 1987 (collectively, the "Lease") for the lease of certain
office space, currently consisting of the 4th through 8th floors in the building
located at 10 S. LaSalle Street, Chicago, Illinois, as more particularly
described in the Lease;
WHEREAS, Tenant desires to lease additional office space from Landlord
upon the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the covenants and conditions
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree as
follows:
1. Definitions. All terms used herein without definition shall have the
meanings ascribed to such terms in the Lease.
2. Expansion of Premises. Tenant hereby leases from Landlord and Landlord
hereby leases to Tenant for the purposes set forth in the Lease the premises
consisting of that certain office space diagrammed on Exhibits A-1, A-2 and A-3
attached hereto, which space is located, respectively, on the 9th, 10th and 13th
floors of the Building consisting of, respectively, 10,291 rentable square feet,
7,660 rentable square feet and 8,345 rentable square feet for a total of 26,296
rentable square feet (the "Expansion Premises"). Effective as of the date
hereof, the "Premises" as defined in the Lease shall include the Expansion
Premises. Except as modified herein, Tenant's lease of the Expansion Premises
shall be upon all terms and conditions contained in the Lease.
3. Lease Term for the Expansion Premises. The term of the lease of the
Expansion Premises (the "Expansion Premises Term") shall commence on April 1,
1998 (the "Expansion Premises Commencement Date") and shall expire on March 31,
2001 (the "Expansion Premises Expiration Date").
<PAGE>
4. Base Rent for the Expansion Premises. Commencing on the Expansion
Premises Commencement Date, Tenant shall pay Base Rent for the Expansion
Premises at the rates listed in the Base Rent Schedule below, in the same manner
and at the same time as required under the terms of the Lease:
Base Rent Schedule for the Expansion Premises
---------------------------------------------
<TABLE>
<CAPTION>
Monthly Annual
Lease Period Base Rent Base Rent
------------ --------- ---------
<S> <C> <C>
4/1/98-3/31/99 $23,009.00 $276,108.00
4/1/99-3/31/00 26,296.00 315,552.00
4/1/00-3/31/01 29,583.00 354,996.00
</TABLE>
5. Rent Adjustment and Tenant's Proportionate Share. Tenant shall pay
Rent Adjustment and any other components of Rent for the Expansion Premises in
accordance with the terms of the Lease, except that Tenant's Proportionate Share
shall be calculated pursuant to the terms of the Lease and, as of the Expansion
Premises Commencement Date, will be 126,653/715,785 or 17.6943%.
6. Possession and Condition of the Premises. Upon execution of this
Amendment by Tenant and Landlord, Landlord shall deliver possession of the
Expansion Premises to Tenant. Upon delivery of possession of the Expansion
Premises to Tenant, Tenant shall be subject to all of the terms, covenants and
conditions of the Lease (except with respect to the payment of Base Rent and
Rent Adjustment for the Expansion Premises) as of the date of such possession.
Landlord shall deliver possession of the Expansion Premises to Tenant in its
"as-is" condition. Tenant shall be conclusively deemed to have accepted the
Expansion Premises "as is" in the condition existing on the date Tenant first
takes possession, and to have waived all claims relating to the condition of the
Expansion Premises. No promise of Landlord to remodel, improve, decorate or make
additions to the Expansion Premises or any part thereof, and no representation
respecting the condition of the Expansion Premises or the Property has been made
to Tenant by Landlord. Tenant shall make improvements to the Expansion Premises
in accordance with the terms of the Workletter attached hereto as Exhibit B.
Tenant shall be entitled to an allowance for such improvements as provided in
the Workletter.
7. Renewal Option for Expansion Premises.
(a) Exercise of Option. Tenant shall have the option (the "Renewal Option")
to extend the Expansion Premises Term for the Expansion Premises for one (1)
additional three (3) year period (the "Renewal Period"). If Tenant desires to
exercise the Renewal Option, Tenant shall deliver written notice ("Renewal
Notice") to Landlord on or before July 1, 2000. The Renewal Option shall be on
the same terms and conditions as contained in the Lease, except during the
Renewal Period, Base Rent shall be the amounts listed in the Expansion Premises
Renewal Base Rent Schedule listed below, there shall be no further renewal
rights and there shall be no tenant or construction allowance or any other
concessions of any kind. If Tenant
2
<PAGE>
successfully exercises the Renewal Option, then the term "Expansion Premises
Term" as used in this Amendment shall be deemed to include the Renewal Period.
(b) Rent. Base Rent for the Expansion Premises during the Renewal Period
shall be the following amounts:
Expansion Premises Renewal Base Rent Schedule
---------------------------------------------
<TABLE>
<CAPTION>
Monthly Annual
Lease Period Base Rent Base Rent
------------- ----------- ------------
<S> <C> <C>
4/1/01-3/31/02 $32,870.00 $394,440.00
4/1/02-3/31/03 36,157.00 433,884.00
4/1/03-3/31/04 39,444.00 473,328.00
</TABLE>
Tenant shall pay Rent Adjustment and other components of Rent for the Expansion
Premises during the Renewal Period in accordance with the terms of this
Amendment and the Lease.
(c) Conditions to Renewal Option. It shall be a condition to Tenant's
exercise of the Renewal Option that both at the time of delivery of Tenant's
Renewal Notice and at the commencement of the Renewal Term, Tenant is not in
Default under the Lease. Any termination of this Lease or termination of
Tenant's right of possession shall terminate all of Tenant's rights to the
Renewal Option. Tenant shall have no right to assign, transfer or otherwise
dispose of any of its rights or interests under this Paragraph 7, such rights
being granted solely to The Northern Trust Company; provided, however, any
successor by merger, consolidation or acquisition of all or substantially all of
the assets or capital stock of The Northern Trust Company shall be entitled to
the rights granted to The Northern Trust Company hereunder.
(d) Condition of the Premises Upon Renewal. The Expansion Premises shall
be leased to Tenant during the Renewal Period in its then "as-is" condition and
Landlord shall have no obligation to remodel, improve, decorate, or make
additions to the Expansion Premises.
Notwithstanding any of the foregoing provisions of this Paragraph, any attempt
by Tenant to exercise a Renewal Option by any method, or at any time, or in any
circumstance, except as specifically set forth above shall, at the sole option
and discretion of Landlord, be null and void and of no force or effect.
8. Limitation of Liability. Tenant agrees, on its behalf and on behalf of
its successors and assigns, that any liability of Landlord with respect to this
Amendment and the Lease shall never exceed the amount of offset which Tenant
utilizes pursuant to Paragraph 12.C of the Lease, plus an amount not to exceed
$10,000,000.00 ("hereinafter collectively referred to as the "Liability Cap")
and Tenant shall not be entitled to recover from Landlord any amounts in excess
of the Liability Cap.
3
<PAGE>
9. Entire Agreement. This Amendment and the Lease contain all the terms,
covenants, conditions and agreements between Landlord and Tenant regarding the
Expansion Premises. No prior or other agreement or understanding pertaining to
such matters shall be valid or of any force and effect.
10. Conflict. In the event of a conflict between the terms of the Lease
and the terms of this Amendment, the terms of this Amendment shall control.
11. Brokers. Tenant represents to Landlord that, except for CB
Commercial/Koll Management Services and Tanguay-Burke-Stratton, L.L.C., Tenant
has not dealt with any real estate broker, sales person, or finder in connection
with this Amendment, and no such person initiated or participated in the
negotiation of this Lease, or showed the Expansion Premises to Tenant. Tenant
hereby agrees to indemnify, protect, defend and hold Landlord, its directors,
officers, employees, affiliates and agents, harmless from and against any and
all liabilities and claims for commissions and fees arising out of a breach of
the foregoing representation.
Landlord represents to Tenant that, except for CB Commercial/Koll Management
Services and Tanguay-Burke-Stratton, L.L.C., Landlord has not dealt with any
real estate broker, sales person, or finder in connection with this Amendment,
and no such person initiated or participated in the negotiation of this Lease.
Landlord hereby agrees to indemnify, protect, defend and hold Tenant, its
directors, officers, employees, affiliates and agents, harmless from and against
any and all liabilities and claims for commissions and fees arising out of a
breach of the foregoing representation. Landlord shall be solely responsible for
the payment of all commissions to the brokers specified in this Paragraph.
12. Reaffirmation of Lease. Except as otherwise herein provided, the
terms and conditions of the Lease are hereby reaffirmed and incorporated herein
by reference and shall, except as hereby modified, in all respects remain in
full force and effect. Any and all references in the Lease and this Amendment to
the "Lease" shall mean the Lease, as amended by this Amendment.
4
<PAGE>
IN WITNESS WHEREOF, this Amendment is executed by the undersigned as
of the day and year first above written.
LANDLORD: TENANT:
Metropolitan Life Insurance Company, The Northern Trust Company,
a New York corporation a national banking corporation
By: Lynn Jones By: /s/ N. Wayne LaChance
------------------------- ---------------------
Its: Assistant Vice-President Its: Vice President
------------------------ --------------
ATTEST:
By: /s/ Victoria Antoni
-------------------
Its: Assistant Secretary
-------------------
5
<PAGE>
EXHIBIT A-1
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT A-2
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT A-3
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT B
Workletter
----------
Metropolitan Life Insurance Company, a New York corporation ("Landlord")
and The Northern Trust Company, a national banking association, ("Tenant") are
executing simultaneously herewith a Second Amendment to Lease (the "Amendment"),
whereby Landlord is leasing certain space (the "Expansion Premises") to Tenant
as more particularly described in the Amendment. In connection with the
execution of the Amendment, Landlord and Tenant have further agreed as follows
(all terms herein without definition shall have the meaning ascribed to such
terms in the Amendment):
1. Space Plan. Tenant, at Tenant's sole cost and expense, subject to
reimbursement by Landlord from the Construction Allowance, has directed and
authorized its internal or in-house architect or an outside architect reasonably
acceptable to Landlord (the "Architect") to prepare a space plan of the
Expansion Premises ("Space Plan") depicting the physical layout of the Expansion
Premises. Upon completion, Tenant shall deliver the Space Plan to Landlord for
Landlord's approval, such approval not to be unreasonably withheld or delayed.
2. Working Drawings. Tenant shall also cause the Architect to prepare, at
Tenant's sole cost and expense, subject to reimbursement by Landlord from the
Construction Allowance, the final architectural, mechanical (including heating,
ventilating and air-conditioning) electrical, plumbing and structural plans and
specifications ("Working Drawings") necessary to complete the work ("Work")
required to construct the improvements to the Expansion Premises depicted in the
Space Plan previously approved by Landlord.
Tenant shall cause Architect to submit the finished Working Drawings to
Landlord and Landlord shall review the Working Drawings and grant its consent or
denial thereof within five (5) business days after receipt of all of the Working
Drawings, which approval shall not be unreasonably withheld or delayed (provided
in all events Landlord may withhold its consent to the Working Drawings to the
extent the same affects the structural integrity of the Building or adversely or
materially affects any Building system). To the extent Landlord does not provide
its consent to the Working Drawings as aforesaid, Landlord shall state, with
specificity, Landlord's reasons for such disapproval. Tenant shall then be
required to make such corrections as Landlord may designate and resubmit the
Working Drawings to Landlord for its consent.
Subsequent to Landlord's approval of the Working Drawings, any changes to
the Working Drawings requested by Tenant shall be subject to the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed, provided Landlord may withhold its consent to any of said changes for
the same reasons previously stated for not approving the Working Drawings and
under the same conditions as stated in the preceding Paragraph.
1
<PAGE>
Tenant shall pay to Landlord any reasonable out-of-pocket costs or expenses
Landlord incurs in the process of reviewing the Working Drawings or any changes
thereto.
3. Work. Tenant shall cause the Work to be completed. Tenant hereby
agrees that the Work shall be completed by a general contractor selected by
Tenant and approved by Landlord, which approval shall not be unreasonably
withheld or delayed (the "General Contractor"). Tenant shall cause General
Contractor to hire only union subcontractors (collectively, "Subcontractors").
Further, Tenant agrees Tenant's failure to cause General Contractor to hire only
union Subcontractors shall constitute a default under the Lease. Tenant agrees
General Contractor shall have no right to commence any Work to the Expansion
Premises unless and until Tenant has tendered to Landlord a building permit for
the Work issued by the City of Chicago. Tenant agrees to display the building
permit at the Expansion Premises at all times during the prosecution of the
Work. Tenant hereby guarantees to Landlord that the Work shall be completed in a
lien free manner and in strict accordance with the Working Drawings and all
applicable laws (it being acknowledged by Landlord and Tenant the provisions of
the Lease shall control with respect to mechanics' liens filed against the Real
Estate or the Building as a result of the Work). Tenant shall only conduct the
Work between the hours of 7:00 a.m. to 6:00 p.m. unless otherwise consented to
by Landlord (which consent shall not be unreasonably withheld or delayed) and
shall cause as minimal disruption as reasonably possible to other tenants of the
Building.
4. Freight Elevator. For purposes of the Work, Tenant shall have the non-
exclusive right to use the Building's freight elevator subject to availability
and scheduling as may be reasonably established by Landlord. Such freight
elevator use by Tenant during normal business hours shall be free of charge
during such construction period; provided, however, to the extent Tenant
utilizes such freight elevators after normal business hours, Tenant shall pay to
Landlord any reasonable costs and expenses incurred by Landlord as a result of
such after hours activities; provided, further, if any other tenant of the
Building is also using said freight elevator with Tenant after normal business
hours, then any charge to Tenant shall be apportioned between all parties
utilizing said freight elevators.
5. Cost of Work. Tenant shall be responsible for and shall pay all costs
associated with the Space Plan, the Working Drawings and the Work. Tenant shall
pay all amounts timely so as to prevent the filing of any liens against the
Expansion Premises, the Building or the Real Estate. Landlord shall provide to
Tenant an allowance to be used by Tenant as payment for costs incurred in
connection with the Space Plan, the Working Drawings and the Work in the total
amount of Two Hundred Ninety-Nine Thousand Seven Hundred Seventy-Four and
40/100ths Dollars ($299,774.40) (the "Construction Allowance"). The Construction
Allowance shall be paid to Tenant on or before April 1, 1998.
6. Lien Waivers. Tenant shall diligently obtain and promptly deliver to
Landlord all waivers of lien and affidavits of the General Contractor, all
subcontractors, laborers, suppliers and materialmen and others conducting
"lienable" work on or to the Expansion Premises. In any event, Tenant shall
submit all such waivers of lien and affidavits to Landlord no later than
September 1, 1998.
2
<PAGE>
7. Utility Costs. Tenant shall be responsible and shall pay for the cost
of utility services provided to the Expansion Premises during construction of
the Work. It is acknowledged by Tenant that Tenant shall be responsible for
causing all utilities to be operating within the Expansion Premises as of the
Expansion Premises Commencement Date and, to the extent such utilities are not
operating within the Expansion Premises as of the Expansion Premises
Commencement Date, through no fault of Landlord, Landlord's obligations to
supply certain utilities described in the Lease shall be of no force and effect
until such time as Tenant causes said utilities to be operational within the
Expansion Premises.
8. Insurance.
(i) During the course of construction of the Work, Tenant shall obtain, pay
for and maintain or cause General Contractor to obtain, pay for and
maintain insurance for the coverages and amounts of coverage not less
than those set forth below in the Schedule of Insurance Coverages (as
hereinafter defined) and shall provide or shall cause General
Contractor to provide to Landlord certificates issued by insurance
companies reasonably satisfactory to Landlord to evidence such
coverages before any Work commences at the Expansion Premises. Such
certificates shall provide that there shall be no termination, non-
renewal, modification or expiration of such coverage without thirty
(30) days prior written notice to Landlord. Such certificates shall
name Metropolitan Life Insurance Company, owner, and CB Commercial Real
Estate Group, Inc. and its affiliates and subsidiaries, manager, as
additional insureds. In the event of any failure by Tenant to cause
General Contractor to comply with the provisions of this Paragraph 8,
Landlord may, at is option, upon notice to Tenant, suspend the Work
until such time as there is full compliance with this Paragraph 8.
Tenant shall provide to Landlord a certified copy of any and all
applicable insurance policies upon request of Landlord.
(ii) Schedule of Insurance Coverages. The following shall constitute the
"Schedule of Insurance Coverages":
(a) Workers' Compensation Insurance. Coverage complying with the law
of the State of Illinois and Employer's Liability insurance with a
limit of $1,000,000.00 each accident, including occupational
disease coverage with a limit of $1,000,000.00 per person subject
to aggregate limit of $1,000,000.00 per annum.
(b) Comprehensive Automobile Liability Insurance. $1,000,000.00
combined single limit of liability for bodily injuries, death and
property damage resulting from any one occurrence, including all
owned, hired and non-owned vehicles.
(c) Commercial General Liability Insurance. $1,000,000.00 combined
single limit of liability for bodily injuries, death and property
damage resulting from any one occurrence, including the following
coverages:
3
<PAGE>
(1) Premises and Operations;
(2) Completed Operations for one (1) year after completion of the
Work;
(3) Broad Form Comprehensive General Liability Endorsement, Bodily
Injury (with employment and contractual exclusions deleted) and
Broad Form Property Damage Coverage;
(4) Independent Contractors; and
(5) Delete Exclusions relative to Collapse, Explosion and Underground
Property Damage Hazards;
(d) Builder's Risk Insurance. Tenant shall procure, pay for, and maintain
all-risk builder's risk insurance (or comparable form) for the full
insurable value of all labor and materials incorporated into the
construction of the Work, while at the construction site and/or
staging area awaiting erection and during erection, until completion
and acceptance. Insurance is to cover real and personal property after
it is received at the construction site and/or staging area (but not
while otherwise stored off-site or in transit). The policy so
purchased shall insure Landlord, General Contractor and the
Subcontractors as their interests may appear may appear and shall be
so written as to provide for reimbursement, in the event of claim for
loss or damage, for the entire cost of repairing or replacing,
reconditioning, or re-erecting the property lost or damaged with
materials of similar kind and quality, including, but not by way of
limitation, the cost of materials, labor, supervision, engineering and
transportation.
Notwithstanding the foregoing, Tenant may elect to effect the all-risk
builder's risk insurance described above through a plan of self
insurance provided that Tenant complies with the provisions of
Paragraph 17.A of the Lease relating to self insurance as applied to
the insurance coverage requirements contained in this subparagraph
(including, without limitation, obtaining Landlord's consent).
(e) Miscellaneous.
(1) Any insured loss or claim of loss pursuant to this Paragraph 8
shall be adjusted by Landlord, and any settlement payments shall
be made payable to Landlord as trustee for the insureds, as their
interests may appear, subject to the requirements of any
applicable mortgagee clause. Upon the occurrence of an insured
loss or claim of loss, monies received will be held by Landlord
who shall make distribution in accordance with an agreement to be
reached in such event between Landlord and Tenant. If the parties
are unable to agree between themselves on the settlement of the
loss, such dispute shall be submitted to a court of competent
jurisdiction to
4
<PAGE>
determine ownership of the disputed amounts but the Work shall
nevertheless progress during any such period of dispute without
prejudice to the rights of any party to the dispute.
(2) Landlord shall not insure or be responsible for any loss or
damage to property owned, rented or leased by General Contractor,
Subcontractors, or their employees, servants or agents, other
than property which will become a part of the permanent
construction.
(3) With respect to General Contractor's operations, Tenant shall
cause General Contractor to purchase, maintain and pay for all-
risk contractor's equipment floater on all machinery, tools,
equipment and other similar property in an amount at least equal
to their fair market value and any deductible shall be for the
account of General Contractor. This insurance coverage shall be
the sole and complete means of recovery for any loss covered by
such insurance.
(f) Subcontractor's Insurance. Tenant shall cause General Contractor to
require each of its Subcontractors to comply with a Worker's
Compensation, Employer's Liability, Comprehensive General Liability
and the Automobile Liability insurance provisions set forth in the
Schedule of Insurance Coverages. Tenant shall cause General
Contractor to cause each of the Subcontractors to deliver to Landlord
certificates of insurance evidencing the foregoing coverages prior to
commencement of respective Work and, in the event Tenant fails to
cause General Contractor to cause each Subcontractor to deliver to
Landlord the required certificates of insurance from such
Subcontractors and a claim is made or suffered, Tenant shall
indemnify, defend and hold harmless Landlord, its shareholders,
officer, directors, affiliates, employee's or agents from any and all
claims for which the required insurance would have provided coverage.
This indemnity obligation is in addition to any other indemnity
obligation provided herein.
(g) Certificates of Insurance. All certificates of insurance required to
be delivered to Landlord as set forth herein from General Contractor
or any Subcontractor shall name Landlord as an additional insured as
its interest may appear.
9. Indemnification. To the fullest extent permitted by law, Tenant shall
indemnify, defend and hold harmless Landlord, its directors, officers,
employees, affiliates and agents (the "Indemnified Parties") from and against
any and all loss, cost, expense, damage, injury, liability, claim, demand,
penalty or cause of action (including reasonable attorneys' fees and court
costs), directly or indirectly arising out of, resulting from or related to (in
whole or in part), (1) the Work, (2) this Workletter, (3) any mechanics' liens
which may be placed against the Building or Real Estate as a result of the Work,
and (4) any act or omission of Tenant, General Contractor, any Subcontractor or
any individual, partnership, joint venture or corporation (a) directly or
indirectly employed by General Contractor or a Subcontractor, or (b) for whose
acts or omissions
5
<PAGE>
General Contractor or any Subcontractor may be liable. Subject to the waiver of
subrogation provisions in the Lease, the obligations of Tenant under this
indemnification shall apply to all matters except those arising solely from the
negligence or the wrongful acts or omissions of Landlord. Tenant shall promptly
advise Landlord in writing of any action, administrative or legal proceeding or
investigation as to which this indemnification may apply, and Tenant, at
Tenant's expense, shall assume on behalf of Landlord and conduct with due
diligence and in good faith the defense thereof with counsel reasonably
satisfactory to Landlord; provided, that Landlord shall have the right to be
represented therein by advisory counsel of its own selection and at its own
expense. The obligations of this Paragraph 9 shall survive final completion of
the Work and shall be in addition to the insurance requirements set forth in the
Lease and shall not be in discharge of or in substitution for the same.
10. Landlord's Supervision. Tenant hereby acknowledges that Landlord, at
Landlord's cost, shall have the right to cause a "Supervising Architect" to
periodically inspect the Work to determine its compliance with the Working
Drawings. Tenant agrees to provide access to the Work to the Supervising
Architect and cooperate with the Supervising Architect at such times as Landlord
may request, in its reasonable discretion.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Workletter as of
the day and year of the execution of the Lease.
LANDLORD: TENANT:
Metropolitan Life Insurance Company, The Northern Trust Company,
a New York corporation a national banking corporation
By: Lynn Jones By: /s/ N. Wayne LaChance
-------------------------- ---------------------
Its: Assistant Vice-President Its: Vice President
------------------------ --------------
ATTEST:
By: /s/ Victoria Antoni
--------------------
Its: Assistant Secretary
6
<PAGE>
Exhibit Number (99)
To 3/31/98 Form 10-Q
William A Osborn
Annual Shareholders Meeting
April 21, 1998
1997 was an outstanding year for Northern Trust. This was our tenth consecutive
year of record earnings with net income growing 20% to $309.4 million. Both of
our businesses, Personal Financial Services and Corporate & Institutional
Services, experienced record new business. This strong new business performance
fueled the 17% growth in revenues for 1997. As a result, we had excellent
performance against all of our strategic financial targets. Our return on equity
of 20.2% exceeded our target range of 18-20% and was the highest in the decade
of the 90's. Earnings per share grew 20% which is double our minimum target
level and ahead of last year's excellent performance. As you may recall, at last
year's meeting, we announced that we were increasing our productivity target to
160% from the long standing 150% target level. We are making excellent progress
toward this new goal. In 1997, our productivity ratio was 158%. This means that
for every $1.00 in expenses we brought in $1.58 in revenues. And as you will see
shortly, we achieved our new target of 160% for the first time with our strong
first quarter performance.
1997 also marked a significant milestone for us. Our trust assets reached $1
trillion for the first time. It is now necessary for us to keep track of trust
assets in increments of $100 billion. In 1997, trust assets grew $340 billion or
41%. Just ten years ago, we had $100 billion in trust assets for the whole
corporation. Now, our Personal Trust business alone has over $100 billion in
<PAGE>
assets under administration. Of the total $1.2 trillion today, we have $216
billion in assets under management - $65 billion in Personal Financial Services
and $151 billion in Corporate & Institutional Services. Assets under management
grew $73 billion in 1997 and are up $20 billion so far in 1998. Strong new
business and favorable equity markets have fueled this asset growth. Total trust
new business (recurring) fees for 1997 were $120 million which represents 33%
growth from 1996.
Northern's success comes from a very unique and highly focused business
strategy. We are in just two businesses: Personal Financial Services and
Corporate and Institutional Services. Our strong commitment to and investment in
these two businesses is very understandable when you see the even balance
between them as measured by the revenue contribution. Corporate and
Institutional Services accounted for 48% of total corporate revenues in 1997. In
this business, we administer and manage global investment asset pools and
provide corporate banking services for corporate and institutional clients
worldwide. Northern is able to offer a comprehensive array of retirement plan,
global custody, investment, treasury management, credit and risk management
products and services. We are one of six major custodians competing for this
business. In Personal Financial Services, which accounted for 50% of total
revenues, we provide trust, investment management, and private banking services
to individuals in targeted high growth, affluent markets. Our PFS business has
achieved excellent growth and we expect this to continue. We see our target
market growing dramatically in the next few years. As we approach the next
century, the U.S. population is expected to grow 1.0% annually. By contrast, the
affluent
<PAGE>
segment is expected to grow at almost 10 times that rate - at 9.6% annually. The
Super Wealthy segment (over $5 million in assets) is expected to grow even
faster at 13%. Our PFS strategy is aimed at providing products and services to
this growing segment of affluent individuals. In our Wealth Management group, we
provide products and services to wealthy families with assets typically
exceeding $100 million. This segment is also experiencing significant growth. To
demonstrate this fact, in 1985, there were 88 families worth over $500 million
in the Forbes 400. In 1996, this number grew to 337. This translates to a 14%
compound annual growth rate.
Personal Financial Services
We opened 5 new PFS office locations in 1997. These included two in California:
Montecito and LaJolla and one in northwest Tucson in Arizona. In addition, we
opened two new locations in Florida: Tampa and the Doral section of Miami. That
brings to 62 the total number of offices that we have in our Personal Financial
Services network. And for 1998, we are very excited to be adding two new states
to our existing five - Colorado and Michigan. First, we are in the process of
acquiring the Trust Bank of Colorado in Denver. This acquisition is expected to
close in mid to late May and will give us access to the attractive Denver
market. We are also in the process of opening an office in Bloomfield Hills, MI,
which is an upscale suburb of Detroit. This office is expected to be open in the
third quarter of this year and we are pleased that Fred Adams, former senior
executive from NBD, will be heading our Michigan operation. In addition to these
two new states, we are planning three new Illinois locations to open later this
year: Hinsdale, Glenview and Chicago West (Logan Square), and a new location
<PAGE>
just north of Sarasota, Florida (Lakewood Ranch). That will bring our total to
68 office locations in 7 states.
Corporate and Institutional Services
In our Corporate and Institutional Business, we are focused on three key
initiatives. First, the expansion of Investment Services. Our extensive global
client base increasingly demands more product capabilities. In February of this
year, Steve Timbers joined Northern in the newly created position of President
of Northern Trust Global Investments. Steve has responsibility for all of
Northern's investment activities at the corporate level and will provide
additional leadership to expand our strategic investment capabilities. In
December of last year, we completed the acquisition of ANB Investment Management
and Trust Company. Now known as Northern Trust Quantitative Advisors, this new
subsidiary expanded our capabilities in passive investment management and index
funds. This was a natural complement to our strong and growing investment
business. We are also focused on increasing clients and services in the
international arena. Northern continues to be one of the top global custodians
in the world. Over the past several years, we have expanded our international
presence with offices in Montreal, Hong Kong and Singapore. We provide products
and services to clients in 34 different countries and our clients are able to
invest in 76 markets worldwide through our ever expanding subcustodian network.
In 1997, International Services experienced the strongest new business growth of
all the C&IS market segments. Our Foreign Exchange group had a phenomenal year
with 78% growth in foreign exchange trading profits and Northern now ranks among
the top ten U.S. banks in FX revenues and
<PAGE>
actively trades in 56 currencies. Another initiative is managing the product mix
in client relationships. While custody, credit services, recordkeeping and
treasury management are core products that allow us to capture clients' assets,
managing the mix of products that clients purchase is the key to client
profitability. With the depth and breadth of our product offerings, we can be
the MasterSource for our clients. They can look to Northern to provide
integrated solutions worldwide. This slide shows you the services we provide to
clients to meet their needs. Our ability to move clients from the inner core
through the outer rings of services is key to our success going forward. The
services on the outer ring of this diagram have higher margins and drive
relationship profitability.
The momentum from 1997 has carried forward into 1998. Yesterday, we announced
first quarter earnings. Trust fees were up 22% from the first quarter of 1998
and FX revenues posted a strong 37% gain. Total revenues for the first quarter
grew 17% from the same period in 1997 and total expenses grew at a slower rate
of 14%. This 3% operating leverage allowed more revenue to fall to the bottom
line. This resulted in net income for the first quarter of $85 million, which
was up 18% from a year ago. Earnings per share were also up 18% to $0.73. These
strong earnings resulted in return on equity of 20.7%, well ahead of our 18-20%
strategic target range. And, as I mentioned earlier, our productivity ratio
reached 160% for the first time ever. Just one year ago, we raised that goal
from 150% to 160%.
Our exceptional financial performance has resulted in extraordinary performance
of our stock price over the last few years. In the twelve months
<PAGE>
of 1997 alone, our stock price rose 92% and was the second highest performing
institution of the top 35 banks in the country. Over the past five years, the
stock price has increased 232%. If you had invested $100 on January 1, 1993,
your investment would have grown to $332 by the end of 1997. That is just on
price alone and does not take into account the dividends earned on those shares
over time. This performance speaks for itself.
In summary, 1997 marked the tenth consecutive year of record earnings for the
corporation and 1998 is off to an excellent start. I would like to thank our
employees - over 7,700 worldwide - for their extraordinary hard work. I would
also like to thank our directors for their counsel, advise and wisdom and our
clients for their confidence and trust in placing their business with us. Our
confidence in Northern's strategic opportunities continues to be high. We are
optimistic that we can continue to deliver a consistently strong operating
performance to you, our shareholders.
<TABLE> <S> <C>
<PAGE>
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