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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to___________
Commission File Number 0-5965
Northern Trust Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 South La Salle Street
Chicago, Illinois 60675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-6000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.66 2/3 Par Value
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Preferred Stock Purchase Rights
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Floating Rate Capital Securities, Series A of NTC Capital I,
and Series B of NTC Capital II
Fully and Unconditionally Guaranteed by the Registrant
-----------------------------------------
Floating Rate Junior Subordinated Debentures,
Series A and Series B of the Registrant
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At February 11, 1998, 111,518,024 shares of Common Stock, $1.66 2/3 par
value, were outstanding, and the aggregate market value of the Common Stock
(based upon the last sale price of the common stock at February 11, 1998, as
reported by the Nasdaq Stock Market) held by non-affiliates was approximately
$7,045,649,011. Determination of stock ownership by non-affiliates was made
solely for the purpose of responding to this requirement and the registrant is
not bound by this determination for any other purpose.
Portions of the following documents are incorporated by reference:
Annual Report to Stockholders for the Fiscal Year Ended December 31,
1997 - Part I and Part II
1998 Notice and Proxy Statement for the Annual Meeting of Stockholders
to be held on April 21, 1998 - Part III
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Northern Trust Corporation
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
INDEX
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Page
PART I
Item 1 Business............................................................ 4
Supplemental Item-Executive Officers of the Registrant..............22
Item 2 Properties..........................................................23
Item 3 Legal Proceedings...................................................23
Item 4 Submission of Matters to a Vote of Security Holders.................23
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters.........................................24
Item 6 Selected Financial Data.............................................24
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................24
Item 7A Quantitative and Qualitative Disclosures About Market Risk..........24
Item 8 Financial Statements and Supplementary Data.........................24
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................24
PART III
Item 10 Directors and Executive Officers of the Registrant..................25
Item 11 Executive Compensation..............................................25
Item 12 Security Ownership of Certain Beneficial Owners and Management......25
Item 13 Certain Relationships and Related Transactions......................25
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....26
Signatures...................................................................27
Exhibit Index................................................................28
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PART I
Item 1--Business
NORTHERN TRUST CORPORATION
Northern Trust Corporation (Corporation) is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended. The
Corporation was organized in Delaware in 1971 and that year became the owner of
all of the outstanding capital stock, except directors' qualifying shares, of
The Northern Trust Company (Bank), an Illinois banking corporation headquartered
in the Chicago financial district and the Corporation's principal subsidiary.
The Corporation also owns banking subsidiaries in Arizona, California, Florida
and Texas, trust companies in Connecticut and New York and various other nonbank
subsidiaries, including a securities brokerage firm, a retirement services
company and a futures commission merchant. The Corporation expects that,
although the operations of other subsidiaries will be of increasing
significance, the Bank will in the foreseeable future continue to be the major
source of the Corporation's assets, revenues and net income. Except where the
context otherwise requires, the term "Northern Trust" refers to Northern Trust
Corporation and its consolidated subsidiaries.
At December 31, 1997, Northern Trust had consolidated total assets of
approximately $25.3 billion and stockholders' equity of approximately $1.7
billion, and was the second largest bank holding company headquartered in
Illinois and the thirty-second largest in the United States.
THE NORTHERN TRUST COMPANY
The Bank was founded by Byron L. Smith in 1889 to provide banking and
trust services to the public. Currently in its 109th year, the Bank's growth has
come primarily from internal sources rather than through merger or acquisition.
At December 31, 1997, the Bank had consolidated assets of approximately $21.2
billion and common equity capital of approximately $1.3 billion. At September
30, 1997, the Bank was the third largest bank in Illinois and the thirty-third
largest in the United States, based on consolidated total assets of
approximately $23.3 billion on that date.
The Bank currently has sixteen banking offices in the Chicago
metropolitan area and nine active wholly-owned subsidiaries: The Northern Trust
International Banking Corporation; Norlease, Inc.; MFC Company, Inc.; Nortrust
Nominees Ltd.; The Northern Trust Company U.K. Pension Plan Limited; The
Northern Trust Company, Canada; Northern Global Financial Services Limited;
Northern Trust Trade Services Limited; and Northern Trust Fund Managers
(Ireland) Limited. The Northern Trust International Banking Corporation, located
in New York, was organized under the Edge Act for the purpose of conducting
international business. Norlease, Inc. provides leasing and leasing-related
lending activities. MFC Company, Inc. holds properties that are received from
the Bank in connection with certain problem loans. Nortrust Nominees Ltd.,
located in London, is a U.K. trust corporation organized to hold U.K. real
estate for fiduciary accounts. The Northern Trust Company U.K. Pension Plan
Limited, located in London, was established in connection with the pension plan
for the Bank's London Branch. The Northern Trust Company, Canada, located in
Toronto, offers institutional trust products and services to Canadian entities.
Northern Global Financial Services Limited, located in Hong Kong, provides
securities lending and relationship servicing for large asset custody clients in
Asia and the Pacific Rim. Northern Trust Trade Services Limited facilitates the
issuance and processing of commercial letters of credit in Hong Kong. Northern
Trust Fund Managers (Ireland) Limited was established to facilitate the offering
of off-shore collective investment products to institutional clients.
OTHER NORTHERN TRUST CORPORATION SUBSIDIARIES
The Corporation's Florida banking subsidiary, Northern Trust Bank of
Florida N.A., headquartered in Miami, at December 31, 1997 had twenty-four
offices located throughout Florida, with total assets of approximately $2.6
billion. The Corporation's Arizona banking subsidiary, Northern Trust Bank of
Arizona N.A., is headquartered in Phoenix and at December 31, 1997 had total
assets of approximately $475 million and served clients from seven office
locations in Arizona. The Corporation's Texas banking subsidiary, Northern Trust
Bank of Texas N.A., headquartered in Dallas, had seven office locations and
total assets of approximately $566 million at December 31, 1997. The
Corporation's California banking subsidiary, Northern Trust Bank of California
N.A., is headquartered in Santa Barbara. At December 31, 1997, it had eight
office locations and total assets of approximately $707 million.
The Corporation has several nonbank subsidiaries. Among them are
Northern Trust Securities, Inc. which provides full brokerage services to
clients of the Bank and the Corporation's other banking and trust subsidiaries
and selectively underwrites general obligation tax-exempt securities. Northern
Futures Corporation is a futures commission merchant. Northern Investment
Corporation holds certain investments, including a loan made to a developer of a
property in which the Bank is the principal tenant. Berry, Hartell, Evers &
Osborne, Inc. is an investment management firm in San Francisco, California. The
Northern Trust Company of New York provides security clearance services for all
nondepository eligible
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securities held by trust, agency, and fiduciary accounts administered by the
Corporation's subsidiaries. Northern Trust Cayman International, Ltd. provides
fiduciary services to clients residing outside of the United States. Northern
Trust Retirement Consulting, L.L.C. is a retirement benefit plan services
company in Atlanta, Georgia. Northern Trust Global Advisors, Inc. in Stamford,
Connecticut is an international provider of institutional investment management
services, and the parent of The Northern Trust Company of Connecticut, and
Northern Trust Quantitative Advisors, Inc. is a manager of index funds and
quantitative investment products.
INTERNAL ORGANIZATION
Northern Trust, under Chairman and Chief Executive Officer William A.
Osborn, organizes client services around three principal businesses: Corporate
and Institutional Services, Personal Financial Services and Global Investments.
In addition, the Worldwide Operations and Technology unit encompasses trust and
banking operations and systems activities. These four business units report to
President and Chief Operating Officer Barry G. Hastings. Also, a Risk Management
unit focuses on financial and risk management.
The following is a brief summary of each unit's business activities.
Corporate and Institutional Services
Headed by Sheila A. Penrose, President -- Corporate and Institutional
Services (C&IS), C&IS provides trust, commercial banking and treasury management
services to corporate and institutional clients. Trust activities encompass
custody services for owners of securities in the United States and foreign
markets, as well as securities lending and asset management services. Services
with respect to securities traded in foreign markets are provided primarily
through the Bank's London Branch. Related foreign exchange services are rendered
at the London and Singapore Branches as well as in Chicago. As measured by
assets administered and by number of clients, Northern Trust is a leading
provider of Master Trust and Master Custody services to three defined market
segments: retirement plans, institutional clients and international clients.
Master Trust and Custody includes a full range of state-of-the-art capabilities
including: worldwide custody settlement and reporting; cash management;
securities lending; and performance analysis services. In addition to Master
Trust and Master Custody, C&IS offers a comprehensive array of retirement
consulting and recordkeeping services and investment products. At December 31,
1997, total assets under administration, excluding personal trust assets, were
$974.1 billion. The Northern Trust Company of New York, The Northern Trust
Company, Canada, Norlease, Inc., The Northern Trust International Banking
Corporation, Northern Futures Corporation, and Northern Trust Retirement
Consulting, L.L.C., are also included in C&IS.
A full range of commercial banking services is offered through the Bank,
which places special emphasis on developing institutional relationships in two
target markets: large domestic corporations and financial institutions (both
domestic and international). Treasury management services are provided to
corporations and financial institutions and include a variety of other products
and services to accelerate cash collections, control disbursement outflows and
generate information to manage cash positions.
Personal Financial Services
Services to individuals is another major dimension of the trust
business. Headed by Mark Stevens, President -- Personal Financial Services
(PFS), PFS encompasses trust, investment management services, estate
administration, banking, and residential real estate mortgage lending. The
Bank's personal financial services strategy includes targeting high net worth
individuals in the metropolitan Chicago market and, through its Wealth
Management Group, nationally. The Bank is one of the largest bank managers of
personal trust assets in the United States, with total assets under
administration of $70.3 billion at December 31, 1997.
PFS services are delivered through the Bank and a network of banking
subsidiaries located in Arizona, California, Florida and Texas. PFS is one of
the largest bank managers of personal trust assets in the United States, with
total assets under administration of $105.2 billion at December 31, 1997.
Northern Trust Securities, Inc. and Berry, Hartell, Evers & Osborne,
Inc. are also part of PFS.
Global Investments
Global Investments, headed by Stephen B. Timbers, President -- Northern
Trust Global Investments (NTGI), NTGI provides investment products and services
to clients of C&IS and PFS. NTGI activities include equity and fixed income
research and portfolio management services. NTGI also acts as the investment
adviser to the Corporation's two families of mutual funds, the Northern Funds
and The Benchmark Funds. Northern Trust Quantitative Advisors, Inc. and Northern
Trust Global Advisors, Inc. are included in NTGI.
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Worldwide Operations and Technology
Supporting primarily all of Northern Trust's business activities is the
Worldwide Operations and Technology Unit. Headed by James J. Mitchell, Executive
Vice President of the Corporation and of the Bank, this unit focuses on
supporting sales, relationship management, transaction processing and product
management activities for C&IS and PFS.
Risk Management
The Risk Management Unit, headed by Senior Executive Vice President and
Chief Financial Officer Perry R. Pero, includes the Credit Policy and Treasury
functions. The Credit Policy function is described fully on page 16 of this Form
10-K. The Treasury Department is responsible for managing the Bank's wholesale
funding and interest rate risk, as well as the portfolio of interest rate risk
management instruments under the direction of the Corporate Asset and Liability
Policy Committee. It is also responsible for the investment portfolios of the
Corporation and the Bank and provides investment advice and management services
to the subsidiary banks.
The Risk Management Unit also includes Corporate Controller, Corporate
Treasurer, Investor Relations and Economic Research functions.
GOVERNMENT POLICIES
The earnings of Northern Trust are affected by numerous external
influences, principally general economic conditions, both domestic and
international, and actions that the United States and foreign governments and
their central banks take in managing their economies. These general conditions
affect all of the Northern Trust's businesses, as well as the quality and volume
of their loan and investment portfolios.
The Board of Governors of the Federal Reserve System is an important
regulator of domestic economic conditions and has the general objective of
promoting orderly economic growth in the United States. Implementation of this
objective is accomplished by its open market operations in United States
Government securities, its setting of the discount rate at which member banks
may borrow from Federal Reserve Banks and its changes in the reserve
requirements for deposits. The policies adopted by the Federal Reserve Board may
strongly influence interest rates and hence what banks earn on their loans and
investments and what they pay on their savings and time deposits and other
purchased funds. Fiscal policies in the United States and abroad also affect the
composition and use of Northern Trust's resources.
COMPETITION
Northern Trust's principal business strategy is to provide quality
financial services to targeted market segments in which it believes it has a
competitive advantage and favorable growth prospects. As part of this strategy,
Northern Trust seeks to deliver a level of service to its clients that
distinguishes it from its competitors. In addition, Northern Trust emphasizes
the development and growth of recurring sources of fee-based income and is one
of only a select group of major bank holding companies in the United States that
generates more revenues from fee-based services than from net interest income.
Northern Trust seeks to develop and expand its recurring fee-based revenue by
identifying selected market niches and providing a high level of individualized
service to its clients in such markets. Northern Trust also seeks to preserve
its asset quality through established credit review procedures and by
maintaining a conservative balance sheet. Finally, Northern Trust seeks to
maintain a strong management team with senior officers having broad experience
and long tenure.
Active competition exists in all principal areas in which the subsidiaries
are presently engaged. C&IS and PFS compete with domestic and foreign financial
institutions, trust companies, financial companies, personal loan companies,
mutual funds and investment advisers. Northern Trust is a leading provider
of Master Trust and Master Custody services and has the leading market share
in the Chicago area personal trust market.
Commercial banking and treasury management services compete with domestic
and foreign financial institutions, finance companies and leasing companies.
These products also face increased competition due to the general trend among
corporations and other institutions to rely more upon direct access to the
credit and capital markets (such as through the direct issuance of commercial
paper) and less upon commercial banks and other traditional financial
intermediaries.
The chief local competitors of the Bank for trust and banking business are
Bank of America, First National Bank of Chicago and its affiliate American
National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, and
LaSalle National Bank. Competitive pressures within the custody market have
resulted in consolidation in the industry, and the chief national competitors of
the Bank for Master Trust/Master Custody services are now Mellon Bank
Corporation, State Street Boston Corporation, Bankers Trust New York
Corporation, Chase Manhattan Corporation and Bank of New York Company, Inc.
REGULATION AND SUPERVISION
The Corporation is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended (Act), and to regulation by the Board of
Governors of the Federal Reserve System. The Act limits the activities which may
be engaged in by the Corporation and its nonbanking subsidiaries to those so
closely related to banking or managing or controlling banks as
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to be a proper incident thereto. Also, under section 106 of the 1970 amendments
to the Act and subject to certain exceptions, subsidiary banks are prohibited
from engaging in certain tie-in arrangements with nonbanking affiliates in
connection with any extension of credit or provision of any property or
services.
The Act also prohibits bank holding companies from acquiring substantially
all the assets of or owning more than 5% of the voting shares of any bank or
nonbanking company which is not already majority owned without prior approval of
the Board of Governors.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Interstate Act) permits an adequately capitalized and adequately managed bank
holding company to acquire, with Federal Reserve Board approval, a bank located
in a state other than the bank holding company's home state, without regard to
whether the transaction is permitted under any state law, except that a host
state may establish by statute the minimum age of its banks (up to a maximum of
5 years) subject to acquisition by out-of-state bank holding companies. The
Federal Reserve Board may not approve the acquisition if the applicant bank
holding company, upon consummation, would control more than 10% of total U.S.
insured depository institution deposits or more than 30% of the host state's
total insured depository institution deposits except in certain cases. The
Interstate Act also permits a bank, with the approval of the appropriate federal
bank regulatory agency, to establish a de novo branch in a state, other than the
bank's home state, in which the bank does not presently maintain a branch if the
host state has enacted a law that applies equally to all banks and expressly
permits all out-of-state banks to branch de novo into the host state. Banks
having different home states may, with approval of the appropriate federal bank
regulatory agency, merge across state lines, unless the home state of a
participating bank opted-out of the Interstate Act prior to June 1, 1997. In
addition, the Interstate Act permits any bank subsidiary of a bank holding
company to receive deposits, renew time deposits, close loans, service loans and
receive payments on loans and other obligations as agent for a bank or certain
grandfathered thrift affiliates, whether such banks or affiliates are located in
a different state or in the same state.
Under the Federal Deposit Insurance Act (FDIA), an insured depository
institution which is commonly controlled with another insured depository
institution shall generally be liable for any loss incurred, or reasonably
anticipated to be incurred, by the Federal Deposit Insurance Corporation (FDIC)
in connection with the default of such commonly controlled institution, or for
any assistance provided by the FDIC to such commonly controlled institution,
which is in danger of default. The term "default" is defined to mean the
appointment of a conservator or receiver for such institution. Thus, any of the
Corporation's banking subsidiaries could incur liability to the FDIC pursuant to
this statutory provision in the event of a loss suffered by the FDIC in
connection with any of the Corporation's other banking subsidiaries (whether due
to a default or the provision of FDIC assistance). Such liability is
subordinated in right of payment to deposit liabilities, secured obligations,
any other general or senior liability and any obligation subordinated to
depositors or other general creditors, other than obligations owed to any
affiliate of the depository institution (with certain exceptions) and any
obligations to shareholders in such capacity. Although neither the Corporation
nor any of its nonbanking subsidiaries may be assessed for such loss under the
FDIA, the Corporation has agreed to indemnify each of its banking subsidiaries,
other than the Bank, for any payments a banking subsidiary may be liable to pay
to the FDIC pursuant to these provisions of the FDIA.
The Bank is a member of the Federal Reserve System, its deposits are
insured by the FDIC, and it is subject to regulation by both these entities, as
well as by the Illinois Office of Banks and Real Estate. The Bank is also a
member of and subject to the rules of the Chicago Clearinghouse Association, and
is registered as a government securities dealer in accordance with the
Government Securities Act of 1986. As a government securities dealer its
activities are subject to the rules and regulations of the Department of the
Treasury. The Bank is registered as a transfer agent with the Federal Reserve
and is therefore subject to the rules and regulations of the Federal Reserve in
this area. State laws governing the Corporation's banking subsidiaries allow
each bank to establish branches anywhere in its state.
The national bank subsidiaries are members of the Federal Reserve System
and the FDIC and are subject to regulation by the Comptroller of the Currency.
The Corporation's nonbanking affiliates are all subject to examination by
the Federal Reserve. In addition, The Northern Trust Company of New York is
subject to regulation by the Banking Department of the State of New York.
Northern Futures Corporation, which is registered as a futures commission
merchant with the Commodity Futures Trading Commission, is a member of the
National Futures Association, the Chicago Board of Trade and the Board of Trade
Clearing Corporation, and is a clearing member of the Chicago Mercantile
Exchange. Northern Trust Securities, Inc. is registered with the Securities and
Exchange Commission and is a member of the National Association of Securities
Dealers, Inc., and, as such, is subject to the rules and regulations of both
these bodies. Berry, Hartell, Evers & Osborne, Inc., Northern Trust Retirement
Consulting, L.L.C., Northern Trust Global Advisors, Inc. and Northern Trust
Quantitative Advisors, Inc. are each registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940 and are subject to that Act
and the rules and regulations of the Commission promulgated thereunder. In
addition, Northern Trust Quantitative Advisors, Inc. is subject to regulation by
the Illinois Office of Banks and Real Estate, and Northern Trust Retirement
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Consulting, L.L.C. is registered as a transfer agent with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 and is subject to
that Act and the rules and regulations of the Commission promulgated thereunder.
The Northern Trust Company of Connecticut is subject to regulation by the
Connecticut Department of Banking. Two families of mutual funds for which the
Bank acts as investment adviser are subject to regulation by the Securities and
Exchange Commission under the Investment Company Act. The Bank also acts as
investment adviser of an investment company which is subject to regulation by
the Central Bank of Ireland under the Companies Act, 1990. Various other
subsidiaries and branches conduct business in other states and foreign countries
and are subject to their regulations and restrictions.
The Corporation and its subsidiaries are affiliates within the meaning of
the Federal Reserve Act so that the banking subsidiaries are subject to certain
restrictions with respect to loans to the Corporation or its nonbanking
subsidiaries and certain other transactions with them or involving their
securities. Information regarding these restrictions, and dividend restrictions
on banking subsidiaries, is incorporated herein by reference to Note 15 titled
"Restrictions on Subsidiary Dividends and Loans or Advances" on page 56 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997.
Under the FDIC's risk-based insurance assessment system, each insured bank
is placed in one of nine risk categories based on its level of capital and other
relevant information. Each insured bank's insurance assessment rate is then
determined by the risk category in which it has been classified by the FDIC.
There is currently a twenty-seven basis point spread between the highest and
lowest assessment rates, so that banks classified as strongest by the FDIC are
subject in 1998 to 0% assessment, and banks classified as weakest by the FDIC
are subject to an assessment rate of .27%. In addition to its insurance
assessment, each insured bank is subject in 1998 to a debt service assessment of
.013%.
The Federal bank regulators have adopted risk-based capital guidelines for
bank holding companies and banks. The minimum ratio of qualifying total capital
to risk-weighted assets (including certain off-balance sheet items) (Total
Capital Ratio) is 8%, and the minimum ratio of that portion of total capital
that is comprised of common stock, related surplus, retained earnings,
noncumulative perpetual preferred stock, minority interests and, for bank
holding companies, a limited amount of qualifying cumulative perpetual preferred
stock, less certain intangibles including goodwill (Tier 1 capital), to risk-
weighted assets is 4%. The balance of total capital may consist of other
preferred stock, certain other instruments, and limited amounts of subordinated
debt and the loan and lease loss allowance.
The Federal Reserve Board risk-based capital standards contemplate that
evaluation of capital adequacy will take account of a wide range of other
factors, including overall interest rate exposure; liquidity, funding and market
risks; the quality and level of earnings; investment, loan portfolio, and other
concentrations of credit; certain risks arising from non traditional activities;
the quality of loans and investments; the effectiveness of loan and investment
policies; and management's overall ability to monitor and control financial and
operating risks including the risks presented by concentrations of credit and
nontraditional activities.
In addition, the Federal Reserve has established minimum Leverage Ratio
(Tier 1 capital to quarterly average total assets) guidelines for bank holding
companies and banks. These guidelines provide for a minimum Leverage Ratio of 3%
for bank holding companies and banks that meet certain specified criteria,
including having the highest regulatory rating. All other banking organizations
are required to maintain a Leverage Ratio of at least 3% plus an additional
cushion of 100 to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory level, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals
for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio
of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to
quarterly average total assets. As of December 31, 1997, the Federal Reserve had
not advised the Corporation of any specific minimum Tangible Tier 1 Leverage
Ratio applicable to it. At December 31, 1997, the Corporation had a Tangible
Tier 1 Leverage Ratio of 6.8%.
In addition to the effects of the provisions described above, the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) substantially
revised the depository institution regulatory and funding provisions of the FDI
Act and made revisions to several other federal banking statutes.
Among other things, FDICIA requires the federal banking regulators to take
prompt corrective action in respect to FDIC-insured depository institutions that
do not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier will depend upon how its capital levels compare to various relevant
capital measures and certain other factors, as established by regulation. Under
applicable regulations, an FDIC-insured bank is defined to be well capitalized
if it maintains a Leverage Ratio of at least 5%, a Total Capital Ratio of at
least 10% and a Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets) of
at least 6% and is not otherwise in a "troubled condition" as
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specified by its appropriate federal regulatory agency. A bank is generally
considered to be adequately capitalized if it is not defined to be well
capitalized but meets all of its minimum capital requirements, i.e., if it has a
Leverage Ratio of 4% or greater (or a Leverage Ratio of 3% or greater if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), a Total Capital Ratio
of 8% or greater and a Tier 1 Capital Ratio of 4% or greater. A bank will be
considered undercapitalized if it fails to meet any minimum required measure,
significantly undercapitalized if it is significantly below such measure and
critically undercapitalized if it maintains a level of tangible equity capital
equal to or less than 2% of total assets. A bank may be reclassified to be in a
capitalization category that is next below that indicated by its actual capital
position if it receives a less than satisfactory examination rating by its
examiners with respect to its assets, management, earnings or liquidity that has
not been corrected, or it is determined that the bank is in an unsafe or unsound
condition or engaged in an unsafe or unsound practice. At December 31, 1997, the
Bank and each of the Corporation's other subsidiary banks met or exceeded the
minimum regulatory ratios that are one of the conditions for them to be
considered to be well capitalized. For further discussion of regulatory capital
requirements for the Corporation and the Bank, see pages 38 and 39 of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 28, titled "Regulatory Capital Requirements" on page 67 of
the Corporation's Annual Report to Shareholders for the year ended December 31,
1997.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of dividends) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Under FDICIA, a bank that is not well capitalized is generally prohibited
from accepting or renewing brokered deposits and offering interest rates on
deposits significantly higher than the prevailing rate in its normal market area
or nationally (depending upon where the deposits are solicited); in addition,
"pass-through" insurance coverage may not be available for certain employee
benefit accounts.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions may be restricted from making payments
of principal and interest on subordinated debt and are subject to appointment of
a receiver or conservator.
FDICIA also contains a variety of other provisions that affect the
operations of a bank, including reporting requirements, regulatory standards for
real estate lending, "truth in savings" provisions and a requirement that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch.
STAFF
Northern Trust employed 7,553 full-time equivalent officers and staff
members as of December 31, 1997, approximately 5,538 of whom were employed by
the Bank.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
STATISTICAL DISCLOSURES
The following statistical disclosures, included in the Corporation's Annual
Report to Stockholders for the year ended December 31, 1997, are incorporated
herein by reference.
<TABLE>
1997
Annual Report
Schedule Page
- ------------------------------------------------------------ ---------------
<S> <C>
Foreign Outstandings........................................ 33
Nonperforming Assets and 90 Day Past Due Loans.............. 34
Analysis of Reserve for Credit Losses....................... 35
Average Balance Sheet....................................... 72
Ratios...................................................... 72
Analysis of Net Interest Income............................. 74
- ------------------------------------------------------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
Additional statistical information on a consolidated basis is set forth
below.
Remaining Maturity and Average Yield of Securities Held to Maturity and
Available for Sale
(Yield on a taxable equivalent basis giving effect of the federal and state
tax rates)
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years Over Ten Years
---------------- ----------------- ----------------- ---------------
Average
($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity
- -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity
U.S. Government $ 72.0 6.72% $ - -% $ - -% $ - -% 5 mos.
Obligations of States and
Political Subdivisions 38.9 10.99 113.8 11.02 93.6 10.07 30.4 8.50 59 mos.
Federal Agency 8.3 6.00 6.0 7.12 - - - - 12 mos.
Other--Fixed 4.5 4.19 7.2 5.40 2.9 2.76 19.9 6.00 86 mos.
--Floating .2 8.00 .8 7.67 1.5 6.30 56.1 6.75 117 mos.
- -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- --------
Total Securities Held to Maturity $ 123.9 7.92% $127.8 10.49% $ 98.0 9.79% $ 106.4 7.11% 58 mos.
- -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- --------
Securities Available for Sale
U.S. Government $ 207.6 6.15% $262.4 6.15% $ - -% $ - -% 11 mos.
Obligations of States and
Political Subdivisions - - .6 9.88 15.8 9.58 113.8 8.22 141 mos.
Federal Agency 2,756.7 5.90 195.9 6.57 14.5 6.65 2.7 6.87 5 mos.
Other--Fixed 13.4 5.66 - - - - - - 5 mos.
--Floating 12.4 6.33 12.5 7.43 .8 6.22 124.2 6.00 105 mos.
- -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- --------
Total Securities Available for Sale $2,990.1 5.92% $471.4 6.36% $ 31.1 8.13% $ 240.7 7.06% 14 mos.
- -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ----- --------
December 31, 1996
-------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years Over Ten Years
---------------- ----------------- ----------------- ---------------
Average
($ in Millions) Book Yield Book Yield Book Yield Book Yield Maturity
- -------------------------------------- -------- ------ ------ ------ ------ ------ ------- ------ --------
Securities Held to Maturity
U.S. Government $ 70.8 6.75% $ 2.6 5.27% $ - -% $ - -% 6 mos.
Obligations of States and
Political Subdivisions 44.0 11.15 128.4 11.01 109.9 10.51 33.6 8.64 59 mos.
Federal Agency 2.0 7.14 16.2 6.32 - - - - 24 mos.
Other--Fixed 9.8 5.04 2.7 3.31 - - 19.5 6.02 77 mos.
--Floating 1.3 7.75 .8 7.75 .6 6.65 56.2 7.00 116 mos.
- -------------------------------------- -------- ------ ------ ----- ------ ----- ------- ------ --------
Total Securities Held to Maturity $ 127.9 8.15% $150.7 10.25% $ 110.5 10.49% $ 109.3 7.33% 58 mos.
- -------------------------------------- -------- ------ ------ ----- ------ ----- ------- ------ --------
Securities Available for Sale
U.S. Government $ 809.0 5.90% $ 97.7 5.97% $ - -% $ - -% 7 mos.
Obligations of States and
Political Subdivisions - - .5 9.88 10.0 9.68 106.5 8.32 146 mos.
Federal Agency 2,735.5 5.76 296.6 6.15 58.9 6.23 5.9 6.64 6 mos.
Other--Fixed 17.2 5.69 12.8 5.66 - - - - 11 mos.
--Floating 4.0 6.17 7.1 6.17 10.7 7.35 139.3 4.44 112 mos.
- -------------------------------------- -------- ------ ------ ----- ------- ------ ------- ----- --------
Total Securities Available for Sale $3,565.7 5.79% $414.7 6.10% $ 79.6 6.81% $ 251.7 6.13% 14 mos.
- -------------------------------------- -------- ------ ------ ----- ------- ------ ------- ----- --------
</TABLE>
10
<PAGE>
Securities Held to Maturity and Available for Sale
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------
(In Millions) 1997 1996 1995 1994 1993
- ----------------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Securities Held to Maturity
U.S. Government $ 72.0 $ 73.4 $ 116.1 $ 137.2 $2,343.7
Obligations of States and Political Subdivisions 276.7 315.9 366.9 474.5 493.5
Federal Agency 14.3 18.2 22.2 - 833.1
Other 93.1 90.9 29.9 29.6 120.5
- ----------------------------------------------- -------- -------- -------- -------- --------
Total Securities Held to Maturity $ 456.1 $ 498.4 $ 535.1 $ 641.3 $3,790.8
- ----------------------------------------------- -------- -------- -------- -------- --------
Securities Available for Sale
U.S. Government $ 470.0 $ 906.7 $1,667.7 $ 801.3 $ -
Obligations of States and Political Subdivisions 130.2 117.0 70.2 - -
Federal Agency 2,969.8 3,096.9 3,152.8 3,251.5 40.9
Other 163.3 191.1 245.6 355.0 170.7
- ----------------------------------------------- -------- -------- -------- -------- --------
Total Securities Available for Sale $3,733.3 $4,311.7 $5,136.3 $4,407.8 $ 211.6
- ----------------------------------------------- -------- -------- -------- -------- --------
Average Total Securities $6,374.2 $6,363.8 $6,193.0 $5,000.9 $4,232.0
- ----------------------------------------------- -------- -------- -------- -------- --------
Total Securities at Year-End $4,198.2 $4,814.9 $5,760.3 $5,053.1 $4,038.7
- ----------------------------------------------- -------- -------- -------- -------- --------
========================================================================================================================
</TABLE>
Loans and Leases by Type
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------
(In Millions) 1997 1996 1995 1994 1993
- ----------------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Domestic
Residential Real Estate $ 5,186.7 $ 4,557.5 $3,896.4 $3,299.1 $2,883.3
Commercial 3,734.8 3,161.4 3,202.1 2,672.0 2,421.1
Broker 170.1 389.1 304.0 274.6 249.4
Commercial Real Estate 582.1 557.7 512.6 494.1 506.5
Personal 1,207.2 989.8 758.9 662.1 617.5
Other 890.1 632.1 625.5 642.1 453.5
Lease Financing 347.0 267.8 202.3 159.9 138.4
- ----------------------------------------------- --------- --------- -------- -------- --------
Total Domestic 12,118.0 10,555.4 9,501.8 8,203.9 7,269.7
International 470.2 382.0 404.2 386.7 353.3
- ----------------------------------------------- --------- --------- -------- -------- --------
Total Loans and Leases $12,588.2 $10,937.4 $9,906.0 $8,590.6 $7,623.0
- ----------------------------------------------- --------- --------- -------- -------- --------
Average Loans and Leases $11,812.9 $10,332.1 $9,136.0 $8,316.1 $7,297.1
- ----------------------------------------------- --------- --------- -------- -------- --------
========================================================================================================================
</TABLE>
Remaining Maturity of Selected Loans and Leases
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
One Year One to Over Five
(In Millions) Total or Less Five Years Years
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Domestic (Excluding Residential Real Estate and Personal Loans)
Commercial $ 3,734.8 $ 2,900.7 $ 681.7 $ 152.4
Commercial Real Estate 582.1 203.5 289.5 89.1
Other 1,060.2 1,040.0 14.3 5.9
Lease Financing 347.0 24.8 76.8 245.4
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Total Domestic 5,724.1 4,169.0 1,062.3 492.8
International 470.2 286.4 149.9 33.9
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Total Selected Loans and Leases $ 6,194.3 $ 4,455.4 $ 1,212.2 $ 526.7
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Interest Rate Sensitivity of Loans and Leases
Fixed Rate $ 4,990.9 $ 3,643.0 $ 884.0 $ 463.9
Variable Rate 1,203.4 812.4 328.2 62.8
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Total $ 6,194.3 $ 4,455.4 $ 1,212.2 $ 526.7
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
=============================================================================================================================
</TABLE>
11
<PAGE>
Average Deposits by Type
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Domestic Offices
Demand and Noninterest-Bearing
Individuals, Partnerships and Corporations $ 1,754.6 $ 1,801.8 $ 1,651.1 $ 1,540.4 $ 1,487.5
Correspondent Banks 92.8 115.2 129.8 192.2 201.1
Other 1,116.5 815.9 966.4 859.9 866.3
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
Total $ 2,963.9 $ 2,732.9 $ 2,747.3 $ 2,592.5 $ 2,554.9
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
Time
Savings and Money Market $ 3,895.4 $ 3,620.7 $ 3,312.4 $ 3,385.7 $ 3,432.1
Savings Certificates less than $100,000 1,076.5 1,169.6 1,160.8 699.9 668.6
Savings Certificates $100,000 and more 959.3 892.8 839.5 529.7 504.3
Other Time 717.3 549.2 542.7 412.8 404.7
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
Total $ 6,648.5 $ 6,232.3 $ 5,855.4 $ 5,028.1 $ 5,009.7
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
Total Domestic Offices $ 9,612.4 $ 8,965.2 $ 8,602.7 $ 7,620.6 $ 7,564.6
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
Foreign Offices
Demand $ 486.4 $ 347.8 $ 299.1 $ 361.7 $ 65.3
Time 4,971.2 3,826.2 3,493.4 3,284.8 2,436.4
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
Total Foreign Offices $ 5,457.6 $ 4,174.0 $ 3,792.5 $ 3,646.5 $ 2,501.7
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
Total Deposits $15,070.0 $13,139.2 $12,395.2 $11,267.1 $10,066.3
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Average Rates Paid on Time Deposits by Type
1997 1996 1995 1994 1993
- -------------------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Time Deposits
Savings and Money Market 3.23% 3.16% 3.29% 2.52% 2.30%
Savings Certificates less than $100,000 5.86 5.85 6.08 4.77 4.61
Savings Certificates $100,000 and more 5.63 5.67 5.95 4.45 3.91
Other Time 5.50 5.44 5.81 4.50 3.88
- -------------------------------------------------------------- -------- -------- -------- -------- --------
Total Domestic Offices 4.25 4.23 4.46 3.20 2.89
- -------------------------------------------------------------- -------- -------- -------- -------- --------
Total Foreign Offices Time 4.82 4.82 5.21 4.18 3.71
- -------------------------------------------------------------- -------- -------- -------- -------- --------
Total Time Deposits 4.49% 4.45% 4.74% 3.58% 3.16%
- -------------------------------------------------------------- -------- -------- -------- -------- --------
===========================================================================================================================
</TABLE>
Remaining Maturity of Time Deposits $100,000 and more
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------------- -----------------------------------
Domestic Offices Domestic Offices
----------------------- ----------------------
Certificates Other Foreign Certificates Other Foreign
(In Millions) of Deposit Time Offices of Deposit Time Offices
- ----------------------------------- ------------ ----- -------- ------------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
3 Months or Less $ 898.0 $ 2.0 $5,395.5 $ 738.6 $ 5.5 $3,466.1
Over 3 through 6 Months 265.9 3.2 50.0 277.5 2.2 30.4
Over 6 through 12 Months 239.5 5.4 5.6 223.1 4.7 8.2
Over 12 Months 234.0 2.4 4.3 205.7 5.6 5.0
- ----------------------------------- ------------ ----- -------- ------------ ----- --------
Total $1,637.4 $13.0 $5,455.4 $1,444.9 $18.0 $3,509.7
- ----------------------------------- ------------ ----- -------- ------------ ----- --------
==================================================================================================================
</TABLE>
12
<PAGE>
Purchased Funds
<TABLE>
<CAPTION>
Federal Funds Purchased
(Overnight Borrowings)
($ in Millions) 1997 1996 1995
- -------------------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Balance on December 31 $ 821.2 $ 653.0 $2,300.1
Highest Month-End Balance 2,765.9 2,715.2 3,620.1
Year--Average Balance 1,690.2 1,842.2 1,564.0
--Average Rate 5.47% 5.31% 5.83%
Average Rate at Year-End 5.64 6.03 5.17
- -------------------------------------------------------------------------------- -------- -------- --------
Securities Sold under Agreements to Repurchase
($ in Millions) 1997 1996 1995
- -------------------------------------------------------------------------------- -------- -------- --------
Balance on December 31 $1,139.7 $ 966.1 $1,858.7
Highest Month-End Balance 3,708.9 2,922.2 2,283.0
Year--Average Balance 1,519.9 1,973.3 1,769.7
--Average Rate 5.38% 5.24% 5.80%
Average Rate at Year-End 5.43 5.69 5.41
- -------------------------------------------------------------------------------- -------- -------- --------
Other Borrowings
(Includes Treasury Tax and Loan Demand Notes and Term Federal Funds Purchased)
($ in Millions) 1997 1996 1995
- -------------------------------------------------------------------------------- -------- -------- --------
Balance on December 31 $2,876.6 $3,142.1 $ 875.9
Highest Month-End Balance 5,528.4 4,953.6 3,415.9
Year--Average Balance 2,120.9 1,274.1 1,034.5
--Average Rate 5.30% 5.07% 5.38%
Average Rate at Year-End 5.01 5.82 3.61
- -------------------------------------------------------------------------------- -------- -------- --------
Total Purchased Funds
($ in Millions) 1997 1996 1995
- -------------------------------------------------------------------------------- -------- -------- --------
Balance on December 31 $4,837.5 $4,761.2 $5,034.7
Year--Average Balance 5,331.0 5,089.6 4,368.2
--Average Rate 5.38% 5.22% 5.71%
- -------------------------------------------------------------------------------- -------- -------- --------
=============================================================================================================================
Commercial Paper
($ in Millions) 1997 1996 1995
- -------------------------------------------------------------------------------- -------- -------- --------
Balance on December 31 $ 146.8 $ 149.0 $ 146.7
Highest Month-End Balance 149.9 153.0 154.4
Year--Average Balance 142.7 143.7 146.0
--Average Rate 5.54% 5.40% 5.87%
Average Rate at Year-End 5.81 5.65 5.80
- -------------------------------------------------------------------------------- -------- -------- --------
=============================================================================================================================
</TABLE>
13
<PAGE>
- --------------------------------------------------------------------------------
Changes in Net Interest Income
<TABLE>
<CAPTION>
1997/96 1996/95
--------------------------------- ---------------------------------
Change Due To Change Due To
------------------ --------------------
(Interest on a taxable equivalent basis)
(In Millions) Volume Rate Total Volume Rate Total
- ----------------------------------------------------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) In Interest Income
Money Market Assets
Federal Funds Sold and Resell Agreements $ 27.1 $ 0.5 $ 27.6 $ 7.1 $ (1.1) $ 6.0
Time Deposits with Banks 45.4 3.2 48.6 2.8 (10.0) (7.2)
Other .1 (.1) -- 2.0 (.1) 1.9
Securities
U.S. Government (52.2) 3.4 (48.8) 27.3 (.1) 27.2
Obligations of States and Political Subdivisions (.5) (2.2) (2.7) (2.0) (4.0) (6.0)
Federal Agency 50.7 2.8 53.5 (6.5) (23.9) (30.4)
Other .9 .3 1.2 (7.5) (.8) (8.3)
Trading Account .1 -- .1 (3.2) -- (3.2)
Loans and Leases 100.1 .8 100.9 80.8 (17.3) 63.5
- ----------------------------------------------------- ------ ------- ------- ------ ------- ------
Total $171.7 $ 8.7 $ 180.4 $100.8 $ (57.3) $ 43.5
- ----------------------------------------------------- ------ ------- ------- ------ ------- ------
Increase (Decrease) In Interest Expense
Deposits
Savings and Money Market $ 8.9 $ 2.6 $ 11.5 $ 9.7 $ (4.5) $ 5.2
Savings Certificates (1.5) (.4) (1.9) 3.6 (5.1) (1.5)
Other Time 9.2 .3 9.5 .4 (2.0) (1.6)
Foreign Offices Time 55.2 .1 55.3 16.1 (13.7) 2.4
Federal Funds Purchased (8.3) 2.8 (5.5) 14.7 (8.0) 6.7
Repurchase Agreements (24.4) 2.7 (21.7) 10.7 (9.9) .8
Commercial Paper (.1) .2 .1 (.1) (.7) (.8)
Other Borrowings 44.9 3.0 47.9 12.1 (3.2) 8.9
Senior Notes 15.6 .9 16.5 (6.8) (2.5) (9.3)
Long-term Debt 5.6 (.4) 5.2 6.8 (.8) 6.0
Floating Rate Capital Securities 14.5 -- 14.5 -- -- --
- ----------------------------------------------------- ------ ------- ------- ------ ------- ------
Total $119.6 $ 11.8 $ 131.4 $ 67.2 $ (50.4) $ 16.8
- ----------------------------------------------------- ------ ------- ------- ------ ------- ------
Increase (Decrease) In Net Interest Income $ 52.1 $ (3.1) $ 49.0 $ 33.6 $ (6.9) $ 26.7
- ----------------------------------------------------- ------ ------- ------- ------ ------- ------
</TABLE>
Note: Changes not due only to volume changes or rate changes are included in
the change due to rate column.
- --------------------------------------------------------------------------------
International Operations (Based on Obligor's Domicile)
See also Note 26 titled "International Operations" on page 65 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997, which is incorporated herein by reference.
Selected Average Assets and Liabilities Attributable to International Operations
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Total Assets $3,507.7 $2,365.5 $2,282.0 $2,820.5 $2,328.8
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Time Deposits with Banks 2,574.5 1,699.3 1,643.7 2,063.1 1,956.7
Other Money Market Assets .1 .1 .1 .4 .9
Loans 537.9 380.5 344.3 445.5 279.9
Customers' Acceptance Liability .5 1.1 1.9 3.0 4.8
Foreign Investments 22.2 23.4 14.3 21.6 29.8
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Total Liabilities $5,960.7 $4,551.2 $4,163.5 $4,089.4 $2,715.0
- ------------------------------------------------------------ -------- -------- -------- -------- --------
Deposits 5,747.2 4,435.7 3,992.2 4,010.6 2,706.2
Liability on Acceptances .5 1.1 1.9 3.0 4.8
- ------------------------------------------------------------ -------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
Percent of International Related Average Assets and Liabilities to
Total Consolidated Average Assets
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets 15% 11% 12% 16% 15%
- --------------------------------------- ---- ---- ---- ---- ----
Liabilities 25 22 21 23 17
- --------------------------------------- ---- ---- ---- ---- ----
</TABLE>
================================================================================
Reserve for Credit Losses Relating to International Operations
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995 1994 1993
- --------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $3.6 $3.5 $4.7 $6.8 $5.3
Charge-Offs -- (.2) (.6) -- (.6)
Recoveries .1 .5 .7 -- .2
Provision for Credit Losses 1.4 (.2) (1.3) (2.1) 1.9
- --------------------------------------- ---- ---- ---- ---- ----
Balance at End of Year $5.0 $3.6 $3.5 $4.7 $6.8
- --------------------------------------- ---- ---- ---- ---- ----
</TABLE>
The Securities and Exchange Commission requires the disclosure of the
reserve for credit losses that is applicable to international operations. The
above table has been prepared in compliance with this disclosure requirement and
is used in determining international operating performance. The amounts shown in
the table should not be construed as being the only amounts that are available
for international loan charge-offs, since the entire reserve for credit losses
is available to absorb losses on both domestic and international loans. In
addition, these amounts are not intended to be indicative of future charge-off
trends.
================================================================================
Distribution of International Loans and Deposits by Type
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------
Loans 1997 1996 1995 1994 1993
- -------------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial $ 240.1 $226.6 $259.9 $233.8 $157.9
Foreign Governments and Official Institutions 115.2 118.3 103.7 72.8 47.1
Banks 51.2 22.8 37.3 77.0 145.9
Other 63.7 14.3 3.3 3.1 2.4
- -------------------------------------------------------- -------- -------- -------- -------- --------
Total $ 470.2 $382.0 $404.2 $386.7 $353.3
- -------------------------------------------------------- -------- -------- -------- -------- --------
December 31
------------------------------------------------------------
Deposits 1997 1996 1995
- -------------------------------------------------------- -------- -------- --------
Commercial $4,473.3 $2,855.4 $2,557.2
Foreign Governments and Official Institutions 782.1 708.6 749.5
Banks 443.4 350.7 415.7
Other Time 490.6 276.2 224.7
Other Demand 11.8 10.7 7.8
- -------------------------------------------------------- -------- -------- --------
Total $6,201.2 $4,201.6 $3,954.9
- -------------------------------------------------------- -------- -------- --------
</TABLE>
================================================================================
15
<PAGE>
- --------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
Overview
The Credit Policy function reports to the Corporation's Chief Financial
Officer. Credit Policy provides a system of checks and balances for Northern
Trust's diverse credit-related activities by establishing and monitoring all
credit-related policies and practices and ensuring their uniform application.
These activities are designed to ensure that credit exposure is diversified
on an industry and client basis, thus lessening the overall credit risk.
Individual credit authority for commercial loans and within Personal
Financial Services is limited to specified amounts and maturities. Credit
decisions involving commitment exposure in excess of the specified individual
limits are submitted to the appropriate Credit Approval Committee (Committee).
Each Committee is chaired by the executive in charge of the area and has a
Credit Policy officer as a voting participant. Each Committee's credit approval
authority is specified, based on commitment levels, credit ratings and
maturities. Credits involving commitment exposure in excess of these group
credit limits require the approval of the Senior Credit Committee or the
business unit head.
Credit Policy established the Counterparty Risk Management Committee in
order to manage counterparty risk more effectively. This committee has sole
credit authority for exposure to all foreign banks, certain domestic banks which
Credit Policy deems to be counterparties and which do not have commercial credit
relationships within the Corporation, and other organizations which Credit
Policy deems to be counterparties.
Under the auspices of Credit Policy, country exposure limits are reviewed
and approved on a country-by-country basis.
As part of the Northern Trust's ongoing credit granting process, internal
credit ratings are assigned to each client and credit before credit is extended,
based on creditworthiness. Credit Policy performs at least annually a review of
selected significant credit exposures to identify at the earliest possible
stages clients who might be facing financial difficulties. Internal credit
ratings are also reviewed during this process. Above average risk loans, which
will vary from time to time, receive special attention by both lending officers
and Credit Policy. This approach allows management to take remedial action in an
effort to deal with potential problems.
An integral part of the Credit Policy function is a monthly formal review
of all past due and potential problem loans to determine which credits, if any,
need to be placed on nonaccrual status or charged off. The provision is reviewed
quarterly to determine the amount necessary to maintain an adequate reserve for
credit losses.
Management of credit risk is reviewed by various bank regulatory agencies.
Independent auditors also perform a review of credit-related procedures, the
loan portfolio and other extensions of credit, and the reserve for credit losses
as part of their examination of the consolidated financial statements.
Allocation of the Reserve for Credit Losses
Bank disclosure guidelines issued by the Securities and Exchange Commission
request management to furnish a breakdown of the reserve for credit losses by
loan category and provide the percentage of loans in each category to total
loans. For this purpose, the reserve is allocated for credit losses associated
with all loans, leases and commitments based on historical loss experience, loan
volume, internal credit ratings and specific amounts designated for certain
nonperforming loans. This allocation method should not be interpreted as an
indication of expected losses within the next year or any specified time period.
In practice, the reserve for credit losses is established and maintained on
an overall basis and is not allocated to specific categories of the portfolio.
- --------------------------------------------------------------------------------
16
<PAGE>
As required by the Securities and Exchange Commission, the following
table breaks down the reserve for credit losses:
Reserve for Credit Losses
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995 1994
- ------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Allocated Reserve
Residential Real Estate $ 4.0 $ 7.0 $ 6.0 $ 5.0
Commercial 96.0 72.0 85.0 86.0
Commercial Real Estate 7.0 5.0 7.0 12.0
Personal 1.0 6.0 8.0 6.0
Other - - - -
Lease Financing 3.0 3.0 3.0 3.0
International - 2.0 3.0 3.0
Unallocated Reserve 36.6 53.3 35.1 29.8
- ------------------------------------------------- ------ ------ ------ ------
Total Reserve $147.6 $148.3 $147.1 $144.8
- ------------------------------------------------- ------ ------ ------ ------
</TABLE>
At December 31, 1993, $.2 million of the reserve was allocated based
on an estimate of the amount that was necessary to provide for potential losses
related to specific nonperforming loans only, while $145.3 million remained
unallocated of the total $145.5 million reserve balance.
- --------------------------------------------------------------------------------
Loan and lease categories as a percent of total loans and leases as
of December 31, 1993 through 1997, are presented below.
Loan and Lease Category to Total Loans and Leases
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loan and Lease Category
Residential Real Estate 41% 42% 39% 38% 38%
Commercial 30 29 32 31 32
Commercial Real Estate 5 5 5 6 6
Personal 10 9 8 8 8
Other 7 9 10 11 9
Lease Financing 3 2 2 2 2
International 4 4 4 4 5
- ------------------------------------------------- ------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
- ------------------------------------------------- ------ ------ ------ ------ ------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
The information presented in the "Credit Risk Management" section should
be read in conjunction with the following information that is incorporated
herein by reference to the Corporation's Annual Report to Stockholders for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
1997
Annual Report
Notes to Consolidated Financial Statements Page(s)
- ------------------------------------------------------------------------------------------------- ---------------
<S> <C>
1. Accounting Policies
F. Interest Risk Management Instruments..................................................... 46
G. Loans and Leases......................................................................... 47
H. Reserve for Credit Losses................................................................ 47
L. Other Real Estate Owned.................................................................. 48
5. Loans and Leases............................................................................ 50
6. Reserve for Credit Losses................................................................... 51
19. Contingent Liabilities...................................................................... 59
20. Off-Balance Sheet Financial Instruments..................................................... 59-62
- -------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations
- -------------------------------------------------------------------------------------------------
Asset Quality and Credit Risk Management......................................................... 32-35
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
In addition, the following schedules on page 15 of this Form 10-K should
be read in conjunction with the "Credit Risk Management" section:
Reserve for Credit Losses Relating to International Operations
Distribution of International Loans and Deposits by Type
18
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
For the discussion of interest rate sensitivity, see the section
entitled "Market Risk Management" on pages 35 to 38 of Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997, which is incorporated herein by reference.
19
<PAGE>
The following unaudited Consolidated Balance Sheet and Consolidated
Statement of Income for The Northern Trust Company were prepared in accordance
with generally accepted accounting principles and are provided here for
informational purposes. These consolidated financial statements should be read
in conjunction with the footnotes accompanying the consolidated financial
statements, included in the Corporation's Annual Report to Stockholders for the
year ended December 31, 1997, and incorporated herein by reference on page 24 of
this Form 10-K.
The Northern Trust Company
Consolidated Balance Sheet (unaudited)
<TABLE>
<CAPTION>
December 31
---------------------------
(In Millions) 1997 1996
- -------------------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Assets
Cash and Due from Banks $ 1,568.8 $ 1,090.4
Federal Funds Sold and Securities Purchased under Agreements to Resell 3,228.7 1,224.9
Time Deposits with Banks 2,282.4 2,059.7
Other Interest-Bearing 104.8 248.0
Securities
Available for Sale 3,407.2 3,983.9
Held to Maturity (Fair Value -- $401.2 in 1997 and $436.1 in 1996) 385.5 416.9
- -------------------------------------------------------------------------------------------- --------- ----------
Total Securities 3,792.7 4,400.8
- -------------------------------------------------------------------------------------------- --------- ----------
Loans
Commercial and Other 6,224.8 5,396.7
Residential Mortgages 2,810.9 2,589.5
- -------------------------------------------------------------------------------------------- --------- ----------
Total Loans and Leases (Net of unearned income - $149.8 in 1997 and $106.6 in 1996) 9,035.7 7,986.2
- -------------------------------------------------------------------------------------------- --------- ----------
Reserve for Credit Losses (118.2) (120.9)
Buildings and Equipment 235.0 211.3
Customers' Acceptance Liability 29.6 42.3
Trust Security Settlement Receivables 291.4 362.3
Other Assets 734.1 621.9
- -------------------------------------------------------------------------------------------- --------- ----------
Total Assets $21,185.0 $18,126.9
- -------------------------------------------------------------------------------------------- --------- ----------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 2,935.4 $ 3,010.5
Savings and Money Market Deposits 2,672.1 2,568.6
Savings Certificates 1,276.7 1,299.5
Other Time 399.6 335.0
Foreign Offices--Demand 451.1 411.1
--Time 5,619.5 3,518.6
- -------------------------------------------------------------------------------------------- --------- ----------
Total Deposits 13,354.4 11,143.3
- -------------------------------------------------------------------------------------------- --------- ----------
Federal Funds Purchased 929.1 759.6
Securities Sold under Agreements to Repurchase 1,057.2 883.4
Other Borrowings 2,745.0 3,028.9
Senior Notes 785.0 305.0
Long-Term Debt 354.2 333.9
Liability on Acceptances 29.6 42.3
Other Liabilities 648.1 527.5
- -------------------------------------------------------------------------------------------- --------- ----------
Total Liabilities 19,902.6 17,023.9
- -------------------------------------------------------------------------------------------- --------- ----------
Stockholder's Equity
Capital Stock--Par Value $60 213.8 213.8
Surplus 245.3 245.3
Undivided Profits 821.8 642.6
Net Unrealized Gain on Securities Available for Sale 1.5 1.3
- -------------------------------------------------------------------------------------------- --------- ----------
Total Stockholder's Equity 1,282.4 1,103.0
- -------------------------------------------------------------------------------------------- --------- ----------
Total Liabilities and Stockholder's Equity $21,185.0 $18,126.9
- -------------------------------------------------------------------------------------------- --------- ----------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
The Northern Trust Company
Consolidated Statement of Income (unaudited)
For the Year Ended
December 31
--------------------------------
(In Millions) 1997 1996 1995
- ------------------------------------------------------------------------------------- -------- ------ ------
<S> <C> <C> <C>
Interest Income
Loans and Leases $ 548.6 $489.3 $406.6
Securities
- Available for Sale 310.0 303.7 275.7
- Held to Maturity 26.5 26.1 26.2
- Trading Account - .1 3.3
- ------------------------------------------------------------------------------------- -------- ------ ------
Total Securities 336.5 329.9 305.2
- ------------------------------------------------------------------------------------- -------- ------ ------
Time Deposits with Banks 133.5 84.8 92.1
Federal Funds Sold and Securities Purchased under Agreements to Resell and Other 71.9 36.7 17.4
- ------------------------------------------------------------------------------------- -------- ------ ------
Total Interest Income 1,090.5 940.7 821.3
- ------------------------------------------------------------------------------------- -------- ------ ------
Interest Expense
Deposits 445.3 373.6 317.0
Federal Funds Purchased 93.3 99.0 94.9
Securities Sold under Agreements to Repurchase 77.4 99.1 94.4
Other Borrowings 107.8 60.9 51.7
Senior Notes 30.9 14.4 23.5
Long-Term Debt 24.4 19.5 17.0
- ------------------------------------------------------------------------------------- -------- ------ ------
Total Interest Expense 779.1 666.5 598.5
- ------------------------------------------------------------------------------------- -------- ------ ------
Net Interest Income 311.4 274.2 222.8
Provision for Credit Losses 5.6 7.4 4.8
- ------------------------------------------------------------------------------------- -------- ------ ------
Net Interest Income after Provision for Credit Losses 305.8 266.8 218.0
- ------------------------------------------------------------------------------------- -------- ------ ------
Noninterest Income
Trust Fees 456.9 397.8 348.3
Treasury Management Fees 59.2 54.2 48.3
Foreign Exchange Trading Profits 104.7 58.7 55.1
Security Commissions and Trading Income .9 .9 .1
Other Operating Income 42.0 36.8 33.3
Investment Security Gains .7 .4 .6
- ------------------------------------------------------------------------------------- -------- ------ ------
Total Noninterest Income 664.4 548.8 485.7
- ------------------------------------------------------------------------------------- -------- ------ ------
Income before Noninterest Expenses 970.2 815.6 703.7
- ------------------------------------------------------------------------------------- -------- ------ ------
Noninterest Expenses
Salaries 322.7 258.3 240.7
Pension and Other Employee Benefits 58.0 52.3 58.6
Occupancy Expense 45.8 45.9 40.2
Equipment Expense 51.3 45.3 39.7
Other Operating Expenses 143.4 131.3 108.9
- ------------------------------------------------------------------------------------- -------- ------ ------
Total Noninterest Expenses 621.2 533.1 488.1
- ------------------------------------------------------------------------------------- -------- ------ ------
Income before Income Taxes 349.0 282.5 215.6
Provision for Income Taxes 117.4 90.5 67.7
- ------------------------------------------------------------------------------------- -------- ------ ------
Net Income $ 231.6 $192.0 $147.9
- ------------------------------------------------------------------------------------- -------- ------ ------
Dividends Paid to the Corporation 50.0 80.0 89.0
- ------------------------------------------------------------------------------------- -------- ------ ------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
- -------------------------------------------------------------------------------
Supplemental Item--Executive Officers of the Registrant
WILLIAM A. OSBORN
Mr. Osborn became Chairman of the Board of the Corporation and the Bank in
October 1995, and Chief Executive Officer of the Corporation and the Bank in
June 1995. He held the title of President of the Corporation and the Bank from
January 1994 to October 1995 and Chief Operating Officer from January 1994
through June 1995. He was a Senior Executive Vice President of the Corporation
and the Bank from November 1992 through 1993 and prior to that time had served
as an Executive Vice President of the Bank since 1987, and of the Corporation
since 1989. Mr. Osborn, 50, began his career with the Bank in 1970.
BARRY G. HASTINGS
Mr. Hastings became President of the Corporation and the Bank in October
1995, and Chief Operating Officer of the Corporation and the Bank in June 1995.
He held the title of Vice Chairman of the Corporation and the Bank from January
1994 through June 1995. He was a Senior Executive Vice President of the
Corporation and the Bank from November 1992 through 1993 and prior to that time
had served as an Executive Vice President of the Bank since 1987, and of the
Corporation since 1990. Mr. Hastings, 50, began his career with the Corporation
in 1974.
DAVID L. EDDY
Mr. Eddy became a Senior Vice President of the Corporation and the Bank and
Treasurer of the Corporation in 1986. Mr. Eddy, 61, joined the Bank in 1960.
JAMES J. MITCHELL
Mr. Mitchell was appointed an Executive Vice President of the Bank in
December 1987 and of the Corporation in October 1994, and is currently head of
the Worldwide Operations and Technology business unit. Mr. Mitchell, 55, joined
the Bank in 1964.
SHEILA A. PENROSE
Ms. Penrose became President - C&IS of the Corporation and of the Bank in
January 1998, and an Executive Vice President of the Bank in November 1993 and
of the Corporation in November 1994. From 1986 until 1993, she had been a Senior
Vice President of the Bank. Ms. Penrose, 52, began her career with the
Corporation in 1977.
PERRY R. PERO
Mr. Pero is Chief Financial Officer of the Corporation and the Bank and
Cashier of the Bank. Mr. Pero is also head of the Risk Management Unit and
Chairman of the Corporate Asset and Liability Policy Committee. He became a
Senior Executive Vice President of the Corporation and the Bank in 1992 after
serving as an Executive Vice President of the Corporation and the Bank since
1987. Mr. Pero, 58, joined the Bank in 1964.
PETER L. ROSSITER
Mr. Rossiter serves as Executive Vice President and General Counsel of the
Corporation and the Bank. He joined the Corporation and the Bank in 1992 as
an Executive Vice President and Associate General Counsel. He held the title
of Secretary of the Corporation and the Bank from April 1993 through November
1997 and has served as an Assistant Secretary since then. Mr. Rossiter, 49,
had been a partner in the law firm of Schiff Hardin & Waite from 1979 to 1992.
HARRY W. SHORT
Mr. Short was appointed Senior Vice President and Controller of the
Corporation and the Bank in October 1994. He joined the Corporation and the Bank
in January 1990 and served as Senior Vice President and General Auditor. Mr.
Short, 50, had been a partner in the accounting firm of KPMG Peat Marwick from
1982 to 1990.
JAMES M. SNYDER
Mr. Snyder was appointed Executive Vice President of the Corporation and
the Bank in November 1996 and is currently the Chief Investment Officer. He had
been a Senior Vice President of the Bank from 1991 to 1996. Mr. Snyder, 51,
joined the Bank in 1969.
- -------------------------------------------------------------------------------
22
<PAGE>
- -------------------------------------------------------------------------------
MARK STEVENS
Mr. Stevens became President - PFS of the Corporation and the Bank in
January 1998, and was appointed an Executive Vice President of the Corporation
and the Bank in February 1996. He served as Chief Executive Officer of Northern
Trust Bank of Florida N.A., from 1987 to 1996. Mr. Stevens, 50, joined the
Corporation in 1979.
STEPHEN B. TIMBERS
Mr. Timbers joined Northern Trust in February 1998, when he was named
President- NTGI and an Executive Vice President of the Corporation and the Bank.
From January 1996 to December 1997, Mr.Timbers, 53, was President, Chief
Executive Officer and Chief Investment Officer of Zurich Kemper Investments,
Inc. (formerly Kemper Financial Services, Inc.), the investment advisor to the
Kemper Funds and the parent organization of Zurich Investment Management, Inc.
From January 1992 until January 1996, he served as President and Chief Operating
Officer of Kemper Corporation.
WILLIAM S. TRUKENBROD
Mr. Trukenbrod was appointed an Executive Vice President of the Corporation
and the Bank in February 1994, and is currently Chairman of the Credit Policy
Committee. Previously, he served as head of the U.S. Corporate Group of
Commercial Banking from 1987 to 1992. He had been a Senior Vice President of the
Bank since 1980 and of the Corporation since 1992. Mr. Trukenbrod, 58, joined
the Bank in 1962.
The positions of Chairman of the Board, Chief Executive Officer, President
and Vice Chairman are elected annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of
stockholders. The other officers are appointed annually by the Board. Officers
continue to hold office until their successors are duly elected or until their
death, resignation or removal by the Board.
Item 2-Properties
The executive offices of the Corporation and the Bank are located at 50
South LaSalle Street in the financial district of Chicago. This Bank-owned
building is occupied by various divisions of Northern Trust's business units.
Financial services are provided by the Bank at this location. Adjacent to this
building are two office buildings in which the Bank leases approximately 332,000
square feet of space principally for staff divisions of the business units. The
Bank also leases approximately 112,000 square feet of a building at 125 South
Wacker Drive in Chicago for computer facilities, banking operations and personal
banking services. Financial services are also provided by the Bank at fourteen
other Chicago metropolitan area locations, five of which are owned and nine of
which are leased. The Bank's trust and banking operations are located in a
465,000 square foot facility at 801 South Canal Street in Chicago. The building
is leased by the Corporation under terms that qualify as a capital lease. In
June 1997, the Bank entered into an agreement to purchase a building and
adjacent land located across the street from the Chicago operations center in
January 2000. The building, which is located at 840 South Canal Street and
contains approximately 340,000 square feet of office space, will be used for
future expansion and to relocate the computer data center and some personnel
currently located in leased facilities in downtown Chicago. Prior to the
purchase date, the Bank will lease, in phases beginning in November 1997,
approximately two floors of this six-story building. Space for the Bank's London
and Singapore Branches, Edge Act subsidiary and The Northern Trust Company,
Canada are leased.
The Corporation's other subsidiaries operate from sixty-one locations,
fourteen of which are owned and forty-seven of which are leased. Detailed
information regarding the addresses of all Northern Trust's locations can be
found on pages 80 and 81 in the Corporation's Annual Report to Stockholders for
the year ended December 31, 1997, which is incorporated herein by reference.
The facilities which are owned or leased are suitable and adequate for
business needs. For additional information relating to properties and lease
commitments, refer to Note 8 titled "Buildings and Equipment" and Note 9 titled
"Lease Commitments" on page 51 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1997, which information is
incorporated herein by reference.
Item 3-Legal Proceedings
The information called for by this item is incorporated herein by reference
to Note 19 titled "Contingent Liabilities" on page 59 of the Corporation's
Annual Report to Stockholders for the year ended December 31, 1997.
Item 4-Submission of Matters to a Vote of Security Holders
None.
- -------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters
The information called for by this item is incorporated herein by reference
to the section of the Consolidated Financial Statistics titled "Common Stock
Dividend and Market Price" on pages 76 and 77 of the Corporation's Annual Report
to Stockholders for the year ended December 31, 1997.
Information regarding dividend restrictions of the Corporation's banking
subsidiaries is incorporated herein by reference to Note 15 titled "Restrictions
on Subsidiary Dividends and Loans or Advances" on page 56 of the Corporation's
Annual Report to Stockholders for the year ended December 31, 1997.
Item 6-Selected Financial Data
The information called for by this item is incorporated herein by reference
to the table titled "Summary of Selected Consolidated Financial Data" on page 22
of the Corporation's Annual Report to Stockholders for the year ended December
31, 1997.
Item 7-Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information called for by this item is incorporated herein by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 22 through 41 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1997.
Item 7A-Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is incorporated herein by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 35 through 38 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1997.
Item 8-Financial Statements and Supplementary Data
The following financial statements of the Corporation and its subsidiaries
included in the Corporation's Annual Report to Stockholders for the year ended
December 31, 1997, are incorporated herein by reference.
<TABLE>
<CAPTION>
1997
Annual Report
For Northern Trust Corporation and Subsidiaries: Page(s)
- --------------------------------------------------------------------------------------------------------- -------------
<S> <C>
Consolidated Balance Sheet-December 31, 1997 and 1996.................................................... 42
Consolidated Statement of Income-Years Ended December 31, 1997, 1996 and 1995............................ 43
Consolidated Statement of Changes in Stockholders' Equity-Years Ended December 31, 1997, 1996 and 1995... 44
Consolidated Statement of Cash Flows-Years Ended December 31, 1997, 1996 and 1995........................ 45
- --------------------------------------------------------------------------------------------------------- -------------
For Northern Trust Corporation (Corporation Only)
- --------------------------------------------------------------------------------------------------------- -------------
Condensed Balance Sheet-December 31, 1997 and 1996....................................................... 68
Condensed Statement of Income-Years Ended December 31, 1997, 1996 and 1995............................... 68
Consolidated Statement of Changes in Stockholders' Equity-Years Ended December 31, 1997, 1996 and 1995... 44
Condensed Statement of Cash Flows-Years Ended December 31, 1997, 1996 and 1995........................... 69
- --------------------------------------------------------------------------------------------------------- -------------
Notes to Consolidated Financial Statements............................................................... 46-69
- --------------------------------------------------------------------------------------------------------- -------------
Report of Independent Public Accountants................................................................. 70
- --------------------------------------------------------------------------------------------------------- -------------
</TABLE>
The section titled "Quarterly Financial Data" on pages 76 and 77 of the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997, is incorporated herein by reference.
Item 9-Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
PART III
Item 10--Directors and Executive Officers of the Registrant
The information called for by Item 10 relating to Directors and Nominees
for election to the Board of Directors is incorporated herein by reference to
pages 2 through 5 of the Corporation's definitive 1998 Notice and Proxy
Statement filed on March 16, 1998 in connection with the solicitation of proxies
for the Annual Meeting of Stockholders to be held April 21, 1998. The
information called for by Item 10 relating to Executive Officers is set forth in
Part I of this Annual Report on Form 10-K. The information called for by Item 10
relating to Item 405 disclosure of delinquent Form 3, 4 or 5 filers is
incorporated by reference to page 9 of the Corporation's definitive 1998 Notice
and Proxy Statement filed on March 16, 1998 in connection with the solicitation
of proxies for the Annual Meeting of Stockholders to be held April 21, 1998.
Item 11--Executive Compensation
The information called for by this item is incorporated herein by reference
to pages 8 and 9 and pages 10 through 17 of the Corporation's definitive 1998
Notice and Proxy Statement filed in connection with the solicitation of proxies
for the Annual Meeting of Stockholders to be held April 21, 1998.
Item 12--Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated herein by reference
to pages 6 and 7 of the Corporation's definitive 1998 Notice and Proxy Statement
filed in connection with the solicitation of proxies for the Annual Meeting of
Stockholders to be held April 21, 1998.
Item 13--Certain Relationships and Related Transactions
The information called for by this item is incorporated herein by reference
to page 9 of the Corporation's definitive 1998 Notice and Proxy Statement filed
in connection with the solicitation of proxies for the Annual Meeting of
Stockholders to be held April 21, 1998.
- --------------------------------------------------------------------------------
25
<PAGE>
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Item 14(a)(1) and (2)--Northern Trust Corporation and Subsidiaries List of
Financial Statements and Financial Statement Schedules
The following financial information is set forth in Item 1 for
informational purposes only:
Financial Information of The Northern Trust Company (Bank Only):
Unaudited Consolidated Balance Sheet-December 31, 1997 and
1996.
Unaudited Consolidated Statement of Income-Years Ended
December 31, 1997, 1996 and 1995.
The following consolidated financial statements of the Corporation and
its subsidiaries are incorporated by reference into Item 8 from the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997:
Consolidated Financial Statements of Northern Trust Corporation
and Subsidiaries:
Consolidated Balance Sheet-December 31, 1997 and 1996.
Consolidated Statement of Income-Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statement of Changes in Stockholders' Equity-
Years Ended December 31, 1997, 1996 and 1995.
Consolidated Statement of Cash Flows-Years Ended December
31, 1997, 1996 and 1995.
The following financial information is incorporated by reference into
Item 8 from the Corporation's Annual Report to Stockholders for the year ended
December 31, 1997:
Financial Statements of Northern Trust Corporation (Corporation):
Condensed Balance Sheet-December 31, 1997 and 1996.
Condensed Statement of Income-Years Ended December 31, 1997,
1996 and 1995.
Consolidated Statement of Changes in Stockholders' Equity-
Years Ended December 31, 1997, 1996 and 1995.
Condensed Statement of Cash Flows-Years Ended December 31,
1997, 1996 and 1995.
The Notes to Consolidated Financial Statements as of December 31, 1997,
incorporated by reference into Item 8 from the Corporation's Annual Report to
Stockholders for the year ended December 31, 1997, pertain to the Bank only
information, consolidated financial statements and Corporation only information
listed above.
The Report of Independent Public Accountants incorporated by reference
into Item 8 from the Corporation's Annual Report to Stockholders for the year
ended December 31, 1997 pertains to the consolidated financial statements and
Corporation only information listed above.
Financial statement schedules have been omitted for the reason that they
are not required or are not applicable.
Item 14(a)3-Exhibits
The exhibits listed on the Exhibit Index beginning on page 28 of this
Form 10-K are filed herewith or are incorporated herein by reference to other
filings.
Item 14(b)-Reports on Form 8-K
In a report on Form 8-K dated October 21, 1997, Northern Trust
incorporated by reference in Item 5 its October 20, 1997 press release,
reporting on its earnings for the third quarter and nine months of 1997. The
press release, with summary financial information, was filed as an exhibit
pursuant to Item 7 of the Form 8-K.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 17, 1998 Northern Trust Corporation
(Registrant)
By: William A. Osborn
--------------------------------
William A. Osborn
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Form 10-K Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
William A. Osborn Chairman of the Board,
- ----------------------------
William A. Osborn Chief Executive Officer and Director
Perry R. Pero Senior Executive Vice President
- ----------------------------
Perry R. Pero and Chief Financial Officer
Harry W. Short Senior Vice President and Controller
- ----------------------------
Harry W. Short (Chief Accounting Officer)
___
Duane L. Burnham Director |
|
Dolores E. Cross Director |
|
Susan Crown Director |
|
Robert S. Hamada Director |
|
Barry G. Hastings Director |
|
Robert A. Helman Director | By: Peter L. Rossiter
---- ----------------------------
Arthur L. Kelly Director | Peter L. Rossiter
| Attorney-in-Fact
Frederick A. Krehbiel Director |
|
William G. Mitchell Director |
|
Edward J. Mooney Director |
|
Harold B. Smith Director |
|
William D. Smithburg Director |
|
Bide L. Thomas Director ___|
Date: March 17, 1998
</TABLE>
27
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed herewith or are incorporated herein
by reference.
<TABLE>
<CAPTION>
Exhibit Incorporated
By Reference to
Exhibit of Same Name
Exhibit in Prior Filing*
Number Description or Filed Herewith
- -------- ----------------------------------------------------------------------- --------------------
<C> <S> <C>
(3) Articles of Incorporation and By-laws
(i) Restated Certificate of Incorporation of Northern Trust
Corporation as amended to date....................................... (13)
(ii) By-laws as amended to date........................................... (8)
(4) Instruments Defining the Rights of Security Holders
(i) Form of The Northern Trust Company's Global Senior
Bank Note (Fixed Rate)............................................... (1)
(ii) Form of The Northern Trust Company's Global Senior
Bank Note (Floating Rate)............................................ (14)
(iii) Form of The Northern Trust Company's Global
Subordinated Medium-Term Bank Note (Fixed Rate)...................... (1)
(iv) Form of The Northern Trust Company's Global
Subordinated Medium-Term Bank Note (Floating Rate)................... (14)
(v) Junior Subordinated Indenture, dated as of January 1,
1997, between Northern Trust Corporation and The First
National Bank of Chicago, as Debenture Trustee....................... (11)
(10) Material Contracts
(i) Northern Trust Corporation Amended Incentive Stock Plan,
as amended May 20, 1986 **........................................... (2)
(1) Amendment dated November 1, 1996................................. (10)
(ii) Lease dated July 1, 1988 between American National Bank
& Trust Company of Chicago as Trustee under Trust
Agreement dated February 12, 1986 and known as Trust No.
66603 (Landlord) and Nortrust Realty Management, Inc.
(Tenant)............................................................. (3)
(iii) Restated Northern Trust Employee Stock Ownership Plan,
dated January 1, 1989, as amended November 21, 1995 and
April 26, 1996....................................................... (10)
(1) Amendments effective January 1, 1996 to the
Northern Trust Employee Stock Plan for former
employees of Tanglewood Bank , N.A........................... (13)
(2) Amendment effective September 30, 1996 to the
Northern Trust Employee Stock Ownership Plan for
certain former employees of First Chicago NBD
Corporation.................................................. (13)
(3) Amendments effective January 1, 1997 to the
Northern Trust Employee Stock Ownership Plan for
former employees of Bent Tree National Bank.................. (13)
(iv) Trust Agreement between The Northern Trust Company and
Citizens and Southern Trust Company (Georgia), N.A.,
(predecessor of NationsBank which, effective January 1,
1998, was succeeded by U.S. Trust Company of California,
N.A.) dated January 26, 1989......................................... (4)
(1) Amendment dated February 21, 1995............................ Filed Herewith
(v) Form of Note Agreement dated January 26, 1989 between
ESOP Trust and each of the institutional lenders, with
respect to the 8.23% Notes of the ESOP Trust......................... (4)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(vi) Guaranty Agreement of Registrant with respect to the
8.23% Notes of the ESOP Trust, dated January 26, 1989......................... (4)
(vii) Share Acquisition Agreement between Registrant and the
ESOP Trust, dated January 26, 1989............................................ (4)
(viii) Implementation Agreement dated June 26, 1996 between the
Registrant, The Northern Trust Company, the ESOP Trust
and NationsBank (South) N.A. as Trustee (effective
January 1, 1998, U.S. Trust Company of California, N.A.
as successor Trustee)......................................................... (9)
(ix) Term Loan Agreement between the ESOP Trust and the
Registrant dated June 28, 1996................................................ (9)
(x) Restated Trust Agreement dated June 18, 1996, between
The Northern Trust Company and Harris Trust and Savings
Bank regarding the Supplemental Employee Stock Ownership
Plan for Employees of The Northern Trust Company, the
Supplemental Thrift-Incentive Plan for Employees of The
Northern Trust Company and the Supplemental Pension Plan
for Employees of The Northern Trust Company**................................. (10)
(xi) Supplemental Employee Stock Ownership Plan for Employees
of The Northern Trust Company as amended and restated as
of April 30, 1996**........................................................... (10)
(xii) Supplemental Thrift-Incentive Plan for Employees of The
Northern Trust Company as amended and restated as of
April 30, 1996**.............................................................. (10)
(xiii) Supplemental Pension Plan for Employees of The Northern
Trust Company as amended and restated as of April 30,
1996**........................................................................ (10)
(xiv) Rights Agreement, dated as of October 17, 1989, between
Northern Trust Corporation and Harris Trust and Savings
Bank.......................................................................... (5)
(1) First Amendment to Rights Agreement dated as of September 17, 1997.... (14)
(2) Second Amendment to Rights Agreement dated as of November 18, 1997.... Filed Herewith
(xv) Lease dated August 27, 1985 between American National
Bank & Trust Company of Chicago as Trustee under Trust
Agreement dated April 5, 1990 and known as Trust No.
110513-07 (Landlord) and The Northern Trust Company
(Tenant), as amended.......................................................... (6)
(1) First Amendment to Agreement of Lease dated August 15, 1986........... (7)
(2) Second Amendment to Agreement of Lease dated August 6, 1987........... (7)
(3) Third Amendment to Agreement of Lease dated May 20, 1988.............. (7)
(4) Fourth Amendment to Agreement of Lease dated May 1, 1990.............. (7)
(5) Fifth Amendment to Agreement of Lease dated January 12, 1995.......... (7)
(6) Sixth Amendment to Agreement of Lease dated November 30, 1995......... (7)
(xvi) Lease dated July 8, 1987 between American National Bank
& Trust Company of Chicago as Trustee under Trust
Agreement dated July 12, 1984 and known as Trust No.
61523 (Landlord) and The Northern Trust Company
(Tenant), as amended.......................................................... (6)
(1) First Amendment to Office Lease dated October 20, 1987................ (12)
(xvii) Amended 1992 Incentive Stock Plan**........................................... (13)
(xviii) Northern Trust Corporation (1997) Management Performance
Plan**........................................................................ (13)
(xix) Northern Trust Corporation (1997) Annual Performance Plan**................... (13)
(xx) Form of Employment Security Agreement dated March 1,
1996 entered into between Northern Trust Corporation and
each of 7 executive officers - as amended**................................... (9)
(xxi) Form of Employment Security Agreement dated May 21, 1996
entered into between Northern Trust Corporation and each
of 30 officers**.............................................................. (9)
(xxii) Form of Employment Security Agreement dated May 21, 1996
entered into between Northern Trust Corporation and each
of 14 officers**.............................................................. (9)
(xxiii) Amended and Restated Trust Agreement of NTC Capital I,
dated as of January 16, 1997, among Northern Trust
Corporation, as Depositor, The First National Bank of
Chicago, as Property Trustee, First Chicago Delaware,
Inc., as Delaware Trustee, and the Administrative
Trustees named therein........................................................ (11)
(xxiv) Guarantee Agreement, dated as of January 16, 1997,
relating to NTC Capital I, by and between Northern Trust
Corporation, as Guarantor, and The First National Bank
of Chicago, as Guarantee Trustee.............................................. (11)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(xxv) Amended and Restated Trust Agreement of NTC Capital II,
dated as of April 25, 1997, among Northern Trust Corporation,
as Depositor, The First National Bank of Chicago, as Property Trustee,
First Chicago Delaware, Inc., as Delaware Trustee, and the
Administrative Trustees named therein.......................................... (13)
(xxvi) Guarantee Agreement, dated as of April 25 1997, relating to
NTC Capital II, by and between Northern Trust Corporation, as Guarantor,
and The First National Bank of Chicago, as Guarantee Trustee................... (13)
(13) 1997 Annual Report to Stockholders..................................................... Filed Herewith
(21) Subsidiaries of the Registrant......................................................... Filed Herewith
(23) Consent of Independent Public Accountants.............................................. Filed Herewith
(24) Powers of Attorney..................................................................... Filed Herewith
(27) Financial Data Schedule................................................................ Filed Herewith
</TABLE>
30
<PAGE>
<TABLE>
<C> <S>
* Prior Filings (File No. 0-5965, except as noted)
(1) Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
(2) Quarterly Report on Form 10-Q for the quarter ended September 30, 1986
(3) Annual Report on Form 10-K for the year ended December 31, 1988
(4) Form 8-K dated January 26, 1989
(5) Form 8-A dated October 30, 1989
(6) Annual Report on Form 10-K for the year ended December 31, 1990
(7) Annual Report on Form 10-K for the year ended December 31, 1995
(8) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996
(9) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(10) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(11) Form 8-K dated January 22, 1997
(12) Annual Report on Form 10-K for the year ended December 31, 1996
(13) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(14) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
** Denotes management contract or compensatory plan or arrangement
---------------------------------------------------------------
</TABLE>
Upon written request to Rose A. Ellis, Secretary, Northern Trust
Corporation, 50 South LaSalle Street, Chicago, Illinois 60675, copies of
exhibits listed above are available to Northern Trust Corporation stockholders
by specifically identifying each exhibit desired in the request.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Corporation
hereby agrees to furnish the Commission, upon request, any instrument defining
the rights of holders of long-term debt of the Corporation not filed as an
exhibit herein. No such instrument authorizes long-term debt securities in
excess of 10% of the total assets of the Corporation and its subsidiaries on
a consolidated basis.
31
<PAGE>
EXHIBIT NUMBER (10)(iv)(1)
To 1997 FORM 10-K
FIRST
AMENDMENT
TO
NORTHERN TRUST COMPANY
EMPLOYEE STOCK OWNERSHIP TRUST
THIS AGREEMENT is made as of the 21st day of February 1995 by and between
THE NORTHERN TRUST COMPANY, an Illinois state bank of Chicago, Illinois (the
"Company"), and NATIONSBANK, as trustee (the "Trustee");
WHEREAS, the Company and the Trustee executed the NORTHERN TRUST COMPANY
EMPLOYEE STOCK OWNERSHIP TRUST agreement (the "Trust") dated the 26th day of
January, 1988; and
WHEREAS, the Company and the Trustee desire to amend the Trust pursuant to
Section 7.1;
NOW, THEREFORE, the sections of the Trust set forth below are amended as
follows, but all other sections of the Trust shall remain in full force and
effect.
1. The second sentence of Section 1.2 is amended in its entirety to read as
follows:
The Company shall furnish to the Trustee at the time of its appointment and
from time to time thereafter the name and specimen signature of each Committee
member or agent of the Committee upon whose statement the Trustee is authorized
to rely.
2. Section 3.1 is hereby amended by adding the following paragraph:
Notwithstanding the foregoing, the committee may appoint a Paying Agent
(including the Company) to make distributions from the Trust Fund through an
account established by the Committee with such Paying Agent for such purpose
after written notice to the Trustee that such an appointment has been made and
that an account has been so established. The Trustee shall make such deposits
from the Trust Fund to such an account as the Committee may from time to time
direct.
3. Section 4.1 is amended by inserting the following language at the end
thereof:
Anything contained herein to the contrary notwithstanding, any part or all of
the assets of the Trust Fund may be deposited with The Northern Trust Company,
an Illinois corporation, of Chicago, Illinois, as Trustee under that certain
"Declaration of Trust creating the Collective Employee Benefit Trust Fund of The
Northern Trust Company" dated October 2, 1961, as the same may be amended from
time to time, such funds to be held and invested by The Northern Trust Company
as such Trustee pursuant to all the terms and conditions of such Declaration,
which is hereby incorporated by reference.
<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: Martin J. Joyce, Jr.
--------------------------------
Its: Senior Vice President
-------------------------------
ATTEST:
Victoria Antoni
- ------------------------------
Its: Assistant Secretary
--------------------------
NATIONSBANK
By: M. Carole Trizzino
--------------------------------
Its: Vice President
-------------------------------
ATTEST:
T. Stuart Gaston
- ------------------------------
Its: Assistant Secretary
--------------------------
<PAGE>
EXHIBIT NUMBER (10)(xiv)(2)
TO 1997 FORM 10-K
SECOND AMENDMENT TO RIGHTS AGREEMENT
THIS SECOND AMENDMENT is made as of November 18, 1997 among Northern Trust
Corporation, a Delaware corporation (the "Company"), and Norwest Bank Minnesota,
National Association, a national banking association (the "Rights Agent").
WHEREAS, the Company and Harris Trust and Savings Bank ("Harris") entered
into a Rights Agreement dated as of October 17, 1989 and a First Amendment
thereto dated as of September 17, 1997 (collectively, the "Rights Agreement");
WHEREAS, effective as of November 10, 1997 Harris was removed as Rights
Agent under the Rights Agreement and Norwest Bank Minnesota, National
Association was appointed to serve as successor Rights Agent under the Rights
Agreement;
WHEREAS, the Company and the Rights Agent may from time to time supplement
or amend the Rights Agreement pursuant to Section 27 of the Rights Agreement;
WHEREAS, no Distribution Date (as defined in the Rights Agreement) has
occurred;
WHEREAS, an appropriate officer of the Company has delivered a certificate
to the Rights Agent which states that this Second Amendment complies with the
terms of Section 27 of the Rights Agreement; and
WHEREAS, all acts and things necessary to make this Second Amendment a
valid, legal and binding instrument of the Company and the Rights Agent have
been duly done, performed and fulfilled, and the execution and delivery hereof
by each of the Company and the Rights Agent have been in all respects duly
authorized by the Company and the Rights Agent, respectively;
NOW, THEREFORE, the Company and the Rights Agent hereby agree that:
1. Pursuant to Section 27 of the Rights Agreement, the stock legend set
forth in Section 3(c) of the Rights Agreement is hereby amended by revising the
first sentence thereof to read as follows:
"This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Rights Agreement between Northern Trust
Corporation and the Rights Agent thereunder dated as of October 17, 1989,
as the same may have been or may be amended, restated or supplemented from
time to time (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal executive offices of Northern Trust Corporation."
<PAGE>
2. The term "Agreement" as used in the Rights Agreement shall be deemed
to refer to the Rights Agreement as amended hereby.
3. This Second Amendment may be executed in two or more counterparts,
each of such counterparts shall for all purposes be deemed to be an original and
all such counterparts shall together constitute but one and the same instrument.
Terms not defined herein shall, unless the context otherwise requires, have the
meanings assigned to such terms in the Rights Agreement.
4. In executing and delivering this Second Amendment, the Rights Agent
shall be entitled to all of the privileges and immunities afforded to the Rights
Agent under the terms and conditions of the Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and attested, all as of the day and year first above written.
NORTHERN TRUST CORPORATION
Attest:
By: /s/ Rose A. Ellis By: /s/ Peter L. Rossiter
--------------------------- ---------------------------
Name: Rose A. Ellis Name: Peter L. Rossiter
Title: Secretary Title: Executive Vice President
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
Attest:
By: /s/ Barabar M. Novak By: /s/ Nancy J. Rosengen
--------------------------- ---------------------------
Name: Barabar M. Novak Name: Nancy J. Rosengen
Title: Vice President Title: Vice President
<PAGE>
EXHIBIT NUMBER (13)
To 1997 Form 10-K
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust Corporation (Corporation) is a bank holding company organized
in 1971 to hold all of the outstanding capital stock of The Northern Trust
Company (Bank), an Illinois banking corporation with its headquarters located
in the Chicago financial district. The Corporation also owns banks in Florida,
California, Arizona and Texas, and various other nonbank subsidiaries, includ-
ing a securities brokerage firm, a futures commission merchant, an interna-
tional investment consulting firm and a retirement services company. Although
the operations of other subsidiaries will be of increasing significance, it is
expected that the Bank will continue to be the major source of the consoli-
dated assets, revenues and net income in the foreseeable future.
All references to "Northern Trust" refer to Northern Trust Corporation and
its subsidiaries on a consolidated basis.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with Northern Trust's Consolidated
Financial Statements and Consolidated Financial Statistics included herein.
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW. Net income for 1997 totaled a record $309.4 million, a 19.5% in-
crease from the $258.8 million earned in 1996 which in turn was 17.6% greater
than the $220.0 million earned in 1995. The record 1997 net income performance
produced a return on average common stockholders' equity of 20.2% compared
with 18.6% in 1996 and 17.6% in 1995. The return on average assets was 1.29%
in 1997 compared with 1.23% in 1996 and 1.13% in 1995.
Effective December 31, 1997, Northern Trust implemented Statement of Finan-
cial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128
requires the presentation of diluted net income per common share, which re-
places the presentation of fully diluted net income per share computed pursu-
ant to Accounting Principles Board Opinion No. 15. Diluted and fully diluted
net income per share are computed in a similar manner. All prior period net
income per share data throughout this report has been restated to conform to
SFAS No. 128. Diluted net income per common share increased 20% to $2.66 in
1997, compared with $2.21 in 1996 and $1.86 in 1995. Over the past five years
the compound growth rate in diluted net income per share has been 15%. Diluted
net income per share for 1997 was $.03 greater than fully diluted net income
per share.
1997 marks the tenth consecutive year of record earnings. Trust fees, net in-
terest income, foreign exchange trading profits and treasury management fees
were all at record levels, while trust assets under administration reached
$1.08 trillion at December 31, 1997, up $300.4 billion from a year ago. Excel-
lent growth in all of Northern Trust's diversified revenue sources produced a
17% increase in revenues while operating expenses increased by 16%, resulting
in a productivity ratio of 158%.
Primarily through the retention of earnings, offset in part by the repurchase
of common stock pursuant to the Corporation's share buyback program, stock-
holders' equity grew to $1.74 billion, as compared to $1.54 billion at Decem-
ber 31, 1996 and $1.45 billion at December 31, 1995.
The Board of Directors increased the quarterly dividend per common share
16.7% in November 1997, to $.21 from $.18, for a new annual rate of $.84. This
is the eleventh consecutive year in which the dividend rate has been in-
creased. The
- -------------------------------------------------------------------------------
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions Except Per Share Information) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $ 438.2 $ 388.3 $ 357.6 $ 334.6 $ 327.9
Provision for Credit Losses 9.0 12.0 6.0 6.0 19.5
Noninterest Income
Trust Fees 689.2 594.4 505.3 453.4 404.8
Other Noninterest Income 245.3 185.6 173.1 180.0 149.0
Noninterest Expenses 891.8 768.9 709.5 700.5 628.2
Provision for Income Taxes 162.5 128.6 100.5 79.3 66.1
- -------------------------------------------------------------------------------------------------
NET INCOME $ 309.4 $ 258.8 $ 220.0 $ 182.2 $ 167.9
- -------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 304.4 $ 253.9 $ 211.5 $ 174.9 $ 161.6
- -------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net Income
Basic $ 2.74 $ 2.27 $ 1.91 $ 1.62 $ 1.52
Diluted 2.66 2.21 1.86 1.58 1.48
Dividends Declared .75 .65 .55 .46 .39
- -------------------------------------------------------------------------------------------------
Average Total Assets $24,051.7 $20,964.3 $19,409.5 $17,885.8 $15,700.2
Senior Notes at Year-End 785.0 305.0 17.0 547.0 817.0
Long-Term Debt at Year-End 439.5 427.8 334.6 244.8 326.8
Floating Rate Capital Securities at Year-End 267.4 -- -- -- --
</TABLE>
Note: Per common share data has been restated to conform with SFAS No. 128.
NORTHERN TRUST CORPORATION
--------------------------
22
<PAGE>
Board's action reflects a policy of increasing the dividend rate with in-
creased profitability while retaining sufficient earnings to allow for strate-
gic expansion and the maintenance of a strong balance sheet and capital ra-
tios.
Northern Trust's strategy will continue to focus on growing its two sharply
defined businesses: Corporate and Institutional Services (C&IS) and Personal
Financial Services (PFS). C&IS focuses on administering and managing domestic
and global investment pools for corporate and institutional clients worldwide.
PFS provides financial services to individuals and closely held businesses
through a unique five-state personal financial services franchise. In execut-
ing this strategy, Northern Trust emphasizes service quality through a high
level of personal service complemented by the effective use of
technology. Expense growth and capital expenditures are closely monitored to
ensure that short- and long-term business
strategies and performance objectives are effectively balanced.
NONINTEREST INCOME. The success of Northern Trust's strategy of maintaining a
diverse, fee-oriented revenue base is evidenced by the fact that noninterest
income represented 66% of its total taxable equivalent revenue in 1997, com-
pared with 65% one year ago. Noninterest income totaled $934.5 million in
1997, $780.0 million in 1996 and $678.4 million in 1995.
TRUST FEES. Trust fees accounted for 74% of total noninterest income and 49%
of total taxable equivalent revenue in 1997. Trust fees for 1997 increased 16%
to $689.2 million from $594.4 million in 1996 which was up 18% from $505.3
million in 1995. Trust fees have increased at a compound growth rate of 13%
for the last five years. The increase in 1997 trust fees is principally the
result of record growth in business from new and existing clients, coupled
with strong growth in security markets. The increase in 1996 fees compared to
1995 was also a result of growth in new business and strong security markets.
Fees generated by Northern Trust Global Advisors, Inc. (NTGA), an asset man-
agement subsidiary acquired in October 1995, and The Beach Bank of Vero Beach,
Florida (Beach Bank), a March 1995 acquisition, contributed approximately
$24.1 million of the trust fee growth in 1996. Total trust assets under admin-
istration at December 31, 1997 were $1.08 trillion compared to $778.9 billion
a year ago, an increase of 39%. Trust assets under management, included in the
above, increased 51% to $196.6 billion, from $130.3 billion at the end of
1996.
Fees are based on the market value of assets managed and administered, the
volume of transactions, securities lending activity, and fees for other serv-
ices rendered. Asset-based fees are typically determined on a sliding scale so
that as the value of a client portfolio grows in size, Northern Trust receives
a smaller percentage of the increasing value as fee income. This fact, to-
gether with the non-asset based nature of certain fees, means that market
value or other incremental changes in a portfolio's size do not typically have
a proportionate impact on the level of trust fees. In addition, C&IS trust re-
lationships are increasingly priced to reflect earnings from activities such
as custody-related deposits and foreign exchange trading which are not in-
cluded in trust fees. Custody-related deposits maintained with bank subsidiar-
ies and foreign branches are primarily interest-bearing and averaged $5.4 bil-
lion in 1997 and $4.3 billion in 1996.
Northern Trust's fiduciary business encompasses Master Trust, Master Custody,
investment management and retirement services for corporate and institutional
asset pools, as well as a complete range of estate planning, fiduciary, and
asset management services for individuals. Fees from these highly focused
services are fairly evenly distributed between Northern Trust's two business
units, C&IS and PFS. A discussion of trust activities in each of these busi-
ness units follows.
CORPORATE AND INSTITUTIONAL SERVICES. Northern Trust is a leading provider of
Master Trust and Master Custody services to three defined market segments: re-
tirement plans; institutional clients; and international clients. Master Trust
and Master Custody includes a full range of state-of-the-art capabilities in-
cluding: worldwide custody settlement and reporting; cash management; securi-
ties lending; and performance analysis services. In addition to Master Trust
and Master Custody, C&IS offers a comprehensive array of retirement consulting
and recordkeeping services and investment products. At December 31, 1997 trust
assets under administration in C&IS totaled $974.1 billion, an increase of 40%
from $693.7 billion a year ago. Trust fees in C&IS increased 16% in 1997 to
$349.6 million from $300.4 million in 1996 which was up 23% from $244.5 mil-
lion in 1995. Excluding the incremental fee growth resulting from the 1995
NTGA acquisition, C&IS trust fees in 1996 increased 13% from the prior year.
The increase in C&IS trust fees in 1997 reflects record new business with
strong fee growth from all product lines including securities lending, invest-
ment management, custody and retirement services.
Retirement Plans. Trust fees from the retirement plans market segment, which
includes the large U.S. corporate market and public and union retirement
funds, totaled $207.5 million in 1997. Trust fees for this segment in 1996 and
1995 totaled $176.4 million and $156.4 million, respectively. Assets under ad-
ministration totaled $557.4 billion at December 31, 1997 compared with $375.2
billion a year ago. Growth in this area has been driven by record new business
from both new and existing clients. For example, during the third quarter of
1997, Northern Trust won a $60 billion relationship, its largest to date. U.S.
demographic trends are expected to advance the growth of retirement services
in future years. Much of the anticipated growth in retirement assets is ex-
pected to come from defined contribution plans of U.S. corporations. Northern
believes that it is well positioned to benefit from this trend given its long-
term relationships with corporate sponsors, its family of institutional mutual
funds, and recordkeeping services offered through Northern Trust Retirement
Consulting, L.L.C. (NTRC). In addition, the 1997 acquisition of ANB IMC, an
investment management firm
NORTHERN TRUST CORPORATION
--------------------------
23
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with an array of funds that seek to replicate the performance of numerous mar-
ket indices, positions Northern Trust to cross-sell its passive management ca-
pabilities to defined contribution plan clients and prospects. The new subsidi-
ary, renamed Northern Trust Quantitative Advisors, Inc. (NTQA), will also as-
sist Northern Trust in continuing to develop its defined benefit plan business.
Institutional. This market segment, which includes insurance companies, foun-
dations and endowments and correspondent trust services, provides attractive
growth opportunities for trust and banking services. The insurance industry
continues to consolidate its relationships with providers who can meet its full
range of banking and custody needs. Northern Trust seeks to maintain an array
of products and services, a strong capital position and systems capabilities
that position it to increase its share of this market. Northern Trust also pro-
vides smaller bank trust departments with custody, systems, and investment
services through its correspondent trust services offerings. Trust fees from
the institutional market segment in 1997, 1996 and 1995 totaled $59.7 million,
$53.2 million and $50.1 million, respectively. Assets under administration at
December 31, 1997 increased to $202.0 billion from $164.2 billion at December
31, 1996.
International. This segment is composed of non-U.S. clients and group trusts.
When compared to the other C&IS market segments, International has had the
highest compound growth rate for the last five years measured in terms of as-
sets under administration and trust fees. At December 31, 1997 assets under ad-
ministration totaled $156.8 billion, up 41% from $111.1 billion at year-end
1996, which in turn was up 65% over the previous year-end. Trust fees for 1997
increased 17% to $50.2 million. This compares with $43.0 million in 1996 which
was up 27% from $33.9 million in 1995.
Global Investment Services. Investment management, securities lending, and
risk and performance analysis services are offered to C&IS clients in all mar-
ket segments, and fees associated with these activities, with the exception of
NTGA-related fees, are included within the market segments above. Total assets
under management grew from $80.4 billion at year-end 1996 to $134.8 billion at
year-end 1997; $76.9 billion was associated with direct asset management, in-
cluding sweep and custom cash funds, while the remaining $57.9 billion repre-
sented securities lending collateral. In 1997 Northern Trust accelerated its
positioning as a global, multi-asset class manager with an expanded array of
investment service and product capabilities. For example, Northern Trust has
expanded its investment advisory service offerings to offshore clients through
Northern Trust Fund Managers (Ireland) Limited with the addition of new off-
shore sterling and U.S. dollar short-term investment funds.
NTGA provides specialized U.S. and international multiple manager programs to
complement the capabilities of Northern Trust in the fixed income, equity and
short-term markets. Total assets under management at NTGA at December 31, 1997
were $6.6 billion versus $5.7 billion at year-end 1996. NTGA earned $32.2
million in trust fees in 1997 versus $27.8 million in 1996.
Passive fund management capabilities were further strengthened with the acqui-
sition of NTQA from First Chicago NBD Corporation. The new subsidiary was a pi-
oneer in developing index funds for institutional investors. The firm manages
approximately $30 billion in trust assets.
Clients who utilize trust services may elect to have their securities lent to
generate revenues, thereby improving their portfolio's total return. The cash
and other assets that have been deposited by investment firms as collateral for
securities they have borrowed from trust clients under the lending program are
managed by Northern Trust and included in trust assets under management. Domes-
tic and international securities lending fees totaled $68.3 million, up 31%
over 1996, which in turn was up 49% over 1995. The growth was due primarily to
an increase in the volume of securities loaned which was driven by new busi-
ness, strong security markets and innovative technology which simplifies the
security lending transactions for the participating brokers. The collateral to-
taled $57.9 billion and $43.2 billion at December 31, 1997 and 1996, respec-
tively.
Global Custody. In terms of assets under administration, global custody is one
of the fastest growing products within C&IS. This product entails custody, set-
tlement and reporting of foreign assets that are held by U.S. and non-U.S. dom-
iciled clients in all of the market segments described above. Northern Trust
continues to strengthen global securities processing and invest in the required
systems capabilities and subcustodial network in order to capitalize on the
growth opportunities presented by the development of worldwide financial mar-
kets. This investment includes the work under way to prepare for the European
Monetary Union and the introduction of the Euro in January 1999. Through its
worldwide network of subcustodians in 77 markets, Northern Trust had global as-
sets of approximately $149 billion under administration at December 31, 1997, a
38% increase over last year. Several of the emerging nations, especially in
Southeast Asia, began to experience economic difficulties in 1997. The vast ma-
jority of Northern Trust's global custody assets are from industrialized na-
tions. About 1.5% of global custody assets are from the world's emerging mar-
kets, including those in Asia.
Competition. Competition in the corporate and institutional business has been
impacted by recent financial services mergers and acquisitions and further con-
solidation in the industry as other providers exit the business. One indication
of this phenomenon is that approximately 80% of the master trust/custody busi-
ness involving U.S. tax-exempt assets is now served by just six institutions.
Northern Trust currently ranks fourth on this list. This trend and Northern
Trust's commitment to the business have created opportunities to win new cli-
ents. For example, in late 1996, Northern Trust was named preferred provider of
master trust and domestic institutional custody services for clients of First
NORTHERN TRUST CORPORATION
--------------------------
24
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CONSOLIDATED TRUST ASSETS UNDER ADMINISTRATION
- -----------------------------------------------------------------------------------------
Five-
Year
Compound
Percent Growth
December 31 Change Rate
- ------------------------------------------------------------------------------------------
($ In Billions) 1997 1996 1995 1994 1993 1997/96
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate $ 134.8 $ 80.4 $ 64.4 $ 48.5 $ 43.4 68% 28%
Personal 61.8 49.9 41.1 33.8 33.7 24 15
- ------------------------------------------------------------------------------------------
TOTAL MANAGED TRUST ASSETS $ 196.6 $130.3 $105.5 $ 82.3 $ 77.1 51% 23%
- ------------------------------------------------------------------------------------------
Corporate $ 839.3 $613.3 $479.9 $393.2 $377.7 37% 21%
Personal 43.4 35.3 28.5 23.1 21.7 23 15
- ------------------------------------------------------------------------------------------
TOTAL NON-MANAGED TRUST ASSETS $ 882.7 $648.6 $508.4 $416.3 $399.4 36% 21%
- ------------------------------------------------------------------------------------------
CONSOLIDATED TRUST ASSETS UNDER
ADMINISTRATION $1,079.3 $778.9 $613.9 $498.6 $476.5 39% 21%
- ------------------------------------------------------------------------------------------
</TABLE>
Chicago NBD as it exited the business. As a result of this agreement, clients
with approximately $29.3 billion in trust assets and annualized fee revenues
of approximately $8.8 million have selected Northern Trust.
Competition has remained intense in the master trust/ master custody busi-
ness, affecting the pricing of associated products and services. Northern
Trust believes that it is positioned to deal with these pressures and maintain
profitability because of its focus on individual client service, developing
deeper client relationships that include a range of services, economies of
scale and technological innovation.
PERSONAL FINANCIAL SERVICES. Northern Trust has positioned itself in states
having significant concentrations of wealth and growth potential. With the ad-
dition of five new offices in 1997, Northern Trust's unique network of Per-
sonal Financial Services offices includes 62 locations in Illinois, Florida,
California, Arizona, and Texas. PFS also includes the Wealth Management Group
which provides customized products and services to meet the complex financial
needs of families throughout the country with assets typically exceeding $100
million. At December 31, 1997 trust assets under administration in PFS totaled
$105.2 billion, an increase of 23% from $85.2 billion at December 31, 1996,
reflecting record new business development in all five states and strong growth
in security markets. Trust fees increased 16% in 1997 to $339.6 million while
1996 trust fees totaled $294.0 million, an increase of 13% from $260.8 million
in 1995. Although all geographic markets contributed to the 1997 increase, the
strongest fee growth occurred in the Wealth Management Group and the Illinois,
Florida, Arizona and Texas markets. With an established presence and expanding
network in growing markets, together with favorable demographic trends, Northern
Trust is well positioned to continue to grow personal trust fees.
Illinois. Personal trust fees in Illinois increased 10% to $142.9 million in
1997 from $130.2 million in 1996, which was up 10% from $118.5 million in
1995. Trust assets under administration totaled $42.8 billion at December 31,
1997 compared with $35.1 billion a year ago, further confirming Northern
Trust's position as the largest provider of personal trust services in the
state of Illinois. The breadth and quality of trust services along with the
financial strength and stability of Northern Trust have provided a sound plat-
form for growth in its personal trust business. It is expected that the Chi-
cago area market will continue to be a significant contributor to personal
trust revenues.
Florida. Northern Trust continues to strengthen its position in the Florida
marketplace. Trust fees for 1997 totaled $93.2 million, up 20% from $77.3 mil-
lion in 1996 which was up 17% from $65.9 million in 1995. Trust assets under
administration were $18.4 billion at December 31, 1997, and $15.3 billion at
year-end 1996, making Northern Trust the second largest provider of personal
trust services in Florida. The five-year compound growth rates for trust fees
and trust assets have been 15% and 14%, respectively. With new offices opened in
Tampa and Doral during 1997, Northern Trust now has 24 offices located in
coastal communities encompassing the southern half of the state. Management
believes that there remains significant opportunity for new and increased
business given the continued population growth in Florida and Northern's
expansion into key market areas.
California. With the opening of offices in La Jolla and Montecito in 1997,
Northern Trust's California subsidiary has eight offices strategically located
throughout the state to reach the California trust market. Trust fees for 1997
increased 11% to $43.6 million from $39.5 million in 1996 which was up 7% from
$37.0 million in 1995. Trust assets under administration totaled $9.6 billion
at December 31, 1997 and $7.3 billion at December 31, 1996.
Arizona. Northern Trust Bank of Arizona N.A. is one of the largest providers
of personal trust services in the state. As in other markets, the strategy in
Arizona includes providing private banking and trust services to targeted high
net worth individuals. A new office was established during 1997 in the Cata-
lina Foothills area of Northwest Tucson, bringing to seven the total number of
offices in the growing Arizona market. Trust fees from this market were $18.8
million in
NORTHERN TRUST CORPORATION
--------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1997, $15.4 million in 1996 and $13.7 million in 1995. Assets under adminis-
tration at December 31, 1997 and 1996 totaled $3.9 billion and $2.6 billion,
respectively.
Texas. Northern Trust has expanded from one office to seven offices since its
entry into the Texas market in 1989, serving the targeted wealth markets of
the Dallas and Houston metropolitan areas. Trust fees for 1997, 1996 and 1995
were $10.4 million, $8.6 million and $6.9 million, respectively. Trust assets
under administration were $2.9 billion at December 31, 1997 and $2.3 billion
at December 31, 1996.
Wealth Management. Trust fees in the rapidly growing national Wealth Manage-
ment Group grew 34% to $30.7 million in 1997 from $23.0 million in 1996, which
was up 22% from $18.8 million in 1995. This group had $27.6 billion of trust
assets under administration at December 31, 1997, a 22% increase from a year
ago. The 166 families served by this group benefit from Northern Trust's so-
phisticated master trust and global custody services and the reporting capa-
bilities of the Passport electronic delivery system.
Expansion. A significant portion of PFS growth over the last few years has
come from its expansion into attractive markets within its five-state network.
These markets include approximately 20% of the nation's high net worth house-
holds, defined as those with at least $1 million of investable assets. Over
the next 10 years, Northern Trust will seek to continue this expansion and
also to expand into markets with promising demographics in other states. The
goal is to build the PFS national network to approximately 100 offices in
targeted markets within as many as 15 states where approximately 40% of all
U.S. high net worth households are located.
INVESTMENT MANAGEMENT. Northern Trust's investment management business bene-
fited significantly in 1997 from strong equity markets around the world, as
well as from broader industry trends, including the increasing preference of
investors to concentrate assets with fewer managers, the globalization of the
financial markets and a greater focus on risk evaluation and management.
Northern's competitive investment results, successful expansion of client re-
lationships and new product offerings contributed to continued growth in as-
sets under management. Northern Trust had $196.6 billion under management for
personal and institutional clients, up 51% from year-end 1996, placing North-
ern Trust among the largest, and fastest growing, investment managers world-
wide.
A composite of actively managed institutional equity accounts exceeded the
S&P 500 benchmark and put Northern in the top 20% of professional active man-
agers. The actively managed domestic equity market funds also performed well,
with each placing within the top 30% of funds with comparable investment ob-
jectives. Northern's actively managed institutional fixed income results con-
tinue to place Northern among the top performing managers. Northern Funds,
Northern's proprietary mutual funds for individuals, also posted strong re-
sults. Several of the 24 portfolios, comprised of domestic and international,
taxable and tax-exempt fixed income, and money market mutual funds, were rec-
ognized as top performers in their categories by industry rating agencies.
FOREIGN EXCHANGE TRADING PROFITS. Foreign exchange trading profits totaled a
record $104.8 million, up 78% from $58.8 million reported a year ago, which
was up from $55.3 million in 1995. The record profits reflect both increased
cross-border trading volumes as Northern Trust's global custody assets con-
tinue to grow and volatility in the currency markets, particularly in the
southeastern Asia region. A substantial component of foreign exchange profits
continued to result from transactions associated with the growing global cus-
tody business. As custodian, Northern Trust provides foreign exchange services
in the normal course of business. Active management of currency positions,
within conservative limits, also contributes to trading profits.
TREASURY MANAGEMENT FEES. The fee portion of treasury management revenues to-
taled $60.2 million in 1997, a 9% increase from the $55.3 million reported in
1996 compared with $49.6 million in 1995. Total treasury management revenues,
which, in addition to fees, include the computed value of compensating deposit
balances increased 7% to $91.6 million from $86.0 million in 1996 compared to
$77.5 million in 1995, reflecting the continued growth in new business in both
paper- and electronic-based products.
SECURITY COMMISSIONS AND TRADING INCOME. Security commissions and trading in-
come totaled $26.1 million in 1997, compared with $23.9 million in 1996 and
$21.7 million in 1995. This income is primarily generated from securities bro-
kerage and futures contract services. Additional revenue is provided from un-
derwriting selected general obligation tax-exempt securities and interest risk
management activities with clients. The 1997 results reflect strong growth in
security brokerage activities offset in part by a decline in the clearing vol-
ume of futures contracts.
OTHER OPERATING INCOME. Other operating income includes loan, letter of
credit and deposit-related service fees and other miscellaneous income from
asset sales. Other operating income in 1997 totaled $53.5 million compared
with $47.2 million in 1996 and $45.5 million in 1995. Included in 1997 was
$11.1 million resulting from settlements reached with Illinois banking regula-
tors concerning the disposition of certain unclaimed balances accumulated over
a number of years. Other operating income in 1996 reflects a $4.0 million gain
from the sale of the Bank's merchant charge card business which was partially
offset by a decrease in gains realized from the sale of lease residuals.
INVESTMENT SECURITY GAINS AND LOSSES. Net security gains totaling $.7 million
were realized in 1997. Of this total, $1.2 million resulted from securities
that were called at a premium, offset by $.5 million of losses from the sale
of securities classified as available for sale. This compares with net gains
of $.4 million in 1996 and $1.0 million in 1995.
NORTHERN TRUST CORPORATION
--------------------------
26
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME (FTE)
- --------------------------------------------------------------------------------
Percent Change
($ In Millions) 1997 1996 1995 1997/96 1996/95
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 1,332.8 $ 1,151.5 $ 1,104.0 15.7% 4.3%
FTE Adjustment 32.7 33.6 37.6 (2.7) (10.8)
- --------------------------------------------------------------------------------
Interest Income-FTE 1,365.5 1,185.1 1,141.6 15.2 3.8
Interest Expense 894.6 763.2 746.4 17.2 2.2
- --------------------------------------------------------------------------------
NET INTEREST INCOME-FTE $ 470.9 $ 421.9 $ 395.2 11.6% 6.8%
- --------------------------------------------------------------------------------
AVERAGE VOLUME
Earning Assets $21,629.7 $18,779.4 $17,193.7 15.2% 9.2%
Interest-Related Funds 18,292.6 15,920.0 14,528.3 14.9 9.6
Noninterest-Related Funds 3,337.1 2,859.4 2,665.4 16.7 7.3
- --------------------------------------------------------------------------------
<CAPTION>
Change in
Percentage
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE RATE
Earning Assets 6.32% 6.31% 6.64% .01 (.33)
Interest-Related Funds 4.89 4.79 5.14 .10 (.35)
Interest Rate Spread 1.43 1.52 1.50 (.09) .02
Total Source of Funds 4.14 4.06 4.34 .08 (.28)
- --------------------------------------------------------------------------------
NET INTEREST MARGIN 2.18% 2.25% 2.30% (.07) (.05)
</TABLE>
Refer to page 74 for detailed analysis of net interest income.
NET INTEREST INCOME. Net interest income is defined as the total of interest
income and amortized fees on earning assets less interest expense on deposits
and borrowed funds, adjusted for the impact of off-balance sheet hedging ac-
tivity. Earning assets, which consist of securities, loans and money market
assets, are financed by a large base of interest-bearing funds, including re-
tail deposits, wholesale deposits, short-term borrowings, senior notes and
long-term debt. Earning assets are also funded by net noninterest-related
funds. Net noninterest-related funds consist of demand deposits, the reserve
for credit losses and stockholders' equity, reduced by nonearning assets in-
cluding cash and due from banks, items in process of collection, buildings and
equipment and other nonearning assets. Variations in the level and mix of
earning assets, interest-bearing funds and net noninterest-related funds, and
their relative sensitivity to interest rate movements, are the dominant fac-
tors affecting net interest income. In addition, net interest income is im-
pacted by the level of nonperforming assets and client use of compensating de-
posit balances to pay for services.
Net interest income for 1997 was a record $438.2 million, up 13% from $388.3
million in 1996, which was up 9% from $357.6 million in 1995. When adjusted to
a fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and par-
tially taxable assets are comparable, although the adjustment to a FTE basis
has no impact on net income. Net interest income on a FTE basis for 1997 was a
record $470.9 million, an increase of $49.0 million or 12% from $421.9 million
in 1996 which in turn was up 7% from $395.2 million in 1995. Through steady
asset growth and conservative interest rate risk management, Northern Trust
has been successful in generating year over year improvement in net interest
income as evidenced by the fact that 1997 represents the fourteenth consecu-
tive year of record performance. The increase in FTE net interest income in
1997 was driven by a $478 million (17%) increase in non-interest related
funds, and a $2.8 billion increase in average earning assets.
The net interest margin declined to 2.18% from 2.25% last year. The decline
in the margin is attributable to a higher proportion of low-spread money mar-
ket assets and narrowing spreads earned on the federal agency securities port-
folio due to the flattening of the yield curve.
Earning assets averaged $21.6 billion, up 15% from the $18.8 billion reported
in 1996, which was up from $17.2 billion in 1995. The growth in average earn-
ing assets reflects a 14% or $1.5 billion increase in loans, and a 65% or $1.3
billion increase in money market assets. Loan volume for the year averaged
$11.8 billion with most of the growth reflected in the domestic portfolio
while international loans increased $158 million. The domestic growth came
principally from residential mortgage activities, up $597 million, and commer-
cial and industrial loans, up $326 million. Reflected in the total loan growth
are non-interest bearing domestic and international overnight advances related
to processing certain trust client investments, which averaged $708 million in
1997, up from $596 million a year ago. Money market assets averaged $3.4 bil-
lion in 1997 versus $2.1 billion in 1996. The increase was principally driven
by a higher level of foreign office time deposits resulting from growth in
global custody activities, and more active short-term investment of non-
interest-bearing balances previously held with global subcustodians. Securi-
ties averaged $6.4 billion in 1997, unchanged from prior year levels.
NORTHERN TRUST CORPORATION
--------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in average earning assets of $2.8 billion was funded through
growth in interest-bearing deposits, other interest-related funding sources,
and noninterest-related funds. The deposit growth was concentrated primarily
in foreign office time deposits, up $1.1 billion, resulting from increased
global custody activity. Other interest-related funds averaged $6.7 billion,
up $811 million, principally from other borrowings (up $847 million). Average
net noninterest-related funds increased $478 million, mainly due to higher de-
mand deposits, noninterest-bearing time and savings deposits, and stockhold-
ers' equity. Stockholders' equity for the year averaged $1.6 billion, an in-
crease of $144 million or 10% from 1996, principally due to the strong earn-
ings performance, offset in part by the repurchase of common stock pursuant to
the Corporation's share buyback program.
PROVISION FOR CREDIT LOSSES. Asset quality remained strong as reflected by the
low level of nonperforming assets which totaled $43.3 million at year-end. The
provision for credit losses decreased to $9.0 million in 1997, down from $12.0
million in 1996 which was up from $6.0 million in 1995. For a discussion of
the reserve for credit losses, refer to pages 34 and 35.
NONINTEREST EXPENSES. Noninterest expenses for 1997 totaled $891.8 million, up
$122.9 million or 16% from $768.9 million in 1996, which was up 8% from $709.5
million in 1995. Total expenses for 1997 included $10.1 million in charges
relating to Year 2000 initiatives and $3.5 million in costs associated with the
planned relocation of Northern Trust's computer data facility. Excluding these
charges, noninterest expenses increased 14% over last year. Expense increases
during 1997 re-flect a variety of growth initiatives, including investments in
technology, PFS office expansion, and staff additions and higher operating
expenses necessary to support new business and growing transaction volumes.
Performance-based compensation also increased, resulting from excellent new
business results, higher foreign exchange profits, improved investment
management performance, strong corporate earnings and the price increase in
Northern Trust Corporation common stock.
The increase in 1996 noninterest expenses from 1995 reflects the impact of
incremental expenses resulting from acquisitions, investments in technology,
PFS office expansion, the opening of a Singapore office, higher performance-
based compensation, and staff additions and related costs necessary to support
new business and transaction volumes.
The productivity ratio, defined as total revenue on a taxable equivalent ba-
sis divided by noninterest expenses, was 158% for 1997 compared with 156% in
1996 and 151% in 1995. The improvement in the productivity ratio over the past
two years was driven by Northern Trust's success in growing revenues while at
the same time controlling expenses.
SALARIES AND BENEFITS. Salaries and benefits, which represent 59% of total
noninterest expenses, increased 19% to $527.3 million in 1997 from $441.3 mil-
lion in 1996, which was up 5% from $419.1 million in 1995. Salary costs, the
largest component of noninterest expenses, totaled $448.3 million, up $79.5
million or 22% from $368.8 million a year ago. The increase in 1997 was pri-
marily attributable to higher performance-based compensation, merit increases
and staff growth. Performance-based compensation expense was up $35.5 million
in 1997 and $15.7 million in 1996 reflecting the impact of record corporate
earnings, excellent new business results, client investment portfolio perfor-
mance and the price increase in Northern Trust Corporation common stock. In-
cluded in the 1995 results was $3.3 million in severance costs associated with
staff reductions.
Staff on a full-time equivalent basis averaged 7,198 compared with 6,665 in
1996 and 6,548 in 1995. The increase in staff levels during 1997 was required
to support growth initiatives and strong new business in both PFS and C&IS.
Including 58 employees from the year-end acquisition of NTQA, staff on a full-
time equivalent basis at December 31, 1997, totaled 7,553, an increase of 9%
from 6,933 at the end of last year.
Employee benefit costs for 1997 totaled $79.0 million, up $6.5 million or 9%
from $72.5 million in 1996 which was down 11% from $81.5 million in 1995. The
increase in employee benefits primarily reflects higher payroll taxes and re-
tirement plan benefits resulting from staff growth. These increases were par-
tially offset by favorable medical plan experience as more employees elected
coverage through managed care plans. The decrease in 1996 employee benefit
costs was a result of changes, effective January 1, 1996, made to the pension,
medical, Thrift Incentive and ESOP plans, to control expense growth.
OCCUPANCY EXPENSE. Net occupancy expense totaled $66.7 million, up 10% or
$6.0 million from $60.7 million in 1996, which was up 5% from $57.9 million in
1995. The principal components of the 1997 increase were higher rental costs,
real estate taxes, and building depreciation expense primarily associated with
business expansion.
EQUIPMENT EXPENSE. Equipment expense, which includes depreciation, rental,
and maintenance costs, totaled $62.2 million in 1997, 11% or $6.2 million
higher than the $56.0 million in 1996, which was up 12% from the $50.0 million
in 1995. The expense levels in each of the three years primarily reflect
planned increases in equipment and computer depreciation and related costs to
support trust and banking business expansion.
OTHER OPERATING EXPENSES. Other operating expenses for 1997 totaled $235.6
million, up 12% from $210.9 million in 1996, which was up 16% from $182.5 mil-
lion in 1995. The increase in the 1997 expense level was principally the re-
sult of continued investment in technology, expansion of the personal trust
and banking office network, and higher operating expenses necessary to support
business growth. These initiatives resulted in increases in computer
NORTHERN TRUST CORPORATION
--------------------------
28
<PAGE>
software amortization, technical and consulting service fees and business de-
velopment efforts.
Investments in technology are designed principally to support and enhance the
transaction processing and securities handling capability of the trust and
banking businesses. Additional capital expenditures planned for systems tech-
nology will result in future expenses for the depreciation of hardware and
amortization of software. Depreciation and software amortization are charged to
equipment and other operating expenses, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes was $162.5 million
in 1997 compared with $128.6 million in 1996 and $100.5 million in 1995. The
effective tax rate was 34% for 1997 compared with 33% for 1996 and 31% for
1995. The higher tax provision in 1997 resulted from the growth in earnings
for both federal and state income tax purposes while federally tax-exempt in-
come declined.
SUBSEQUENT IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS. The
portions of Statement of Financial Accounting Standards (SFAS) No. 125, "Ac-
counting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," that address the accounting treatment of repurchase agree-
ments and securities lending transactions were implemented, as required, on
January 1, 1998. The implementation of these portions of SFAS No. 125 did not
have a material impact on Northern Trust's consolidated financial statements.
FINANCIAL CONDITION
- -------------------------------------------------------------------------------
Average earning assets in 1997 increased 15% to $21.6 billion. The growth was
concentrated primarily in residential mortgages, commercial and industrial
loans, and short-term money market assets. A high quality and liquid balance
sheet is maintained with securities and money market assets averaging $9.8
billion or 45% of total earning assets.
Loans averaged $11.8 billion in 1997 and increased 14% from the prior year.
Average domestic loans increased 13% to $11.3 billion for the year while the
average international portfolio increased to $538 million from $380 million in
1996. The increase in the domestic loan portfolio reflects substantial growth
in residential mortgages which increased 14% on average and totaled $5.2 bil-
lion at year-end. Commercial and industrial loans also contributed to the
growth in the domestic portfolio, increasing 10% to average $3.6 billion for
the year. Commercial real estate loans increased $24.4 million and at December
31, 1997, totaled $582.1 million representing 5% of domestic loans.
The management strategy for investment securities is to maintain a very high
quality portfolio with generally short-term maturities. To maximize after-tax
income, investments in tax-exempt municipal securities are utilized but with
somewhat longer maturities. Northern Trust utilizes short-term U.S. Government
securities, federal agency securities and money market assets to manage li-
quidity and to take advantage of short-term investment opportunities. The av-
erage balance of the securities portfolio, which includes securities held to
maturity and available for sale, was unchanged from last year at $6.4 billion.
U.S. Government securities averaged $823 million in 1997, down from $1.7 bil-
lion in 1996. U.S. Government securities had an average maturity of 11 months
at December 31, 1997, compared with seven months at the prior year-end. Aver-
age municipal securities declined slightly and averaged $409 million, provid-
ing a fully taxable equivalent yield of 9.32%. The average maturity of munici-
pal securities was 85 months, up from 82 months a year ago. Federal agency se-
curities averaged $4.9 billion in 1997, up from $4.0 billion in 1996, and had
an average maturity at December 31, 1997 and 1996 of five months and six
months, respectively. Other securities, consisting primarily of preferred
stock, Federal Home Loan Bank stock, and privately issued collateralized mort-
gage obligations, averaged $243 million, up slightly from $228 million last
year. Approximately $790 million of federal agency and other securities have
variable rates that are reset at least every six months to reflect the level
of short-term interest rates. At year-end 1997, the fair value of the securi-
ties portfolio of $4.2 billion exceeded the book value of these securities by
$17.3 million.
Money market assets averaged $3.4 billion, up 65% from $2.1 billion last
year, primarily the result of growth in global custody activities and the more
active short-term investment of noninterest-bearing balances previously held
with global subcustodians.
Total interest-related funds averaged $18.3 billion in 1997, up $2.4 billion
or 15% from 1996. Savings and money market deposits increased 8% and averaged
$3.9 billion while foreign office time deposits increased $1.1 billion or 30%.
The increase in foreign time deposits resulted primarily from greater global
custody activity. Federal funds purchased, securities sold under agreements to
repurchase, and other borrowings collectively increased $241 million on aver-
age compared to the prior year. The balances within these classifications vary
based upon funding requirements, interest rate levels, and the availability of
collateral used to secure these borrowings. Balances in other borrowings pri-
marily represent treasury, tax and loan note option balances which provide a
funding source at an attractive rate relative to federal funds. Deposits re-
lated to trust activities in the domestic banking subsidiaries, coupled with
growth of the global custody business, continued to have a significant impact
on the balance sheet as these deposits in 1997 averaged $5.4 billion repre-
senting 47% of total deposits.
In 1996, the Bank issued $100 million of 7.30% Subordinated Notes due 2006.
The notes were issued under the terms of an Offering Circular allowing the
Bank to offer subordinated bank notes and up to $1.7 billion aggregate princi-
pal amount at any time outstanding of its senior bank notes (less certain se-
nior bank notes issued prior to April 1993 and still outstanding), with matu-
rities ranging from 30 days to 15
NORTHERN TRUST CORPORATION
--------------------------
29
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AVERAGE EARNING ASSETS AND SOURCE OF FUNDS
- ----------------------------------------------------------------------------------------------------
Percent Change
- ----------------------------------------------------------------------------------------------------
($ In Millions) 1997 1996 1995 1997/96 1996/95
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE EARNING ASSETS
Money Market Assets $ 3,442.6 $ 2,083.5 $ 1,864.7 65.2% 11.7%
Securities
U.S. Government 822.9 1,702.0 1,225.7 (51.7) 38.9
Obligations of States and Political Subdivisions 408.8 414.1 434.7 (1.3) (4.7)
Federal Agency 4,890.1 4,010.7 4,124.8 21.9 (2.8)
Other 243.4 228.2 353.4 6.7 (35.4)
Trading Account 9.0 8.8 54.4 1.5 (83.7)
- ----------------------------------------------------------------------------------------------------
Total Securities 6,374.2 6,363.8 6,193.0 .2 2.8
- ----------------------------------------------------------------------------------------------------
Loans and Leases-Domestic 11,275.1 9,951.6 8,791.8 13.3 13.2
-International 537.8 380.5 344.2 41.4 10.5
- ----------------------------------------------------------------------------------------------------
Total Loans and Leases 11,812.9 10,332.1 9,136.0 14.3 13.1
- ----------------------------------------------------------------------------------------------------
Total Earning Assets $21,629.7 $18,779.4 $17,193.7 15.2% 9.2%
- ----------------------------------------------------------------------------------------------------
AVERAGE SOURCE OF FUNDS
Deposits-Savings and Money Market $ 3,895.4 $ 3,620.7 $ 3,312.4 7.6% 9.3%
-Savings Certificates 2,035.8 2,062.4 2,000.3 (1.3) 3.1
-Other Time 717.3 549.2 542.7 30.6 1.2
-Foreign Offices Time 4,971.2 3,826.2 3,493.4 29.9 9.5
- ----------------------------------------------------------------------------------------------------
Total Deposits 11,619.7 10,058.5 9,348.8 15.5 7.6
Federal Funds Purchased 1,690.2 1,842.2 1,564.0 (8.3) 17.8
Securities Sold under Agreements to Repurchase 1,519.9 1,973.3 1,769.7 (23.0) 11.5
Commercial Paper 142.7 143.7 146.0 (.7) (1.6)
Other Borrowings 2,120.9 1,274.1 1,034.5 66.5 23.2
Senior Notes 539.3 267.5 394.0 101.6 (32.1)
Long-Term Debt 435.8 360.7 271.3 20.8 32.9
Floating Rate Capital Securities 224.1 -- -- 100.0 --
- ----------------------------------------------------------------------------------------------------
Total Interest-Related Funds 18,292.6 15,920.0 14,528.3 14.9 9.6
Noninterest-Related Funds, net 3,337.1 2,859.4 2,665.4 16.7 7.3
- ----------------------------------------------------------------------------------------------------
Total Source of Funds $21,629.7 $18,779.4 $17,193.7 15.2% 9.2%
</TABLE>
years. The senior notes are issued periodically and provide an additional fund-
ing source for the Bank. At December 31, 1997, an additional $100 million of
subordinated bank notes with maturities ranging from 5 years to 15 years can be
issued under the terms of the current Offering Circular for this program. Se-
nior notes issued under the terms of the program averaged $539 million, up $272
million from last year.
On January 16, 1997, the Corporation issued $150 million of Floating Rate Cap-
ital Securities, Series A, through a wholly-owned statutory business trust.
These securities were issued at a discount to yield 60.5 basis points above the
three-month London Interbank Offered Rate (LIBOR). On April 25, 1997, the Cor-
poration issued an additional $120 million of Floating Rate Capital Securities,
Series B, through a separate wholly-owned statutory business trust. These secu-
rities were issued at a discount to yield 67.9 basis points above the three-
month LIBOR. Series A and Series B securities mature in 2027 and qualify as
tier 1 capital for regulatory purposes.
CAPITAL EXPENDITURES
- --------------------------------------------------------------------------------
Northern Trust's Management Committee reviews and approves proposed capital ex-
penditures which exceed $500,000. This process assures that the major projects
to which Northern Trust commits its resources produce benefits compatible with
corporate strategic goals.
During 1997, Northern Trust continued to improve its hardware and software ca-
pabilities, especially related to trust activities. Such improvements help as-
sure that Northern Trust offers state-of-the-art technology which enables cli-
ents to obtain the highest level of quality service within a competitive cost
structure, a characteristic which helps distinguish Northern Trust from its
competitors. In this regard, having completed the development and installation
of the base platform of its trust management system (supporting both the corpo-
rate and personal business areas), major system development efforts in 1997 fo-
cused on risk and performance tools and investment services. These applications
build off the core product, providing various state-of-the-art processing and
client-related delivery vehicles all under the umbrella of
NORTHERN TRUST CORPORATION
--------------------------
30
<PAGE>
Passport, Northern Trust's desktop delivery service first offered to clients
in 1995. The next generation of rate of return and risk attribution perfor-
mance tools was rolled out in 1997. Northern Trust introduced to its corporate
clients Alerts, a sophisticated investment policy monitoring tool. The In-
vestor Workstation was introduced internally in 1997. It is a state-of-the-art
investment reporting tool used to support Northern Trust's growing portfolio
of assets under management. The unamortized capitalized cost of corporate-wide
software development projects at December 31, 1997 was $145.1 million, of
which $65.1 million represented the book value of the trust management system.
Northern Trust's 1998 technology plans include the continued development of
analytical and delivery tools valuable to its corporate trust clients and var-
ious initiatives in Personal Financial Services, including the extension of
the Passport tools to serve personal clients and client relationship manage-
ment desktop servicing functionality.
Capital expenditures in 1997 also included the leasehold improvements and
furnishings associated with the opening of new offices in Florida, California
and Arizona, as well as expansion or remodeling in several existing offices.
In addition, $20 million was capitalized as part of the agreement to purchase
in 2000 a building and adjacent land located across the street from the Chi-
cago operations center. Prior to the purchase date, the Bank will lease, in
phases beginning in 1997, approximately two floors of this six story building.
The building is expected to be used for future expansion and the relocation of
the computer data center and some personnel currently located in leased facil-
ities in downtown Chicago.
Capital expenditures for 1997 totaled $129.2 million of which $36.9 million
was for building and leasehold improvements, $4.9 million for furnishings,
$35.4 million for hardware and machinery and $52.0 million for software. Dur-
ing 1998, in addition to its technology initiatives, Northern Trust will con-
tinue to invest in the expansion of the five-state network of Personal Finan-
cial Services offices.
YEAR 2000 PROJECT. Like every other business dependent upon computerized in-
formation processing, Northern Trust must deal with "Year 2000" issues, which
stem from using two digits to reflect the year in computer programs and data.
Computer programmers and other designers of equipment that use microprocessors
have long abbreviated dates by eliminating the first two digits of the year
under the assumption that those two digits will always be 19. As the Year 2000
approaches, many systems may be unable to accurately process certain date-
based information, which could cause a variety of operational problems for
businesses.
The magnitude and nature of the Year 2000 challenge is summarized by an ex-
cerpt from a report made to Congress by the Securities and Exchange Commission
(SEC) in June of 1997. "It is not, and will not, be possible for any single
entity or collective enterprise to represent that it has achieved complete
Year 2000 compliance and thus to guarantee its remediation efforts. The prob-
lem is simply too complex for such a claim to have legitimacy. Efforts to
solve Year 2000 problems are best described as "risk mitigation'. Success in
the effort will have been achieved if the number and seriousness of any tech-
nical failures is minimized, and they are quickly identified and repaired if
they do occur."
Northern Trust's data processing software and hardware provide essential sup-
port to virtually all of its businesses, so successfully addressing Year 2000
issues is of the highest importance. Failure to complete renovation of the
critical systems used by Northern Trust on a timely basis could have a materi-
ally adverse effect on its operations and financial performance, as could Year
2000 problems experienced by others with whom Northern Trust does business.
Although the nature of the problem is such that there can be no complete as-
surance it will be successfully resolved, Northern Trust's renovation and
"risk mitigation" program is well under way. Northern Trust has a dedicated
Year 2000 Project Team whose members have significant systems development and
maintenance experience on Northern Trust's many banking and trust applica-
tions, which run on a variety of mainframe, mid-range and desktop platforms.
Northern Trust has been developing systems using four digit years since the
mid 1980's. All other critical systems have been systematically identified for
renovation or replacement. Northern Trust licensed a number of software tools
that help automate the renovation process, most notably on its mainframe com-
puters. These tools reduce the amount of manual effort required and increase
the integrity of the changes. Northern Trust's Year 2000 project also includes
a comprehensive testing plan. Completion of work on Northern Trust's critical
systems is expected by December 31, 1998, so that testing with outside parties
may be conducted during 1999.
Northern Trust has also established a Year 2000 Business Issues task force in
order to systematically address issues that are not directly related to inter-
nal systems. Part of the work of this task force includes monitoring programs
to contact vendors, suppliers, utilities, federal and state agencies and oth-
ers with which Northern Trust's systems interact in areas important to its
businesses to determine their Year 2000 readiness. Northern Trust will conduct
testing with other parties where possible and appropriate. For example, during
1998, Northern Trust will be reviewing the Year 2000 preparedness of its
subcustodians during its normal discussions and due diligence visits. Northern
Trust is also developing and implementing various methods for assessing Year
2000 issues as part of its credit review and investment analysis processes.
Although Northern Trust is attempting to monitor and validate the efforts of
other parties, it cannot control the success of those efforts. Contingency
plans are being established where appropriate to provide Northern Trust with
alternatives in case these entities experience significant Year 2000 difficul-
ties which impact Northern Trust.
Northern Trust is also contacting clients and customers to explain its Year
2000 program. The formats and protocols by
NORTHERN TRUST CORPORATION
--------------------------
31
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which data is exchanged with clients will not change as a result of Northern
Trust's Year 2000 systems-related changes.
The estimated expense for Northern Trust's Year 2000 renovation project from
1997 forward is approximately $25 million and includes the costs of purchasing
licenses for software programming tools and the costs of the time of internal
staff in Worldwide Technology and outside consultants. This estimate does not
include the time that internal staff in user departments will devote to testing
programming changes, although this testing is not expected to add significant
incremental costs. All Year 2000 costs are expensed as incurred. As of December
31, 1997, $10.1 million of the project costs have been incurred. The majority
of the remaining costs are expected to be incurred in 1998.
RISK MANAGEMENT
- --------------------------------------------------------------------------------
Asset Quality and Credit Risk Management
SECURITIES. A high quality securities portfolio is maintained with 84% of the
total portfolio comprised of U.S. Treasury or federal agency securities. The
remainder of the portfolio is comprised of obligations of states and political
subdivisions, preferred stock and other securities. At December 31, 1997, 78%
of these securities were rated triple-A or double-A, 18% were rated single-A
and 4% were below A or not rated by Standard and Poor's and/or Moody's Invest-
ors Service. Other securities consist primarily of Federal Home Loan Bank stock
and privately issued collateralized mortgage obligations, backed by federal
agency securities or mortgage loans.
Northern Trust is an active participant in the repurchase agreement market.
This market provides a relatively low cost alternative for short-term funding.
Securities sold under agreements to repurchase are held by the counterparty un-
til the repurchase transaction matures. Increases in the fair value of these
securities in excess of the repurchase liability could subject Northern Trust
to credit risk in the event of default by the counterparty. To minimize this
risk, collateral values are continuously monitored and Northern Trust sets lim-
its on exposure with counterparties and regularly assesses their financial con-
dition.
LOANS AND OTHER EXTENSIONS OF CREDIT. A certain degree of credit risk is inher-
ent in Northern Trust's various lending activities. Credit risk is managed
through the Credit Policy function, which is designed to ensure adherence to a
high level of credit standards. Credit Policy provides a system of checks and
balances for Northern Trust's diverse credit-related activities by establishing
and monitoring all credit-related policies and practices throughout Northern
Trust and ensuring their uniform application. These activities are designed to
ensure that credit exposure is diversified on an industry and client basis,
thus lessening overall credit risk. These credit management activities also ap-
ply to Northern Trust's use of derivative financial instruments, including for-
eign exchange contracts and interest risk management instruments.
A further way in which credit risk is managed is by requiring collateral. Man-
agement's assessment of the borrower's creditworthiness determines whether col-
lateral is obtained. The amount and type of collateral held varies but may in-
clude deposits held in financial institutions, U.S. Treasury securities, other
marketable securities, income-producing commercial properties, accounts receiv-
able, property, plant and equipment, and inventory. Collateral values are moni-
tored on a regular basis to ensure that they are maintained at an appropriate
level.
The largest component of credit risk relates to the loan portfolio. Although
credit exposure is well-diversified, there are certain groups that meet the ac-
counting definition under SFAS No. 105 of credit risk concentrations. According
to this statement, group concentrations of credit risk exist if a number of
borrowers or other counterparties are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet con-
tractual obligations to be similarly affected by changes in economic or other
conditions. The fact that an extension of credit falls into one of these groups
does not indicate that the credit has a higher than normal degree of credit
risk. These groups are: residential real estate, middle market companies and
small businesses, banks and bank holding companies and commercial real estate.
RESIDENTIAL REAL ESTATE. The residential real estate loan portfolio totaled
$5.2 billion or 43% of total domestic loans at December 31, 1997, compared with
$4.6 billion or 43% at December 31, 1996. Residential real estate loans consist
of conventional home mortgages and equity credit lines, which generally require
a loan to collateral value of 75% to 80%. Of the total $5.2 billion in residen-
tial real estate loans, $2.8 billion were in the greater Chicago area with the
remainder distributed throughout the other geographic regions served by North-
ern Trust. Legally binding commitments to extend credit, which are primarily
equity credit lines, totaled $455.9 million and $405.8 million as of December
31, 1997 and 1996, respectively.
MIDDLE MARKET COMPANIES AND SMALL BUSINESSES. Credit exposure to middle market
companies and small businesses is primarily in the form of commercial loans,
which totaled $1.6 billion at December 31, 1997 and $1.4 billion as of December
31, 1996. These loans are to a diversified group of borrowers that are predomi-
nantly in the manufacturing, wholesaling, distribution and services industries,
most of which have total annual sales of less than $500 million. The largest
component of this group of borrowers is located in the midwestern areas served
by the Bank. Middle market and small businesses have been an important focus of
business development, and it is part of the strategic plan to continue to se-
lectively grow the portfolio with such entities. The credit risk associated
with middle market and small business lending is principally influenced by gen-
eral economic conditions and the resulting impact on the borrower's operations.
NORTHERN TRUST CORPORATION
--------------------------
32
<PAGE>
Off-balance sheet credit exposure to middle market companies and small busi-
nesses in the form of legally binding commitments to extend credit, standby
letters of credit, and commercial letters of credit totaled $1.9 billion,
$830.1 million, and $22.7 million, respectively, as of December 31, 1997, and
$1.5 billion, $748.7 million, and $18.1 million, respectively, as of December
31, 1996.
BANKS AND BANK HOLDING COMPANIES. On-balance sheet credit risk to banks and
bank holding companies, both domestic and international, totaled $5.5 billion
and $4.4 billion at December 31, 1997 and 1996, respectively. The majority of
this exposure consisted of short-term money market assets, which totaled $4.0
billion and $3.1 billion as of December 31, 1997 and 1996, respectively, and
noninterest-bearing demand balances maintained at correspondent banks which to-
taled $1.1 billion as of December 31, 1997, compared to $896 million at year-
end 1996. Commercial loans to banks totaled $232 million and $247 million, re-
spectively, as of December 31, 1997 and 1996. The majority of these loans were
to U.S. bank holding companies, primarily in the seventh Federal Reserve Dis-
trict, for their acquisition purposes. Such lending activity is limited to en-
tities which have a substantial business relationship with Northern Trust. Le-
gally binding commitments to extend credit to banks and bank holding companies
totaled $222 million and $178 million as of December 31, 1997 and 1996, respec-
tively.
COMMERCIAL REAL ESTATE. In managing its credit exposure, management has de-
fined a commercial real estate loan as one where: (1) the borrower's principal
business activity is the acquisition of or the development of real estate for
commercial purposes; (2) the principal collateral is real estate held for com-
mercial purposes and loan repayment is expected to flow from the operation of
the property; or (3) the loan repayment is expected to flow from the sale or
refinance of real estate as a normal and ongoing part of the business.
Unsecured lines of credit to firms or individuals engaged in commercial real
estate endeavors are included without regard to the use of loan proceeds. The
commercial real estate portfolio consists of interim loans and commercial mort-
gages.
The interim loans, which totaled $235.0 million and $236.3 million as of De-
cember 31, 1997 and 1996, respectively, are composed primarily of loans to de-
velopers that are highly experienced and well-known to Northern Trust. Short-
term interim loans provide financing for the initial phases of the acquisition
or development of commercial real estate, with the intent that the borrower
will refinance the loan through another financial institution or sell the proj-
ect upon its completion. The interim loans are primarily in the Chicago market
in which Northern Trust has a strong presence and a thorough knowledge of the
local economy.
Commercial mortgage financing, which totaled $347.1 million and $321.4 million
as of December 31, 1997 and 1996, respectively, is provided for the acquisition
of income producing properties. Cash flows from the properties generally are
sufficient to amortize the loan. These loans average less than $500,000 each
and are primarily located in the suburban Chicago and Florida markets.
At December 31, 1997, off-balance sheet credit exposure to commercial real es-
tate developers in the form of legally binding commitments to extend credit and
standby letters of credit totaled $73.7 million and $36.0 million, respective-
ly. At December 31, 1996, legally binding commitments were $61.5 million and
standby letters of credit were $22.5 million.
FOREIGN OUTSTANDINGS. Short-term interbank time deposits with foreign banks
represent the largest category of foreign outstandings. The Chicago head office
and the London Branch actively participate in the interbank market with U.S.
and foreign banks. In recent years, international commercial banking activities
have been focused on import and export financing for U.S.-based clients.
As used in this discussion, foreign outstandings are cross-border outstandings
as defined by the Securities and Exchange Commission. They consist of loans,
acceptances, interest-bearing deposits with financial institutions, accrued in-
terest and other monetary assets. Not included are letters of credit, loan com-
mitments, and foreign office local currency claims on residents funded by local
currency liabilities. Foreign outstandings related to a specific country are
net of guarantees given by third parties resident outside the country and the
value of tangible, liquid collateral held outside the country. However, trans-
actions with branches of foreign banks are included in these outstandings and
are classified according to the country location of the foreign entities' head
office.
Risk related to foreign outstandings is continually monitored and internal
limits are imposed on foreign exposure. The following table provides informa-
tion on foreign outstandings by country that exceed 1.00% of Northern Trust's
assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOREIGN OUTSTANDINGS
- --------------------------------------------------------------------------------
Commercial
(In Millions) Banks and Other Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
AT DECEMBER 31, 1997
Germany $502 $-- $502
Japan 394 -- 394
United Kingdom 251 71 322
- --------------------------------------------------------------------------------
At December 31, 1996
Japan $993 $-- $993
- --------------------------------------------------------------------------------
At December 31, 1995
Japan $259 $-- $259
- --------------------------------------------------------------------------------
</TABLE>
Aggregate foreign outstandings by country falling between 0.75% and 1.00% of
total assets at December 31, 1997 totaled $192 million to France. This compares
with none at December 31, 1996 and 1995.
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS. Nonperforming assets consist of
nonaccrual loans, restructured loans and Other Real Estate Owned (OREO). OREO
is comprised of commercial and residential properties
NORTHERN TRUST CORPORATION
--------------------------
33
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
- -------------------------------------------------------------------------------
December 31
- -----------------------------------------------------------------------------
(In Millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans
Domestic
Residential Real Estate $ 5.3 $ 3.2 $ 2.4 $ 1.3 $ 1.5
Commercial 26.3 2.2 17.5 15.7 17.5
Commercial Real Estate 7.1 11.3 9.0 9.1 4.8
Personal .2 .2 .1 .3 .3
Other -- -- -- -- --
Lease Financing -- -- -- .1 1.9
- -----------------------------------------------------------------------------
Total Domestic 38.9 16.9 29.0 26.5 26.0
- -----------------------------------------------------------------------------
International -- -- .2 1.3 1.3
- -----------------------------------------------------------------------------
Total Nonaccrual Loans 38.9 16.9 29.2 27.8 27.3
- -----------------------------------------------------------------------------
Restructured Loans 2.5 2.6 2.7 -- --
Other Real Estate Owned 1.9 1.9 1.8 2.2 9.7
- -----------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $43.3 $21.4 $33.7 $30.0 $37.0
- -----------------------------------------------------------------------------
TOTAL 90 DAY PAST DUE LOANS (STILL ACCRUING) $13.9 $15.2 $22.0 $17.3 $22.8
- -----------------------------------------------------------------------------
</TABLE>
acquired in partial or total satisfaction of problem loans. Past due loans are
loans that are delinquent 90 days or more and still accruing interest. The
balance in this category at any reporting period can fluctuate widely based on
the timing of cash collections, renegotiations and renewals.
Maintaining a low level of nonperforming assets is important to the ongoing
success of a financial institution. Northern Trust's comprehensive credit re-
view and approval process is critical to the ability to minimize nonperforming
assets on a long-term basis. In addition to the negative impact on both net
interest income and credit losses, nonperforming assets also increase operat-
ing costs due to the expense associated with collection efforts.
The table above presents the nonperforming assets and past due loans for the
current year and the prior years. Of the total loan portfolio of $12.6 billion
at December 31, 1997, $41.4 million or .33% was nonperforming, an increase of
$21.9 million from year-end 1996.
Included in the portfolio of nonaccrual loans are those which meet the crite-
ria as being "impaired" under the definition in SFAS No. 114. A loan is im-
paired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contrac-
tual terms of the loan agreement. As of December 31, 1997, impaired loans,
which also have been classified as nonperforming, totaled $38.3 million, with
$4.7 million of the reserve for credit losses allocated to these loans.
RESERVE FOR CREDIT LOSSES. In evaluating the adequacy of the reserve for
credit losses, management relies predominantly on a disciplined credit review
process which is applicable to the full range of the credit exposures. The re-
view process, directed by Credit Policy, is intended to identify as early as
possible clients who might be facing financial difficulties. Once identified,
the extent of the client's financial difficulty is carefully monitored by
Credit Policy, which recommends to management the portion of any credits that
need a specific reserve allocation or should be charged-off. Other factors
considered by management in evaluating the adequacy of the reserve include:
the relative size of the subsidiary banks' single loan lending limits; loan
volume; historical net loan loss experience; level and composition of
nonaccrual, past due and restructured loans; the condition of industries and
geographic areas experiencing or expected to experience particular economic
adversities; international developments; current and anticipated economic con-
ditions; credit evaluations; and the liquidity and volatility of the markets.
From time to time specific amounts of the reserve are designated for certain
loans in connection with management's analysis of the adequacy of the reserve
for credit losses, as well as its evaluation of impaired loans.
The reserve balance is not a precise amount, but is derived from judgments
based on the above factors. It represents management's best estimate of the
reserve for credit losses necessary to adequately cover probable losses from
current credit exposures. The provision for credit losses is the charge
against current earnings that is determined by management as the amount needed
to maintain an adequate reserve.
The overall credit quality of the loan portfolio has remained strong as evi-
denced by the relatively low level of nonperforming loans and net charge-offs.
Management's assessment of the financial condition of specific clients facing
financial difficulties, level of nonperforming loans and portfolio growth re-
lating to low-risk residential lending, were among the factors impacting man-
agement's analysis of the adequacy of the reserve. The combination of these
factors
NORTHERN TRUST CORPORATION
--------------------------
34
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ANALYSIS OF RESERVE FOR CREDIT LOSSES
- -------------------------------------------------------------------------------
($ In Millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of
Year $ 148.3 $ 147.1 $ 144.8 $ 145.5 $ 145.5
- --------------------------------------------------------------------------------
Charge-Offs
Residential Real Estate .8 .2 .6 .1 .2
Commercial 11.4 6.2 5.5 5.3 11.2
Commercial Real Estate .7 7.4 3.6 4.1 7.8
Personal 1.3 1.5 1.2 1.2 2.1
Other .2 .1 .2 -- .2
Lease Financing -- -- -- -- 1.3
International -- .2 .6 -- .6
- --------------------------------------------------------------------------------
Total Charge-Offs 14.4 15.6 11.7 10.7 23.4
- --------------------------------------------------------------------------------
Recoveries
Residential Real Estate .1 .2 -- -- .2
Commercial 2.3 .5 2.1 1.0 1.9
Commercial Real Estate 1.6 1.9 2.3 1.1 .7
Personal .6 .6 .5 1.2 .8
Other .1 .1 .2 .2 .1
Lease Financing -- -- -- .5 --
International -- .5 .7 -- .2
- --------------------------------------------------------------------------------
Total Recoveries 4.7 3.8 5.8 4.0 3.9
- --------------------------------------------------------------------------------
Net Charge-Offs 9.7 11.8 5.9 6.7 19.5
Provision for Credit
Losses 9.0 12.0 6.0 6.0 19.5
Reserve Related to Acqui-
sitions -- 1.0 2.2 -- --
- --------------------------------------------------------------------------------
Net Change in Reserve (.7) 1.2 2.3 (.7) --
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 147.6 $ 148.3 $ 147.1 $ 144.8 $ 145.5
- --------------------------------------------------------------------------------
Loans and Leases at Year-
End $12,588.2 $10,937.4 $9,906.0 $8,590.6 $7,623.0
- --------------------------------------------------------------------------------
Average Total Loans and
Leases $11,812.9 $10,332.1 $9,136.0 $8,316.1 $7,297.1
- --------------------------------------------------------------------------------
As a Percent of Year-End
Loans and Leases
Net Loan Charge-Offs .08% .11% .06% .08% .26%
Provision for Credit
Losses .07 .11 .06 .07 .26
Reserve Balance at Year-
End 1.17 1.36 1.49 1.69 1.91
- --------------------------------------------------------------------------------
As a Percent of Average
Loans and Leases
Net Loan Charge-Offs .08% .11% .06% .08% .27%
Reserve Balance at Year-
End 1.25 1.44 1.61 1.74 1.99
- --------------------------------------------------------------------------------
</TABLE>
resulted in a reserve for credit losses of $147.6 million at December 31,
1997, compared with $148.3 million last year. The table above summarizes the
changes in the reserve for credit losses for the current year and the prior
years.
Market Risk Management
OVERVIEW. The Board of Directors has overall responsibility for Northern
Trust's interest rate and foreign exchange risk management policies. To ensure
adherence to these policies, the Corporate Asset and Liability Policy Commit-
tee (ALCO) establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates. The guidelines apply to both on- and
off-balance sheet positions. ALCO also establishes and monitors limits for
foreign exchange risk. The goal of the ALCO process is to maximize earnings
while maintaining a high quality balance sheet and carefully controlling in-
terest rate and foreign exchange risk.
ASSET/LIABILITY MANAGEMENT. Asset/liability management activities include
lending, accepting and placing deposits, investing in securities, issuing
debt, and hedging interest rate risk with off-balance sheet instruments. The
primary market risk associated with asset/liability management activities is
interest rate risk. Sensitivity of earnings to interest rate changes arises
when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed so that
NORTHERN TRUST CORPORATION
--------------------------
35
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
movements of interest rates on assets and liabilities (adjusted for off-balance
sheet hedges) are highly correlated and contribute to earnings even in periods
of volatile interest rates.
Northern Trust utilizes the following measurement techniques in the management
of interest rate risk: simulation of earnings; simulation of the economic value
of equity; and gap analysis. These three techniques are complementary and are
used in concert to provide a comprehensive picture of interest rate risk man-
agement capability.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, Northern
Trust is able to measure the potential impact of different interest rate as-
sumptions on pretax earnings. All on-balance sheet positions, as well as deriv-
ative financial instruments (principally interest rate swaps) that are used to
manage interest rate risk, are included in the model simulation.
Northern Trust used model simulations to measure its earnings sensitivity rel-
ative to management's most likely interest rate scenario as of December 31,
1997. This interest rate scenario assumed a steady interest rate environment
during 1998. The interest sensitivity was tested by running alternative scena-
rios above and below the most likely interest rate outcome. The table below
shows the effect on 1998 pre-tax earnings of 100 and 200 basis point upward and
downward movements in interest rates relative to management's interest rate as-
sumptions. Each of the movements in interest rates was assumed to have occurred
gradually over a one year period. The 100 basis point increase, for example,
consisted of twelve consecutive monthly increases of 8.3 basis points.
The following assumptions were also incorporated into the model simulations:
. The balance sheet size was assumed to remain constant over the one year
simulation horizon.
. All maturing assets and liabilities were invested or deposited into identi-
cal items with the same maturity.
. Prepayments on mortgage loans were projected under each rate scenario using
a mortgage analytics system that incorporated market prepayment assump-
tions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INTEREST RATE RISK SIMULATION OF INCOME BEFORE INCOME TAXES AS OF
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Estimated Impact on
1998 Income Before
Income Taxes
(In Millions) Increase/(Decrease)
- --------------------------------------------------------------------------------
<S> <C>
INCREASE IN INTEREST RATES ABOVE MANAGEMENT'S -
INTEREST RATE FORECAST
100 Basis Points $(12)
200 Basis Points (26)
DECREASE IN INTEREST RATES BELOW
MANAGEMENT'S INTEREST RATE FORECAST
100 Basis Points 5
200 Basis Points 10
- --------------------------------------------------------------------------------
</TABLE>
. Changes in the spreads between retail deposit rates and asset yields were
estimated based on historical patterns and current competitive trends.
The simulations of earnings do not incorporate any management actions which
might moderate the negative consequences of interest rate deviations. There-
fore, they do not reflect likely actual results but serve as conservative esti-
mates of interest rate risk.
A second technique used to measure interest rate risk is simulation of the
economic value of equity, which provides estimates of the potential future im-
pact on equity of various changes in interest rates. The potential effect of
interest rate changes on equity is derived from the impact of such changes on
the market values of assets, liabilities and off-balance sheet instruments.
Northern Trust limits aggregate market risk, as measured in this fashion, to an
acceptable level within the context of risk-return trade-offs.
The third technique that is used to measure interest rate risk is gap analy-
sis. The calculation of the interest sensitivity gap is shown in the following
table, which measures the timing mismatches between assets and liabilities.
This interest sensitivity gap is determined by subtracting the amount of lia-
bilities from the volume of assets that reprice in a particular time interval.
A liability sensitive position results when more liabilities than assets
reprice or mature within a given period. Under this scenario, as interest rates
decline, increased net interest revenue will be generated. Conversely, an asset
sensitive position results when more assets than liabilities reprice within a
given period; in this instance, net interest revenue would benefit from an in-
creasing interest rate environment. The economic impact of creating a liability
or asset sensitive position depends on the magnitude of actual changes in in-
terest rates relative to the current expectations of market participants.
A variety of actions are used to implement interest risk management strate-
gies, including:
. purchases of securities;
. sales of securities that are classified as available for sale;
. issuance of senior notes;
. placing and taking Eurodollar time deposits; and
. hedging with various types of derivative financial instruments.
Northern Trust strives to use the most effective instruments for implementing
its interest risk management strategies, considering the costs, liquidity and
capital requirements of the various alternatives. For more detail regarding how
derivative financial instruments are used to implement interest risk management
strategies, refer to Note 20 on page 59.
FOREIGN EXCHANGE TRADING. Foreign exchange trading activities consist princi-
pally of providing foreign exchange services to clients. Most of these services
are provided in connection with Northern Trust's growing global custody
NORTHERN TRUST CORPORATION
--------------------------
36
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
- -------------------------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------------------------
1-3 4-12 1-2 3-5 Over 5
(In Millions) Months Months Years Years Years Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money Market Assets $ 5,267.2 $ 42.2 $ -- $ -- $ -- $ 5,309.4
Securities-Available for Sale 2,855.9 475.4 195.0 73.5 133.5 3,733.3
-Held to Maturity 69.4 115.8 52.8 68.0 150.1 456.1
-Trading Account 8.8 -- -- -- -- 8.8
Loans and Leases 5,336.9 1,454.3 937.9 2,116.7 2,742.4 12,588.2
- -------------------------------------------------------------------------------------------------
Total Earning Assets $13,538.2 $2,087.7 $1,185.7 $2,258.2 $ 3,026.0 $22,095.8
- -------------------------------------------------------------------------------------------------
SOURCE OF FUNDS
Savings and NOW Accounts $ 2,682.0 $ -- $ -- $ -- $ 523.5 $ 3,205.5
Money Market Deposit Accounts and
Savings Certificates 3,444.4 1,079.7 263.9 351.2 653.1 5,792.3
Other Time 3,373.8 27.3 -- -- -- 3,401.1
Senior Notes and Long-Term Debt 540.7 59.8 .5 48.4 575.1 1,224.5
Floating Rate Capital Securities 267.4 -- -- -- -- 267.4
Other Borrowings 4,842.2 140.7 1.0 .4 -- 4,984.3
Noninterest-Related Funds, net 453.2 49.3 90.0 -- 2,628.2 3,220.7
- -------------------------------------------------------------------------------------------------
Total Source of Funds $15,603.7 $1,356.8 $ 355.4 $ 400.0 $ 4,379.9 $22,095.8
- -------------------------------------------------------------------------------------------------
Interest Sensitive Gap $(2,065.5) $ 730.9 $ 830.3 $1,858.2 $(1,353.9) $ --
Off-Balance Sheet Hedges 1,140.7 414.3 (187.3) (718.3) (649.4) --
- -------------------------------------------------------------------------------------------------
Adjusted Interest Sensitive Gap $ (924.8) $1,145.2 $ 643.0 $1,139.9 $(2,003.3) $ --
- -------------------------------------------------------------------------------------------------
Cumulative Interest Sensitive Gap $ (924.8) $ 220.4 $ 863.4 $2,003.3 $ -- $ --
- -------------------------------------------------------------------------------------------------
</TABLE>
- -Assets and liabilities whose rates are variable are reported based on their
repricing dates. Those with fixed rates are reported based on their scheduled
contractual repayment dates, except for certain investment securities and loans
secured by 1-4 family residential properties that are based on anticipated pre-
payments.
- -The interest rate sensitivity assumptions presented for demand deposits, non-
interest-bearing time deposits, savings accounts and NOW accounts are based on
historical and current experiences regarding product portfolio retention and
interest rate repricing behavior. The portion of these deposits which are con-
sidered long-term and stable have been classified in the Over 5 Years category.
business. However, in the normal course of business Northern also engages in
proprietary trading of foreign currencies. The primary market risk associated
with these activities is foreign exchange risk.
Foreign currency positions exist when aggregate obligations to purchase and
sell a currency other than the U.S. dollar do not offset each other, or offset
each other in different time periods. Northern Trust mitigates the risk related
to its foreign currency positions by establishing limits on the amounts of and
durations of its positions. The limits on overnight inventory positions are
generally lower than the limits established for intra-day trading activity. All
positions are monitored by a risk management function, which is separate from
the trading function, to ensure that the limits are not exceeded. Although po-
sition limits are important in controlling foreign exchange risk, they are not
a substitute for the experience or judgment of Northern Trust's senior manage-
ment and its foreign currency traders, who have extensive knowledge of the for-
eign currency markets. Foreign currency positions and strategies are adjusted
as needed in response to changing market conditions.
As part of its risk management activities, Northern Trust regularly measures
the risk of loss associated with foreign currency positions using a value at
risk model. This statistical model provides an estimate, based on a 95% confi-
dence interval, of the potential loss in earnings that may be incurred if an
adverse one-day shift in foreign currency exchange rates were to occur. The
model, which is based on a variance/co-variance methodology, incorporates his-
torical currency price data and historical correlations in price movement among
the currencies. All foreign currency positions, including foreign denominated
assets and liabilities that were not converted to U.S. dollars through the use
of hedge contracts, are included in the model.
Northern Trust's value at risk, based on foreign currency positions as of De-
cember 31, 1997, was $91 thousand. This figure is an indication of the degree
of risk inherent in the foreign exchange contract portfolio as of year-end.
However, it is not a prediction of an expected loss. Actual future gains and
losses will vary depending on market conditions and the size and duration of
future foreign currency positions.
NORTHERN TRUST CORPORATION
--------------------------
37
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER TRADING ACTIVITIES. Market risk associated with other trading activities
is negligible. Northern Trust is a party to various interest risk management
instruments, most of which consist of interest rate swaps entered into to meet
clients' interest risk management needs. When Northern Trust enters into such
swaps, its policy is to mitigate the resulting interest rate risk with an off-
setting swap or with futures contracts. Northern Trust carries in its trading
portfolio a small inventory of securities that are held for sale to its cli-
ents. The interest rate risk associated with these securities is insignifi-
cant.
Liquidity Risk Management
The objective of liquidity risk management is to ensure that Northern Trust
can meet its cash flow requirements and to capitalize on business opportuni-
ties on a timely and cost effective basis. Management monitors the liquidity
position on a daily basis to ensure that funds are available at a minimum cost
to meet loan and deposit cash flows. The liquidity profile is also structured
to ensure that the capital needs of the Corporation and its banking subsidiar-
ies are met. Management maintains a detailed liquidity contingency plan de-
signed to adequately respond to dramatic changes in market conditions.
Liquidity is secured by managing the mix of items on the balance sheet and
expanding potential sources of liquidity. The balance sheet sources of liquid-
ity include the short-term money market portfolio, unpledged available for
sale securities, maturing loans, and the ability to securitize a portion of
the loan portfolio. Further, liquidity arises from the diverse funding base
and the fact that a significant portion of funding comes from clients that
have other relationships with Northern Trust.
A significant source of liquidity is the ability to draw funding from both
domestic and international markets. The Bank's senior long-term debt is rated
AA- by Standard & Poor's, Aa3 by Moody's Investors Service, AA+ by Thomson
BankWatch, and AA by Fitch IBCA. These ratings put The Northern Trust Company
in the top tier of United States banks.
Northern Trust maintains a liquid balance sheet with loans representing only
50% of total assets. Further, at December 31, 1997, it had a significant li-
quidity reserve on its balance sheet in the form of cash and due from banks,
securities available for sale, and money market assets, which in aggregate to-
taled $10.8 billion or 43% of total assets.
The Corporation's uses of cash consist mainly of dividend payments to the
Corporation's common and preferred stockholders, the payment of principal and
interest to note holders, purchases of its common stock and acquisitions.
These requirements are met largely by dividend payments from its subsidiaries,
and by interest and dividends earned on investment securities and money market
assets. Bank subsidiaries have the ability to pay dividends during 1998 equal
to their 1998 eligible net profits plus $342.8 million. Bank subsidiary divi-
dends are subject to certain restrictions that are explained in Note 15 on
page 56. The Corporation's liquidity, defined as the amount of marketable as-
sets in excess of commercial paper, was strong at $272 million at year-end
1997. The cash flows of the Corporation are shown in Note 29 on page 69. The
Corporation also has a $50 million back-up line of credit for its commercial
paper issuance. The Corporation's strong credit ratings allow it to access
credit markets on favorable terms.
Capital Management
One of management's primary objectives is to maintain a strong capital posi-
tion to merit the confidence of clients, the investing public, bank regulators
and stockholders. A strong capital position helps Northern Trust withstand un-
foreseen
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY
- --------------------------------------------------------------------------------
December 31
- --------------------------------------------------------------------------------
<S> <C> <C>
($ In Millions) 1997 1996
- --------------------------------------------------------------------------------
TIER 1 CAPITAL
Common Stockholders' Equity $ 1,619 $ 1,424
Floating Rate CapitalSecurities 267 --
Goodwill and Other Intangible Assets (122) (81)
Net Unrealized Gain on Securities (2) (2)
- --------------------------------------------------------------------------------
Total Tier 1 Capital 1,762 1,341
- --------------------------------------------------------------------------------
TIER 2 CAPITAL
Auction Rate Preferred Stock 120 120
Reserve for Credit Losses 148 148
Long-Term Debt* 315 335
- --------------------------------------------------------------------------------
Total Tier 2 Capital 583 603
- --------------------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL 2,345 1,944
- --------------------------------------------------------------------------------
Risk-Weighted Assets** $18,342 $16,380
- --------------------------------------------------------------------------------
Total Assets
End of Period (EOP) $25,315 $21,608
Average Fourth Quarter** 25,646 20,907
Total Loans-EOP 12,588 10,937
RATIOS
Risk-Based Capital to
Risk-Weighted Assets
Tier 1 9.6% 8.2%
Total (Tier 1 and Tier 2) 12.8 11.9
Leverage (Tier 1 to Fourth
Quarter Average Assets) 6.9 6.4
- --------------------------------------------------------------------------------
Common Stockholders' Equity to
Total Loans EOP 12.9% 13.0%
Total Assets EOP 6.4 6.6
Stockholders' Equity to
Total Loans EOP 13.8 14.1
Total Assets EOP 6.9 7.1
- --------------------------------------------------------------------------------
</TABLE>
Notes:
*Long-Term Debt that qualifies for risk-based capital amortizes for the pur-
pose of inclusion in tier 2 capital during the five years before maturity.
**Assets have been adjusted for goodwill and other intangible assets, net
unrealized gain on securities and excess reserve for credit losses that have
been excluded from tier 1 and tier 2 capital, if any.
NORTHERN TRUST CORPORATION
--------------------------
38
<PAGE>
adverse developments and take advantage of profitable investment opportunities
when they arise. In 1997, common equity on average increased 11% or $148 mil-
lion reaching a record $1.6 billion at year-end, while total risk-weighted as-
sets rose 12%. Total equity as of December 31, 1997 was $1.7 billion including
$120 million of auction rate preferred stock. The average dividend rate de-
clared on the $120 million of auction rate preferred stock was 4.13% during
1997 versus 4.00% in 1996. In January 1996, the Corporation called for redemp-
tion its $50 million Series E convertible preferred stock. Virtually all of
the holders elected to convert rather than redeem their preferred stock, and
in January 1996, the Corporation issued 2,396,744 shares of common stock in
connection with the conversion.
During 1997 the Corporation purchased 1,409,753 of its own shares as part of
the buyback program authorized in 1994 and 1996. The Corporation may purchase,
after December 31, 1997, up to 3.2 million additional shares under the current
buyback program.
The Board of Directors increased the quarterly dividend by 16.7% to $.21 per
common share in November 1997. Over the last five years the common dividend
has increased 127%.
Northern Trust Corporation's risk-based capital ratios were strengthened by
the issuance in January of $150 million Floating Rate Capital Securities, Se-
ries A and in April by the issuance of $120 million Floating Rate Capital Se-
curities, Series B, both of which qualify as tier 1 capital. Both series of
the Floating Rate Capital Securities have a 30 year fixed maturity. The combi-
nation of these Capital Securities and growth in retained earnings increased
tier 1 capital by $421 million or 31%, much greater than the 12% increase in
risk-weighted assets, resulting in significantly higher capital ratios com-
pared to 1996. All of Northern Trust's capital ratios were well above the ra-
tios that are a requirement for regulatory treatment as "well capitalized".
At December 31, 1997, tier 1 capital was 9.6% and total capital was 12.8% of
risk-weighted assets. These risk-based capital ratios are well above the mini-
mum requirements of 4.0% for tier 1 and 8.0% for total risk-based capital ra-
tios. Northern Trust's leverage ratio (tier 1 capital to fourth quarter aver-
age assets) of 6.9% is also well above the regulatory requirement of 3.0%. In
addition, each of the subsidiary banks had a ratio of at least 8.2% for tier 1
capital, 10.6% for total risk-based capital, and 5.7% for the leverage ratio.
Operational and Fiduciary Risk Management
In providing banking and trust services, Northern Trust, in addition to safe-
keeping and managing trust and corporate assets, processes cash and securities
transactions exceeding $125 billion on average each business day. These activ-
ities expose Northern Trust to operational and fiduciary risk. Controls over
such processing activities are closely monitored to safeguard the assets of
Northern Trust and its clients. However, from time to time Northern Trust has
suffered losses related to these risks and there can be no assurance that such
losses will not occur in the future.
Operational risk is the risk of unexpected losses attributable to human er-
ror, systems failures, fraud, or inadequate internal controls and procedures.
This risk is mitigated through a system of internal controls that are designed
to keep operating risk at appropriate levels in view of Northern Trust's cor-
porate standards and the risks inherent in the markets in which Northern Trust
operates. The system of internal controls includes policies and procedures
that require the proper authorization, approval, documentation and monitoring
of transactions. Each business unit is responsible for complying with corpo-
rate policies and external regulations applicable to the unit, and is respon-
sible for establishing specific procedures to do so. Northern Trust's internal
auditors monitor the overall effectiveness of the system of internal controls
on an ongoing basis.
Fiduciary risk is the risk of loss that may occur as a result of breaching a
fiduciary duty to a client. To limit this risk, the Trust Investment Committee
establishes corporate policies and procedures to ensure that obligations to
clients are discharged faithfully and in compliance with applicable legal and
regulatory requirements. These policies and procedures provide guidance and
establish standards related to the creation, sale, and management of invest-
ment products, trade execution, and counterparty selection. Business units
have the primary responsibility for adhering to the policies and procedures
applicable to their businesses.
LINES OF BUSINESS
- -------------------------------------------------------------------------------
The results for the major business units are presented in order to promote a
greater understanding of their financial performance and strategic direction.
The information, presented on an internal management reporting basis, is de-
rived from internal accounting systems that support the strategic objectives
and management structure. Consequently, Northern Trust's presentations are not
necessarily comparable with similar information for other financial institu-
tions.
Management has developed accounting systems to allocate revenue and expenses
related to each line of business, as well as certain corporate support servic-
es, worldwide operations and systems development expenses. The systems also
incorporate processes for allocating assets, liabilities and the applicable
interest income and expense. Equity is primarily allocated using the federal
regulatory risk-based capital guidelines, coupled with management's judgment
of the operational risks inherent in the business. Allocations of capital and
certain corporate expenses may not be representative of the levels that would
be required if the businesses were independent entities.
NORTHERN TRUST CORPORATION
--------------------------
39
<PAGE>
CORPORATE AND INSTITUTIONAL SERVICES. Corporate and Institutional Services in-
cludes corporate trust, investment management and securities lending services,
certain commercial banking activities of the Bank, treasury management servic-
es, foreign exchange activities, the London and Singapore branches of the Bank,
NTRC and NTGA.
PERSONAL FINANCIAL SERVICES. Personal Financial Services encompasses personal
trust and investment management services, estate administration, personal bank-
ing and mortgage and other lending to individuals and middle market companies.
This business unit also includes the commercial banking activities of the af-
filiate banks and the activities of Northern Trust Securities, Inc.
CORPORATE AND OTHER. Corporate and Other includes the Bank's Treasury Depart-
ment, Northern Futures Corporation and other corporate items, including the im-
pact of long-term debt, preferred equity, holding company investments, and cor-
porate operating expenses. The increase in noninterest expenses in 1997 is due
to higher performance-based incentive plan expenses and certain special tech-
nology-related charges associated with the Year 2000 project and planned relo-
cation of Northern Trust's computer data facility. The decline in noninterest
expenses from 1995 to 1996 reflects decreases in severance costs and pension
settlement charges, and lower salary and benefit expenses resulting from staff
reductions in corporate support areas.
The following table reflects the earnings contribution of Northern Trust's
lines of business for the years ended December 31, 1997, 1996 and 1995 on the
basis described above.
<TABLE>
- ------------------------------------------------------------------------------------
Corporate and
Institutional Serv- Personal Corporate
ices Financial Services and Other
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($ In
Millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------
Net Interest
Income* $134.9 $112.9 $111.4 $319.8 $286.4 $260.4 $16.2 $22.6 $23.4
Provision
for Credit
Losses 8.6 (.6) 1.6 3.1 15.3 4.3 (2.7) (2.7) .1
Noninterest
Income
Trust Fees 349.6 300.4 244.5 339.6 294.0 260.8 -- -- --
Other 183.1 132.7 125.7 45.5 43.1 38.6 16.7 9.8 8.8
Noninterest
Expenses 424.5 367.3 312.6 421.7 383.5 366.5 45.6 18.1 30.4
- ------------------------------------------------------------------------------------
Income be-
fore Income
Taxes* 234.5 179.3 167.4 280.1 224.7 189.0 (10.0) 17.0 1.7
Provision
for Income
Taxes* 92.4 70.8 65.6 111.4 89.6 75.1 (8.6) 1.8 (2.6)
- ------------------------------------------------------------------------------------
NET INCOME $142.1 $108.5 $101.8 $168.7 $135.1 $113.9 $(1.4) $15.2 $ 4.3
- ------------------------------------------------------------------------------------
Percentage
Contribution 46% 42% 46% 54% 52% 52% --% 6% 2%
- ------------------------------------------------------------------------------------
</TABLE>
*Stated on a fully taxable equivalent basis (FTE). Total includes $32.7 mil-
lion, $33.6 million and $37.6 million of FTE adjustment for 1997, 1996 and
1995, respectively.
Note: Certain reclassifications have been made to 1996 and 1995 financial in-
formation to conform to the current year presentation.
NORTHERN TRUST CORPORATION
--------------------------
40
<PAGE>
FORWARD-LOOKING INFORMATION
- --------------------------------------------------------------------------------
This annual report contains statements that may be considered forward-looking,
such as the discussion of Northern Trust's financial goals, expansion and busi-
ness development plans, business prospects and positioning with respect to mar-
ket, demographic and pricing trends, credit quality and outlook, and antici-
pated expenses for Year 2000 systems renovation. These statements speak of
Northern Trust's plans, goals, beliefs or expectations, refer to estimates or
use similar terms. Actual results could differ materially from the results in-
dicated by these statements because the realization of those results is subject
to many uncertainties including:
. The future health of the U.S. and international economies and other eco-
nomic factors that affect wealth creation, investment and savings patterns,
and Northern Trust's interest rate risk exposure and credit risk.
. Changes in U.S. and worldwide securities markets, with respect to the mar-
ket values of financial assets and the level of volatility in certain mar-
kets such as foreign exchange.
. The impact of recent difficulties experienced in a number of economies, in-
cluding those of many Southeast Asian countries, upon Northern Trust and
its clients and borrowers.
. Regulatory developments in the U.S. and other countries where Northern
Trust has significant business.
. Changes in the nature of Northern Trust's competition resulting from indus-
try consolidation, regulatory change and other factors, as well as actions
taken by particular competitors.
. Northern Trust's success in continuing to generate significant levels of
new business in its existing markets.
. Northern Trust's success in identifying and penetrating targeted markets,
through acquisition on financially acceptable terms or de novo entry, and
generating a profit in those markets in a reasonable time.
. Northern Trust's ability to continue to fund and accomplish technological
innovation, improve processes and controls and attract and retain capable
staff in order to deal with increasing volume and complexity in many of its
businesses and technology challenges, such as Year 2000 systems renovation
and the introduction of the Euro.
. The ability of various vendors, clients and others with whom Northern Trust
interacts to complete Year 2000 systems renovation efforts on a timely ba-
sis and in a manner that allows them to continue normal business operations
and furnish products, services or data to Northern Trust without disrup-
tion.
. The ability of each of Northern Trust's principal businesses to maintain a
product mix that achieves satisfactory margins.
. Changes in tax laws or other legislation that could affect Northern Trust's
personal and institutional asset administration businesses.
Some of these uncertainties that may affect future results are discussed in
more detail in the sections of "Item 1--Business" of the Annual Report on Form
10-K captioned "Government Policies", "Competition" and "Regulation and Super-
vision". All forward-looking statements included in this document are based
upon information presently available, and Northern Trust assumes no obligation
to update any forward-looking statement.
NORTHERN TRUST CORPORATION
--------------------------
41
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------------------------
($ In Millions) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 1,738.9 $ 1,292.5
Federal Funds Sold and Securities Purchased under
Agreements to Resell (Note 4) 2,991.7 1,022.6
Time Deposits with Banks 2,283.2 2,060.0
Other Interest-Bearing 34.5 114.3
Securities (Note 3)
Available for Sale 3,733.3 4,311.7
Held to Maturity (Fair value-$473.4 in 1997 and
$518.9 in 1996) 456.1 498.4
Trading Account 8.8 4.8
- -------------------------------------------------------------------------------
Total Securities 4,198.2 4,814.9
- -------------------------------------------------------------------------------
Loans and Leases (Note 5)
Commercial and Other 7,401.5 6,379.9
Residential Mortgages 5,186.7 4,557.5
- -------------------------------------------------------------------------------
Total Loans and Leases (Net of unearned income-$151.9
in 1997 and $109.1 in 1996) 12,588.2 10,937.4
- -------------------------------------------------------------------------------
Reserve for Credit Losses (Note 6) (147.6) (148.3)
Buildings and Equipment (Notes 8 and 9) 316.4 291.5
Customers' Acceptance Liability 31.4 44.7
Trust Security Settlement Receivables 291.4 362.3
Other Assets (Note 17) 989.1 816.4
- -------------------------------------------------------------------------------
Total Assets $25,315.4 $21,608.3
- -------------------------------------------------------------------------------
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing $ 3,510.1 $ 3,476.7
Savings and Money Market 4,278.9 3,880.1
Savings Certificates 2,092.6 2,056.3
Other Time 572.0 462.7
Foreign Offices--Demand 451.0 410.7
--Time 5,455.4 3,509.7
- -------------------------------------------------------------------------------
Total Deposits 16,360.0 13,796.2
Federal Funds Purchased 821.2 653.0
Securities Sold under Agreements to Repurchase (Note 4) 1,139.7 966.1
Commercial Paper 146.8 149.0
Other Borrowings 2,876.6 3,142.1
Senior Notes (Note 10) 785.0 305.0
Long-Term Debt (Note 10) 439.5 427.8
Floating Rate Capital Securities (Note 11) 267.4 --
Liability on Acceptances 31.4 44.7
Other Liabilities 708.8 580.3
- -------------------------------------------------------------------------------
Total Liabilities 23,576.4 20,064.2
- -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock (Note 12) 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized
280,000,000 shares in 1997 and 140,000,000 shares in
1996; Outstanding 111,367,436 shares and 111,247,732
shares in 1997 and 1996, respectively (Notes 12 and 14) 189.9 189.9
Capital Surplus 225.5 231.7
Retained Earnings 1,330.8 1,110.2
Net Unrealized Gain on Securities Available for Sale
(Note 3) 2.1 1.6
Common Stock Issuable-Performance Plan (Note 24) 11.7 10.4
Deferred Compensation-ESOP and Other (37.5) (35.5)
Treasury Stock (at cost-2,593,326 shares in 1997 and
2,712,780 shares in 1996) (103.5) (84.2)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 1,739.0 1,544.1
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $25,315.4 $21,608.3
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 46-69.
NORTHERN TRUST CORPORATION
--------------------------
42
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
For the Year Ended December 31
- -------------------------------------------------------------------------------
($ In Millions Except Per Share
Information) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans and Leases (Note 5) $ 793.1 $ 693.4 $ 630.9
Securities (Note 3)
Available For Sale 326.0 318.9 324.0
Held to Maturity 30.7 32.5 40.0
Trading Account .6 .5 3.6
- -------------------------------------------------------------------------------
Total Securities 357.3 351.9 367.6
- -------------------------------------------------------------------------------
Time Deposits with Banks 133.5 84.9 92.1
Federal Funds Sold and Securities
Purchased under Agreements to Resell
and Other (Note 4) 48.9 21.3 13.4
- -------------------------------------------------------------------------------
Total Interest Income 1,332.8 1,151.5 1,104.0
- -------------------------------------------------------------------------------
Interest Expense
Deposits 522.2 447.8 443.3
Federal Funds Purchased 92.4 97.9 91.2
Securities Sold under Agreements to
Repurchase (Note 4) 81.7 103.4 102.6
Commercial Paper 7.9 7.8 8.6
Other Borrowings 112.4 64.5 55.6
Senior Notes (Note 10) 30.9 14.4 23.7
Long-Term Debt (Note 10) 32.6 27.4 21.4
Floating Rate Capital Securities
(Note 11) 14.5 -- --
- -------------------------------------------------------------------------------
Total Interest Expense 894.6 763.2 746.4
- -------------------------------------------------------------------------------
Net Interest Income 438.2 388.3 357.6
Provision for Credit Losses (Note 6) 9.0 12.0 6.0
- -------------------------------------------------------------------------------
Net Interest Income after Provision
for Credit Losses 429.2 376.3 351.6
- -------------------------------------------------------------------------------
Noninterest Income
Trust Fees 689.2 594.4 505.3
Treasury Management Fees 60.2 55.3 49.6
Foreign Exchange Trading Profits 104.8 58.8 55.3
Security Commissions and Trading
Income 26.1 23.9 21.7
Other Operating Income (Note 16) 53.5 47.2 45.5
Investment Security Gains (Note 3) .7 .4 1.0
- -------------------------------------------------------------------------------
Total Noninterest Income 934.5 780.0 678.4
- -------------------------------------------------------------------------------
Income before Noninterest Expenses 1,363.7 1,156.3 1,030.0
- -------------------------------------------------------------------------------
Noninterest Expenses
Salaries (Notes 24 and 25) 448.3 368.8 337.6
Pension and Other Employee Benefits
(Note 18) 79.0 72.5 81.5
Occupancy Expense (Notes 8 and 9) 66.7 60.7 57.9
Equipment Expense (Note 8) 62.2 56.0 50.0
Other Operating Expenses (Note 17) 235.6 210.9 182.5
- -------------------------------------------------------------------------------
Total Noninterest Expenses 891.8 768.9 709.5
- -------------------------------------------------------------------------------
Income before Income Taxes 471.9 387.4 320.5
Provision for Income Taxes (Note 13) 162.5 128.6 100.5
- -------------------------------------------------------------------------------
NET INCOME $ 309.4 $ 258.8 $ 220.0
- -------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 304.4 $ 253.9 $ 211.5
- -------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
(Note 14)--BASIC $ 2.74 $ 2.27 $ 1.91
--DILUTED 2.66 2.21 1.86
- -------------------------------------------------------------------------------
Average Number of Common Shares Out-
standing--Basic 110,977,645 111,933,829 110,737,342
--Diluted 114,661,156 114,839,118 115,085,474
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 46-69.
NORTHERN TRUST CORPORATION
--------------------------
43
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
For the Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at January 1 $ 120.0 $ 170.0 $ 170.0
Conversion of Preferred Stock, Series E -- (50.0) --
- -------------------------------------------------------------------------------
Balance at December 31 120.0 120.0 170.0
- -------------------------------------------------------------------------------
COMMON STOCK
Balance at January 1 189.9 93.6 90.6
Stock Issued-Incentive Plan and Awards -- -- .3
Stock Issued-Acquisitions -- -- 2.7
Conversion of Preferred Stock, Series E -- 1.3 --
Transfer from Capital Surplus-Two-for-
One Stock Split -- 95.0 --
- -------------------------------------------------------------------------------
Balance at December 31 189.9 189.9 93.6
- -------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at January 1 231.7 306.1 302.2
Stock Issued-Incentive Plan and Awards (6.2) (8.6) (.2)
Stock Issued-Acquisitions -- -- 4.1
Conversion of Preferred Stock, Series E -- 29.2 --
Transfer to Common Stock-Two-for-One
Stock Split -- (95.0) --
- -------------------------------------------------------------------------------
Balance at December 31 225.5 231.7 306.1
- -------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at January 1 1,110.2 928.8 762.7
Net Income 309.4 258.8 220.0
Dividends Declared-Common Stock (83.8) (72.5) (60.4)
Dividends Declared-Preferred Stock (5.0) (4.9) (8.6)
Pooled Affiliates -- -- 15.1
- -------------------------------------------------------------------------------
Balance at December 31 1,330.8 1,110.2 928.8
- -------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE FOR SALE
Balance at January 1 1.6 2.6 (15.8)
Unrealized Gain (Loss), net .5 (1.0) 18.4
- -------------------------------------------------------------------------------
Balance at December 31 2.1 1.6 2.6
- -------------------------------------------------------------------------------
COMMON STOCK ISSUABLE-PERFORMANCE PLAN
Balance at January 1 10.4 14.7 17.9
Stock Issuable, net of Stock Issued 1.3 (4.3) (3.2)
- -------------------------------------------------------------------------------
Balance at December 31 11.7 10.4 14.7
- -------------------------------------------------------------------------------
DEFERRED COMPENSATION-ESOP AND OTHER
Balance at January 1 (35.5) (39.4) (38.8)
Compensation Deferred (8.9) (2.7) (11.8)
Compensation Amortized 9.3 7.5 10.3
Unfunded Pension Liability, net (2.4) (.9) .9
- -------------------------------------------------------------------------------
Balance at December 31 (37.5) (35.5) (39.4)
- -------------------------------------------------------------------------------
TREASURY STOCK
Balance at January 1 (84.2) (23.8) (8.1)
Stock Options and Awards 51.0 42.9 28.8
Stock Purchased (70.3) (122.5) (65.5)
Stock Issued-Acquisitions -- -- 21.0
Conversion of Preferred Stock, Series E -- 19.2 --
- -------------------------------------------------------------------------------
Balance at December 31 (103.5) (84.2) (23.8)
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY AT DECEMBER 31 $1,739.0 $ 1,544.1 $ 1,452.6
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 46-69.
NORTHERN TRUST CORPORATION
--------------------------
44
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
For the Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 309.4 $ 258.8 $ 220.0
Adjustments to Reconcile Net Income to
Net Cash Provided
by Operating Activities:
Provision for Credit Losses 9.0 12.0 6.0
Depreciation on Buildings and Equipment 49.3 46.8 42.2
(Increase) Decrease in Interest Receivable (4.7) 17.7 (32.8)
Increase in Interest Payable 20.6 9.4 .3
Amortization and Accretion of
Securities and Unearned Income (190.0) (120.2) (153.5)
Amortization of Software, Goodwill and
Other Intangibles 51.0 42.3 35.8
Deferred Income Tax 38.0 29.5 17.7
Net (Increase) Decrease in Trading
Account Securities (4.0) 84.1 (84.9)
Other, net (77.5) (32.4) 91.0
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 201.1 348.0 141.8
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Federal
Funds Sold and Securities Purchased
under Agreements to Resell (1,969.1) (860.5) 638.9
Net (Increase) Decrease in Time
Deposits with Banks (223.2) (492.4) 297.3
Net (Increase) Decrease in Other
Interest-Bearing Assets 79.8 (59.8) (45.0)
Purchases of Securities-Held to
Maturity (162.6) (2,068.7) (662.3)
Proceeds from Maturity and Redemption
of Securities-Held to Maturity 207.2 2,112.9 819.6
Purchases of Securities-Available for
Sale (75,308.5) (31,666.5) (31,206.1)
Proceeds from Sale, Maturity and
Redemption of Securities-Available
for Sale 76,121.5 32,611.3 30,828.7
Net Increase in Loans and Leases (1,708.0) (1,066.5) (1,155.3)
Purchases of Buildings and Equipment (57.5) (56.8) (41.8)
Proceeds from Sale of Buildings and
Equipment 3.3 -- 4.5
Net (Increase) Decrease in Trust
Security Settlement Receivables 70.9 (35.2) (21.4)
Decrease in Cash Due to Acquisitions (53.0) (14.6) (43.5)
Other, net (1.2) (10.6) 2.3
- -------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,000.4) (1,607.4) (584.1)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 2,563.8 1,308.0 378.7
Net Increase (Decrease) in Federal
Funds Purchased 168.2 (1,647.1) 1,328.1
Net Increase (Decrease) in Securities
Sold under Agreements to Repurchase 173.6 (892.6) (374.0)
Net Increase (Decrease) in Commercial Paper (2.2) 2.3 22.9
Net Increase (Decrease) in Short-Term
Other Borrowings (157.0) 2,273.2 (56.1)
Proceeds from Term Federal Funds Purchased 1,612.4 2,630.2 4,132.7
Repayments of Term Federal Funds Purchased (1,720.9) (2,637.2) (4,280.1)
Proceeds from Senior Notes & Long-Term Debt 803.4 901.5 1,260.0
Repayments on Senior Notes & Long-Term Debt (331.7) (520.3) (1,700.2)
Proceeds from Floating Rate Capital
Securities 267.4 -- --
Treasury Stock Purchased (66.2) (118.2) (63.7)
Net Proceeds from Stock Options 13.0 12.1 9.0
Cash Dividends Paid on Common and
Preferred Stock (85.3) (74.7) (65.8)
Other, net 7.2 5.8 (32.8)
- -------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 3,245.7 1,243.0 558.7
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash and Due
from Banks 446.4 (16.4) 116.4
Cash and Due from Banks at Beginning of
Year 1,292.5 1,308.9 1,192.5
- -------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 1,738.9 $ 1,292.5 $ 1,308.9
- -------------------------------------------------------------------------------
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Building Purchase Obligation $ 20.0 $ -- $ --
Conversion of Preferred Stock, Series E
to Common Stock -- 49.7 --
Acquisition of Affiliate for Stock, net -- -- 41.3
Transfer of Securities from Held to
Maturity to Available for Sale -- -- 68.5
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest Paid $ 874.1 $ 753.8 $ 745.0
Income Taxes Paid 102.5 82.7 76.4
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements on pages 46-69.
NORTHERN TRUST CORPORATION
--------------------------
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES--The consolidated financial statements have been pre-
pared in conformity with generally accepted accounting principles and report-
ing practices prescribed for the banking industry. A description of the sig-
nificant accounting policies follows:
A. BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Northern Trust Corporation (Corporation) and its wholly-owned sub-
sidiary The Northern Trust Company (Bank) and their wholly-owned subsidiaries.
Throughout the notes, the term "Northern Trust" refers to Northern Trust Cor-
poration and subsidiaries. Significant intercompany balances and transactions
have been eliminated in consolidation. The consolidated statement of income
includes results of acquired and pooled subsidiaries from the dates of acqui-
sition.
B. NATURE OF OPERATIONS. The Corporation is a bank holding company whose
principal subsidiary is the Chicago-based Bank. The Corporation also owns
banks in Florida, California, Arizona and Texas, and various other nonbank
subsidiaries, including a brokerage firm, a futures commission merchant, an
international investment consulting firm and a retirement services company.
Northern Trust generates the majority of its revenues from its two primary
business units, Corporate and Institutional Services (C&IS) and Personal Fi-
nancial Services (PFS).
The C&IS unit provides trust and custody-related services in the United
States and foreign markets to corporations and institutions; a full range of
commercial banking services to large domestic corporations and financial in-
stitutions; treasury management services to meet the needs of major corpora-
tions and financial institutions; and foreign exchange services for global
custody clients and Northern Trust's own account.
The PFS unit provides personal trust, investment management, estate adminis-
tration, personal banking and mortgage lending services, and also provides
commercial banking services to middle market companies. These services are de-
livered through the Bank and the network of subsidiaries in Florida, Califor-
nia, Arizona and Texas.
C. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The prepara-
tion of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D. FOREIGN CURRENCY TRANSLATION. Foreign currency asset and liability ac-
counts of overseas branches and subsidiaries are translated at current rates
of exchange, except for buildings and equipment which are translated at rates
in effect at the date of acquisition. Income and expense accounts are trans-
lated at month-end rates of exchange.
Foreign exchange trading positions are valued daily at prevailing market
rates. Gains and losses on trading positions and on positions entered into to
hedge foreign denominated investments are recognized currently in other oper-
ating income. Unrealized gains on trading positions are reported as other as-
sets and unrealized losses are reported as other liabilities in the consoli-
dated balance sheet. Gains and losses on foreign currency positions that were
entered into to hedge specific, firm foreign currency obligations are deferred
and recognized in income over the life of the underlying asset or liability or
as the underlying expense or commitment is incurred.
E. SECURITIES. Securities Available for Sale consist of debt and equity secu-
rities that are not intended to be held to maturity and are not held for trad-
ing. Securities available for sale are reported at fair value, with unrealized
gains and losses credited or charged, net of the tax effect, directly to
stockholders' equity. Realized gains and losses on securities available for
sale are determined on a specific identification basis and are reported in the
consolidated statement of income as investment security gains and losses.
Securities Held to Maturity consist of debt securities that management in-
tends to, and Northern Trust has the ability to, hold until maturity. Such se-
curities are reported at cost, adjusted for amortization of premium and accre-
tion of discount.
Securities Held for Trading are stated at fair value. Realized and unrealized
gains and losses on securities held for trading are reported in the consoli-
dated statement of income under security commissions and trading income.
F. INTEREST RISK MANAGEMENT INSTRUMENTS. Interest risk management instruments
include interest rate swap contracts, futures contracts, options and similar
contracts. Northern Trust is a party to various interest risk management in-
struments to meet the interest risk management needs of its clients, as part
of its trading activity for its own account and as part of its asset/liability
management activities. Unrealized gains and receivables on interest risk man-
agement instruments are reported as other assets and unrealized losses and
payables are reported as other liabilities in the consolidated balance sheet.
ASSET/LIABILITY MANAGEMENT INSTRUMENTS. Interest rate swaps are the primary
interest risk management instrument used for asset/liability management pur-
poses. Futures contracts, options, and similar contracts are also used for
asset/liability management, but these contracts do not have a material impact
on Northern Trust's financial condition or net income. Accrued interest income
or expense on asset/liability management swaps is recognized as a component of
the interest income or expense of the hedged items. Unrealized gains and
losses on such swaps are recognized consistent with the method of accounting
for the hedged items. For example, there is no recognition of unrealized gains
and losses on swaps used to hedge items that are carried at their amortized
cost. Unrealized gains and losses on interest rate swaps used to hedge avail-
able for sale securities are reported in stockholders' equity, net of applica-
ble taxes.
NORTHERN TRUST CORPORATION
--------------------------
46
<PAGE>
A swap that is classified in the asset/liability management category must be
assigned to hedge a specific asset or liability and must reduce Northern
Trust's interest rate risk. It must also achieve its intended objective of
converting the yield on the hedged asset or liability to the desired rate.
This criteria is assumed to have been met if the interest rate on the hedged
asset or liability is identical to the offsetting interest rate on the swap.
If the two rates are not identical, the correlation between the levels of the
two rates since the inception of the swap must be measured to ensure that the
swap is meeting its intended objective. In addition, the notional amount of
the swap must be less than or equal to the par amount of the item being
hedged. If a forward swap is entered into to hedge an anticipated transaction,
the significant terms (e.g., the expected date, type of instrument, quantity,
and maturity date) of the anticipated transaction must be identified, and it
must be probable that the anticipated transaction will occur.
If an asset/liability management swap is terminated or ceases to meet the
criteria described above, any realized or unrealized gain or loss at the time
is deferred and amortized over the remainder of the original hedge period. Any
subsequent realized or unrealized gains or losses are reported as security
commissions and trading income in the consolidated statement of income. If the
item being hedged is sold, any deferred or unrealized gain or loss on the swap
at the time of the transaction is considered in the calculation of the gain or
loss on the sale. If the swap is not terminated, it must be marked to market
on a prospective basis, with realized and unrealized gains and losses included
in security commissions and trading income in the consolidated statement of
income.
CLIENT-RELATED AND TRADING INSTRUMENTS. Interest risk management instruments
entered into to meet clients' interest risk management needs or for trading
purposes are carried at fair value, with realized and unrealized gains and
losses included in security commissions and trading income.
Cash collected and disbursed in connection with interest risk management in-
struments is reported in the consolidated statement of cash flows under the
heading "Cash Flows From Operating Activities."
G. LOANS AND LEASES. Loans that are held to maturity are reported at the
principal amount outstanding, net of unearned income. Residential real estate
loans classified as held for sale are reported at the lower of aggregate cost
or market value. Interest income on loans is recorded on an accrual basis un-
til, in the opinion of management, there is a question as to the ability of
the debtor to meet the terms of the contract, or when interest or principal is
more than 90 days past due and the loan is not well-secured and in the process
of collection. At the time a loan is placed on nonaccrual status, interest ac-
crued but not collected is reversed against interest income of the current pe-
riod. Loans are returned to accrual status when factors indicating doubtful
collectibility no longer exist. Interest collected on nonaccrual loans is ap-
plied to principal unless, in the opinion of management, collectibility of
principal is not in doubt.
Premiums and discounts on loans are recognized as an adjustment of yield by
the interest method based on the contractual terms of the loan. Commitment
fees that are considered to be an adjustment to the loan yield, loan origina-
tion fees and certain direct costs are deferred and accounted for as an ad-
justment of the yield.
Unearned lease income from direct financing and leveraged leases is recog-
nized using the interest method. This method provides a constant rate of re-
turn on the unrecovered investment over the life of the lease.
H. RESERVE FOR CREDIT LOSSES. The reserve for credit losses is established
through provisions for credit losses charged to income. Loans, leases and
other extensions of credit deemed uncollectible are charged to the reserve.
Subsequent recoveries, if any, are credited to the reserve. The loan and lease
portfolio and other extensions of credit are regularly reviewed to evaluate
the adequacy of the reserve for credit losses. The impact of economic condi-
tions on the creditworthiness of borrowers is given major consideration in
determining the adequacy of the reserve. Credit loss experience, changes in
the character and size of the loan portfolio, the estimated value of impaired
loans compared to their recorded investment, and management's judgment are
other factors used in assessing the overall adequacy of the reserve for credit
losses and the resulting provision for credit losses. Actual losses may vary
from current estimates and the amount of the provision may be either greater
than or less than actual net charge-offs.
I. MORTGAGE SERVICING RIGHTS. Mortgage servicing rights are capitalized as a
separate asset when purchased or when acquired through the origination of
mortgage loans that are subsequently sold with the servicing rights retained.
The servicing rights are included in other assets and are amortized as an off-
set to other operating income over their estimated life. Servicing rights are
evaluated for impairment based on their fair value. For purposes of measuring
impairment, Northern Trust stratifies its servicing rights by loan type and
interest rate. Fair value is determined considering market prices for similar
assets.
J. FEES ON STANDBY LETTERS OF CREDIT AND PARTICIPATIONS IN BANKERS ACCEPT-
ANCES. Fees on standby letters of credit are recognized in other operating
income on the straight-line method over the lives of the underlying agree-
ments. Commissions on bankers acceptances are recognized in other operating
income when received.
K. BUILDINGS AND EQUIPMENT. Buildings and equipment owned are carried at
original cost less accumulated depreciation. The charge for depreciation is
computed on the straight-line method based on the following range of lives:
buildings--10 to 30 years; equipment--4 to 10 years; and leasehold improve-
ments--lease term to 15 years. Leased properties meeting certain criteria are
capitalized and amortized using the straight-line method over the lease period.
NORTHERN TRUST CORPORATION
--------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. OTHER REAL ESTATE OWNED (OREO). OREO is comprised of commercial and resi-
dential real estate properties acquired in partial or total satisfaction of
problem loans.
OREO assets are carried at the lower of cost or fair value. Losses identified
at the time of acquisition of such properties are charged against the reserve
for credit losses. Subsequent write-downs that may be required to the carrying
value of these assets and losses realized from asset sales are charged to other
operating expenses. Gains realized from the sale of OREO are included in other
operating income.
M. INTANGIBLE ASSETS. Goodwill, arising from the excess of purchase price over
the fair value of net assets of acquired subsidiaries, is being amortized using
the straight-line method primarily over fifteen years.
Other purchased intangible assets arising from acquisitions are amortized us-
ing various methods over the estimated lives of the assets. Software is being
amortized using the straight-line method over the estimated useful life of the
asset, ranging from 5 to 7 years.
N.TRUST ASSETS AND FEES. Assets held in fiduciary or agency capacities are not
included in the consolidated balance sheet, since such items are not assets of
Northern Trust. Income from trust activities is recorded on the accrual basis.
O.TRUST SECURITY SETTLEMENT RECEIVABLES. These receivables represent other
items in the process of collection presented on behalf of trust clients.
P.INCOME TAXES. In accordance with SFAS No. 109, "Accounting for Income Tax-
es," an asset and liability approach to accounting for income taxes is fol-
lowed. The objective is to recognize the amount of taxes payable or refundable
for the current year, and to recognize deferred tax assets and liabilities re-
sulting from temporary differences between the amounts reported in the finan-
cial statements and the tax bases of assets and liabilities. The measurement of
tax assets and liabilities is based on enacted tax laws and applicable tax
rates.
Q. CASH FLOW STATEMENTS. Cash and cash equivalents have been defined as those
amounts included in the consolidated balance sheet as "Cash and Due from
Banks."
2. RECLASSIFICATIONS--Certain reclassifications have been made to prior periods'
consolidated financial statements to place them on a basis comparable with the
current period's consolidated financial statements.
3. SECURITIES--SECURITIES AVAILABLE FOR SALE. The following tables summarize the
amortized cost, fair values and remaining maturities of securities available
for sale.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF
SECURITIES AVAILABLE FOR SALE
- -----------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 469.3 $ .9 $ .2 $ 470.0
Obligations of
States and
Political
Subdivisions 123.5 6.7 -- 130.2
Federal Agency 2,969.0 1.7 .9 2,969.8
Preferred Stock 128.5 .4 .1 128.8
Other 35.2 -- .7 34.5
- -----------------------------------------------------------
Total $3,725.5 $9.7 $1.9 $3,733.3
- -----------------------------------------------------------
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $.1 million and $4.6 million, re-
spectively, as of December 31, 1997. Unrealized gains on these hedges are re-
ported as other assets in the consolidated balance sheet; unrealized losses are
reported as other liabilities. As of December 31, 1997, stockholders' equity
included a credit of $2.1 million, net of tax, to recognize the appreciation on
securities available for sale, net of the related hedges.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
December 31, 1996
- -----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 906.8 $ .9 $1.0 $ 906.7
Obligations of
States and
Political
Subdivisions 114.5 2.9 .4 117.0
Federal Agency 3,095.0 2.7 .8 3,096.9
Preferred Stock 139.6 -- .2 139.4
Other 51.9 1.0 1.2 51.7
- -----------------------------------------------------------
Total $4,307.8 $7.5 $3.6 $4,311.7
- -----------------------------------------------------------
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge available for sale securities totaled $2.2 million and $3.5 million, re-
spectively, as of December 31, 1996. Unrealized gains on these hedges are re-
ported as other assets in the consolidated balance sheet; unrealized losses are
reported as other liabilities. As of December 31, 1996, stockholders' equity
included a credit of $1.6 million, net of tax, to recognize the appreciation on
securities available for sale, net of the related hedges.
NORTHERN TRUST CORPORATION
--------------------------
48
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------
REMAINING MATURITY OF SECURITIES
AVAILABLE FOR SALE
- ---------------------------------------------
December 31, 1997
- ---------------------------------------------
Amortized Fair
(In Millions) Cost Value
- ---------------------------------------------
<S> <C> <C>
Due in One Year or Less $2,990.5 $2,990.1
Due After One Year
Through Five Years 469.6 471.4
Due After Five Years
Through Ten Years 29.4 31.1
Due After Ten Years 236.0 240.7
- ---------------------------------------------
Total $3,725.5 $3,733.3
- ---------------------------------------------
</TABLE>
Asset-backed and mortgage-backed securities were included in the above table
taking into account anticipated future prepayments.
SECURITIES HELD TO MATURITY. The following tables summarize the book values,
fair values and remaining maturities of securities held to maturity.
<TABLE>
<CAPTION>
- ------------------------------------------------------
RECONCILIATION OF BOOK VALUES TO FAIR VALUES OF
SECURITIES HELD TO MATURITY
- ------------------------------------------------------
December 31, 1997
- ------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 72.0 $ -- $ -- $ 72.0
Obligations of
States and Po-
litical
Subdivisions 276.7 18.4 -- 295.1
Federal Agency 14.3 -- -- 14.3
Other 93.1 -- 1.1 92.0
- ------------------------------------------------------
Total $456.1 $18.4 $1.1 $473.4
- ------------------------------------------------------
December 31, 1996
- ------------------------------------------------------
Gross Gross
Book Unrealized Unrealized Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 73.4 $ .1 $ -- $ 73.5
Obligations of
States and
Political
Subdivisions 315.9 20.5 .1 336.3
Federal Agency 18.2 .1 .1 18.2
Other 90.9 -- -- 90.9
- ------------------------------------------------------
Total $498.4 $20.7 $ .2 $518.9
- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------
REMAINING MATURITY OF SECURITIES HELD
TO MATURITY
- ---------------------------------------------
December 31,
1997
- ---------------------------------------------
Book Fair
(In Millions) Value Value
- ---------------------------------------------
<S> <C> <C>
Due in One Year or Less $123.9 $124.7
Due After One Year Through
Five Years 127.8 135.7
Due After Five Years Through
Ten Years 98.0 105.0
Due After Ten Years 106.4 108.0
- ---------------------------------------------
Total $456.1 $473.4
- ---------------------------------------------
</TABLE>
Asset-backed and mortgage-backed securities were included in the above table
taking into account anticipated future prepayments.
Income on obligations of states and political subdivisions totaled $25.3 mil-
lion, $26.8 million and $30.7 million in 1997, 1996 and 1995, respectively.
Dividends received on preferred stock totaled $4.2 million, $4.4 million and
$8.0 million for 1997, 1996 and 1995, respectively.
Refer to Note 20 for additional detail related to interest risk management in-
struments used to hedge securities.
INVESTMENT SECURITY GAINS AND LOSSES. Realized gross security gains and losses,
which were included in the consolidated statement of income, totaled $1.2 mil-
lion and $.5 million, respectively in 1997. The $1.2 million of gains in 1997
resulted when held to maturity and available for sale securities were called at
a premium. Realized gross security losses in 1997 resulted entirely from the
sale of securities classified as available for sale. Realized gross security
gains and losses totaled $1.5 million and $1.1 million, respectively, in 1996.
Of the $1.5 million in gains in 1996, $1.0 million was related to the sale of
securities classified as available for sale. The remaining $.5 million resulted
when held to maturity securities were called at a premium. Realized gross
security losses in 1996 resulted entirely from the sale of securities classified
as available for sale. Realized gross security gains and losses in 1995 totaled
$1.0 million and none, respectively.
4. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE--Securities purchased under agreements to resell and
securities sold under agreements to repurchase are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. To minimize
any potential credit risk associated with these transactions, the fair value of
the securities purchased or sold is continuously monitored, limits are set on
exposure with counterparties, and the financial condition of counterparties is
regularly assessed. It is Northern Trust's policy to take possession of securi-
ties purchased under agreements to resell.
NORTHERN TRUST CORPORATION
--------------------------
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize information related to securities purchased un-
der agreements to resell and securities sold under agreements to repurchase.
<TABLE>
<CAPTION>
- -----------------------------------------------
SECURITIES PURCHASED UNDER AGREEMENTS
TO RESELL
- -----------------------------------------------
December 31
- -----------------------------------------------
($ In Millions) 1997 1996
- -----------------------------------------------
<S> <C> <C>
Average Balance During
the Year $ 356.3 $ 131.2
Average Interest Rate
Earned During the Year 5.56% 5.39%
Maximum Month-End Bal-
ance During the Year 2,435.5 554.5
- -----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- -----------------------------------------------
December 31
- -----------------------------------------------
($ In Millions) 1997 1996
- -----------------------------------------------
<S> <C> <C>
Average Balance During
the Year $1,519.9 $1,973.3
Average Interest Rate
Paid During the Year 5.38% 5.24%
Maximum Month-End Bal-
ance During the Year 3,708.9 2,922.2
- -----------------------------------------------
</TABLE>
5. LOANS AND LEASES--Amounts outstanding in selected loan categories are shown
below.
<TABLE>
<CAPTION>
- ------------------------------------------------
December 31
- ------------------------------------------------
(In Millions) 1997 1996
- ------------------------------------------------
<S> <C> <C>
Domestic
Residential Real Estate $ 5,186.7 $ 4,557.5
Commercial 3,734.8 3,161.4
Broker 170.1 389.1
Commercial Real Estate 582.1 557.7
Personal 1,207.2 989.8
Other 890.1 632.1
Lease Financing 347.0 267.8
- ------------------------------------------------
Total Domestic 12,118.0 10,555.4
International 470.2 382.0
- ------------------------------------------------
Total Loans and Leases $12,588.2 $10,937.4
- ------------------------------------------------
</TABLE>
Other domestic and international loans include $924.5 million at December 31,
1997, and $765.3 million at December 31, 1996 of overnight trust-related ad-
vances in connection with next day security settlements. Lease financing in-
cludes leveraged leases of $179.6 million at December 31, 1997, and $139.1 mil-
lion at December 31, 1996.
Residential real estate loans held for sale totaled $39.7 million and $3.7
million at December 31, 1997 and 1996, respectively.
Refer to Note 20 for detail related to interest risk management instruments
used to hedge loans.
NONPERFORMING ASSETS. Presented below are outstanding amounts of nonaccrual
loans, restructured loans and OREO.
<TABLE>
<CAPTION>
- --------------------------------------------------
December 31
- --------------------------------------------------
(In Millions) 1997 1996
- --------------------------------------------------
<S> <C> <C>
Nonaccrual Loans
Domestic--Commercial Real Estate $ 7.1 $11.3
--Other 31.8 5.6
International -- --
- --------------------------------------------------
Total Nonaccrual Loans 38.9 16.9
Restructured Loans 2.5 2.6
Other Real Estate Owned 1.9 1.9
- --------------------------------------------------
Total Nonperforming Assets $43.3 $21.4
- --------------------------------------------------
</TABLE>
Included in nonperforming assets were loans with a recorded investment at De-
cember 31, 1997 and December 31, 1996 of $38.3 million and $16.8 million, re-
spectively, which were also classified as impaired. At December 31, 1997 and
December 31, 1996 impaired loans totaling $7.9 million and $13.6 million, re-
spectively, had no portion of the reserve for credit losses allocated to them,
while $30.4 million at December 31, 1997 had an allocated reserve of $4.7 mil-
lion and $3.2 million at December 31, 1996 had an allocated reserve of $.5 mil-
lion. Total recorded investment in impaired loans averaged $34.4 million in
1997 and $27.6 million in 1996. Total interest income recognized on impaired
loans was $191 thousand and $1.0 million in 1997 and 1996, respectively, most
of which was recognized using the accrual method of accounting in 1997 and the
cash-basis method in 1996.
There were no unfunded loan commitments and standby letters of credit issued
to borrowers whose loans were classified as nonaccrual at December 31, 1997,
while there were $61 thousand at December 31, 1996.
Interest income that would have been recorded on domestic nonaccrual loans in
accordance with their original terms amounted to $3.6 million in 1997, $3.1
million in 1996 and $2.9 million in 1995, compared with amounts that were
actually recorded of $1.2 million, $.9 million and $.7 million, respectively.
Write-downs and realized losses on OREO of $.4 million in each of the three
years presented were charged to other operating expenses.
NORTHERN TRUST CORPORATION
--------------------------
50
<PAGE>
6. RESERVE FOR CREDIT LOSSES--Changes in the reserve for credit losses were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------
(In Millions) 1997 1996 1995
- -----------------------------------------------
<S> <C> <C> <C>
Balance at Beginning
of Year $148.3 $147.1 $144.8
- -----------------------------------------------
Charge-Offs
Domestic
Commercial Real
Estate (.7) (7.4) (3.6)
Other (13.7) (8.0) (7.5)
International -- (.2) (.6)
- -----------------------------------------------
Total Charge-Offs (14.4) (15.6) (11.7)
Recoveries 4.7 3.8 5.8
- -----------------------------------------------
Net Charge-Offs (9.7) (11.8) (5.9)
Provision for Credit
Losses 9.0 12.0 6.0
Reserve Related to
Acquisitions -- 1.0 2.2
- -----------------------------------------------
Balance at End of
Year $147.6 $148.3 $147.1
- -----------------------------------------------
</TABLE>
7. MORTGAGE SERVICING RIGHTS--Servicing rights capitalized as a result of orig-
inating mortgage loans and selling the loans with the servicing rights retained
totaled $723 thousand and $307 thousand during 1997 and 1996, respectively. Am-
ortization of the servicing rights totaled $94 thousand during 1997 and $22
thousand during 1996, resulting in carrying values of $914 thousand and $285
thousand as of December 31, 1997 and 1996, respectively. There were no valua-
tion allowances established to record impairment of mortgage servicing rights
during 1997 or 1996.
8. BUILDINGS AND EQUIPMENT--Summary of buildings and equipment is presented be-
low.
<TABLE>
<CAPTION>
- ------------------------------------------------
December 31, 1997
- ------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- ------------------------------------------------
<S> <C> <C> <C>
Land $ 39.1 $ -- $ 39.1
Buildings 102.2 35.8 66.4
Equipment 231.1 113.0 118.1
Leasehold Im-
provements 65.4 32.9 32.5
Buildings Leased
under Capital
Leases (Note 9) 74.1 13.8 60.3
- ------------------------------------------------
Total Buildings
and Equipment $511.9 $195.5 $316.4
- ------------------------------------------------
<CAPTION>
December 31, 1996
- ------------------------------------------------
Net
Original Accumulated Book
(In Millions) Cost Depreciation Value
- ------------------------------------------------
<S> <C> <C> <C>
Land $ 30.5 $ -- $ 30.5
Buildings 83.9 32.3 51.6
Equipment 228.0 114.0 114.0
Leasehold Im-
provements 61.5 28.3 33.2
Buildings Leased
Under Capital
Leases (Note 9) 74.1 11.9 62.2
- ------------------------------------------------
Total Buildings
and Equipment $478.0 $186.5 $291.5
- ------------------------------------------------
</TABLE>
The charge for depreciation amounted to $49.3 million in 1997, $46.8 million
in 1996 and $42.2 million in 1995.
9. LEASE COMMITMENTS--At December 31, 1997, Northern Trust was obligated under
a number of noncancellable operating leases for premises and equipment. Certain
leases contain rent escalation clauses, based on market indices or increases in
real estate taxes and other operating expenses and renewal option clauses call-
ing for increased rentals. There are no restrictions imposed by any lease
agreement regarding the payment of dividends, debt financing or Northern Trust
entering into further lease agreements. Minimum annual lease commitments as of
December 31, 1997, for all noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------
Future Minimum
(In Millions) Lease Payments
- ----------------------------------------------
<S> <C>
1998 $ 31.3
1999 26.7
2000 25.2
2001 21.5
2002 19.1
Later Years 98.8
- ----------------------------------------------
Total Minimum Lease Payments $222.6
- ----------------------------------------------
</TABLE>
Rental expense for all operating leases is included in occupancy expense and
amounted to $27.8 million in 1997, $25.3 million in 1996 and $23.4 million in
1995.
The building and land utilized at the Chicago operations center has been
leased under an agreement which qualifies as a capital lease. The long-term fi-
nancing for the property was provided by the Corporation and the Bank. In the
event of sale or refinancing, the Bank will receive all proceeds except for 58%
of any proceeds in excess of the original project costs which will be paid to
the lessor.
In June 1997, the Bank entered into an agreement to purchase a building and
adjacent land located across the street from the Chicago operations center for
$23.5 million in January 2000. The building, which contains approximately
340,000 square feet of rentable office space, will be used for future expansion
and to relocate the computer data center and some personnel currently located
in leased facilities in downtown Chicago. Prior to the purchase date, the Bank
will lease, in phases beginning in 1997, approximately two floors of this six-
story building. The present value of the land and building is reported in
buildings and equipment, and the related purchase obligation appears in long-
term debt in the consolidated balance sheet.
NORTHERN TRUST CORPORATION
--------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below reflects the future minimum lease payments required under cap-
ital leases, net of any payments received on the long-term financing, and the
present value of net capital lease obligations at December 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------
Future Minimum
(In Millions) Lease Payments, Net
- ----------------------------------------------
<S> <C>
1998 $ 1.3
1999 1.3
2000 1.4
2001 1.6
2002 1.6
Later Years 13.0
- ----------------------------------------------
Total Minimum Lease
Payments, net 20.2
Less: Amount Represent-
ing Interest 8.8
- ----------------------------------------------
Net Present Value under
Capital Lease Obligations $11.4
- ----------------------------------------------
</TABLE>
10. SENIOR NOTES, LONG-TERM DEBT AND LINES OF CREDIT--SENIOR NOTES. Summary of
Bank senior notes outstanding at December 31 is presented below.
<TABLE>
<CAPTION>
- ----------------------------------------------
($ In Millions) Rate 1997 1996
- ----------------------------------------------
<S> <C> <C> <C>
Due 1997 (a) (b)
Fixed 5.10-5.65% $ -- $225.0
Fixed-Convert-
ible to Floating 4.93-5.07 -- 75.0
Due 1998 (a) (b)
Fixed 5.75-6.29 405.0 5.0
Floating 5.60-5.85 380.0 --
- ----------------------------------------------
Total Bank Senior
Notes $785.0 $305.0
- ----------------------------------------------
</TABLE>
Refer to bottom of next table for applicable notes.
LONG-TERM DEBT. Summary of long-term debt outstanding at December 31 is pre-
sented below.
<TABLE>
<CAPTION>
- ------------------------------------------------------
($ In Millions) 1997 1996
- ------------------------------------------------------
<S> <C> <C>
Corporation-Subordinated Debt
9.15% Notes due March 1998 (a) $ 10.0 $ 10.0
9.20% Notes due March 1998 (a) 13.0 13.0
9.00% Notes due May 1998 (a) 50.0 50.0
9.20% Notes due May 2001 (a) 25.0 25.0
Bank-Subordinated Debt
6.50% Notes due May 2003 (a) 100.0 100.0
6.70% Notes due Sept. 2005 (a) (b) 100.0 100.0
7.30% Notes due Sept. 2006 (a) (b) 100.0 100.0
- ------------------------------------------------------
Subordinated Long-Term Debt $398.0 $398.0
- ------------------------------------------------------
Corporation-Other Long-Term Debt
8.23% ESOP Installment Notes
with Final Payment due
December 1998 (c) $ 9.5 $ 18.2
Capital Lease Obligations (d) 11.4 11.6
Building Purchase Obligation (d) 20.6 --
- ------------------------------------------------------
Other Long-Term Debt $ 41.5 $ 29.8
- ------------------------------------------------------
Total Long-Term Debt $439.5 $427.8
- ------------------------------------------------------
Long-Term Debt Qualifying as
Risk-Based Capital $315.0 $334.6
- ------------------------------------------------------
</TABLE>
(a) Not redeemable prior to maturity.
(b) Under the terms of its current Offering Circular, the Bank has the ability
to offer from time to time its senior bank notes in an aggregate principal
amount of up to $1.7 billion at any one time outstanding and up to an addi-
tional $100 million of subordinated notes. Each senior note will mature
from 30 days to fifteen years and each subordinated note will mature from
five years to fifteen years, following its date of original issuance. Each
note will mature on such date as selected by the initial purchaser and
agreed to by the Bank.
(c) Notes were issued directly by the ESOP trust to finance the purchase of
8,640,000 common shares. The Corporation unconditionally guarantees the
payment of principal, premium, if any, and interest. The interest rate is
subject to adjustment in the event of certain tax law changes affecting
ESOP plans. Refer to Note 18.
(d) Refer to Note 9.
Refer to Note 20 for detail related to interest risk management instruments
used to hedge notes.
LINES OF CREDIT. The Corporation currently maintains commercial paper back-up
facility lines of credit with three banks totaling $50 million. The termination
date is November 2001. The commitment fee is determined by a pricing matrix
that is based on the long-term senior debt ratings of the Corporation. Current-
ly, the annual fee is one-tenth of 1% of the commitment. There were no
borrowings under commercial paper back-up facilities during 1997 or 1996.
NORTHERN TRUST CORPORATION
--------------------------
52
<PAGE>
11. FLOATING RATE CAPITAL SECURITIES--The following table summarizes the book
value of Floating Rate Capital Securities outstanding:
<TABLE>
<CAPTION>
- ---------------------------------------------
December 31
- ---------------------------------------------
(In Millions) 1997 1996
- ---------------------------------------------
<S> <C> <C>
$150 Million Series A due Jan-
uary 15, 2027 $148.6 --
$120 Million Series B due
April 15, 2027 118.8 --
- ---------------------------------------------
Total Floating Rate Capital
Securities $267.4 --
- ---------------------------------------------
</TABLE>
On January 16, 1997, the Corporation issued $150 million of Floating Rate Cap-
ital Securities, Series A, through a statutory business trust wholly-owned by
the Corporation. On April 25, 1997, the Corporation also issued, through a sep-
arate wholly-owned statutory business trust, $120 million of Floating Rate Cap-
ital Securities, Series B. The sole assets of the trusts are Subordinated De-
bentures of Northern Trust Corporation which have the same interest rates and
maturity dates as the corresponding distribution rates and redemption dates of
the Floating Rate Capital Securities. The Series A Securities were issued at a
discount to yield 60.5 basis points above the three-month London Interbank Of-
fered Rate (LIBOR), while the Series B Securities were issued at a discount to
yield 67.9 basis points above the three-month LIBOR. Both Series A and B Secu-
rities qualify as tier 1 capital for regulatory purposes.
The Corporation has fully, irrevocably and unconditionally guaranteed all pay-
ments due on such Capital Securities. The holders of the Capital Securities are
entitled to receive preferential cumulative cash distributions quarterly in ar-
rears (based on the liquidation amount of $1,000 per Capital Security) at an
interest rate equal to the rate on the corresponding Subordinated Debentures.
The interest rate on the Series A and Series B securities is equal to three-
month LIBOR plus 0.52% and 0.59%, respectively. Subject to certain exceptions,
the Corporation has the right to defer payment of interest on the Subordinated
Debentures at any time or from time to time for a period not exceeding 20 con-
secutive quarterly periods provided that no extension period may extend beyond
the stated maturity date. If interest is deferred on the Subordinated Deben-
tures, distributions on the Capital Securities will also be deferred and the
Corporation will not be permitted, subject to certain exceptions, to pay or de-
clare any cash distributions with respect to the Corporation's capital stock or
debt securities that rank the same as or junior to the Subordinated Debentures,
until all past due distributions are paid. The Subordinated Debentures are
unsecured and subordinated to substantially all of the Corporation's existing
indebtedness.
The Corporation has the right to redeem the Series A Subordinated Debentures
on or after January 15, 2007 and the Series B Subordinated Debentures on or af-
ter April 15, 2007, in each case in whole or in part. In addition, the Corpora-
tion has the right to redeem the Subordinated Debentures held by either trust
in whole but not in part at any time within 90 days following certain defined
tax or regulatory capital treatment changes, at a price equal to the principal
amount plus accrued and unpaid interest.
12. STOCKHOLDERS' EQUITY--PREFERRED STOCK. The Corporation is authorized to is-
sue 10,000,000 shares of preferred stock without par value. The Board of Direc-
tors of the Corporation is authorized to fix the particular preferences,
rights, qualifications and restrictions for each series of preferred stock is-
sued. Summary of preferred stock outstanding is presented below.
<TABLE>
<CAPTION>
- ---------------------------------------------
December 31
- ---------------------------------------------
(In Millions) 1997 1996
- ---------------------------------------------
<S> <C> <C>
Auction Rate Preferred Stock
Series C 600 shares
@ $100,000 per share $ 60.0 $ 60.0
Flexible Auction Rate Cumu-
lative Preferred Stock Se-
ries D 600 shares @ $100,000
per share 60.0 60.0
- ---------------------------------------------
Total Preferred Stock $120.0 $120.0
- ---------------------------------------------
</TABLE>
SERIES C--In 1987, 600 shares of Auction Rate Preferred Stock (APS) Series C
were issued, with a $100,000 per share stated value. Dividends on the shares of
APS are cumulative. Rates are determined every 49 days by Dutch auction unless
the Corporation fails to pay a dividend or redeem any shares for which it has
given notice of redemption, in which case the dividend rate will be set at 175%
of the 60-day "AA" Composite Commercial Paper Rate. The dividend rate in any
auction will not exceed a percentage determined by the prevailing credit rating
of the APS. The current maximum dividend rate is 120% of the 60-day "AA" Com-
posite Commercial Paper Rate. No dividends other than dividends payable in ju-
nior stock, such as Common Stock, may be paid on Common Stock until full cumu-
lative dividends on the APS have been paid. The average rate for this issue as
declared during 1997 was 4.13%. The shares of APS are redeemable at the option
of the Corporation, in whole or in part, on any Dividend Payment Date at
$100,000 per share, plus accrued and unpaid dividends.
SERIES D--In 1990, 600 shares of Flexible Auction Rate Cumulative Preferred
Stock Series D (FAPS) were issued with a $100,000 per share stated value. Each
dividend period contains 49 days (the "Short-Term Dividend Period") or a number
of days greater than 49 days (as selected by the Term Selection Agent) which is
divisible by seven (the "Long-Term Dividend Period"). Rates for each dividend
period are determined
NORTHERN TRUST CORPORATION
--------------------------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by Dutch auction unless the Corporation fails to pay the full amount of any
dividend or redemption. The dividend rate in any auction will not exceed a per-
centage (currently 125%), determined by the prevailing credit rating of the
FAPS, of the 60-day "AA" Composite Commercial Paper Rate or the Reference Rate,
which rate is the Composite Commercial Paper Rate or the Treasury Rate, as ap-
propriate for the length of each Short-Term or Long-Term Dividend Period, re-
spectively. If the Corporation fails to pay the full amount of any dividend or
redemption, each dividend period thereafter (until auctions are resumed) will
be a Short-Term Dividend Period and the dividend rate will be 250% of the 60-
day "AA" Composite Commercial Paper Rate; additional dividends will accrue for
the balance of any Long-Term Dividend Period in which such a failure to pay oc-
curs. No dividends other than dividends payable in junior stock, such as Common
Stock, may be paid on Common Stock until full cumulative dividends on the FAPS
have been paid. The average rate for this issue as declared during 1997 was
4.12%. The shares of FAPS are redeemable at the option of the Corporation, in
whole or in part, at $100,000 per share plus accrued and unpaid dividends.
SERIES E--On January 5, 1996, the Corporation called for redemption its out-
standing 6.25% Cumulative Convertible Preferred Stock Series E. The Series E
was sold to the public in the form of 1,000,000 Depositary Shares, each
representing one-twentieth of a share of the Series E Preferred Stock (equal to
50,000 preferred shares). In January 1996, 994,737 of the total 1,000,000 De-
positary Shares were converted at the option of the holders at a conversion
price of $41.50 into 1,198,372 (2,396,744 shares on a post-split basis) shares
of the Corporation's common stock. The conversion resulted in fractions of
shares for which the Corporation paid cash. The remaining 5,263 Depositary
Shares were redeemed on January 26, 1996, for cash at a redemption price of
$52.8038 per Depositary Share.
PREFERRED STOCK PURCHASE RIGHTS. In 1989, the Board of Directors of the Corpo-
ration declared a dividend distribution of one Preferred Stock Purchase Right
on each outstanding share of the Corporation's common stock to the stockholders
of record on October 31, 1989. The Rights are subject to anti-dilution provi-
sions, and each Right is now exercisable for one-sixth of one-hundredth of a
share of Series A Junior Participating Preferred Stock at an exercise price of
$41.67 for each such fractional share. The Rights are evidenced by the common
stock certificates and are not exercisable or transferable apart from the com-
mon stock until twenty days after a person or group acquires 15 percent or more
of the Corporation's voting power or announces a tender or exchange offer which
could result in ownership of 25 percent or more of the voting power. Shares of
the Participating Preferred Stock purchasable upon exercise of the Rights will
not be redeemable.
In the event that a person or group acquires 25 percent or more of the Corpo-
ration voting power or if the Corporation merges or engages in certain self-
dealing transactions with a 15 percent or more stockholder, each Right will en-
title the holder, other than such person or group in certain circumstances, to
purchase that number of shares of surviving company common stock which at the
time of the transaction would have a market value of twice the exercise price
of the Right.
The Rights do not have voting rights and are redeemable at the option of the
Corporation at a price of one cent per Right at any time prior to the close of
business on the 20th day following publication of the acquisition of 15 percent
or more of the voting power by a person or group. Unless earlier redeemed, the
Rights will expire on October 31, 1999.
COMMON STOCK. In November 1996, the Corporation declared a two-for-one split of
its common stock, to be effected by means of a 100% stock distribution. One
share for each share held by shareholders of record on December 2, 1996 was
distributed on December 9, 1996.
Also in November 1996, the Corporation announced that it increased its common
stock buyback authorization by approximately 4.2 million shares. An additional
3.2 million shares may be purchased after December 31, 1997 under the current
program. These shares may be repurchased from time to time in open market pur-
chases, and the shares would be used primarily for management incentive plans
and other corporate purposes.
An analysis of changes in the number of shares of common stock outstanding
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Balance at
January 1 111,247,732 55,664,412 54,089,259
Distribution of
Two-for-One
Stock Split -- 55,664,412 --
Conversion of
Preferred Stock,
Series E -- 2,396,744 --
Employee Benefit
Plans:
Incentive Plan
and Awards 315,147 377,086 406,084
Stock Options
Exercised 1,214,310 1,242,034 640,229
Issued for
Acquisitions -- -- 2,014,999
Treasury Stock
Purchases (1,409,753) (4,096,956) (1,486,159)
- ----------------------------------------------------------
Balance at
December 31 111,367,436 111,247,732 55,664,412
- ----------------------------------------------------------
</TABLE>
Note: 1996 share activity reflects the December 1996 two-for-one stock split.
NORTHERN TRUST CORPORATION
--------------------------
54
<PAGE>
13. INCOME TAXES--The table below reconciles the total provision for income
taxes recorded in the consolidated statement of income with the amounts com-
puted at the statutory federal tax rate of 35%.
<TABLE>
<CAPTION>
- ------------------------------------------------------
(In Millions) 1997 1996 1995
- ------------------------------------------------------
<S> <C> <C> <C>
Tax at Statutory Rate $165.2 $135.6 $112.2
Tax-Exempt Income (10.7) (11.6) (13.9)
State Taxes, net 8.5 4.8 2.4
Other (.5) (.2) (.2)
- ------------------------------------------------------
Provision for Income Taxes $162.5 $128.6 $100.5
- ------------------------------------------------------
</TABLE>
The components of the consolidated provision for income taxes for each of the
three years ended December 31, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------
(In Millions) 1997 1996 1995
- --------------------------------------------
<S> <C> <C> <C>
Current Tax Provision:
Federal $102.4 $ 91.4 $ 75.7
State 6.8 3.8 2.9
Foreign 15.3 3.9 4.2
- --------------------------------------------
Total 124.5 99.1 82.8
- --------------------------------------------
Deferred Tax Provision:
Federal 31.7 26.0 16.9
State 6.3 3.5 .8
- --------------------------------------------
Total 38.0 29.5 17.7
- --------------------------------------------
Provision for Income
Taxes $162.5 $128.6 $100.5
- --------------------------------------------
</TABLE>
In addition to the amounts shown in the above tables, tax liabilities or (ben-
efits) have been recorded directly to stockholders' equity for the following
items:
<TABLE>
<CAPTION>
- -----------------------------------------------
(In Millions) 1997 1996
- -----------------------------------------------
<S> <C> <C>
Current Tax Benefit for Em-
ployee Stock Options and
Other Employee Benefit
Plans $(15.6) $(8.7)
Deferred Tax Effect of
Unrealized Security Gains
(Losses) .3 (.6)
Deferred Tax Effect of Un-
funded Pension Liabilities (1.4) (.5)
- -----------------------------------------------
</TABLE>
Deferred taxes result from temporary differences between the amounts reported
in the consolidated financial statements and the tax bases of assets and lia-
bilities. Deferred tax liabilities and assets have been computed based on the
statutory federal tax rate of 35%, as follows:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------
(In Millions) 1997 1996
- ------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Lease Financing $122.4 $ 88.3
Software Development 39.3 40.6
Accumulated Depreciation 9.2 6.5
Acquired Intangible Assets 7.5 6.5
Other Liabilities 21.0 16.7
- ------------------------------------------------
Gross Deferred Tax Liabilities 199.4 158.6
- ------------------------------------------------
Deferred Tax Assets:
Reserve for Credit Losses 51.2 51.4
Leased Facilities 7.3 7.6
Other Assets 15.5 10.2
- ------------------------------------------------
Gross Deferred Tax Assets 74.0 69.2
Valuation Reserve -- --
- ------------------------------------------------
Deferred Tax Assets, net of
Valuation Reserve 74.0 69.2
- ------------------------------------------------
Net Deferred Tax Liabilities $125.4 $ 89.4
- ------------------------------------------------
</TABLE>
At December 31, 1997, Northern Trust had a federal net operating loss
carryforward of $4.3 million resulting from a business acquisition, which is
available to reduce future tax return liabilities. In addition, Northern Trust
had a state net operating loss and tax credit carryforwards of $5.3 million and
$2.0 million, respectively. The carryforwards are subject to various limita-
tions imposed by tax law.
14. NET INCOME PER COMMON SHARE COMPUTATIONS--Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," established new standards for
computing and presenting net income per common share. Northern Trust imple-
mented SFAS No. 128 as of December 31, 1997. All prior period net income per
common share data presented throughout these consolidated financial statements
has been restated to conform to the requirements of SFAS No. 128. The computa-
tion of net income per common share is presented on the following page.
NORTHERN TRUST CORPORATION
--------------------------
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
($ In Millions Except Per Share
Information) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC NET INCOME PER COMMON SHARE
Net Income $309.4 $258.8 $220.0
Less: Dividends on Preferred Stock (5.0) (4.9) (8.5)
- -------------------------------------------------------------------------------
Net Income Applicable to Common Stock $304.4 $253.9 $211.5
Average Number of Common Shares
Outstanding 110,977,645 111,933,829 110,737,342
Basic Net Income Per Common Share $ 2.74 $ 2.27 $ 1.91
DILUTED NET INCOME PER COMMON SHARE
Net Income Applicable to Common Stock $304.4 $253.9 $211.5
Add Back: Dividends on Series E
Convertible Preferred Stock -- -- 3.1
- -------------------------------------------------------------------------------
Net Income Used to Compute Diluted
Net Income Per Common Share $304.4 $253.9 $214.6
- -------------------------------------------------------------------------------
Average Number of Common Shares
Outstanding 110,977,645 111,933,829 110,737,342
Plus: Dilutive Potential Common
Shares
Stock Options 2,846,992 1,968,038 1,218,508
Performance Shares 579,737 611,072 690,502
Series E Convertible Preferred Stock -- 190,928 2,409,640
Other 256,782 135,251 29,482
- -------------------------------------------------------------------------------
Average Common and Potential
Common Shares 114,661,156 114,839,118 115,085,474
- -------------------------------------------------------------------------------
Diluted Net Income Per Common Share $ 2.66 $ 2.21 $ 1.86
- -------------------------------------------------------------------------------
</TABLE>
15. RESTRICTIONS ON SUBSIDIARY DIVIDENDS AND LOANS OR ADVANCES--Provisions of
state and federal banking laws restrict the amount of dividends that can be
paid to the Corporation by its banking subsidiaries. Under applicable state
and federal laws, no dividends may be paid in an amount greater than the net
profits then on hand, subject to other applicable provisions of law. In addi-
tion, prior approval of the relevant federal banking regulator is required if
dividends declared by any of the Corporation's banking subsidiaries in any
calendar year will exceed its net profits (as defined) for that year, combined
with its retained net profits for the preceding two years. Based on these reg-
ulations, the Corporation's banking subsidiaries, without regulatory approval,
could declare dividends during 1998 equal to their 1998 eligible net profits
(as defined) plus $342.8 million. The ability of each banking subsidiary to
pay dividends to the Corporation may be further restricted as a result of reg-
ulatory policies and guidelines relating to dividend payments and capital ade-
quacy.
State and federal laws limit the transfer of funds by a banking subsidiary to
the Corporation and certain of its affiliates in the form of loans or exten-
sions of credit, investments or purchases of assets. Transfers of this kind to
the Corporation or a nonbanking subsidiary by a banking subsidiary are each
limited to 10% of the banking subsidiary's capital and surplus with respect to
each affiliate and to 20% in the aggregate, and are also subject to certain
collateral requirements. These transactions, as well as other transactions be-
tween a banking subsidiary and the Corporation or its affiliates, must also be
on terms substantially the same as, or at least as favorable as, those pre-
vailing at the time for comparable transactions with non-affiliated companies
or, in the absence of comparable transactions, on terms, or under circumstances,
including credit standards, that would be offered to, or would apply to, non-
affiliated companies.
16. OTHER OPERATING INCOME--Included in the 1997 results is $11.1 million re-
sulting from settlements reached with Illinois banking regulators concerning
the disposition of certain unclaimed balances accumulated over a number of
years.
17. OTHER OPERATING EXPENSES--The components of other operating expenses were
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------
(In Millions) 1997 1996 1995
- --------------------------------------------
<S> <C> <C> <C>
Business Development $ 32.0 $ 26.9 $ 23.0
Purchased Profes-
sional Services 81.0 76.7 57.6
Telecommunications 13.2 11.4 10.8
Postage and Supplies 22.0 21.9 20.7
FDIC Premium 1.2 -- 8.5
Software Amortiza-
tion 41.1 32.6 28.3
Goodwill and Other
Intangibles Amorti-
zation 9.9 9.7 7.5
Pension Settlement
Charges -- .5 4.1
Other Expense 35.2 31.2 22.0
- --------------------------------------------
Total Other Operat-
ing Expenses $235.6 $210.9 $182.5
- --------------------------------------------
</TABLE>
Software, goodwill and other intangible assets are included in other assets
in the consolidated balance sheet. Software totaled $145.1 million at December
31, 1997 and $133.8 million at December 31, 1996. Goodwill totaled $96.0 mil-
lion at December 31, 1997 and $66.5 million at December 31, 1996. Other intan-
gibles totaled $48.3 million at December 31, 1997 and $39.4 million at Decem-
ber 31, 1996.
NORTHERN TRUST CORPORATION
--------------------------
56
<PAGE>
18. PENSION AND OTHER EMPLOYEE BENEFITS-- PENSION. A noncontributory qualified
pension plan covers substantially all employees. The plan provides benefits for
normal and early retirement, benefits for vested employees and, under certain
circumstances, survivor benefits in the event of death. Benefits are based on
the employees' years of service and their five highest consecutive years of
compensation. The proportion of average compensation paid as a pension benefit
is determined by length of service. Contributions to the plan satisfy or exceed
the minimum funding requirements of ERISA. Certain retiree death benefits are
funded through the pension and the related cost is included as pension expense.
Assets held by the plan consist primarily of listed stocks and corporate bonds.
Northern Trust also maintains a noncontributory nonqualified pension plan for
participants whose retirement benefit payments under the qualified plan are ex-
pected to exceed the limits imposed by federal tax law. Northern Trust has a
nonqualified trust, referred to as a "Rabbi" Trust, to fund benefits in excess
of those permitted in certain of its qualified plans. The primary purpose of
the trust is to fund nonqualified retirement benefits. This arrangement offers
certain officers a degree of assurance for payment of benefits in excess of
those permitted in the related qualified plans. The assets remain subject to
the claims of creditors and are not the property of the employees. Therefore,
they are accounted for as corporate assets and are included in other assets in
the consolidated balance sheet.
The following tables set forth the status and the net periodic pension cost of
the domestic qualified and nonqualified pension benefit plans for 1997 and
1996. Prior service costs and unrecognized net assets established at January 1,
1986 are being amortized on the straight-line basis over 13.2 years.
PLAN STATUS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Qualified Nonqualified
Plan Plan
- -------------------------------------------------------------
September 30
- -------------------------------------------------------------
($ In Millions) 1997 1996 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial Present Value of
Benefit Obligation:
Vested Benefit Obligation $151.1 $140.1 $ 16.1 $ 12.3
Accumulated Benefit
Obligation 167.5 155.6 17.4 13.2
- -------------------------------------------------------------
Projected Benefit
Obligation for Service
Rendered to Date 219.2 206.1 23.8 19.4
Plan Assets at Fair Value 288.2 229.0 -- --
- -------------------------------------------------------------
Plan Assets In Excess of
(Less Than) Projected
Benefit Obligation 69.0 22.9 (23.8) (19.4)
Unrecognized Net Asset
(Effective January 1,
1986) (2.2) (3.6) (.1) (.1)
Unrecognized Net Loss 17.6 53.6 12.7 8.6
Unrecognized Prior Service
Cost (7.3) (7.9) 2.0 2.4
Valuation Adjustment (.3) (.3) -- --
- -------------------------------------------------------------
Prepaid (Accrued) Pension
Cost at September 30 76.8 64.7 (9.2) (8.5)
Net (Expense) Funding
October to December (1.9) (1.7) (.2) 1.0
Additional Minimum
Liability at December 31 -- -- (7.3) (3.8)
- -------------------------------------------------------------
Prepaid (Accrued) Pension
Cost at December 31 $ 74.9 $ 63.0 $(16.7) $(11.3)
- -------------------------------------------------------------
Assumptions:
Discount Rates 7.25% 7.50% 6.75% 7.00%
Rate of Increase in
Compensation Level 5.90 5.80 5.90 5.80
Expected Long-Term Rate
of Return on Assets 9.00 9.00 N/A N/A
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------
NET PERIODIC PENSION COST
- -----------------------------------------------
Qualified Nonqualified
Plan Plan
- -----------------------------------------------
(In Millions) 1997 1996 1997 1996
- -----------------------------------------------
<S> <C> <C> <C> <C>
Service Cost $10.6 $10.4 $ 1.1 $ 1.1
Interest Cost 15.9 14.9 1.4 1.4
Actual Return on
Plan Assets (56.9) (27.9) -- --
Net Amortization 37.8 10.0 .9 1.0
- -----------------------------------------------
Net Periodic
Pension Cost $ 7.4 $ 7.4 $ 3.4 $ 3.5
- -----------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension expense for 1995 was $8.3 million and $3.8 million for the qualified
and nonqualified plans, respectively. In 1996, the service benefit formula and
survivor annuity provisions were amended and the mortality assumptions were
changed for the qualified and nonqualified plans. The changes reduced total
1996 pension expense by $1.1 million.
Total assets in the "Rabbi" Trust related to the nonqualified pension plan at
December 31, 1997 and 1996 amounted to $14.3 million, and $10.3 million, re-
spectively.
A pension plan is also maintained for the London Branch employees. At December
31, 1997, the fair value of assets and the projected benefit obligation totaled
approximately $13.0 million and $11.0 million, respectively. At December 31,
1996, the fair value of assets and the projected benefit obligation were $7.8
million and $9.1 million, respectively. Pension expense for 1997 and 1996 was
$1.4 million and $1.1 million, respectively.
THRIFT INCENTIVE PLAN. The Corporation and its subsidiaries have a defined con-
tribution Thrift Incentive Plan covering substantially all employees. The cor-
porate contribution is contingent upon the level of employee contribution and
meeting a predefined earnings target for the year. The maximum corporate con-
tribution was equal to 4% of an employee's salary in 1997 and 1996, and 5% in
1995. The estimated contribution to this plan is charged to pension and other
employee benefits and totaled $9.1 million in 1997, $8.0 million in 1996 and
$11.3 million in 1995.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). A leveraged ESOP in which substantially
all employees of Northern Trust are eligible to participate was established in
1989. Under the original terms of the ESOP, the shares were to be allocated
over ten years. In 1996, the terms of the ESOP were amended. The original matu-
rity of the ESOP-related debt was effectively extended by an additional three
years through financing provided by the Corporation and the remaining ESOP
shares are being allocated over the six year period ending December 31, 2001.
The Corporation will make an additional contribution of $5.4 million in cash or
shares of common stock in each of the years 2002 and 2003.
Dividends paid on unallocated shares held in the ESOP Trust are used for debt
service on the ESOP notes. Compensation expense is accounted for based primar-
ily on the amount of cash paid by Northern Trust to the ESOP for principal pay-
ments on the ESOP notes. Of the original 9 million shares in the ESOP Trust,
7,200,370 shares have been allocated as of December 31, 1997. The ESOP shares
not yet allocated to individual accounts are treated as deferred compensation
and accounted for as a reduction of stockholders' equity.
The following table presents information related to the ESOP.
<TABLE>
<CAPTION>
- --------------------------------------------
(In Millions) 1997 1996
- --------------------------------------------
<S> <C> <C>
Total ESOP Compensation Expense $2.6 $2.3
Interest Incurred on ESOP-
Related Debt 1.3 2.0
Amount Contributed to ESOP-
Related Debt 3.4 3.6
Dividends and Interest on Unal-
located ESOP Shares Used for
Debt Service 1.8 1.9
- --------------------------------------------
</TABLE>
OTHER POSTRETIREMENT BENEFITS. Northern Trust maintains an unfunded
postretirement health care plan. Employees retiring under the provisions of The
Northern Trust Pension Plan may be eligible for postretirement health care cov-
erage. These benefits are provided either through an indemnity plan, subject to
deductibles, co-payment provisions and other limitations or through health
maintenance organizations. The provisions may be changed at the discretion of
Northern Trust, which also reserves the right to terminate these benefits at
any time.
The following tables set forth the plan status at December 31 and the net pe-
riodic postretirement benefit cost of the domestic postretirement health care
plan for 1997 and 1996. The transition obligation at January 1, 1993 is being
amortized to expense over a twenty year period.
<TABLE>
<CAPTION>
- ----------------------------------------------
PLAN STATUS
- ------------------------------------------------------
(In Millions) 1997 1996
- ------------------------------------------------------
<S> <C> <C>
Accumulated Postretirement Benefit
Obligation (APBO) Measured at
September 30:
Retirees and Dependents $15.0 $15.9
Actives Eligible for Benefits 4.7 5.3
Actives Not Yet Eligible 8.7 12.1
- ------------------------------------------------------
Total APBO 28.4 33.3
Unamortized Transition Obligation (8.7) (11.3)
Unrecognized Net Loss (3.2) (8.2)
- ------------------------------------------------------
Net Postretirement Benefit Liability $16.5 $13.8
- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
NET PERIODIC POSTRETIREMENT
BENEFIT COST
- --------------------------------------------
(In Millions) 1997 1996
- --------------------------------------------
<S> <C> <C>
Service Cost $ .9 $ 1.3
Interest Cost 2.0 2.6
Net Amortization .6 1.2
- --------------------------------------------
Net Periodic Postretirement
Benefit Cost $ 3.5 $ 5.1
- --------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
58
<PAGE>
Postretirement health care expense for 1995 was $6.2 million. In 1996, the
cost sharing provisions of the plan were amended and resulted in a reduction in
1996 expense of $1.8 million.
For measurement purposes, a 9.0% annual increase in the cost of covered health
care benefits was assumed for 1998. This rate is assumed to decrease gradually
to 5.5% in 2002 and remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care trend rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation for the
postretirement health care plan as of December 31, 1997 by approximately $1.1
million, and the aggregate of the service and interest cost components of the
1997 net periodic postretirement benefit cost by $.1 million. The weighted av-
erage discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% at December 31, 1997 and 7.50% at December 31, 1996.
19. CONTINGENT LIABILITIES--Because of the nature of its activities, Northern
Trust is subject to pending and threatened legal actions that arise in the nor-
mal course of business. In the judgment of management, after consulta- tion
with legal counsel, none of the litigation to which the Corporation or any of
its subsidiaries is a party will have a material effect, either individually or
in the aggregate, on the consolidated financial position or results of opera-
tions.
20. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS--COMMITMENTS AND LETTERS OF CREDIT.
Northern Trust, in the normal course of business, enters into various types of
commitments and issues letters of credit to meet the liquidity and credit
enhancement needs of its clients. Credit risk is the principal risk associated
with these instruments. The contractual amounts of these instruments represent
the credit risk should the instrument be fully drawn upon and the client
default. To control the credit risk associated with entering into commitments
and issuing letters of credit, Northern Trust subjects such activities to the
same credit quality and monitoring controls as its lending activities.
Commitments and letters of credit consist of the following:
LEGALLY BINDING COMMITMENTS TO EXTEND CREDIT generally have fixed expiration
dates or other termination clauses. Since a significant portion of the commit-
ments are expected to expire without being drawn upon, the total commitment
amount does not necessarily represent future loans or liquidity requirements.
PARTICIPATIONS IN BANKERS ACCEPTANCES obligate Northern Trust, in the event of
default by the counterparty, to reimburse the holder of the acceptance an
amount equal to its participation in the acceptance.
COMMERCIAL LETTERS OF CREDIT are instruments issued by Northern Trust on be-
half of its clients that authorize a third party (the beneficiary) to draw
drafts up to a stipulated amount under the specified terms and conditions of
the agreement. Commercial letters of credit are issued primarily to facilitate
international trade.
STANDBY LETTERS OF CREDIT obligate Northern Trust to meet certain financial
obligations of its clients, if, under the contractual terms of the agreement,
the clients are unable to do so. These instruments are primarily issued to sup-
port public and private financial commitments, including commercial paper, bond
financing, initial margin requirements on futures exchanges and similar trans-
actions.
The following table shows the contractual amounts of commitments and letters
of credit.
<TABLE>
<CAPTION>
COMMITMENTS AND LETTERS OF CREDIT
- ------------------------------------------------
<CAPTION>
December 31
- ------------------------------------------------
(In Millions) 1997 1996
- -------------------------------------------------
<S> <C> <C>
Legally Binding Com-
mitments to Extend
Credit $11,946.6 $10,299.3
Participations in
Bankers Acceptances 7.8 20.6
Commercial Letters of
Credit 98.6 117.8
Standby Letters of
Credit:
Corporate $ 401.9 $ 378.4
Industrial Revenue 843.0 724.5
Other 298.3 214.3
- ------------------------------------------------
Total Standby Letters
of Credit* $ 1,543.2 $ 1,317.2
- ------------------------------------------------
</TABLE>
*These amounts include $199.1 million and $165.3 million of standby letters of
credit secured by cash deposits or participated to others as of December 31,
1997 and 1996, respectively. The weighted average maturity of standby letters
of credit was 24 months at December 31, 1997 and 28 months at December 31,
1996.
RISK MANAGEMENT INSTRUMENTS. These instruments include foreign exchange con-
tracts, foreign currency futures contracts, and various interest risk manage-
ment instruments.
Northern Trust is a party to various risk management instruments that are used
in the normal course of business to meet the risk management needs of its cli-
ents; as part of its trading activity for its own account; and as part of its
asset/liability management activities. The major risk associated with these in-
struments is that interest or foreign exchange rates could change in an unan-
ticipated manner, resulting in higher interest costs or a loss in the under-
lying value of the instrument. These risks are mitigated by establishing limits
for risk management positions, monitoring the level of actual positions taken
against such established limits, monitoring the level of any interest rate sen-
sitivity gaps created by such positions, and by using hedging techniques. When
establishing position limits, market liquidity and volatility, as well as expe-
rience in each market, are all taken into account.
NORTHERN TRUST CORPORATION
--------------------------
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated credit risk associated with these instruments relates to the
failure of the counterparty to pay based on the contractual terms of the agree-
ment, and is generally limited to the gross unrealized market value gains on
these instruments. The amount of credit risk will increase or decrease during
the lives of the instruments as interest and foreign exchange rates fluctuate.
This risk is controlled by limiting such activity to an approved list of
counterparties and by subjecting such activity to the same credit and quality
controls as are followed in lending and investment activities.
Risk management instruments include:
FOREIGN EXCHANGE CONTRACTS are agreements to exchange specific amounts of cur-
rencies at a future date, at a specified rate of exchange. Foreign exchange
contracts are entered into primarily to meet the foreign exchange risk manage-
ment needs of clients. Foreign exchange contracts are also used for trading
purposes and asset/liability management.
FOREIGN CURRENCY AND INTEREST RATE FUTURES CONTRACTS are agreements for de-
layed delivery of foreign currency, securities or money market instruments in
which the buyer agrees to take delivery at a specified future date of a speci-
fied currency, security, or instrument, at a specified price or yield. All of
Northern Trust's futures contracts are traded on organized exchanges that re-
quire the daily settlement of changes in the value of the contracts. Futures
contracts are utilized in trading activities and asset/liability management to
limit Northern Trust's exposure to unfavorable fluctuations in foreign exchange
rates or interest rates.
INTEREST RATE PROTECTION CONTRACTS are agreements which enable clients to
transfer, modify or reduce their interest rate risk. As a seller of interest
rate protection, Northern Trust receives a fee at the outset of the agreement
and then assumes the risk of an unfavorable change in interest rates. Northern
Trust also purchases interest rate protection contracts for asset/liability
management.
INTEREST RATE SWAP CONTRACTS involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal
amounts; these types of transactions constitute the majority of the interest
rate swap portfolio. Northern Trust has also entered into a limited number of
more complex interest rate swap transactions that were executed concurrently
with the purchase of $24 million of structured agency notes. The structured
notes are included in the available for sale portion of the securities portfo-
lio. The interest rate swap contracts are used to hedge the nonstandard fea-
tures of the structured notes thereby converting them to U.S. dollar denomi-
nated floating rate notes indexed to LIBOR.
FORWARD SALE CONTRACTS represent commitments to sell a specified amount of se-
curities at an agreed upon date and price. Northern Trust utilizes forward sale
contracts principally in connection with its sale of mortgage loans.
EXCHANGE-TRADED OPTION CONTRACTS grant the buyer the right, but not the obli-
gation, to purchase or sell at a specified price, a stated number of units of
an underlying financial instrument, at a future date.
The following table shows the contractual/notional amounts of risk management
instruments. The notional amounts of risk management instruments do not repre-
sent credit risk, and are not recorded in the consolidated balance sheet. They
are used merely to express the volume of this activity.
<TABLE>
<CAPTION>
RISK MANAGEMENT INSTRUMENTS
- ------------------------------------------------------------
Contractual/Notional
Amounts
December 31
- ------------------------------------------------------------
(In Millions) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Asset/Liability Management:
Foreign Exchange Contracts $ 155.8 $ 46.0
Foreign Currency Futures Contracts 4.0 3.3
Interest Rate Futures
Contracts Sold -- 101.7
Interest Rate
Protection Contracts Purchased 85.0 25.0
Interest Rate Swap Contracts 2,812.7 2,571.4
Forward Sale Contracts 50.9 11.3
Exchange-Traded Option
Contracts Purchased -- 2.8
Client-Related and Trading:
Foreign Exchange Contracts 16,193.1 13,420.7
Interest Rate Futures
Contracts Sold 10.0 15.0
Interest Rate Protection
Contracts--Purchased 13.8 34.0
--Sold 24.9 43.2
Interest Rate Swap Contracts 63.5 328.9
- ------------------------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
60
<PAGE>
RISK MANAGEMENT INSTRUMENTS USED FOR ASSET/LIABILITY MANAGEMENT. Northern Trust
utilizes various types of risk management instruments, primarily interest rate
swaps, as tools for managing interest rate and option risk related to its own
balance sheet. The following table summarizes the expected maturities and
weighted average interest rates to be paid and received on the asset/liability
management swap portfolio at December 31, 1997. A key assumption in the
preparation of the table is that floating rates remain constant at December 31,
1997 levels.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
REMAINING MATURITY OF ASSET/LIABILITY MANAGEMENT INTEREST RATE SWAPS
- -------------------------------------------------------------------------------
($ In Millions) 1998 1999 2000 2001 2002 2003-2007 Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PAY FIXED
Notional Amount $190.1 186.5 230.0 222.4 303.3 620.9 $1,753.2
Average Pay Rate 5.41% 6.56 6.37 6.89 5.84 6.80 6.41%
Average Receive Rate 5.91 5.87 5.91 5.84 5.16 5.83 5.74
- -------------------------------------------------------------------------------
RECEIVE FIXED
Notional Amount $400.0 -- 15.0 -- -- 100.0 $ 515.0
Average Pay Rate 5.79% -- 5.72 -- -- 5.75 5.78%
Average Receive Rate 5.96 -- 5.99 -- -- 6.31 6.03
- -------------------------------------------------------------------------------
PAY AND RECEIVE VARIABLE
(BASIS SWAPS)
Notional Amount $544.5 -- -- -- -- -- $ 544.5
Average Pay Rate 5.56% -- -- -- -- -- 5.56%
Average Receive Rate 5.70 -- -- -- -- -- 5.70
- -------------------------------------------------------------------------------
</TABLE>
Some of the principal uses of risk management instruments, together with the
notional amounts outstanding, are described as follows:
CONVERT YIELDS ON SECURITIES TO AN EFFECTIVE LIBOR RATE. At December 31,
1997, interest rate swaps with a notional amount of $338 million were used to
convert fixed and floating rate interest payments on securities (classified as
available for sale) to floating rate payments indexed to LIBOR. Swaps with a
notional amount of $174 million were combined with fixed rate securities, $140
million were combined with floating rate securities indexed to Treasury Bill
rates, and $24 million were combined with structured notes, whose non-standard
features were hedged. The swaps were executed simultaneously with the purchase
of the notes. The securities were converted to an effective LIBOR rate to
match LIBOR-based funding costs.
REDUCE INTEREST RATE RISK FROM FIXED RATE LOANS FUNDED WITH VARIABLE RATE LI-
ABILITIES. Northern Trust paid a fixed rate and received a floating rate on
interest rate swaps with a notional amount of $1.5 billion at December 31,
1997 to hedge the interest rate risk from fixed rate loans. For accounting
purposes these swaps were designated to either convert the fixed rate on the
loan to an effective floating rate or to convert floating rate funding to a
fixed rate. Interest rate floors with a notional amount of $85 million at De-
cember 31, 1997 were used to hedge mortgage loan prepayment risk.
SWAPS COMBINED WITH LIABILITIES TO OBTAIN FAVORABLE FUNDING COSTS. Interest
rate swaps with a notional amount of $980 million at December 31, 1997 were
used in conjunction with the issuance of senior notes and subordinated notes
to obtain desired funding characteristics. Of these swaps, $500 million con-
verted fixed rate notes to floating rate funding indexed to LIBOR, $380 mil-
lion converted floating rate notes to a different floating rate index, and
$100 million converted a floating rate note to a fixed rate. The use of swaps
in combination with notes permitted Northern Trust to issue notes with rate
and maturity features that were most desired by investors while converting the
rate characteristics to meet its needs.
HEDGING FOREIGN CURRENCY RISK. Forward foreign exchange contracts and foreign
currency futures contracts were used to reduce exposure to fluctuations in the
dollar value of capital investments in foreign subsidiaries and from foreign
currency assets and obligations. The notional amounts of these contracts at
year-end 1997 were $155.8 million of forward foreign exchange contracts and
$4.0 million of short sales of foreign currency futures contracts.
HEDGING MORTGAGES HELD FOR SALE. Northern Trust hedges the market risk of its
portfolio of fixed rate commitments and mortgages held for sale with a combi-
nation of derivative financial instruments. At December 31, 1997 the portfolio
was hedged with $50.9 million of forward sales of mortgage-backed securities.
No deferred gains or losses related to interest risk management instruments
used for asset/liability management were included in the consolidated balance
sheet at year-end 1997 or 1996.
CLIENT AND TRADING-RELATED INTEREST RISK MANAGEMENT INSTRUMENTS. Net revenue
associated with client and trading-related interest risk management activities
totaled $.3 million, $.3 million, and $2.8 million during 1997, 1996, and
1995, respectively. The majority of these revenues are related to interest
rate swaps, futures contracts, and interest rate protection agreements, and
are reported as trading income in the consolidated statement of income.
NORTHERN TRUST CORPORATION
--------------------------
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
However, the amount reported for 1995 also included interest income earned on
U.S. Government securities that were classified as trading account securities
and hedged with futures contracts.
OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. As part of securities custody
activities and at the direction of trust clients, Northern Trust lends securi-
ties owned by clients to borrowers who are reviewed by the Credit Policy Credit
Approval Committee. In connection with these activities, Northern Trust has is-
sued certain indemnifications against loss resulting from the bankruptcy of the
borrower of securities. The borrowing party is required to fully collateralize
securities received with cash, marketable securities, or irrevocable standby
letters of credit. As securities are loaned, collateral is maintained at a min-
imum of 100 percent of the fair value of the securities plus accrued interest,
with revaluation of the collateral on a daily basis. The amount of securities
loaned as of December 31, 1997 and 1996 subject to indemnification was $29.5
billion and $15.7 billion, respectively. Because of the requirement to fully
collateralize securities borrowed, management believes that the exposure to
credit loss from this activity is remote.
The Bank is a participating member of various cash and securities clearing or-
ganizations. It participates in these organizations on behalf of its clients
and on behalf of itself as a result of its own investment and trading activi-
ties. A wide variety of securities transactions are settled through these orga-
nizations, including those involving obligations of states and political subdi-
visions, asset-backed securities, commercial paper, Eurodollars and securities
issued by the Government National Mortgage Association.
As a result of its participation in cash and securities clearing organiza-
tions, the Bank could be responsible for a pro rata share of certain credit-re-
lated losses arising out of the clearing activities. The method in which such
losses would be shared by the clearing members is stipulated in each clearing
organization's membership agreement. Credit exposure related to these agree-
ments varies from day to day, primarily as a result of fluctuations in the vol-
ume of transactions cleared through the organizations. The estimated credit ex-
posure at December 31, 1997 and 1996 was $73 million and $70 million, respec-
tively, based on the clearing volume for those days. Controls related to these
clearing transactions are closely monitored to protect the assets of Northern
Trust.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS--SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the estimated fair
value of certain financial instruments. Considerable judgment is required to
interpret market data when computing estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amounts Northern
Trust could have realized in a market exchange.
The information provided below should not be interpreted as an estimate of the
fair value of Northern Trust since the disclosures, in accordance with SFAS No.
107, exclude the values of nonfinancial assets and liabilities, as well as a
wide range of franchise, relationship, and intangible values, which are inte-
gral to a full assessment of the consolidated financial position.
The use of different assumptions and/or estimation methods may have a material
effect on the computation of estimated fair values. Therefore, comparisons be-
tween Northern Trust's disclosures and those of other financial institutions
may not be meaningful.
The following methods and assumptions were used in estimating the fair values
of the financial instruments:
SECURITIES. Fair values of securities were based on quoted market values, when
available. If quoted market values were not available, fair values were based
on quoted market values for comparable instruments.
LOANS (NOT INCLUDING LEASE FINANCING RECEIVABLES). The fair values of one-to-
four family residential mortgages were based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for dif-
ferences in loan characteristics. The fair values of the remainder of the loan
portfolio were estimated using a discounted cash flow method in which the dis-
count rate used was the rate at which Northern Trust would have originated the
loan had it been originated as of the financial statement date, giving effect
to current economic conditions on loan collectibility.
SAVINGS CERTIFICATES, OTHER TIME AND FOREIGN OFFICES TIME DEPOSITS. The fair
values of these instruments were estimated using a discounted cash flow method
that incorporated market interest rates.
SENIOR NOTES, LONG-TERM DEBT, AND FLOATING RATE CAPITAL SECURITIES. Fair val-
ues were based on quoted market prices, when available. If quoted market prices
were not available, fair values were based on quoted market prices for compara-
ble instruments.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The fair values of commitments and
letters of credit represent the amount of unamortized fees on these instru-
ments. The fair values of all other off-balance sheet financial instruments
were estimated using market prices, pricing models, or quoted market prices of
financial instruments with similar characteristics.
FINANCIAL INSTRUMENTS VALUED AT CARRYING VALUE. Due to their short maturity,
the respective carrying values of certain on-balance sheet financial instru-
ments approximated their fair values. These financial instruments include cash
and due from banks; money market assets; customers' acceptance liability; trust
security settlement receivables; federal funds purchased; securities sold under
agreements to repurchase; commercial paper; other borrowings; and liability on
acceptances.
The fair values required to be disclosed for demand, savings, and money market
deposits pursuant to SFAS No. 107 must equal the amounts disclosed in the con-
solidated balance sheet.
NORTHERN TRUST CORPORATION
--------------------------
62
<PAGE>
- --------------------------------------------------------------------------------
Fair Values of On-Balance Sheet Financial Instruments. The following table
summarizes the fair values of on-balance sheet financial instruments.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and Due From Banks $ 1,738.9 $ 1,738.9 $ 1,292.5 $ 1,292.5
Money Market Assets 5,309.4 5,309.4 3,196.9 3,196.9
Securities:
Available for Sale 3,733.3 3,733.3 4,311.7 4,311.7
Held to Maturity 456.1 473.4 498.4 518.9
Trading Account 8.8 8.8 4.8 4.8
Loans (excluding leases), net of credit
loss reserve:
Held to Maturity 12,053.9 12,114.9 10,517.6 10,507.6
Held for Sale 39.7 40.0 3.7 3.7
Acceptance Liability 31.4 31.4 44.7 44.7
Trust Security Settlement Receivables 291.4 291.4 362.3 362.3
Liabilities
Deposits:
Demand, Savings and Money Market 8,240.0 8,240.0 7,767.5 7,767.5
Savings Certificates, Other Time and
Foreign Offices Time 8,120.0 8,138.1 6,028.7 6,047.9
Federal Funds Purchased 821.2 821.2 653.0 653.0
Repurchase Agreements 1,139.7 1,139.7 966.1 966.1
Commercial Paper 146.8 146.8 149.0 149.0
Other Borrowings 2,876.6 2,876.6 3,142.1 3,142.1
Senior Notes 785.0 784.9 305.0 304.7
Long-Term Debt 439.5 450.4 427.8 432.2
Floating Rate Capital Securities 267.4 267.7 -- --
Liabilities on Acceptances 31.4 31.4 44.7 44.7
- -------------------------------------------------------------------------------------------------------
</TABLE>
FAIR VALUES OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The following tables
summarize the fair values of off-balance sheet financial instruments.
<TABLE>
<CAPTION>
- -------------------------------------------
December 31
- -------------------------------------------
1997 1996
- -------------------------------------------
Book Fair Book Fair
(In Millions) Value Value Value Value
- -------------------------------------------
<S> <C> <C> <C> <C>
Commitments and
Letters of Cred-
it:
Loan Commit-
ments $ 2.1 $ 2.1 $ 2.1 $ 2.1
Letters of
Credit 1.0 1.0 .7 .7
Asset/Liability
Management:
Foreign Ex-
change
Contracts
Assets 1.9 1.9 2.9 2.9
Liabilities 1.7 1.7 -- --
Interest Rate
Swap Contracts
Assets 13.1 15.1 14.8 19.2
Liabilities 8.2 39.9 5.8 23.5
Other Financial
Instruments
Assets .3 .4 .1 .1
Liabilities .4 .4 -- --
- -------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------
Fair Value
- ----------------------------------------------
(In Millions) 1997 1996
- ----------------------------------------------
<S> <C> <C>
Client-Related and Trading:*
Foreign Exchange Contracts
Assets $215.9 $142.0
Liabilities 214.7 142.0
Interest Rate Swap Contracts
Assets .7 7.6
Liabilities .6 7.5
Interest Rate Protection
Contracts
Assets -- .1
Liabilities -- .1
- ----------------------------------------------
</TABLE>
*Assets and liabilities associated with foreign exchange contracts averaged
$249.1 million and $249.9 million, respectively, during 1997. Assets and lia-
bilities associated with other client-related and trading account instruments
averaged $4.5 million and $4.3 million, respectively, during 1997.
22. CONCENTRATIONS OF CREDIT RISK--The information in the section titled Loans
and Other Extensions of Credit found on pages 32 through 33 is incorporated by
reference.
23. PLEDGED AND RESTRICTED ASSETS--Certain of Northern Trust's subsidiaries, as
required or permitted by law, pledge assets to secure public and trust depos-
its, repurchase agreements and for other purposes. On December 31, 1997, secu-
rities and loans totaling $6.2 billion ($3.2 billion of U.S. Government and
agency securities, $400 million of obligations of states and political subdivi-
sions and $2.6 billion of loans and other securities), were pledged. Collateral
required for these purposes totaled $4.5 billion. Deposits maintained
NORTHERN TRUST CORPORATION
--------------------------
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at the Federal Reserve Bank to meet reserve requirements averaged $259.6
million in 1997 and $247.8 million in 1996.
24. STOCK-BASED COMPENSATION PLANS--Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," establishes financial ac-
counting and reporting standards for stock-based compensation plans.
SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based
method, or (2) an intrinsic-value-based method which is prescribed by Account-
ing Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and related interpretations. Both the accounting and disclosure re-
quirements of SFAS No. 123 were effective in 1996. Northern Trust has elected
to continue accounting for its stock-based incentive plans and awards under APB
25, and has adopted the disclosure requirements of SFAS No. 123.
A description of Northern Trust's stock-based compensation is presented below.
AMENDED INCENTIVE STOCK PLAN--AMENDED 1992 INCENTIVE STOCK PLAN (PLANS). The
Amended Incentive Stock Plan was superseded by the Amended 1992 Incentive Stock
Plan and terminated on December 31, 1994. Outstanding grants and awards under
the Amended Incentive Stock Plan will remain in effect in accordance with their
terms, but no further grants or awards will be made.
The Amended 1992 Incentive Stock Plan (Plan) was adopted in 1992 and has been
amended on several occasions. The Plan is administered by the Compensation and
Benefits Committee (Committee) of the Board of Directors. Non-employee direc-
tors and key officers of the Corporation or its subsidiaries are eligible to
receive awards under the Plan. Awards under the Plan may be granted in any one
or a combination of (a) incentive stock options and non-qualified stock op-
tions, (b) stock appreciation rights, (c) stock awards, (d) performance shares,
and (e) stock equivalents.
The total number of shares of the Corporation's common stock authorized for
distribution under the Plan is 16,000,000. As of December 31, 1997, shares
available for future grants under the Plan totaled 7,334,438.
STOCK OPTIONS. Stock options consist of options to purchase common stock at
purchase prices not less than 100% of the fair market value thereof on the date
the option is granted. Options have a maximum 10 year life and will vest and
become exercisable in 2 years after the date of grant. In addition, the Plan
provides that all options may become exercisable upon a change of control as
defined in the Plan. All options terminate at such time as determined by the
Committee and as provided in the terms and conditions of the respective option
grants.
A summary of the status of stock options under the Plans at December 31, 1997,
1996 and 1995 and changes during the years then ended is presented in the table
below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding,
January 1 7,494,612 $19.96 7,468,946 $16.52 7,574,804 $14.05
Granted ($56.63 to
$59.94 per share) 1,178,500 56.63 1,315,700 33.16 1,259,600 23.41
Exercised ($6.96 to
$23.50 per share) (1,214,310) 14.00 (1,242,034) 13.18 (1,280,458) 8.45
Cancelled (14,400) 27.67 (48,000) 21.77 (85,000) 19.97
- ------------------------------------------------------------------------------------------
Options Outstanding De-
cember 31 ($6.96 to
$59.94 per share) 7,444,402 $26.72 7,494,612 $19.96 7,468,946 $16.52
- ------------------------------------------------------------------------------------------
Options Exercisable, De-
cember 31 4,958,202 $17.92 4,961,312 $15.62 5,120,346 $14.34
- ------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of outstanding and exercisable options under the
Plans at December 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Options Outstanding
- -------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
$6.96 to $15.50 per share 1,504,650* 2.5 Years $11.38
$18.63 to $23.50 per share 3,453,552* 6.5 Years 20.77
$26.78 to $59.94 per share 2,486,200 9.2 Years 44.28
- -------------------------------------------------------------------
</TABLE>
*Exercisable
NORTHERN TRUST CORPORATION
--------------------------
64
<PAGE>
STOCK AWARDS. Under the Plans, stock awards or equivalents can be awarded by
the Committee to participants which entitle them to receive a payment in cash
or Northern Trust Corporation common stock based on such terms and conditions
as the Committee deems appropriate.
Total expense applicable to stock awards was $.9 million in 1997, $.5 million
in 1996 and $.4 million in 1995. In 1997 and 1996, 49,750 shares and 12,000
shares, respectively, of restricted stock were awarded with a weighted average
grant-date fair value of $56.63 and $26.78, respectively. No shares were
awarded in 1995. As of December 31, 1997 restricted stock awards outstanding
totaled 162,250 shares. These shares vest, subject to continuing employment,
over a period of five to nine years.
PERFORMANCE SHARES. Under the performance share provisions of the Plans, par-
ticipants will be entitled to have each award credited to an account main-
tained for them if established performance goals are achieved with distribu-
tion after vesting. The value of shares earned but not yet distributed under
the Plan is credited to performance share accounts and is shown in stockhold-
ers' equity as common stock issuable-performance plan.
Total salary expense for performance shares was $20.5 million in 1997, $9.7
million in 1996 and $5.6 million in 1995. In 1997, 1996 and 1995, 312,000
shares, 331,000 shares and 306,500 shares, respectively, were granted with a
weighted average grant-date fair value of $44.25, $26.88 and $17.00, respec-
tively. As of December 31, 1997, 436,778 shares of stock had been credited to
performance share accounts subject to meeting vesting conditions and 1,006,944
shares had been granted, subject to meeting established performance goals and
vesting conditions, for three-year performance periods ending in 1997 through
1999.
DIRECTOR STOCK PLAN. Each non-employee director of the Corporation received or
will receive a grant of 500 shares of common stock on the date of each annual
meeting of stockholders in the years 1997, 1998 and 1999 under the Northern
Trust Corporation 1997 Stock Plan for Non-Employee Directors adopted in Febru-
ary 1997.
OTHER STOCK-BASED COMPENSATION ARRANGEMENTS. The Corporation, in conjunction
with an acquisition, awarded 432,280 restricted shares of the Corporation's
common stock with a grant-date fair value of $23.75 to certain subsidiary em-
ployee participants contingent upon continued employment, non-competition
agreements and, in some cases, meeting predetermined performance goals.
Total salary expense related to this arrangement totaled $2.9 million in
1997, $1.8 million in 1996 and $.3 million in 1995.
PRO FORMA INFORMATION. Pro forma information regarding net income and earnings
per share is required by SFAS No. 123, and has been determined as if the Cor-
poration had accounted for its stock-based compensation under SFAS No. 123.
For purposes of estimating the fair value of the Corporation's employee stock
options at the grant-date, a Black-Scholes option pricing model was used with
the following weighted average assumptions for 1997, 1996 and 1995, respec-
tively: risk-free interest rates of 6.10%, 6.64% and 6.54%; dividend yields of
1.30%, 1.92% and 2.21%; volatility factors of the expected market price of the
Corporation's common stock of 20.9%, 22.4% and 19.2%; and a weighted average
expected life of the option of 6.0 years, 5.8 years and 5.8 years. The
weighted average fair value of options granted in 1997, 1996 and 1995 was
$17.20, $9.11 and $6.58, respectively. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the op-
tions' two year vesting period. Under SFAS No. 123, options and awards granted
prior to 1995 are not required to be included in the pro forma information.
Because the SFAS No. 123 method of accounting has not been applied to options
and other stock-based compensation granted prior to January 1, 1995, the re-
sulting pro forma compensation cost may not be representative of that to be
expected in future years. The Corporation's pro forma information follows:
<TABLE>
<CAPTION>
- ----------------------------------------------
(In Millions Except
Per Share
Information) 1997 1996 1995
- ----------------------------------------------
<S> <C> <C> <C>
Net Income as Re-
ported $309.4 $258.8 $220.0
Pro Forma Adjust-
ments Increase
(Decrease) Due To:
Stock Options (9.2) (4.8) (1.0)
Performance Shares
and Other
Arrangements 8.1 1.4 .4
- ----------------------------------------------
Pro Forma Net Income $308.3 $255.4 $219.4
- ----------------------------------------------
Earnings Per Share
as Reported:
Basic $ 2.74 $ 2.27 $ 1.91
Diluted 2.66 2.21 1.86
Pro Forma Earnings
Per Share:
Basic $ 2.73 $ 2.24 $ 1.90
Diluted 2.64 2.18 1.86
- ----------------------------------------------
</TABLE>
25. CASH-BASED COMPENSATION PLANS--Various incentive plans provide for cash
incentives and bonuses to selected employees based upon accomplishment of cor-
porate net income objectives, business unit goals and individual performance.
The plans provide for acceleration of benefits in certain circumstances in-
cluding a change in control. The estimated contributions to these plans are
charged to salary expense and totaled $68.0 million in 1997, $45.3 million in
1996 and $35.7 million in 1995.
26. INTERNATIONAL OPERATIONS (BASED ON OBLIGOR'S DOMICILE)--Northern Trust's
international activities are centered in the commercial banking, capital mar-
kets and global custody businesses of the Bank, three overseas branches, one
Edge Act subsidiary, the Hong Kong subsidiaries, NTGA, and Northern Trust of
Florida. Total assets
NORTHERN TRUST CORPORATION
--------------------------
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employed in international operations were $3.3 billion on December 31, 1997,
$2.8 billion on December 31, 1996 and $2.3 billion on December 31, 1995. Of
these assets, $1.7 billion on December 31, 1997, $1.3 billion on December 31,
1996 and $1.1 billion on December 31, 1995 were employed in Europe.
Net income from international operations includes the direct net income con-
tributions of foreign branches, foreign subsidiaries and the Edge Act subsidi-
ary. The Bank and Northern Trust of Florida international profit contributions
reflect direct salary and other expenses of the business units, plus expense
allocations for interest, occupancy, overhead and the provision for credit
losses. The interest expense is allocated to international operations based on
specifically matched or pooled funding. Allocations of indirect noninterest
expenses related to international activities are not significant but, when
made, are based on various methods such as time, space and number of employ-
ees.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
GEOGRAPHIC DISTRIBUTION OF SELECTED ASSETS
- -----------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------
Time Time Time
Deposits Customers' Deposits Customers' Deposits Customers'
with Acceptance with Acceptance with Acceptance
(In Millions) Banks Loans Liability Banks Loans Liability Banks Loans Liability
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Europe $1,392.4 $ 92.2 $ -- $1,047.2 $ 97.1 $-- $ 849.6 $ 70.0 $ --
North America 454.4 85.6 -- 692.7 100.7 -- 323.6 123.4 --
Latin America -- 280.4* 1.5 -- 176.7* .2 236.7 170.7* 1.8
Asia-Pacific 436.3 12.0 .2 319.9 7.5 .3 158.1 40.1 .6
- -----------------------------------------------------------------------------------------------------
Total $2,283.1 $470.2 $1.7 $2,059.8 $382.0 $.5 $1,568.0 $404.2 $2.4
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Includes loans guaranteed by the Export-Import Bank of $148.0 million in
1997, $122.2 million in 1996 and $116.5 million in 1995.
The majority of the remaining loans are trade-related.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
GEOGRAPHIC DISTRIBUTION OF OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
Gross Income Gross Income Gross Income
Operating Before Net Operating Before Net Operating Before Net
(In Millions) Income Taxes Income Income Taxes Income Income Taxes Income
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Europe $146.4 $30.7 $19.1 $ 73.5 $15.9 $ 9.9 $ 67.0 $14.9 $ 9.2
North America 258.7 26.3 16.4 187.1 19.7 12.2 113.8 15.4 9.5
Latin America 69.1 7.1 4.5 35.7 4.6 2.9 39.9 5.1 3.2
Asia-Pacific 123.1 22.7 14.1 97.5 15.7 9.8 105.8 20.3 12.6
- -----------------------------------------------------------------------------------------
Total $597.3 $86.8 $54.1 $393.8 $55.9 $34.8 $326.5 $55.7 $34.5
- -----------------------------------------------------------------------------------------
</TABLE>
The table summarizes international performance based on the domicile of the
primary obligor without regard to guarantors or the location of collateral.
27. ACQUISITIONS--On March 31, 1995, the Corporation completed the acquisition
of Beach One Financial Services, Inc., parent company of The Beach Bank of
Vero Beach, Florida. The acquisition was effected through a merger in which
the Corporation issued 3,245,136 shares (adjusted for the two-for-one stock
split payable to stockholders of record at December 2, 1996) of its common
stock totaling $56.2 million. The Corporation accounted for the transaction as
pooling-of-interests. Prior period consolidated financial statements were not
restated due to the immateriality of the transaction.
On July 31, 1995, the Corporation completed the acquisition of Tanglewood
Bancshares, Inc., parent company of Tanglewood Bank N.A. of Houston, Texas for
$32.5 million in cash. The transaction was recorded under the purchase method
of accounting. Included in the acquisition cost were $14.4 million of goodwill
and $5.8 million of other intangibles, which are being amortized over fifteen
and ten years, respectively.
On October 31, 1995, the Corporation completed the acquisition of RCB Inter-
national Inc. (RCB), an international provider of institutional investment
management services. RCB shareholders received at closing $11.0 million in
cash, $.6 million in notes and 784,862 shares (adjusted for two-for-one split)
of Corporation common stock. The transaction was recorded under the purchase
method of accounting. In addition, 432,280 shares (adjusted for two-for-one
stock split) of Corporation common stock and $2.6 million in cash were allo-
cated for various deferred compensation plans and other deferred payment ar-
rangements. Shares and cash available under these deferred payment arrange-
ments are payable over one to seven years and are contingent upon continued
employment, non-competition agreements and, in some cases, meeting predeter-
mined performance goals. Included in the
--
NORTHERN TRUST CORPORATION
--------------------------
66
<PAGE>
acquisition cost of RCB were $18.8 million of goodwill and $8.0 million of other
intangibles, both of which are being amortized over a fifteen year period. In
August 1996, RCB's name was changed to Northern Trust Global Advisors, Inc.
On November 15, 1996, the Corporation completed the acquisition of Metroplex
Bancshares, Inc., parent company of Bent Tree National Bank (Bent Tree) in Dal-
las, Texas for $14.6 million in cash. The transaction was recorded under the
purchase method of accounting. Included in the acquisition cost were $6.0 mil-
lion of goodwill and $2.1 million of other intangibles, which are being amor-
tized over fifteen and ten years, respectively. Bent Tree was merged into
Northern Trust Bank of Texas N.A. during the first quarter of 1997.
On December 31, 1997, the Corporation completed the acquisition of ANB Invest-
ment Management and Trust Company (ANB IMC) from First Chicago NBD Corporation
for $53 million in cash. The transaction was recorded under the purchase method
of accounting. Included in the acquisition cost were $36.0 million of goodwill
and $10.0 million of other intangibles which will be amortized over 15 and 10
years, respectively. ANB IMC, whose name has been changed to Northern Trust
Quantitative Advisors, Inc., is a leading manager of index funds with approxi-
mately $30 billion of assets under management at December 31, 1997.
28. REGULATORY CAPITAL REQUIREMENTS--Northern Trust and its subsidiary banks
are subject to various regulatory capital requirements administered by the fed-
eral bank regulatory authorities. Under these requirements, banks must maintain
specific ratios of total and tier I capital to risk-weighted assets and of tier
I capital to average assets in order to be classified as "well capitalized."
The regulatory capital requirements impose certain restrictions upon banks that
meet minimum capital requirements but are not "well capitalized" and obligate
the federal bank regulatory authorities to take "prompt corrective action" with
respect to banks that do not maintain such minimum ratios. Such prompt correc-
tive action could have a direct material effect on a bank's financial state-
ments.
As of December 31, 1997, each of Northern's subsidiary banks had capital ra-
tios above the level required for classification as a "well capitalized" insti-
tution and had not received any regulatory notification of a lower classifica-
tion. There are no conditions or events since that date that management be-
lieves have adversely affected the capital categorization of any subsidiary
bank for these purposes. The following table summarizes the risk-based capital
amounts and ratios for Northern Trust and for each of its subsidiary banks
whose net income for 1997 exceeded 10% of the consolidated total.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Minimum to
Qualify as
Well
Actual Capitalized
- ----------------------------------------------------------------------------------
($ In Millions) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Capital to Risk-Weighted Assets
Consolidated $2,345 12.8% $1,834 10.0%
The Northern Trust Company 1,687 10.9 1,549 10.0
Northern Trust Bank of Florida N.A. 191 11.1 173 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 1,762 9.6 1,101 6.0
The Northern Trust Company 1,269 8.2 929 6.0
Northern Trust Bank of Florida N.A. 174 10.1 104 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 1,762 6.9 1,282 5.0
The Northern Trust Company 1,269 5.7 1,104 5.0
Northern Trust Bank of Florida N.A. 174 7.3 119 5.0
As of December 31, 1996:
Total Capital to Risk-Weighted Assets
Consolidated $1,944 11.9% $1,638 10.0%
The Northern Trust Company 1,512 10.8 1,399 10.0
Northern Trust Bank of Florida N.A. 170 11.1 153 10.0
Tier 1 Capital to Risk-Weighted Assets
Consolidated 1,341 8.2 983 6.0
The Northern Trust Company 1,091 7.8 839 6.0
Northern Trust Bank of Florida N.A. 154 10.0 92 6.0
Tier 1 Capital (to Fourth Quarter Average Assets)
Consolidated 1,341 6.4 1,045 5.0
The Northern Trust Company 1,091 6.1 888 5.0
Northern Trust Bank of Florida N.A. 154 7.4 104 5.0
- ----------------------------------------------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29. NORTHERN TRUST CORPORATION (CORPORATION ONLY)--Condensed financial infor-
mation is presented below. Investments in wholly-owned subsidiaries are carried
on the equity method of accounting.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
CONDENSED BALANCE SHEET
- ------------------------------------------------------------
December 31
- ------------------------------------------------------------
(In Millions) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on Deposit with Subsidiary Bank $ .6 $ --
Time Deposits with International Banks 279.4 101.0
Securities 139.8 149.6
Investments in Wholly-Owned
Subsidiaries--Bank Subsidiaries 1,633.1 1,415.3
--Nonbank Subsidiaries 92.4 44.1
Loans--Nonbank Subsidiaries 8.3 16.2
--Other 1.4 27.6
Buildings and Equipment 7.6 7.8
Other Assets 180.1 96.1
- ------------------------------------------------------------
Total Assets $2,342.7 $1,857.7
- ------------------------------------------------------------
LIABILITIES
Commercial Paper $ 146.8 $ 149.0
Long-Term Debt 383.5 116.6
Other Liabilities 73.4 48.0
- ------------------------------------------------------------
Total Liabilities 603.7 313.6
STOCKHOLDERS' EQUITY 1,739.0 1,544.1
- ------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $2,342.7 $1,857.7
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
- ------------------------------------------------------------------
For the Year Ended
December 31
(In Millions) 1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income
Dividends-Bank Subsidiaries $ 85.5 $113.9 $134.3
-Nonbank Subsidiaries 5.6 1.6 1.6
Intercompany Interest and Other Charges 20.0 10.2 11.4
Interest and Other Income 7.2 8.0 11.3
- ------------------------------------------------------------------
Total Operating Income 118.3 133.7 158.6
- ------------------------------------------------------------------
Operating Expenses
Interest Expense 33.3 18.9 20.6
Other Operating Expenses 13.1 6.9 7.2
- ------------------------------------------------------------------
Total Operating Expenses 46.4 25.8 27.8
- ------------------------------------------------------------------
Income before Income Taxes and
Equity in Undistributed Net
Income of Subsidiaries 71.9 107.9 130.8
Benefit for Income Taxes (10.3) (5.1) (6.1)
- ------------------------------------------------------------------
Income before Equity in Undistributed
Net Income of Subsidiaries 82.2 113.0 136.9
Equity in Undistributed Net
Income of Subsidiaries
Bank Subsidiaries 219.9 137.9 76.1
Nonbank Subsidiaries 7.3 7.9 7.0
- ------------------------------------------------------------------
NET INCOME $309.4 $258.8 $220.0
- ------------------------------------------------------------------
Net Income
Applicable to Common Stock $304.4 $253.9 $211.5
- ------------------------------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
68
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------
For the Year Ended
December 31
- -----------------------------------------------------------------------------------------
(In Millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 309.4 $ 258.8 $ 220.0
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Equity in Undistributed Net Income of Subsidiaries (227.2) (145.8) (83.1)
(Increase) Decrease in Accrued Income (1.2) .9 .6
Increase in Prepaid Expenses (3.0) (.3) (.1)
Other, net 8.7 11.0 (6.8)
- -----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 86.7 124.6 130.6
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net Increase in Time Deposits with Banks (178.4) (5.4) (53.6)
Purchases of Securities (392.1) (354.4) (279.4)
Sales of Securities 369.6 361.3 173.7
Proceeds from Maturity and Redemption of Securities 32.8 19.2 142.0
Capital Investments in Subsidiaries (61.2) (14.6) (43.5)
Net Decrease in Loans to Subsidiaries 7.9 47.2 25.0
Net Decrease in Other Loans .2 .2 .3
Other, net (.2) (.5) (2.6)
- -----------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (221.4) 53.0 (38.1)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net Increase (Decrease) in Commercial Paper (2.2) 2.3 22.9
Repayment of Long-Term Debt (8.8) (10.2) (10.2)
Proceeds from Long-Term Debt Issued to Subsidiaries 275.6 -- --
Treasury Stock Purchased (66.2) (118.2) (63.7)
Cash Dividends Paid on Common and Preferred Stock (85.3) (74.7) (65.8)
Net Proceeds from Stock Options 13.0 12.1 9.0
Other, net 9.2 10.9 13.2
- -----------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 135.3 (177.8) (94.6)
- -----------------------------------------------------------------------------------------
Net Change in Cash on Deposit with Subsidiary Bank .6 (.2) (2.1)
Cash on Deposit with Subsidiary Bank at Beginning of Year -- .2 2.3
- -----------------------------------------------------------------------------------------
CASH ON DEPOSIT WITH SUBSIDIARY BANK AT END OF YEAR $ .6 $ -- $ .2
- -----------------------------------------------------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS, NORTHERN TRUST CORPORATION:
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheet of Northern Trust
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in stock-
holders' equity and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern Trust Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their opera-
tions and their cash flows for each of the three years in the period ended De-
cember 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 20, 1998
NORTHERN TRUST CORPORATION
--------------------------
70
<PAGE>
CONSOLIDATED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
- ---------------------------------------------------------------------------------
($ In Millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 1,095.4 $ 1,072.9 $ 1,178.7 $ 1,206.6 $ 1,025.3
Federal Funds Sold and
Securities Purchased
under Agreements to
Resell 815.3 333.3 204.2 237.0 171.3
Time Deposits with
Banks 2,574.7 1,699.5 1,643.9 2,063.3 1,956.8
Other Interest-Bearing 52.6 50.7 16.6 119.9 73.5
Securities
U.S. Government and
Other 5,956.4 5,940.9 5,703.9 4,482.0 3,700.2
Obligations of States
and Political
Subdivisions 408.8 414.1 434.7 465.1 502.3
Trading Account 9.0 8.8 54.4 53.8 29.5
- ---------------------------------------------------------------------------------
Total Securities 6,374.2 6,363.8 6,193.0 5,000.9 4,232.0
- ---------------------------------------------------------------------------------
Loans and Leases
Commercial and Other 6,967.7 6,084.0 5,556.3 5,183.1 4,704.9
Residential Mortgages 4,845.2 4,248.1 3,579.7 3,133.0 2,592.2
- ---------------------------------------------------------------------------------
Total Loans and Leases 11,812.9 10,332.1 9,136.0 8,316.1 7,297.1
- ---------------------------------------------------------------------------------
Reserve for Credit
Losses (148.1) (147.5) (146.2) (145.2) (145.5)
Other Assets 1,474.7 1,259.5 1,183.3 1,087.2 1,089.7
- ---------------------------------------------------------------------------------
Total Assets $24,051.7 $20,964.3 $19,409.5 $17,885.8 $15,700.2
- ---------------------------------------------------------------------------------
LIABILITIES
Deposits
Demand and Other
Noninterest-Bearing $ 2,963.9 $ 2,732.9 $ 2,747.3 $ 2,592.5 $ 2,554.9
Savings and Money
Market 3,895.4 3,620.7 3,312.4 3,385.7 3,432.1
Savings Certificates 2,035.8 2,062.4 2,000.3 1,229.6 1,172.9
Other Time 717.3 549.2 542.7 412.8 404.7
Foreign Offices-Demand 486.4 347.8 299.1 361.7 65.3
-Time 4,971.2 3,826.2 3,493.4 3,284.8 2,436.4
- ---------------------------------------------------------------------------------
Total Deposits 15,070.0 13,139.2 12,395.2 11,267.1 10,066.3
- ---------------------------------------------------------------------------------
Federal Funds Purchased 1,690.2 1,842.2 1,564.0 1,350.7 1,692.5
Securities Sold under
Agreements to
Repurchase 1,519.9 1,973.3 1,769.7 1,444.3 664.4
Commercial Paper 142.7 143.7 146.0 138.1 131.5
Other Borrowings 2,120.9 1,274.1 1,034.5 1,007.5 940.8
Senior Notes 539.3 267.5 394.0 781.8 554.1
Long-Term Debt 435.8 360.7 271.3 293.6 297.9
Floating Rate Capital
Securities 224.1 -- -- -- --
Other Liabilities 679.3 477.9 462.1 377.2 279.6
- ---------------------------------------------------------------------------------
Total Liabilities 22,422.2 19,478.6 18,036.8 16,660.3 14,627.1
- ---------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 1,629.5 1,485.7 1,372.7 1,225.5 1,073.1
- ---------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $24,051.7 $20,964.3 $19,409.5 $17,885.8 $15,700.2
- ---------------------------------------------------------------------------------
RATIOS
Dividend Payout Ratio 27.5% 28.5% 28.6% 28.4% 25.6%
Return on Average
Assets 1.29 1.23 1.13 1.02 1.07
Return on Average
Common Equity 20.17 18.64 17.58 16.57 17.89
Tier 1 Capital to Risk-
Weighted Assets-End of
Period 9.61 8.19 8.82 8.95 9.31
Total Capital to Risk-
Weighted Assets-End of
Period 12.78 11.87 12.49 12.36 13.41
Leverage Ratio 6.87 6.42 6.19 6.22 6.24
Average Stockholders'
Equity to Average
Assets 6.78 7.09 7.07 6.85 6.83
Average Loans and
Leases Times Average
Stockholders' Equity 7.2X 7.0x 6.7x 6.8x 6.8x
- ---------------------------------------------------------------------------------
Stockholders-End of
Period 3,380 3,335 3,331 2,962 2,922
Staff-End of Period
(Full-time equivalent) 7,553 6,933 6,531 6,608 6,259
- ---------------------------------------------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
72
<PAGE>
CONSOLIDATED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
- -------------------------------------------------------------------------------
(Interest and Rate on a Taxable
Equivalent Basis) 1997 1996
- -------------------------------------------------------------------------------
($ In Millions) Interest Volume Rate Interest Volume Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE EARNING ASSETS
Money Market Assets
Federal Funds Sold and
Resell Agreements $ 45.9 $ 815.3 5.63% $ 18.3 $ 333.3 5.49%
Time Deposits with Banks 133.5 2,574.7 5.18 84.9 1,699.5 5.00
Other 3.0 52.6 5.68 3.0 50.7 5.91
- -------------------------------------------------------------------------------
Total Money Market Assets 182.4 3,442.6 5.30 106.2 2,083.5 5.10
- -------------------------------------------------------------------------------
Securities
U.S. Government 48.8 822.9 5.94 97.6 1,702.0 5.73
Obligations of States and
Political Subdivisions 38.1 408.8 9.32 40.8 414.1 9.86
Federal Agency 281.9 4,890.1 5.77 228.4 4,010.7 5.69
Other 14.9 243.4 6.11 13.7 228.2 6.00
Trading Account .7 9.0 7.33 .6 8.8 7.09
- -------------------------------------------------------------------------------
Total Securities 384.4 6,374.2 6.03 381.1 6,363.8 5.99
- -------------------------------------------------------------------------------
Loans and Leases 798.7 11,812.9 6.76 697.8 10,332.1 6.75
- -------------------------------------------------------------------------------
Total Earning Assets $1,365.5 $21,629.7 6.32% $1,185.1 $18,779.4 6.31%
- -------------------------------------------------------------------------------
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market $ 125.8 $ 3,895.4 3.23% $ 114.3 $ 3,620.7 3.16%
Savings Certificates 117.2 2,035.8 5.76 119.1 2,062.4 5.78
Other Time 39.4 717.3 5.50 29.9 549.2 5.44
Foreign Offices Time 239.8 4,971.2 4.82 184.5 3,826.2 4.82
- -------------------------------------------------------------------------------
Total Deposits 522.2 11,619.7 4.49 447.8 10,058.5 4.45
Federal Funds Purchased 92.4 1,690.2 5.47 97.9 1,842.2 5.31
Securities Sold Under
Agreements to Repurchase 81.7 1,519.9 5.38 103.4 1,973.3 5.24
Commercial Paper 7.9 142.7 5.54 7.8 143.7 5.40
Other Borrowings 112.4 2,120.9 5.30 64.5 1,274.1 5.07
Senior Notes 30.9 539.3 5.75 14.4 267.5 5.37
Long-Term Debt 32.6 435.8 7.48 27.4 360.7 7.59
Floating Rate Capital
Securities 14.5 224.1 6.49 -- -- --
- -------------------------------------------------------------------------------
Total Interest-Related
Funds 894.6 18,292.6 4.89 763.2 15,920.0 4.79
- -------------------------------------------------------------------------------
Interest Rate Spread -- -- 1.43% -- -- 1.52%
- -------------------------------------------------------------------------------
Noninterest-Related Funds -- 3,337.1 -- -- 2,859.4 --
- -------------------------------------------------------------------------------
Total Source of Funds $ 894.6 $21,629.7 4.14% $ 763.2 $18,779.4 4.06%
- -------------------------------------------------------------------------------
Net Interest Income/Margin $ 470.9 -- 2.18% $ 421.9 -- 2.25%
- -------------------------------------------------------------------------------
NET INTEREST INCOME/MARGIN
COMPONENTS
Domestic $ 466.0 $18,492.2 2.52% $ 420.6 $16,678.5 2.52%
International 4.9 3,137.5 .16 1.3 2,100.9 .06
- -------------------------------------------------------------------------------
Consolidated $ 470.9 $21,629.7 2.18% $ 421.9 $18,779.4 2.25%
</TABLE>
Notes-Average volume includes nonaccrual loans.
-Interest on loans and money market assets includes fees of $3.9 million in
1997, $4.3 million in 1996, $5.1 million in 1995, $6.8 million in 1994 and
$13.9 million in 1993.
-Total interest income includes adjustments on loans and securities
(primarily obligations of states and political subdivisions) to a taxable
equivalent basis. Such adjustments are based on the U.S. federal income
tax rate (35%) and State of Illinois income tax rate (7.18%) before giving
effect to the deductibility of state taxes for federal income tax
purposes. Lease financing receivable balances are reduced by deferred
income. Total taxable equivalent interest adjustments amounted to $32.7
million in 1997, $33.6 million in 1996, $37.6 million in 1995, $33.4
million in 1994 and $34.1 million in 1993.
-Yields on the portion of the securities portfolio classified as available
for sale are based on amortized cost.
NORTHERN TRUST CORPORATION
--------------------------
74
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------
Interest Volume Rate Interest Volume Rate Interest Volume Rate
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.3 $ 204.2 6.02% $ 10.9 $ 237.0 4.59% $ 5.5 $ 171.3 3.24%
92.1 1,643.9 5.60 97.8 2,063.3 4.74 86.5 1,956.8 4.42
1.1 16.6 6.88 5.2 119.9 4.31 2.6 73.5 3.53
- ---------------------------------------------------------------------------------
105.5 1,864.7 5.66 113.9 2,420.2 4.71 94.6 2,201.6 4.30
- ---------------------------------------------------------------------------------
70.4 1,225.7 5.74 73.8 1,779.6 4.15 102.5 2,646.6 3.87
46.8 434.7 10.75 52.8 465.1 11.35 58.6 502.3 11.66
258.8 4,124.8 6.28 114.2 2,333.6 4.90 29.7 773.9 3.84
22.0 353.4 6.21 19.6 368.8 5.31 13.6 279.7 4.88
3.8 54.4 7.04 4.3 53.8 7.91 2.2 29.5 7.52
- ---------------------------------------------------------------------------------
401.8 6,193.0 6.49 264.7 5,000.9 5.29 206.6 4,232.0 4.88
- ---------------------------------------------------------------------------------
634.3 9,136.0 6.94 503.5 8,316.1 6.05 439.3 7,297.1 6.02
- ---------------------------------------------------------------------------------
$1,141.6 $17,193.7 6.64% $882.1 $15,737.2 5.61% $740.5 $13,730.7 5.39%
- ---------------------------------------------------------------------------------
$ 109.1 $ 3,312.4 3.29% $ 85.3 $ 3,385.7 2.52% $ 78.8 $ 3,432.1 2.30%
120.6 2,000.3 6.03 56.9 1,229.6 4.63 50.5 1,172.9 4.31
31.5 542.7 5.81 18.6 412.8 4.50 15.7 404.7 3.88
182.1 3,493.4 5.21 137.2 3,284.8 4.18 90.4 2,436.4 3.71
- ---------------------------------------------------------------------------------
443.3 9,348.8 4.74 298.0 8,312.9 3.58 235.4 7,446.1 3.16
91.2 1,564.0 5.83 55.5 1,350.7 4.11 51.1 1,692.5 3.02
102.6 1,769.7 5.80 61.9 1,444.3 4.28 20.0 664.4 3.00
8.6 146.0 5.87 5.9 138.1 4.31 4.3 131.5 3.23
55.6 1,034.5 5.38 36.0 1,007.5 3.57 26.0 940.8 2.76
23.7 394.0 6.00 33.8 781.8 4.32 18.4 554.1 3.33
21.4 271.3 7.88 23.0 293.6 7.84 23.3 297.9 7.84
-- -- -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------
746.4 14,528.3 5.14 514.1 13,328.9 3.86 378.5 11,727.3 3.22
- ---------------------------------------------------------------------------------
-- -- 1.50% -- -- 1.75% -- -- 2.17%
- ---------------------------------------------------------------------------------
-- 2,665.4 -- -- 2,408.3 -- -- 2,003.4 --
- ---------------------------------------------------------------------------------
$ 746.4 $17,193.7 4.34% $514.1 $15,737.2 3.27% $378.5 $13,730.7 2.75%
- ---------------------------------------------------------------------------------
$ 395.2 -- 2.30% $368.0 -- 2.34% $362.0 -- 2.64%
- ---------------------------------------------------------------------------------
$ 392.6 $15,193.7 2.58% $357.3 $12,890.4 2.77% $344.2 $11,491.0 3.00%
2.6 2,000.0 .13 10.7 2,846.8 .38 17.8 2,239.7 .79
- ---------------------------------------------------------------------------------
$ 395.2 $17,193.7 2.30% $368.0 $15,737.2 2.34% $362.0 $13,730.7 2.64%
- ---------------------------------------------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
75
<PAGE>
CONSOLIDATED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
- -------------------------------------------------------------------------------
STATEMENT OF INCOME 1997
- -------------------------------------------------------------------------------
(In Millions Except Per Entire Fourth Third Second First
Share Information) Year Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 1,332.8 361.8 339.2 331.8 300.0
Interest Expense 894.6 248.5 229.6 222.6 193.9
- -------------------------------------------------------------------------------
Net Interest Income 438.2 113.3 109.6 109.2 106.1
Provision for Credit
Losses 9.0 3.0 5.0 .5 .5
Trust Fees 689.2 185.2 177.4 168.3 158.3
Other Noninterest Income 245.3 62.1 77.3 54.9 51.0
Noninterest Expenses 891.8 233.6 234.7 217.0 206.5
Provision for Income
Taxes 162.5 42.7 43.6 39.5 36.7
- -------------------------------------------------------------------------------
NET INCOME $ 309.4 81.3 81.0 75.4 71.7
- -------------------------------------------------------------------------------
Net Income Applicable to
Common Stock $ 304.4 80.0 79.7 74.2 70.5
- -------------------------------------------------------------------------------
PER COMMON SHARE
Net Income-Basic $ 2.74 .72 .72 .67 .64
-Diluted 2.66 .70 .70 .65 .62
- -------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
(In Millions)
ASSETS
Cash and Due from Banks $ 1,095.4 1,094.5 1,056.2 1,073.9 1,158.0
Money Market Assets 3,442.6 3,938.4 3,553.1 3,371.1 2,895.1
Securities 6,374.2 6,879.2 6,232.1 6,514.5 5,861.1
Loans and Leases 11,812.9 12,502.5 12,001.2 11,610.4 11,120.5
Reserve for Credit Losses (148.1) (147.8) (148.2) (148.4) (148.3)
Other Assets 1,474.7 1,501.7 1,469.0 1,438.2 1,490.5
- -------------------------------------------------------------------------------
Total Assets $24,051.7 25,768.5 24,163.4 23,859.7 22,376.9
- -------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Demand and Other
Noninterest-Bearing $ 2,963.9 3,003.7 2,934.0 2,880.7 3,037.8
Savings and Other
Interest-Bearing 5,931.2 5,993.2 5,840.6 5,918.7 5,973.2
Other Time 717.3 709.4 771.0 772.6 614.6
Foreign Offices 5,457.6 6,526.4 5,749.8 4,993.4 4,535.5
- -------------------------------------------------------------------------------
Total Deposits 15,070.0 16,232.7 15,295.4 14,565.4 14,161.1
Purchased Funds 5,473.7 5,648.5 4,961.0 6,132.0 5,153.3
Senior Notes 539.3 793.7 844.0 245.1 265.0
Long-Term Debt 435.8 443.7 443.6 427.9 427.8
Floating Rate Capital
Securities 224.1 267.4 267.3 236.0 123.8
Other Liabilities 679.3 679.1 702.1 647.6 688.6
Stockholders' Equity 1,629.5 1,703.4 1,650.0 1,605.7 1,557.3
- -------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $24,051.7 25,768.5 24,163.4 23,859.7 22,376.9
- -------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST
INCOME
($ In Millions)
Earning Assets $21,629.7 23,320.1 21,786.4 21,496.0 19,876.7
Interest-Related Funds 18,292.6 19,870.2 18,388.5 18,235.5 16,639.6
Noninterest-Related Funds 3,337.1 3,449.9 3,397.9 3,260.5 3,237.1
Net Interest Income
(Taxable equivalent) 470.9 121.5 117.6 117.7 114.1
Net Interest Margin
(Taxable equivalent) 2.18% 2.07 2.14 2.20 2.33
- -------------------------------------------------------------------------------
COMMON STOCK DIVIDEND AND
MARKET PRICE
Dividends $ .75 .21 .18 .18 .18
Market Price Range-High 71.50 71.50 59.50 51.875 45.25
-Low 34.00 54.625 47.25 35.875 34.00
- -------------------------------------------------------------------------------
</TABLE>
Note: Per common share data has been restated to reflect the two-for-one stock
split effected through a 100% stock distribution on December 9, 1996.
The common stock of Northern Trust Corporation is traded on the Nasdaq National
Market under the symbol NTRS.
NORTHERN TRUST CORPORATION
--------------------------
76
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1996
- -----------------------------------------------------------
Entire Fourth Third Second First
Year Quarter Quarter Quarter Quarter
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,151.5 290.6 289.9 286.1 284.9
763.2 190.0 191.1 190.6 191.5
- -----------------------------------------------------------
388.3 100.6 98.8 95.5 93.4
12.0 .5 2.5 4.0 5.0
594.4 152.6 148.2 149.2 144.4
185.6 48.7 46.6 46.5 43.8
768.9 200.5 191.8 192.1 184.5
128.6 33.5 32.8 31.7 30.6
- -----------------------------------------------------------
$ 258.8 67.4 66.5 63.4 61.5
- -----------------------------------------------------------
$ 253.9 66.2 65.3 62.2 60.2
- -----------------------------------------------------------
$ 2.27 .60 . 58 .55 .54
2.21 .58 . 57 .54 .52
- -----------------------------------------------------------
$ 1,072.9 1,074.7 972.6 1,047.6 1,197.8
2,083.5 2,197.1 2,082.6 1,987.2 2,065.9
6,363.8 5,715.7 6,257.1 6,755.7 6,734.9
10,332.1 10,832.7 10,533.9 10,176.7 9,777.3
(147.5) (147.9) (147.4) (147.3) (147.2)
1,259.5 1,315.8 1,291.5 1,208.2 1,221.3
- -----------------------------------------------------------
$20,964.3 20,988.1 20,990.3 21,028.1 20,850.0
- -----------------------------------------------------------
$ 2,732.9 2,773.7 2,620.4 2,686.0 2,852.5
5,683.1 5,735.3 5,596.4 5,713.2 5,687.8
549.2 599.4 523.0 462.6 611.4
4,174.0 4,270.0 4,375.0 4,146.7 3,901.2
- -----------------------------------------------------------
13,139.2 13,378.4 13,114.8 13,008.5 13,052.9
5,233.3 4,847.2 5,317.0 5,530.2 5,242.4
267.5 296.3 205.0 254.5 314.4
360.7 431.9 339.7 335.9 334.8
-- -- -- -- --
477.9 512.8 523.3 424.5 449.7
1,485.7 1,521.5 1,490.5 1,474.5 1,455.8
- -----------------------------------------------------------
$20,964.3 20,988.1 20,990.3 21,028.1 20,850.0
- -----------------------------------------------------------
$18,779.4 18,745.5 18,873.6 18,919.6 18,578.1
15,920.0 15,786.9 16,021.7 16,103.6 15,768.2
2,859.4 2,958.6 2,851.9 2,816.0 2,809.9
421.9 108.4 107.2 104.3 102.0
2.25% 2.30 2.26 2.22 2.21
- -----------------------------------------------------------
$ .645 .18 .155 .155 .155
37.75 37.75 34.00 29.00 28.125
24.625 32.00 28.375 25.375 24.625
- -----------------------------------------------------------
</TABLE>
NORTHERN TRUST CORPORATION
--------------------------
77
<PAGE>
Corporate Structure
Northern Trust Corporation
50 South LaSalle Street, Chicago, Illinois 60675
(312) 630-6000
Principal Subsidiary
The Northern Trust Company
50 South LaSalle Street, Chicago, Illinois 60675
120 East Oak Street, Chicago, Illinois 60611
125 South Wacker Drive, Chicago, Illinois 60675
7801 South State Street, Chicago, Illinois 60619
8501 West Higgins Road, Chicago, Illinois 60631
6401 North Harlem Avenue, Chicago, Illinois 60631
826 S. Northwest Highway, Barrington, Illinois 60010
579 Central Avenue, Highland Park, Illinois 60035
120 East Scranton Avenue, Lake Bluff, Illinois 60044
265 Deerpath Road, Lake Forest, Illinois 60045
959 South Waukegan Road, Lake Forest, Illinois 60045
701 South McKinley Road, Lake Forest, Illinois 60045
400 East Diehl Road, Naperville, Illinois 60563
One Oakbrook Terrace, Oakbrook Terrace, Illinois 60181
1501 Woodfield Road, Schaumburg, Illinois 60173
62 Green Bay Road, Winnetka, Illinois 60093
London Branch
155 Bishopsgate, London EC2M 3XS, England
Cayman Islands Branch
P.O. Box 501, Georgetown, Cayman Islands,
British West Indies
Singapore Branch
80 Raffles Place, #46-02, UOB Plaza 1,
Singapore 048624
Subsidiaries of The Northern Trust Company
The Northern Trust
International Banking Corporation
One World Trade Center, New York, New York 10048
Northern Global Financial Services Limited
18 Harbour Road, Wanchai
Hong Kong
Northern Trust Trade Services Limited
Asia Pacific Tower, 17th Floor,
3 Garden Road, Central, Hong Kong
Northern Trust Fund Managers (Ireland) Limited
George's Dock House
International Financial Services Centre
Dublin 1, Ireland
NorLease, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
The Northern Trust Company, Canada
161 Bay Street, Suite 4540, Canada Trust Tower, B.C.E. Place
Toronto, Ontario, Canada M5J 2S1
International Affiliate
Transatlantic Trust Corporation
75 Rochford Street, P.O. Box 429
Charlottetown, Prince Edward Island,
Canada C1A 7K7
Other Subsidiaries of
the Corporation
Northern Trust Bank of Florida N.A.
700 Brickell Avenue, Miami, Florida 33131
595 Biltmore Way, Coral Gables, Florida 33134
328 Crandon Boulevard, Suite 101, Key Biscayne, Florida 33149
3001 Aventura Boulevard, Aventura, Florida 33180
8600 NW 17th Street, Suite 120, Miami, Florida 33126
1100 East Las Olas Boulevard, Fort Lauderdale, Florida 33301
2601 East Oakland Park Boulevard,
Fort Lauderdale, Florida 33306
301 Yamato Road, Boca Raton, Florida 33431
770 East Atlantic Avenue, Delray Beach, Florida 33483
440 Royal Palm Way, Palm Beach, Florida 33480
11780 U.S. Highway 1, Suite 100,
North Palm Beach, Florida 33408
2201 S.E. Kingswood Terrace, Monterey Commons,
Stuart, Florida 34996
755 Beachland Boulevard, Vero Beach, Florida 32963
1440 A1A, Vero Beach, Florida 32963
4001 Tamiami Trail North, Naples, Florida 34103
530 Fifth Avenue South, Naples, Florida 34102
26790 South Tamiami Trail, Bonita Springs, Florida 34134
8060 College Parkway S.W., Fort Myers, Florida 33919
1515 Ringling Boulevard, Sarasota, Florida 34236
901 Venetia Bay Boulevard, Suite 100, Venice, Florida 34292
540 Bay Isles Road, Longboat Key, Florida 34228
233 15th Street West, Bradenton, Florida 34205
100 Second Avenue South, St. Petersburg, Florida 33701
425 North Florida Avenue, Tampa, Florida 33602
NORTHERN TRUST CORPORATION
--------------------------
80
<PAGE>
CORPORATE STRUCTURE
- --------------------------------------------------------------------------------
Other Subsidiaries of
the Corporation continued
Northern Trust Bank of Arizona N.A.
2398 East Camelback Road, Phoenix, Arizona 85016
6373 East Tanque Verde Road, Tucson, Arizona 85715
10220 West Bell Road, Sun City, Arizona 85351
10015 West Royal Oak Road, Sun City, Arizona 85351
7001 North Scottsdale Road, Scottsdale, Arizona 85253
19432 R. H. Johnson Boulevard, Sun City West, Arizona 85375
1525 South Greenfield Road, Mesa, Arizona 85206
3450 E. Sunrise Drive, Tucson, Arizona 85718
Northern Trust Bank of California N.A.
355 South Grand Avenue, Suite 2600,
Los Angeles, California 90071
620 Newport Center Drive, Suite 200,
Newport Beach, California 92660
4370 LaJolla Village Drive, Suite 1000,
San Diego, California 92122
1125 Wall Street, La Jolla, California 92037
206 East Anapamu Street, Santa Barbara, California 93101
1485 East Valley Road, (Montecito),
Santa Barbara, California 93108
580 California Street, Suite 1800,
San Francisco, California 94104
10877 Wilshire Boulevard (Westwood), Suite 100,
Los Angeles, California 90024
74--900 Highway 111, Suite 221,
Indian Wells, California 92210
Northern Trust Bank of Texas N.A.
2020 Ross Avenue, Dallas, Texas 75201
5540 Preston Road, Dallas, Texas 75205
16475 Dallas Parkway, Dallas, Texas 75248
2701 Kirby Drive, Houston, Texas 77098
600 Bering Drive, Houston, Texas 77057
10000 Memorial Drive, Houston, Texas 77024
700 Rusk Street, Houston, Texas 77002
Northern Trust Global Advisors, Inc.
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
The Northern Trust Company of Connecticut
300 Atlantic Street, Suite 400, Stamford, Connecticut 06901
NT Global Advisors, Inc.
161 Bay Street, Suite 4540, Canada Trust Tower, B.C.E. Place,
Toronto, Ontario, Canada M5J 2S1
NT Fund Advisors of Quebec, Inc.
770 Sherbrooke Street West, Suite 1420,
Montreal, Quebec, Canada H3A 1G1
Northern Trust Global Advisors, Limited
One Gloster Court, Whittle Avenue, Segensworth West,
Fareham, Hampshire PO15 5SH, England
Northern Trust Quantitative Advisors, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
The Northern Trust Company of New York
40 Broad Street, New York, New York 10004
Northern Trust Cayman International, Ltd.
P.O. Box 1586, Grand Cayman, Cayman Islands,
British West Indies
Northern Trust Securities, Inc.
50 South LaSalle Street, Chicago, Illinois 60675
Berry, Hartell, Evers & Osborne, Inc.
580 California Street, Suite 1900,
San Francisco, California 94104
Northern Trust Retirement Consulting, L.L.C.
400 Perimeter Center Terrace, Suite 850,
Atlanta, Georgia 30346
19119 North Creek Parkway, Suite 200,
Bothell, Washington 98011
Northern Futures Corporation
50 South LaSalle Street, Chicago, Illinois 60675
================================================================================
NORTHERN TRUST CORPORATION
--------------------------
81
<PAGE>
EXHIBIT NUMBER (21)
TO 1997 FORM 10-K
NORTHERN TRUST CORPORATION SUBSIDIARIES
AS OF MARCH 1, 1998
<TABLE>
<CAPTION>
Percent Jurisdiction of
Owned Incorporation
------- ---------------
<S> <C> <C>
The Northern Trust Company 100% Illinois
NorLease, Inc. 100% Delaware
MFC Company, Inc. 100% Delaware
The Northern Trust Company, Canada 100% Ontario, Canada
Nortrust Nominees Ltd. 100% London
The Northern Trust Company U.K. Pension Plan Limited 100% London
The Northern Trust International Banking Corporation 100% Edge Act
Nortrust International Finance (Hong Kong) Ltd. 100% Hong Kong
Northern Global Financial Services Ltd. 100% Hong Kong
Northern Trust Trade Services Limited 100% Hong Kong
Northern Trust Fund Managers (Ireland) Limited 100% Ireland
Northern Trust of Florida Corporation 100% Florida
Northern Trust Cayman International, Ltd. 100% Cayman Islands,
BWI
Northern Trust Bank of Florida N.A. 100% National Bank
Realnor Properties, Inc. 100% Florida
Realnor Special Properties, Inc. 100% Florida
Realnor 1177, Inc. 100% Florida
Realnor Hallandale, Inc. 100% Florida
Nortrust of Arizona Holding Corporation 100% Arizona
Northern Trust Bank of Arizona N.A. 100% National Bank
Northern Trust of California Corporation 100% Delaware
Northern Trust Bank of California N.A. 100% National Bank
Berry, Hartell, Evers & Osborne, Inc. 100% Delaware
Metroplex Bancshares, Inc. 100% Texas
Metroplex Delaware Financial Corporation 100% Delaware
Northern Trust Bank of Texas N.A. 75.5% National Bank
Fiduciary Services Inc. 100% Texas
Tanglewood Bancshares, Inc. 100% Texas
Northern Trust Bank of Texas N.A. 24.5% National Bank
Northern Futures Corporation 100% Delaware
</TABLE>
<PAGE>
NORTHERN TRUST CORPORATION SUBSIDIARIES
AS OF MARCH 1, 1998
(continued)
<TABLE>
<CAPTION>
Percent State of
Owned Incorporation
------- -------------
<S> <C> <C>
Northern Trust Holdings L.L.C. 100% Delaware
Northern Investment Corporation 100% Delaware
Northern Investment Management Company 100% Delaware
Northern Trust Securities, Inc. 100% Delaware
Northern Trust Services, Inc. 100% Illinois
Nortrust Realty Management, Inc. 100% Illinois
The Northern Trust Company of New York 100% New York
Northern Trust Retirement Consulting, L.L.C. 100% Delaware
Northern Trust Global Advisors, Inc. 100% Delaware
NT Global Advisors, Inc. 100% Ontario, Canada
Northern Trust Global Advisors Limited 100% England
The Northern Trust Company of Connecticut 100% Connecticut
NT Fund Advisors of Quebec, Inc. 100% Quebec, Canada
Northern Trust Quantitative Advisors, Inc. 100% Illinois
NTC Capital I 100% Delaware
NTC Capital II 100% Delaware
</TABLE>
<PAGE>
EXHIBIT NUMBER (23)
TO 1997 FORM 10-K
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 20, 1998, incorporated by reference in Northern
Trust Corporation's Annual Report on Form 10-K for the year ended December 31,
1997, into the Corporation's previously filed Form S-8 Registration Statements
File Nos. 33-22546, 33-47597, 33-51971, 33-63843, 333-00809, 333-25135, 333-
25283 and 333-35685; and the Corporation's previously filed Form S-3 Nos. 333-
18951, 333-45203 and 333-25649.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 13, 1998
<PAGE>
EXHIBIT NUMBER (24)
TO 1997 FORM 10-K
POWER OF ATTORNEY
- -----------------
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned officers and directors of Northern Trust Corporation
hereby severally constitute and appoint William A. Osborn, Perry R. Pero and
Peter L. Rossiter, and each of them singly, our true and lawful attorneys and
agents with full power to them and each of them singly, to sign for us in our
names, in the capacities indicated below, Form 10-K, annual report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year
ended December 31, 1997, and to file such Form, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting to such attorneys and agents, and each of them, full
power of substitution and revocation in the premises, and generally to do all
such things in our name and behalf in our capacities as officers and directors
to enable Northern Trust Corporation to comply with the provisions of the
Securities Exchange Act of 1934, as amended, and all regulations of the
Securities and Exchange Commission thereunder, hereby ratifying and confirming
our signatures as they may be signed by our attorneys, or any one of them, to
such Form, and all that our attorneys and agents, or any of them, may do or
cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned have hereunto executed this Power of
Attorney
this 17th day of February, 1998.
-------
William A. Osborn Barry G. Hastings
- ---------------------------- ----------------------------
William A. Osborn Barry G. Hastings
Chairman of the Board, Chief President, Chief Operating
Executive Officer and Director Officer and Director
Perry R. Pero Harry W. Short
- ---------------------------- ----------------------------
Perry R. Pero Harry W. Short
Senior Executive Vice President Senior Vice President and Controller
and Chief Financial Officer (Chief Accounting Officer)
Duane L. Burnham Delores E. Cross
- ---------------------------- ----------------------------
Duane L. Burnham Delores E. Cross
Director Director
Susan Crown Robert S. Hamada
- ---------------------------- ----------------------------
Susan Crown Robert S. Hamada
Director Director
<PAGE>
Robert A. Helman Arthur L. Kelly
- ---------------------------- ----------------------------
Robert A. Helman Arthur L. Kelly
Director Director
Frederick A. Krehbiel William G. Mitchell
- ---------------------------- ----------------------------
Frederick A. Krehbiel William G. Mitchell
Director Director
Edward J. Mooney Harold B. Smith
- ---------------------------- ----------------------------
Edward J. Mooney Harold B. Smith
Director Director
William D. Smithburg Bide L. Thomas
- ---------------------------- ----------------------------
William D. Smithburg Bide L. Thomas
Director Director
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
I, Victoria Antoni, a Notary Public, DO HEREBY CERTIFY that the above named
directors and officers of Northern Trust Corporation, personally known to me to
be the same persons whose names are subscribed to the foregoing instrument,
appeared before me this day in person, and severally acknowledged that they
signed and delivered the instrument as their free and voluntary act, for the
uses and purposes therein set forth.
GIVEN under my hand and notarial seal this 17th day of February, 1998.
--------
Victoria Antoni
----------------------
Notary Public
My Commission Expires:
7/25/99
- ----------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and the Consolidated Statement of Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,738,860
<INT-BEARING-DEPOSITS> 2,283,200
<FED-FUNDS-SOLD> 2,991,741
<TRADING-ASSETS> 8,814
<INVESTMENTS-HELD-FOR-SALE> 3,733,301
<INVESTMENTS-CARRYING> 456,129
<INVESTMENTS-MARKET> 473,402
<LOANS> 12,588,223
<ALLOWANCE> 147,638
<TOTAL-ASSETS> 25,315,380
<DEPOSITS> 16,359,942
<SHORT-TERM> 5,612,467
<LIABILITIES-OTHER> 740,189
<LONG-TERM> 863,761
<COMMON> 189,935
120,000
0
<OTHER-SE> 1,429,086
<TOTAL-LIABILITIES-AND-EQUITY> 25,315,380
<INTEREST-LOAN> 793,113
<INTEREST-INVEST> 356,785
<INTEREST-OTHER> 182,916
<INTEREST-TOTAL> 1,332,814
<INTEREST-DEPOSIT> 522,243
<INTEREST-EXPENSE> 894,666
<INTEREST-INCOME-NET> 438,148
<LOAN-LOSSES> 9,000
<SECURITIES-GAINS> 720
<EXPENSE-OTHER> 891,800
<INCOME-PRETAX> 471,909
<INCOME-PRE-EXTRAORDINARY> 309,393
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309,393
<EPS-PRIMARY> 2.74
<EPS-DILUTED> 2.66
<YIELD-ACTUAL> 2.18
<LOANS-NON> 38,923
<LOANS-PAST> 13,857
<LOANS-TROUBLED> 2,505
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 148,327
<CHARGE-OFFS> 14,409
<RECOVERIES> 4,719
<ALLOWANCE-CLOSE> 147,638
<ALLOWANCE-DOMESTIC> 110,125
<ALLOWANCE-FOREIGN> 28
<ALLOWANCE-UNALLOCATED> 37,485
</TABLE>
