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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to___________
Commission File Number 0-5965
Northern Trust Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 South La Salle Street
Chicago, Illinois 60675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-6000
-----------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.66 2/3 Par Value
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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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The registrant is filing this Form 10-K/A (Amendment No. 2) for the purpose of
expanding its discussion of Reserve for Credit Losses methodology and the
determination of the Reserve during the periods reported upon in its Annual
Report on Form 10-K for the fiscal year ended December 31, 1997. This addition
amends the Credit Risk Management section found in Part I, Item 1 (Business
discussion) on pages 16 and 17 of that report.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
By: /s/ Perry R. Pero
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PERRY R. PERO
Senior Executive Vice President
and Chief Financial Officer
Date: March 2, 1999
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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.
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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
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<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.
Reserve Methodology
The reserve for credit losses represents management's estimate of probable
losses which have occurred as of the date of the financial statements. The loan
and lease portfolio and other credit exposures are regularly reviewed to
evaluate the adequacy of the reserve for credit losses. In determining the level
of the reserve, Northern Trust evaluates the reserve necessary for specific non-
performing loans and estimates losses inherent in other credit exposures.
The result is a reserve with three components:
. Specific Reserves. The amount of specific reserves is determined through a
loan-by-loan analysis of non-performing loans that considers expected future
cash flows, the value of collateral and other factors that may impact the
borrower's ability to pay.
. Allocated Inherent Reserve. The amount of the allocated portion of the
inherent loss reserve is based on loss factors assigned to Northern Trust's
credit exposures based on internal credit ratings. These loss factors are
determined on the basis of historical charge-off experience. In addition,
management applies judgment in determining particular components of the inherent
reserve, as when in 1997 management began to use an "industry base" reserve of
1% for the commercial and commercial real estate segments of the portfolio.
. Unallocated Inherent Reserve. Management determines the unallocated portion of
the inherent loss reserve based on factors that cannot be associated with a
specific credit or loan categories. These factors include management's
subjective evaluation of local and national economic and business conditions,
portfolio concentration and changes in the character and size of the loan
portfolio. The unallocated portion of the inherent loss reserve reflects
management's attempt to ensure that the overall reserve appropriately reflects a
margin for the imprecision necessarily inherent in estimates of expected credit
losses.
The continuous control process maintained by the Credit Policy Group and the
lending staff and the quarterly analysis of specific and inherent loss
components is the principal method relied upon by management to ensure that
changes in estimated credit loss levels are adjusted on a timely basis. The
inclusion of historical loss factors in the process of determining the allocated
inherent component of the reserve also acts as a self-correcting mechanism of
management's estimation process, as loss experience more remote in time is
replaced by more recent experience. However, these historical loss factors
played a less important role in determining the allocated inherent reserve after
1996. In its analysis of the specific and the inherent components of the
reserve, management also considers the experience of peer institutions and
regulatory guidance in addition to Northern Trust's own experience.
Loans, leases and other extensions of credit deemed uncollectable are charged to
the reserve. Subsequent recoveries, if any, are credited to the reserve. 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. The related provision
for credit losses, which is charged to income, is the amount necessary to adjust
the reserve to the level determined through the above process.
Reserve for Credit Losses 1993-1997
The following table analyzes the reserve for credit losses at December 31 for
each of the five years in the period ended December 31, 1997 and identifies the
charge-offs and recoveries by loan category and the provisions for credit losses
during each of those years.
<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
Provisions for Credit Losses 9.0 12.0 6.0 6.0 19.5
Reserve Related to Acquisitions --- 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 $7,297.1
- ---------------------------------------------------------------------------------------------------------------------------
As a Percent of Year-End Loans and
Leases
Net Loan Charge-Offs .08% .11% .06% .08% .26%
Provisions for Credit Losses .07 .11 .06 .07 .26
Reserve Balance at Year-End 1.17 1.36 1.49 1.69 1.91
- ---------------------------------------------------------------------------------------------------------------------------
As a Percent of Average Loans and
Leases
Net Loan Charge-Offs .08% .11% .06% .08% .27%
Reserve Balance at Year-End 1.25 1.44 1.61 1.74 1.99
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the specific portion of the reserve, the allocated
portion of the inherent reserve and its components by loan category and the
unallocated portion of the reserve at the end of each of the years 1993 through
1997. The table also shows the loans in each category as a percentage of total
loans.
16
<PAGE>
ALLOCATION OF THE RESERVE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
At December 31
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Reserve Loans to Reserve Loans to Reserve Loans to Reserve Loans to
($ in Millions) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specific Reserves $ 10.7 ---% $ .8 ---% $ 1.3 ---% $ .3 ---%
- --------------------------------------------------------------------------------------------------------------------------
Inherent Reserves
Residential Real Estate 3.7 41 7.1 42 5.4 39 5.2 38
Commercial 87.1 30 71.2 29 84.4 32 85.9 31
Commercial Real Estate 6.4 5 5.1 5 6.8 5 12.3 6
Personal .6 10 6.2 9 8.4 8 5.5 8
Other --- 7 --- 9 --- 10 --- 11
Lease Financing 2.9 3 2.9 2 2.9 2 2.9 2
International --- 4 2.3 4 2.6 4 2.9 4
Unallocated 36.2 --- 52.7 --- 35.3 --- 29.8 ---
- --------------------------------------------------------------------------------------------------------------------------
Total Inherent Reserve 136.9 --- 147.5 --- 145.8 --- 144.5 ---
- --------------------------------------------------------------------------------------------------------------------------
Total Reserve $147.6 100% $148.3 100% $147.1 100% $144.8 100%
- --------------------------------------------------------------------------------------------------------------------------
</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.
Specific Component of the Reserve
The specific component of the reserve is determined on a loan-by-loan basis as
part of the regular review of classified and non-performing loans and potential
charge-offs. The specific reserve is based on a loan's current book value
compared to the present value of its projected future cash flows, collateral
value or market value, as is relevant for the particular loan. At December 31,
1995, the specific reserve component was established at $1.3 million,
principally to cover the estimated loss on specific impaired commercial real
estate loans. As of December 31, 1996 the specific reserve component was
$800,000, somewhat lower than at December 31, 1995, as a result of this
loan-by-loan analysis.
As of December 31, 1997, the specific reserve component increased to $10.7
million. During 1997, and as part of the regular review of classified and
non-performing loans and potential charge-offs, management determined that the
increase in non-performing loans, reflecting principally deterioration in one
specific commercial credit exposure, called for an increase in the specific
reserve for that period. Because the increase in higher risk loans was
principally due to one larger, non-performing loan, management did not view this
development as evidence of a deteriorating trend in credit quality.
Allocated Inherent Component of the Reserve
The allocated portion of the inherent reserve is based on management's review of
historical charge-off experience as well as management's judgment for loans in
each credit rating category over a period of time which management determines is
adequate to reflect longer term economic trends. This approach was supplemented
in 1997 when management also began applying a minimum reserve analysis to the
commercial and commercial real estate segments of the portfolio, which are
deemed to have greater risk potential than is reflected in the historical
charge-off analysis.
An important building block in reaching the appropriate allocated inherent
reserve is an analysis of loans by credit rating categories. Credit ratings are
determined by members of the Credit Policy Group at the time each loan is
approved. These credit ratings are subject to periodic reviews in which the
Credit Policy Group, which is independent of line management, makes the final
determination of ratings for each loan in the portfolio. Credit ratings range
from "1" for the strongest credits to "9" for the weakest; a "9" rated loan
would normally represent a complete loss. For each of these credit rating
categories, the loss ratio for each past year is calculated by expressing the
loan charge-offs for that year as a percentage of previous year-end outstanding
loans in that credit rating category. These yearly loss ratios for each credit
rating category are then averaged over the period chosen to develop the
historical loss ratio.
The changes in the allocated inherent portion of the reserve in 1995 and 1996
are principally due to two factors. First, the historical loss ratios applied
changed with the passage of time, generally decreasing to reflect more favorable
charge-off experience. The loss ratios for these years represent the cumulative
average historical charge-off ratios beginning in 1987, with subsequent years
added to the base. Second, growth in the loan portfolio increased the allocated
inherent reserve because the historical charge-off ratios were applied to
increasing year-end principal balances.
In 1997, management changed the measurement period for calculating the
historical loss ratio to use only the most recent five years, in order to more
closely align the ratios to the economic factors currently affecting the
portfolio. At that time, management also decided to use for the commercial and
commercial real estate segments of the portfolio an "industry base" reserve of
1% in order to measure the loss estimated to be inherent in these riskier
segments. Because commercial and commercial real estate loans had in Northern
Trust's experience produced significant losses in brief periods at particular
points in economic cycles, management believed it appropriate to use a reserve
higher than recent charge-off experience would suggest. This decision was
supported by what management perceived to be industry practice for minimum
reserve levels, and is intended to prevent an understatement of reserves based
upon over-reliance on recent, favorable economic conditions. The decisions to
shorten the period for calculating historical loss ratios and use an industry
base reserve, which were related in management's judgment, had the effect of
increasing the allocated inherent reserve by $41.9 million.
Also in 1997, management reduced the amounts of credit exposure assigned to
undrawn loan commitments and standby letters of credit, to reflect this exposure
by using the factors applied in risk based capital calculations. In 1995 and
1996 the full notional amount of the off balance sheet exposures had been used
for purposes of this calculation. The 1997 change had the effect of reducing the
allocated inherent reserve by $35.4 million.
Unallocated Inherent Component of the Reserve
The unallocated portion of the inherent loss reserve is based on management's
review of other factors affecting the determination of probable losses inherent
in the portfolio, which are not necessarily captured by the application of
historical loss ratios. This portion of the reserve analysis involves the
exercise of judgment and reflects management's attempt to ensure that the
overall reserve reflects all appropriate considerations, including the fact that
the reserve should have a margin that recognizes the imprecision inherent in the
process of estimating expected credit losses.
Throughout the period 1995 - 97, the loan portfolio, and in particular
commercial loans, continued to grow at a significant rate. Although the
allocated reserve declined in 1995 and 1996, management decided to increase the
unallocated reserve from $35.3 million at the end of 1995 to $52.7 million at
the end of 1996 to provide for probable losses in the growing loan portfolio. In
1997, although growth in the loan portfolio continued and affected management's
overall judgment, the change to five years in the measurement period used for
historical loss ratios of the inherent allocated reserve and the introduction of
the 1% minimum industry base level reserve for commercial and commercial real
estate loans resulted in an increase in the allocated inherent reserve.
Management viewed the use of the 1% industry base level reserve as a more clear
identification of some of the risk previously dealt with by the unallocated
inherent reserve which took account in a different way of the growth in the
higher risk segments of the portfolio. Accordingly, management concluded that
the unallocated inherent portion of the reserve should decrease to $36.2
million.
Other Factors
During the period from 1995 to 1997 there were no significant changes in
concentration of credits that impacted asset quality. Direct cross border
lending exposure did not play a significant role in the determination of loan
loss reserves since the exposure is relatively small and most of it represents
short term extensions of credit to highly-rated borrowers, principally in
connection with trade finance. The total amount of highest risk loans, those
rated "6" to "8", was $134 million at December 31, 1995. The principal amount in
these categories declined at the end of 1996 to $97 million, due to the
resolution of four higher risk credits totaling approximately $31 million during
the year. By the end of December 1997, the amount had increased again to $118
million, principally due to one larger, non-performing loan. These changes were
not deemed significant in determining loan loss reserves, although charge-offs
for these loans and changes in these categories would have affected the
historical loss analysis described earlier. There were no "9" rated loans
reported at any time during these periods because loans are charged off when
they are so rated.
Non-performing loans declined during 1996 to $19.5 million from $31.9 million at
year-end 1995. The increase in non performing loans in 1997 to $41.4 million is
principally due to one major non-performing commercial loan. These changes were
deemed relatively minor in a portfolio that exceeded $9.1 billion throughout the
period.
Overall Reserve
Management's evaluation of the factors above resulted in reserves for credit
losses of $147.1 million, $148.3 million and $147.6 million at the end of 1995,
1996 and 1997, respectively, reflecting the conclusion that losses inherent in
the portfolio were larger than would otherwise be suggested by the favorable
charge-off experience in recent years. At each year end in this period,
management concluded that the absolute level of the reserve should not decline
appreciably in view of the continuing growth of the loan portfolio. However, the
reserve as a percentage of year-end total loans declined from 1.49% at year-end
1995 to 1.36% at year-end 1996 and 1.17% at year-end 1997. This decline is
consistent with the trend Northern Trust has experienced during the recent
economic expansion whereby conservative underwriting standards, improved credit
quality and favorable charge-off experience have offset the steady growth in the
portfolio.
The components of the reserve did change over this period. Specific reserves
increased from 1995 to 1997. Allocated inherent reserves fell slightly in 1996
and then increased in 1997, largely as a result of the changes in methodology
summarized above, and unallocated inherent reserves rose in 1996 and returned to
approximately the 1995 level in 1997 as a result of the judgmental factors
earlier described.
The resulting provisions for credit losses were $6.0 million in 1995, $12
million in 1996 and $9 million in 1997. Net charge-offs were $5.9 million in
1995, $11.8 million in 1996, and $9.7 million in 1997.
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.
- -------------------------------------------------------------------------------
23
