<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to_____
Commission File Number 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312)630-6000
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
111,643,477 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on March 31, 1999)
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
March 31 December 31 March 31
-------- ----------- ---------
($ In Millions) 1999 1998 1998
- ---------------------------------------------------------------------------------------- -------- ----------- ---------
<S> <C> <C> <C>
Assets
Cash and Due from Banks $ 1,195.1 $ 2,366.0 $ 1,124.0
Federal Funds Sold and Securities Purchased under Agreements to Resell 672.7 1,164.4 1,622.1
Time Deposits with Banks 2,633.1 3,264.7 1,844.3
Other Interest-Bearing 117.5 21.8 67.6
Securities
Available for Sale 6,731.2 5,375.2 4,652.0
Held to Maturity (Fair value - $488.2 at March 1999, $485.7 at December 1998,
$500.0 at March 1998) 477.5 472.5 485.3
Trading Account 14.5 9.1 14.2
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Total Securities 7,223.2 5,856.8 5,151.5
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Loans and Leases
Commercial and Other 8,047.2 7,761.7 7,554.5
Residential Mortgages 5,999.3 5,885.2 5,397.7
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Total Loans and Leases (Net of unearned income - $230.5 at March 1999,
$224.3 at December 1998, $147.1 at March 1998) 14,046.5 13,646.9 12,952.2
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Reserve for Credit Losses (147.2) (146.8) (147.7)
Buildings and Equipment 346.2 340.2 327.8
Customers' Acceptance Liability 42.1 33.3 25.4
Trust Security Settlement Receivables 354.2 336.7 357.3
Other Assets 1,071.2 986.0 927.3
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Total Assets $27,554.6 $27,870.0 $24,251.8
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 3,919.5 $ 3,927.5 $ 3,626.9
Savings and Money Market 4,638.7 4,614.7 4,305.2
Savings Certificates 2,198.7 2,175.0 2,125.9
Other Time 513.5 540.2 470.5
Foreign Offices - Demand 504.3 413.4 445.1
- Time 4,817.5 6,531.9 5,192.6
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Total Deposits 16,592.2 18,202.7 16,166.2
Federal Funds Purchased 2,048.6 2,025.1 1,312.1
Securities Sold Under Agreements to Repurchase 2,843.5 2,114.9 875.8
Commercial Paper 144.8 148.1 128.8
Other Borrowings 1,588.7 1,099.2 1,909.3
Senior Notes 800.0 700.0 680.0
Long-Term Debt 458.5 458.2 416.8
Debt - Floating Rate Capital Securities 267.5 267.4 267.4
Liability on Acceptances 42.1 33.3 25.4
Other Liabilities 737.7 880.8 669.5
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Total Liabilities 25,523.6 25,929.7 22,451.3
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Stockholders' Equity
Preferred Stock 120.0 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized 280,000,000 shares at March 1999
December 1998 and March 1998; Outstanding 111,643,477 at March 1999,
111,214,740 at December 1998 and 111,518,993 at March 1998 189.9 189.9 189.9
Capital Surplus 202.5 212.9 225.9
Retained Earnings 1,650.0 1,582.9 1,391.2
Net Unrealized Gain (Loss) on Securities Available for Sale 3.9 (.6) 1.9
Common Stock Issuable - Performance Plan 56.3 30.4 31.5
Deferred Compensation - ESOP and Other (55.8) (44.3) (50.8)
Treasury Stock - (at cost, 2,317,285 shares at March 1999, 2,746,022 shares at
December 1998, and 2,441,769 shares at March 1998) (135.8) (150.9) (109.1)
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Total Stockholders' Equity 2,031.0 1,940.3 1,800.5
- ------------------------------------------------------------------------------------------ --------- --------- ---------
Total Liabilities and Stockholders' Equity $27,554.6 $27,870.0 $24,251.8
- ------------------------------------------------------------------------------------------ --------- --------- ---------
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
First Quarter
Ended March 31
--------------------------
($ In Millions Except Per Share Information) 1999 1998
- -------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Noninterest Income
Trust Fees $224.5 $193.7
Foreign Exchange Trading Profits 25.6 28.1
Treasury Management Fees 18.1 15.9
Security Commissions and Trading Income 7.5 7.2
Other Operating Income 10.4 11.0
Investment Security Gains - .7
- -------------------------------------------------------------------- ----------- -----------
Total Noninterest Income 286.1 256.6
- -------------------------------------------------------------------- ----------- -----------
Net Interest Income
Interest Income 370.2 357.3
Interest Expense 244.6 243.7
- -------------------------------------------------------------------- ----------- -----------
Net Interest Income 125.6 113.6
Provision for Credit Losses .5 4.0
- -------------------------------------------------------------------- ----------- -----------
Net Interest Income after Provision for Credit Losses 125.1 109.6
- -------------------------------------------------------------------- ----------- -----------
Noninterest Expenses
Compensation 135.7 121.7
Employee Benefits 26.0 23.5
Occupancy Expense 17.7 16.9
Equipment Expense 15.6 16.5
Other Operating Expenses 71.4 57.6
- -------------------------------------------------------------------- ----------- -----------
Total Noninterest Expenses 266.4 236.2
- -------------------------------------------------------------------- ----------- -----------
Income before Income Taxes 144.8 130.0
Provision for Income Taxes 49.7 45.1
- -------------------------------------------------------------------- ----------- -----------
Net Income $ 95.1 $ 84.9
- -------------------------------------------------------------------- ----------- -----------
Net Income Applicable to Common Stock $ 94.0 $ 83.6
- -------------------------------------------------------------------- ----------- -----------
Net Income Per Common Share - Basic $ .85 $ .75
- Diluted .82 .73
- -------------------------------------------------------------------- ----------- -----------
Average Number of Common Shares Outstanding - Basic 110,821,545 110,902,111
- Diluted 115,070,383 115,055,796
- -------------------------------------------------------------------- ----------- -----------
</TABLE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
First Quarter
Ended March 31
----------------------
($ In Millions) 1999 1998
- --------------------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
Net Income
Other Comprehensive Income (before tax) $ 95.1 $ 84.9
Unrealized Gains on Securities Available for Sale
Unrealized Holding Gains Arising during the Period 7.2 .3
Less: Reclassification Adjustments for Gains Included in Net Income - (.2)
Income Tax Provision Related to Items of Other Comprehensive Income (2.7) (.3)
- --------------------------------------------------------------------------------------------- ------- -------
Other Comprehensive Income 4.5 (.2)
- --------------------------------------------------------------------------------------------- ------- -------
Comprehensive Income $ 99.6 $ 84.7
- --------------------------------------------------------------------------------------------- ------- -------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NORTHERN TRUST CORPORATION
First Quarter
Ended March 31
------------------------
(In Millions) 1999 1998
- ---------------------------------------------------------------- ------------------------
<S> <C> <C>
Preferred Stock
Balance at January 1 and March 31 $ 120.0 $ 120.0
- ---------------------------------------------------------------- ------------------------
Common Stock
Balance at January 1 and March 31 189.9 189.9
- ---------------------------------------------------------------- ------------------------
Capital Surplus
Balance at January 1 212.9 225.5
Stock Issued - Incentive Plan and Awards (10.4) .4
- ---------------------------------------------------------------- ------------------------
Balance at March 31 202.5 225.9
- ---------------------------------------------------------------- ------------------------
Retained Earnings
Balance at January 1 1,582.9 1,330.8
Net Income 95.1 84.9
Dividend Declared - Common Stock (26.8) (23.4)
Dividends Declared - Preferred Stock (1.2) (1.1)
- ---------------------------------------------------------------- ------------------------
Balance at March 31 1,650.0 1,391.2
- ---------------------------------------------------------------- ------------------------
Net Unrealized Gain (Loss) on Securities Available for Sale
Balance at January 1 (.6) 2.1
Unrealized Gain (Loss), net 4.5 (.2)
- ---------------------------------------------------------------- ------------------------
Balance at March 31 3.9 1.9
- ---------------------------------------------------------------- ------------------------
Common Stock Issuable - Performance Plan
Balance at January 1 30.4 11.7
Stock Issuable, net of Stock Issued 25.9 19.8
- ---------------------------------------------------------------- ------------------------
Balance at March 31 56.3 31.5
- ---------------------------------------------------------------- ------------------------
Deferred Compensation - ESOP and Other
Balance at January 1 (44.3) (37.5)
Compensation Deferred (14.5) (15.4)
Compensation Amortized 3.0 2.1
- ---------------------------------------------------------------- ------------------------
Balance at March 31 (55.8) (50.8)
- ---------------------------------------------------------------- ------------------------
Treasury Stock
Balance at January 1 (150.9) (103.5)
Stock Options and Awards 40.6 22.7
Stock Purchased (25.5) (28.3)
- ---------------------------------------------------------------- ------------------------
Balance at March 31 (135.8) (109.1)
- ---------------------------------------------------------------- ------------------------
Total Stockholders' Equity at March 31 $2,031.0 $1,800.5
- ---------------------------------------------------------------- ------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION
First Quarter
Ended March 31
--------------------------
(In Millions) 1999 1998
- ---------------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 95.1 $ 84.9
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses .5 4.0
Depreciation on Buildings and Equipment 14.3 13.3
(Increase) Decrease in Interest Receivable (3.4) 8.9
Decrease in Interest Payable (9.6) (4.9)
Amortization and Accretion of Securities and Unearned Income (40.6) (75.8)
Amortization of Software, Goodwill and Other Intangibles 15.5 13.3
Net Increase in Trading Account Securities (5.4) (5.4)
Other Noncash, net (192.3) 23.9
- ---------------------------------------------------------------------------------------- ---------- ----------
Net Cash (Used in) Provided by Operating Activities (125.9) 62.2
- ---------------------------------------------------------------------------------------- ---------- ----------
Cash Flows from Investing Activities:
Net Decrease in Federal Funds Sold and Securities Purchased under Agreements to Resell 491.7 1,369.6
Net Decrease in Time Deposits with Banks 631.6 438.9
Net Increase in Other Interest-Bearing Assets (95.7) (33.1)
Purchases of Securities-Held to Maturity (43.9) (106.0)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 39.4 82.7
Purchases of Securities-Available for Sale (10,821.3) (22,089.6)
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 9,510.4 21,242.3
Net Increase in Loans and Leases (406.2) (363.9)
Purchases of Buildings and Equipment (20.3) (24.7)
Net Increase in Trust Security Settlement Receivables (17.5) (65.9)
Other, net .8 (2.4)
- ---------------------------------------------------------------------------------------- ---------- ----------
Net Cash (Used in) Provided by Investing Activities (731.0) 447.9
- ---------------------------------------------------------------------------------------- ---------- ----------
Cash Flows from Financing Activities:
Net Decrease in Deposits (1,610.5) (193.8)
Net Increase in Federal Funds Purchased 23.5 490.9
Net Increase (Decrease) in Securities Sold under Agreements to Repurchase 728.6 (263.9)
Net Decrease in Commercial Paper (3.3) (18.0)
Net Increase (Decrease) in Short-Term Other Borrowings 425.8 (939.4)
Proceeds from Term Federal Funds Purchased 2,555.3 184.0
Repayments of Term Federal Funds Purchased (2,491.6) (211.9)
Proceeds from Senior Notes & Long-Term Debt 100.4 -
Repayments on Senior Notes & Long-Term Debt - (128.0)
Treasury Stock Purchased (25.5) (28.3)
Net Proceeds from Stock Options 9.6 4.9
Cash Dividends Paid on Common and Preferred Stock (28.0) (24.4)
Other, net 1.7 2.9
- ---------------------------------------------------------------------------------------- ---------- ----------
Net Cash Used in Financing Activities (314.0) (1,125.0)
- ---------------------------------------------------------------------------------------- ---------- ----------
Decrease in Cash and Due from Banks (1,170.9) (614.9)
Cash and Due from Banks at Beginning of Year 2,366.0 1,738.9
- ---------------------------------------------------------------------------------------- ---------- ----------
Cash and Due from Banks at March 31 $ 1,195.1 $ 1,124.0
- ---------------------------------------------------------------------------------------- ---------- ----------
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 254.1 $ 248.6
Income Taxes Received (16.3) (3.1)
- ---------------------------------------------------------------------------------------- ---------- ----------
</TABLE>
5
<PAGE>
Notes to Consolidated Financial Statements
1. Basis of Presentation - The consolidated financial statements include the
accounts of Northern Trust Corporation and its subsidiaries (Northern
Trust), all of which are wholly-owned. Significant intercompany balances
and transactions have been eliminated. The consolidated financial
statements as of March 31, 1999 and 1998 have not been audited by
independent public accountants. In the opinion of management, all
adjustments necessary for a fair presentation of the financial position and
the results of operations for the interim periods have been made. All such
adjustments are of a normal recurring nature. Certain reclassifications
have been made to prior periods' consolidated financial statements to place
them on a basis comparable with the current period's consolidated financial
statements. For a description of Northern Trust's significant accounting
policies, refer to Note 1 of the Notes to Consolidated Financial Statements
in the 1998 Annual Report to Shareholders.
2. Securities - The following table summarizes the book and fair values of
securities.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 March 31, 1998
-----------------------------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Government $ 55.5 $ 55.5 $ 55.3 $ 55.4 $ 83.1 $ 83.1
Obligations of States
and Political Subdivisions 254.1 267.2 261.8 277.2 263.9 280.5
Federal Agency 2.0 2.0 3.0 3.0 8.0 8.0
Other 165.9 163.5 152.4 150.1 130.3 128.4
- ---------------------------------------------------------------------------------------------------------------------
Subtotal 477.5 488.2 472.5 485.7 485.3 500.0
- ---------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 249.2 249.2 260.0 260.0 312.6 312.6
Obligations of States
and Political Subdivisions 263.6 263.6 266.1 266.1 169.7 169.7
Federal Agency 6,099.0 6,099.0 4,695.4 4,695.4 4,027.3 4,027.3
Preferred Stock 101.5 101.5 135.4 135.4 112.5 112.5
Other 17.9 17.9 18.3 18.3 29.9 29.9
- ---------------------------------------------------------------------------------------------------------------------
Subtotal 6,731.2 6,731.2 5,375.2 5,375.2 4,652.0 4,652.0
- ---------------------------------------------------------------------------------------------------------------------
Trading Account 14.5 14.5 9.1 9.1 14.2 14.2
- ---------------------------------------------------------------------------------------------------------------------
Total Securities $7,223.2 $7,233.9 $5,856.8 $5,870.0 $5,151.5 $5,166.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity
March 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Book --------------------------- Fair
(In Millions) Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 55.5 $ -- $ -- $ 5.5
Obligations of States and Political Subdivisions 254.1 13.6 .5 267.2
Federal Agency 2.0 -- -- 2.0
Other 165.9 -- 2.4 163.5
- -----------------------------------------------------------------------------------------------------------------
Total $477.5 $13.6 $ 2.9 $ 488.2
- -----------------------------------------------------------------------------------------------------------------
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale
March 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized --------------------------- Fair
(In Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Government $ 248.8 $ .4 $ -- $ 249.2
Obligations of States and Political Subdivisions 256.1 7.8 .3 263.6
Federal Agency 6,099.6 2.5 3.1 6,099.0
Preferred Stock 101.2 .3 -- 101.5
Other 18.5 -- .6 17.9
- -----------------------------------------------------------------------------------------------------------------
Total $6,724.2 $11.0 $ 4.0 $6,731.2
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge securities available for sale totaled $5.1 million and $5.9 million
respectively, as of March 31, 1999. At March 31, 1999, stockholders' equity
included a credit of $3.9 million, net of tax, to recognize the appreciation on
securities available for sale and the related hedges.
3. Pledged Assets - Securities and loans pledged to secure public and trust
deposits, repurchase agreements and for other purposes as required or permitted
by law were $7.2 billion on March 31, 1999, $5.6 billion on December 31, 1998
and $5.2 billion on March 31, 1998.
4. Contingent Liabilities - Standby letters of credit outstanding were $1.6
billion on March 31, 1999, December 31, 1998 and March 31, 1998.
7
<PAGE>
5. Loans and Leases - Amounts outstanding in selected loan categories are shown
below.
<TABLE>
<CAPTION>
(In Millions) March 31, 1999 December 31, 1998 March 31, 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Residential Real Estate $ 5,999.3 $ 5,885.2 $ 5,397.7
Commercial 4,402.9 3,937.9 3,750.7
Broker 136.9 147.6 238.2
Commercial Real Estate 663.6 677.1 588.1
Personal 1,284.7 1,463.4 1,183.5
Other 554.2 509.6 802.7
Lease Financing 536.8 528.3 342.5
- ----------------------------------------------------------------------------------------------------------------
Total Domestic 13,578.4 13,149.1 12,303.4
International 468.1 497.8 648.8
- ----------------------------------------------------------------------------------------------------------------
Total Loans and Leases $14,046.5 $13,646.9 $12,952.2
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1999, other domestic and international loans included $659.6
million of overnight trust-related advances primarily in connection with next
day security settlements, compared with $592.6 million at December 31, 1998 and
$946.8 million at March 31, 1998.
At March 31, 1999, nonperforming loans totaled $30.2 million. Included in this
amount were loans with a recorded investment of $29.0 million which were also
classified as impaired. A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans
totaling $5.2 million had no portion of the reserve for credit losses allocated
to them, while impaired loans totaling $23.8 million had an allocated reserve of
$11.7 million. For the first quarter of 1999, the total recorded investment in
impaired loans averaged $26.7 million. Total interest income recorded on
impaired loans for the quarter ended March 31, 1999 was $105 thousand.
At March 31, 1998, nonperforming loans totaled $36.2 million and included $34.4
million of impaired loans. Of these impaired loans, $6.5 million had no reserve
allocation while $27.9 million had an allocated reserve of $6.4 million.
Impaired loans for the first quarter of 1998 averaged $36.9 million with $25
thousand of interest income recognized.
8
<PAGE>
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as
follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
-----------------------
(In Millions) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $146.8 $147.6
Charge-Offs
Commercial Real Estate (.2)
Other (.4) (4.5)
International
- -----------------------------------------------------------------------------
Total Charge-Offs (.4) (4.7)
- -----------------------------------------------------------------------------
Recoveries .3 .8
- -----------------------------------------------------------------------------
Net Charge-Offs (.1) (3.9)
Provision for Credit Losses .5 4.0
Reserve Related to Acquisitions
- -----------------------------------------------------------------------------
Balance at End of Period $147.2 $147.7
- -----------------------------------------------------------------------------
</TABLE>
The reserve for credit losses represents management's estimate of probable
inherent 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 nonperforming loans and also estimates losses inherent in other credit
exposures.
The result is a reserve with the following components:
Specific Reserve. The amount of specific reserves is determined through a loan-
by-loan analysis of nonperforming 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 primarily
based on management's judgment concerning the effect of the business cycle on
the creditworthiness of Northern Trust's borrowers, as well as historical
charge-off experience.
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.
9
<PAGE>
7. Net Income Per Common Share Computations - The computation of net income per
common share is presented in the following table.
<TABLE>
<CAPTION>
First Quarter
Ended March 31
----------------------------
($ In Millions Except Per Share Information) 1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Basic Net Income Per Common Share:
Net Income $95.1 $84.9
Less: Dividends on Preferred Stock (1.1) (1.3)
- ---------------------------------------------------------------------------
Net Income Applicable to Common Stock $94.0 $83.6
Average Number of Common Shares Outstanding 110,821,545 110,902,111
Basic Net Income Per Common Share $.85 $.75
Diluted Net Income Per Common Share:
Net Income Applicable to Common Stock $94.0 $83.6
- ---------------------------------------------------------------------------
Average Number of Common Shares Outstanding 110,821,545 110,902,111
Plus Dilutive Potential Common Shares:
Stock Options 3,228,940 3,305,992
Performance Shares 680,451 537,505
Other 339,447 310,188
- ---------------------------------------------------------------------------
Average Common and Potential Common Shares 115,070,383 115,055,796
Diluted Net Income Per Common Share $.82 $.73
- ---------------------------------------------------------------------------
</TABLE>
8. Accounting Standards Pronouncements -- On January 1, 1999, Northern Trust
adopted Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
the capitalization of certain external and internal costs of computer software
developed or obtained for internal use. Salary and benefit costs totaling $2.8
million were capitalized in the first quarter as a result of adopting SOP 98-1.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
10
<PAGE>
A company may elect to implement SFAS No. 133 at the start of any quarter
beginning with the third quarter of 1998, but must adopt the new statement by
January 1, 2000. SFAS No. 133 cannot be applied retroactively.
Northern Trust plans to adopt the new statement on January 1, 2000. The
accounting requirements of this statement are complex and the Financial
Accounting Standards Board is in the process of responding to several
significant interpretation requests. Northern Trust has concluded that certain
of its present hedge strategies, including those used to manage fixed interest
rate risk in its loan portfolio, are not likely to qualify for the special
accounting treatment contemplated by SFAS No. 133. Accordingly, management is
evaluating various alternatives for managing interest rate risk which may
include adjustments to hedge strategies, termination of certain swap contracts,
sale of fixed rate assets and issuance of longer-term fixed rate liabilities,
and would expect to implement one or more of these alternatives prior to or in
connection with the adoption of SFAS No. 133. Until the interpretive issues
referred to above are addressed and these alternatives fully evaluated by
management, it is not possible to quantify the actual impact that this statement
will have on the earnings and financial position of Northern Trust.
9. Acquisition - On May 15, 1998, Northern Trust Corporation completed the
acquisition of Trustbank Financial Corp., parent company of Trust Bank of
Colorado, for approximately $15 million in cash. The transaction was recorded
under the purchase method of accounting. Included in the acquisition cost was
$10.4 million of goodwill which is being amortized over fifteen years.
10. Business Segments
The table on page 17 reflecting the earnings contribution of Northern Trust's
business segments for the three months ended March 31, 1999 and 1998 is
incorporated by reference.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER EARNINGS HIGHLIGHTS
Net income increased 12% to a record $95.1 million from the $84.9 million earned
in the first quarter of last year. Net income per common share on a diluted
basis also increased 12% to a record $.82 for the first quarter, up from $.73
earned a year ago. This earnings performance produced an annualized return on
average common equity (ROE) of 20.62% versus 20.73% reported last year, and an
annualized return on average assets (ROA) of 1.31% versus 1.32% in 1998. Trust
fees grew by 16% and continue to represent the key driver of revenue growth. The
12% earnings per share growth and 20.62% ROE exceeded Northern Trust's strategic
financial targets, while the productivity ratio of 158% was slightly below the
corporate goal of 160%.
Noninterest Income
Noninterest income increased 11% and totaled $286.1 million for the quarter,
accounting for 68% of total taxable equivalent revenue. Trust fees of $224.5
million increased 16% or $30.8 million over the like period of 1998, and
represented 78% of noninterest income and 53% of total taxable equivalent
revenue. This fee growth was driven by strong new business and higher market
values of trust assets administered. Trust assets under administration increased
12% from a year ago and totaled $1.3 trillion at March 31, 1999. Trust assets
under the management of Northern Trust also grew 12% from the prior year and
totaled $242.7 billion at March 31, 1999. At December 31, 1998, trust assets
under administration totaled $1.26 trillion with $236.0 billion under
management.
Trust fees are based on the market value of assets managed and administered, the
volume of transactions, securities lending volume and spreads, and fees for
other services rendered. Asset-based trust fees are typically determined on a
sliding scale so that as the value of a client portfolio grows in size, Northern
Trust receives a smaller percentage of the increasing value as trust fee income.
Therefore, market value or other changes in a portfolio's size do not typically
have a proportionate impact on the level of trust fees. In addition, Corporate
and Institutional Services (C&IS) trust relationships are increasingly priced to
reflect earnings from activities such as custody-related deposits and foreign
exchange trading which are not included in trust fees.
12
<PAGE>
Noninterest Income (continued)
Trust fees from Personal Financial Services (PFS) increased 20% from the prior
year level of $91.8 million and totaled $110.6 million for the first quarter,
reflecting strong new business throughout Northern Trust's national PFS network
and favorable equity markets. All states recorded double-digit increases in
trust fees, with Florida, Arizona and Texas each up over 20%. The Wealth
Management Group also had excellent performance, with trust fees increasing 25%.
Wealth Management now administers $39.2 billion for significant family asset
pools nationwide, up 26% from last year. Total personal trust assets under
administration increased $20.1 billion from the prior year and $4.4 billion
since December 31, 1998, and totaled $125.6 billion at March 31, 1999. Of the
personal trust assets under administration, $75.8 billion is managed by Northern
Trust compared to $64.9 billion one year ago and $73.4 billion at December 31,
1998. Net recurring PFS new business sold through March 31, 1999 and expected to
transition throughout the year was $15.0 million in annualized trust fees. In
comparison, net recurring new business for all of 1998 was $40 million.
With expansion in Indian Wells, California and entry into Grand Rapids, Michigan
in 1999, Northern Trust's network of Personal Financial Services offices now
includes 69 locations in seven states. Several additional offices are expected
to open during the remainder of 1999.
Trust fees from Corporate & Institutional Services (C&IS) increased 12% in the
quarter and totaled $113.9 million compared to $101.9 million in the year-ago
quarter, reflecting strong new business. C&IS trust fees are derived from a full
range of custody, investment, advisory and recordkeeping services rendered to
retirement and other asset pools of corporate and institutional clients
worldwide. Although all of these services contributed to the first quarter fee
growth, nearly 60% of the increase was a result of very strong securities
lending fees, which increased 39% or $7.1 million to $25.0 million primarily as
a result of new business, increased spreads for both domestic and international
securities and favorable equity markets. Excellent new business results drove
fees generated by Northern Trust Retirement Consulting, LLC up 31% or $2.4
million compared to last year's first quarter. Fees from investment products
increased $2.2 million to $33.6 million while custody fees increased modestly.
Total C&IS trust assets under administration increased to $1.17 trillion at
March 31, 1999, up 11% from March 31, 1998 and 3% from December 31, 1998. Of the
C&IS trust assets under administration, $166.9 billion is managed by Northern
Trust, up 10% from March 31, 1998. Trust assets under administration included
approximately $207 billion of global custody assets.
Net new C&IS business sold in the first quarter and expected to transition
during the year was $14.9 million in annualized trust fees. In comparison, net
new business sold for all of 1998 was $70 million.
13
<PAGE>
Noninterest Income (continued)
Foreign exchange trading profits were $25.6 million compared to $28.1 million in
the first quarter of the prior year. First quarter foreign exchange activity was
impacted by a lower level of custody-related foreign exchange transactions,
reflecting in particular the end of trading among the 11 European currencies
that became convertible at fixed rates into the euro effective January 1, 1999.
Total treasury management revenues from both fees and the computed value of
compensating deposit balances increased 6% from the first quarter of 1998 to
$24.8 million, reflecting the continued growth in business from both new and
existing clients. The fee portion of these revenues accrued in the quarter was
$18.1 million, up 14% from $15.9 million in the comparable quarter last year.
Security commissions and trading income of $7.5 million were up 5% from a year
ago. This reflects a 21% increase in brokerage commissions at Northern Trust
Securities, Inc. offset in part by the absence of futures commissions resulting
from Northern Trust's exit from the futures business in the middle of last year.
Other operating income was $10.4 million for the first quarter compared with
$11.0 million in the same period of last year, reflecting primarily a reduction
in trust deposit-related fee income.
Net Interest Income
Net interest income for the quarter totaled $125.6 million, 11% higher than the
$113.6 million reported in the first quarter of 1998. Net interest income is
defined as the total of interest income and amortized fees on earning assets,
less interest expense on deposits and borrowed funds, adjusted for the impact of
off-balance sheet hedging activity. When net interest income is adjusted to a
fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and
partially taxable assets are comparable, although the adjustment to a FTE basis
has no impact on net income. Net interest income on a FTE basis for the quarter
was $134.5 million, up 10% from the $122.0 million reported in 1998. The
increase in net interest income reflects 12% growth in average earning asset
levels and higher levels of noninterest-related funds. The net interest margin
declined to 2.07% from 2.11% reported in the year-ago quarter. The slight
decline in the net interest margin is largely attributable to the growth in
short-term, low margin assets.
Earning assets for the first quarter averaged $26.3 billion, up 12% from the
$23.4 billion average for the same quarter of 1998. The $2.9 billion growth in
average earning assets was concentrated in the loan portfolio which increased
11% to average $14.1 billion and in money market assets which increased 35% to
$4.7 billion. Securities averaged $7.5 billion in the quarter, up a modest 4%
from last year as Northern Trust invested assets more heavily in money market
assets rather than short-term government securities in order to maximize after-
tax yields.
14
<PAGE>
Net Interest Income (continued)
The loan growth was concentrated within the domestic portfolio which increased
$1.4 billion to average $13.5 billion, while international loans decreased 16%.
Residential mortgage loans accounted for nearly one-half of the domestic growth,
increasing 13% to average $5.9 billion for the quarter, comprising 43% of the
total loan portfolio. Commercial and industrial loans averaged $4.4 billion
during the first quarter compared to $3.9 billion in the prior year quarter.
Funding for the growth in earning assets came from several sources. Total
interest-bearing deposits averaged $13.3 billion, up 8% or $1.0 billion from the
first quarter of 1998. This growth came principally from savings and money
market deposits (up $469 million) and foreign office time deposits (up $420
million). The increase in foreign office time deposits resulted primarily from
continued growth in global custody activity. Other interest-related funds grew
23% or $1.7 billion resulting predominantly from higher levels of federal funds
purchased and securities sold under agreements to repurchase in support of the
growth in money market assets. Noninterest-related funds increased 4% to average
$3.7 billion, due to growth in common stockholders' equity resulting from
retained earnings.
Provision for Credit Losses
The provision for credit losses of $.5 million in the first quarter was $3.5
million below the comparable quarter in 1998. For a discussion of the provision
and reserve for credit losses, refer to the Asset Quality section.
Noninterest Expenses
Noninterest expenses totaled $266.4 million for the quarter, an increase of 13%
or $30.2 million from the $236.2 million in the year-ago quarter. Approximately
55% of the increase in expenses related to salaries, incentives and employee
benefits. In addition, the expense growth reflects costs associated with
technology investments, business promotion, and expansion of the PFS office
network.
Compensation and benefits, which represent 61% of total noninterest expenses,
increased to $161.7 million from $145.2 million in the year-ago quarter. The
increase was primarily attributable to staff growth, merit increases and higher
performance-based incentives. These increases were partially offset by staff
reductions, resulting from the outsourcing of the Northern Trust's Illinois
check processing activities at year-end 1998, Northern Trust's exit from the
futures business in the middle of 1998, and the capitalization of salary costs
associated with the development of software in accordance with SOP 98-1 (as
described in Note 8). Staff levels increased from one year ago to support growth
initiatives and strong new business in both PFS and C&IS. Staff on a full-time
equivalent basis at
15
<PAGE>
Noninterest Expenses (continued)
March 31, 1999 totaled 8,043, up 5% from 7,672 at March 31, 1998. Staff levels
would have been approximately 9% higher than a year ago had the Northern
Trust not outsourced the Illinois check processing. Higher performance-based
compensation is principally attributable to increased accruals for incentive
plans, as a result of new business and strong corporate performance, and for
stock-based compensation plans.
Net occupancy expense totaled $17.7 million, up 5% from $16.9 million in the
first quarter of 1998, due primarily to the opening of additional PFS offices
over the past twelve months and additional space leased to support business
growth. The principal components of the increase were higher net rental costs,
building maintenance and depreciation, lease operating and utility expense.
Equipment expense, comprised of depreciation, rental and maintenance costs,
totaled $15.6 million, down 5% from the $16.5 million reported in the first
quarter of 1998. The decrease from the previous year resulted primarily from a
reduction in equipment rental costs and related maintenance, brought about by
the termination of certain leases associated with the relocation of the computer
data facility during 1998. Partially offsetting this decline were higher levels
of depreciation of computer hardware and equipment.
Other operating expenses in the quarter totaled $71.4 million compared to $57.6
million last year. Professional services associated with the outsourcing of
check processing increased other operating expenses by $4.0 million. Higher 1999
expense levels also reflect continued investment in technology, expansion of the
personal trust and banking office network, and higher operating expenses
necessary to support business growth. The expense categories most affected were
business development, contract data processing, telecommunications charges,
amortization of software, and costs associated with processing errors and legal
claims.
The components of other operating expenses were as follows:
<TABLE>
<CAPTION>
First Quarter
Ended March 31
-----------------------------
(In Millions) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Business Development $ 9.5 $ 8.1
Purchased Professional Services 26.9 20.2
Telecommunications 4.3 3.4
Postage and Supplies 6.8 6.1
Software Amortization 11.9 10.0
Goodwill and Other Intangibles Amortization 3.6 3.3
Other Expense 8.4 6.5
- ------------------------------------------------------------------------------------------
Total Other Operating Expenses $71.4 $57.6
- ------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Provision for Income Taxes
The provision for income taxes was $49.7 million for the first quarter compared
with $45.1 million in the year-ago quarter. The higher tax provision in 1999
resulted primarily from the growth in taxable earnings for federal income tax
purposes. The effective tax rate was 34.3% for 1999 and 34.7% for 1998.
BUSINESS SEGMENTS
The following table reflects the earnings contribution of Northern Trust's
business segments for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Corporate and Personal
Institutional Financial Treasury and
Services Services Other Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
($ in Millions) 1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest Income
Trust Fees $ 113.9 $ 101.9 $ 110.6 $ 91.8 $ - $ - $ 224.5 $ 193.7
Other 48.5 48.6 12.7 12.8 .4 1.5 61.6 62.9
Net Interest Income after
Provision for Credit Losses* 42.7 32.3 87.2 80.9 4.1 4.8 134.0 118.0
Noninterest Expenses 126.9 118.4 127.8 107.3 11.7 10.5 266.4 236.2
Income before Income Taxes* 78.2 64.4 82.7 78.2 (7.2) (4.2) 153.7 138.4
Provision for Income Taxes* 30.7 25.3 32.9 31.0 (5.0) (2.8) 58.6 53.5
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 47.5 $ 39.1 $ 49.8 $ 47.2 $ (2.2) $ (1.4) $ 95.1 $ 84.9
- --------------------------------------------------------------------------------------------------------------------------------
Percentage Net Income
Contribution 50% 46% 52% 56% (2)% (2)% 100% 100%
- --------------------------------------------------------------------------------------------------------------------------------
Average Assets $12,603.2 $11,143.4 $10,967.5 $9,564.1 $5,809.6 $5,298.4 $29,380.3 $26,005.9
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Stated on a fully taxable equivalent basis (FTE). Total includes FTE
adjustments of $8.9 million for 1999 and $8.4 million for 1998.
Note: Certain reclassifications have been made to 1998 financial information to
conform to the current year's presentation.
Corporate and Institutional Services
Noninterest Income increased 8% from $150.5 million in the first quarter of 1998
to $162.4 million in the first quarter of 1999. Trust fees reflecting strong new
business growth increased 12% to $113.9 million in the current quarter compared
to $101.9 million in last year's first quarter. Other income remained relatively
unchanged at $48.5 million in the current quarter.
Net interest income after provision for credit losses increased 32% from $32.3
million in last year's first quarter to $42.7 million in the current quarter
reflecting an 11% increase in earning assets and an increase in the net interest
margin to 1.64% from 1.50% a year ago.
Noninterest expenses were up 7% to $126.9 million in the current quarter due
primarily to staff growth and increased expense allocations for product and
administrative support.
17
<PAGE>
Personal Financial Services
Noninterest income increased 18% from $104.6 million in last year's first
quarter to $123.3 million in the current quarter due mainly to a 20% increase in
trust fees which totaled $110.6 million in the current quarter resulting
primarily from strong new business growth and favorable equity markets. Other
income decreased slightly from $12.8 million in last year's first quarter to
$12.7 million in the current quarter.
Net interest income after provision for credit losses increased 8% to $87.2
million in the current quarter due primarily to a $1.2 billion increase in
average loan volume.
Noninterest expenses increased 19% from $107.3 million in the last year's first
quarter to $127.8 million in the current quarter. Approximately 51% of the
increase related to salaries, incentives and employee benefits, which was driven
by staff growth and performance-based incentive plans, and 25% to expense
allocations for product and administrative support. Business promotion costs
increased 30% as PFS expanded its advertising and special client programs.
Treasury and Other
The Treasury Department is responsible for managing the Bank's wholesale
funding, capital position and interest rate risk, as well as the portfolio of
interest rate risk management instruments. It is also responsible for the
investment portfolios of the Corporation and the Bank. "Other" corporate income
and expenses represent items that are not allocated to the business units and
generally represent certain nonrecurring items and certain executive level
compensation. The first quarter results of Treasury and Other reflect a higher
level of net interest income generated by the Treasury Department which was more
than offset by increased corporate level interest expense and compensation
costs.
YEAR 2000 PROJECT
Remediation Status. As of March 31, 1999, Northern Trust had completed Year 2000
renovation and validation for all mission critical information technology
systems, including those provided by third parties. For approximately 98% of
these, Northern Trust had also completed the implementation stage, in which
systems or applications are returned to production after the review of test
results. Implementation of all of the remaining systems is expected by June 30,
1999, except for one system where a decision will be made in the second quarter
whether to proceed with plans to convert to an already-validated third-party
system or renovate the existing system. In measuring the progress of this work,
Northern Trust has used an inclusive definition of "mission critical" items,
with approximately 90% of Northern Trust's core applications included in this
category. With respect to non-mission critical applications, including non-
critical desktop software, Northern Trust's target for substantial completion of
Year 2000 work is June 1999.
18
<PAGE>
YEAR 2000 PROJECT (continued)
Northern Trust has also commenced integration testing, which will continue
through 1999. This testing is designed to assure that logically related systems
work with each other and that each system can run on compliant versions of
hardware and operating system software. During this period, Northern Trust is
also using recently-developed, automated audit tools to determine whether any
additional changes to already-renovated code are needed.
In addition to its Year 2000 work on systems and applications, Northern Trust
through its Business Issues Task Force has coordinated a review of various
infrastructure issues, such as checking elevators and heating, ventilation and
air-conditioning equipment, some of which include embedded systems, to verify
that the equipment will function in the Year 2000 or determine that remediation
or alternate plans will be needed. The assessment phase of this task has been
completed. Renovation, validation and implementation have been completed for
most of the mission critical equipment identified as needing renovation,
although Northern Trust continues to review documentation furnished by vendors
of some equipment used outside Illinois. Employee access systems in Northern
Trust's Chicago complex and New York offices are scheduled to be replaced with
Year 2000 ready systems by the end of the third quarter. Contingency plans are
also being developed for Northern Trust's important locations, to allow critical
functions to continue in the event of infrastructure problems.
Credit and Other Year 2000 Readiness Reviews. As part of its credit analysis
process, Northern Trust has developed and implemented a project plan for
assessing the Year 2000 readiness of its significant credit clients. Northern
Trust completed its initial assessment of Year 2000 readiness for these clients
in 1998 and, as of April 30, 1999, had received responses from approximately 50%
of the clients contacted in a second round of inquiries. Northern Trust's Year
2000 readiness review process is intended to screen for clients with more than
moderate Year 2000 risk so that these clients can be reviewed more closely and
their progress more frequently monitored. The responses received as of April 30,
together with publicly-available information evaluated, has led Northern Trust
to assign more than moderate Year 2000 risk ratings to credit clients with
approximately $85 million in outstanding loans. The ratings reflect some
postponements since December 31, 1998 in clients' announced Year 2000
remediation deadlines, which can result in a higher risk rating, as well as
other issues identified in the readiness review, including issues relating to
credit clients' progress in contingency planning and use of third-party reviews.
Problems encountered by a borrower in developing or executing a Year 2000
strategy are considered as part of the overall risk assessment. As part of its
continuing assessment process, Northern Trust expects to take action, which may
include additional credit loss provisions, if appropriate in light of its
evaluation of clients' overall risk profiles.
In addition, as part of its fiduciary activities, Northern Trust has developed
and is implementing a plan for taking the Year 2000 issue into consideration in
evaluating investment portfolios, and a plan to evaluate and deal with the Year
2000 issues presented by other types of property held in trust. Northern Trust
has also contacted clients to explain its Year 2000 Program and will continue
these communications throughout the year.
19
<PAGE>
YEAR 2000 PROJECT (continued)
Suppliers and other Third-Party Reviews. The Business Issues Task Force is
monitoring programs to contact important vendors and suppliers to verify their
Year 2000 readiness. Northern Trust has evaluated the risk posed by each
supplier based on its criticality, its responses to inquiries about Year 2000
readiness and, where applicable, test results furnished. This evaluation is
being used in the contingency planning process described later.
During 1998, Northern Trust completed on-site, Year 2000 due diligence visits
with subcustodians who account for most of Northern Trust's global securities
processing -- approximately 95% as measured by market value of holdings and 88%
as measured by current transaction volume. Northern Trust has conducted
additional reviews by teleconference, and some of the on-site reviews in effect
covered more than the location visited because the subcustodian reviewed acts in
several markets. Reviews conducted by these methods have covered approximately
99.9% of both transaction volume and market value of holdings. The great
majority of these subcustodians appear to be making adequate progress, although
Northern Trust has transitioned its business to another subcustodian in one
market as a result of concerns that included Year 2000 issues. Northern Trust is
a member of the Steering Committee of Custody 2000, a working group within the
Global 2000 Coordinating Group of financial institutions around the world which
is facilitating Year 2000 testing between global custodians and their
subcustodians. Northern Trust will continue to monitor subcustodians' Year 2000
work throughout the year and develop contingency plans, which will include
moving to another subcustodian where necessary and feasible.
Northern Trust also relies on entities such as the Federal Reserve System,
Depository Trust Company, Participants Trust Company, Society for Worldwide
Interbank Financial Telecommunications (SWIFT), and the Clearing House Interbank
Payment Systems (CHIPS) in its securities processing and banking businesses, as
do other financial services providers in similar businesses. Testing with these
organizations has been completed. Northern Trust has also participated in the
securities industry-wide testing sponsored by the Securities Industry
Association Asset Managers Forum.
Northern Trust also plans to test for certain key dates in the new century with
other critical third party service providers, although it may be necessary to
rely on proxy testing in some cases. The majority of this work is expected to be
done in the first half of 1999.
Client Testing. Northern Trust will offer testing opportunities to its clients
for some of its products and services. In appropriate circumstances, Northern
Trust will make available testing documentation, including test results, to
clients instead of conducting actual tests. Northern Trust has furnished a
Client Testing Catalog to its corporate and institutional clients, describing
plans for client testing.
20
<PAGE>
YEAR 2000 PROJECT (continued)
Contingency Planning. Although Northern Trust is attempting to monitor and
validate the efforts of other parties, it cannot control the success of these
efforts. It is also possible that there will be unanticipated problems with
systems Northern Trust has renovated and tested. Northern Trust has not tried to
predict the severity of the various malfunctions that may occur, alone or in
combination with other external or internal problems. Instead, Northern Trust is
developing contingency plans, where practical, to provide alternatives in
situations where an entity furnishing a critical product or service, or with
which Northern Trust has another business relationship critical to its
operations, experiences significant Year 2000 difficulties that will affect
Northern Trust or where internal problems develop.
The contingency planning process focuses on Northern Trust's critical functions,
such as securities processing, investment and trading, money movement, cash
services, client servicing and balance sheet and liquidity management. In each
area, the process identifies various Year 2000 failure scenarios that could
threaten these functions, and then identifies where practicable alternative
methods to perform the function or other strategies to mitigate the effect of
the failure. Contingency planning is now a principal focus of Northern Trust's
Year 2000 work. The basic Year 2000 contingency plans are expected to be
developed by the end of the second quarter, with testing and refinement to
continue into the third quarter.
The Year 2000 contingency planning effort builds on Northern Trust's existing
business continuity plans and recovery capabilities. These include or are
expected to include synchronous mirroring of data processed at the main data
center in Chicago at a nearby back-up site, as well as a contract for remote
hotsite recovery in the event of a regional problem; a redundant, alternate-site
backup for wire transfer functions; independent linkages with major securities
depositories; and the use of standby power generators for the Chicago data
center and wire transfer functions, for Northern Trust's London Branch and for
Northern Trust Retirement Consulting LLC. In developing Year 2000 contingency
plans for managing balance sheet and liquidity risk, Northern Trust is likewise
building on existing plans for dealing with market or other developments that
could create funding and liquidity issues. The Year 2000 contingency plans call
for restructuring the shorter-term portion of the balance sheet to increase
liquidity as year-end approaches; developing alternative sources of funding to
meet unusual needs should they occur; and positioning Northern Trust's banking
subsidiaries to be able to respond to unusual client demands near and over the
year-end.
In order to provide as stable an environment as possible going into the new
year, Northern Trust has imposed a systems moratorium commencing September 20,
1999, after which no programming changes may be made without the specific
approval of the head of Worldwide Technology and the Year 2000 Project Manager.
Northern Trust is also developing event management plans for the period from
late December 1999 through early January 2000, refining existing models for
managing information flow,
21
<PAGE>
YEAR 2000 PROJECT (continued)
communication processes and decision-making. A Steering Committee consisting of
the Corporation's Management Committee and key Year 2000 Project Team members
will be available to provide on-site strategic decisions and direction, and key
staff members will be in critical offices over the Year 2000 weekend to monitor
the rollover. Systems analysts and operations personnel will also be conducting
systems and data validation throughout the Year 2000 weekend, and backup
personnel in all key areas will be on standby in the event they are needed.
Expense. The estimated total expense for Northern Trust's Year 2000 renovation
project is $35 million. This estimate includes the cost of purchasing licenses
for software programming tools, the cost of the time of internal staff in
Worldwide Technology, the cost of consultants and $6.0 million of accelerated
purchases of equipment necessary to support contingency plans and Year 2000
testing. The estimate does not include the time that internal staff in user
departments are devoting to testing programming changes, although this testing
is not believed to have added nor expected to add significant incremental costs.
These Year 2000 costs have been and are expected to be expensed as incurred,
except that the costs for equipment supporting contingency plans and testing is
being amortized over its useful life in accordance with Northern Trust's
accounting policies. As of March 31, 1999, $26.4 million of the estimated $35
million of project costs have been incurred. $4.8 million of costs were incurred
in the first quarter of 1999, of which $2.9 million related to capitalized
equipment purchases. The remaining costs are expected to be incurred fairly
evenly through the first quarter of 2000. Of the total Worldwide Technology
Group expenses (excluding depreciation and amortization) for 1997, 1998 and
1999, it is estimated that 12% to 14% will be for Year 2000 renovation costs, or
less than 1.5% of Northern Trust's anticipated aggregate noninterest expenses
for those years. Although the priority given to Year 2000 work may result in
extending the time for completing some other technology projects, these delays
are not expected to have a material effect on Northern Trust's business.
Potential Risks. Northern Trust recognizes the importance of successfully
completing all aspects of the Year 2000 Project. Northern Trust data processing
software and hardware provide essential support to virtually all of its
businesses. Failure to complete Year 2000 renovation of the critical systems
used by Northern Trust thoroughly and on a timely basis could have a materially
adverse effect on its operations and financial performance, as could Year 2000
problems experienced by others on whom Northern Trust relies or with whom it
otherwise does business. Because of the range of possible issues and the large
number of variables involved, it is impossible to quantify the potential cost of
problems should Northern Trust's remediation efforts or the efforts of those
with whom it does business not be successful and Northern Trust's contingency
plans fail to avoid or mitigate the resulting problems. The issue is of such
magnitude, however, that these costs could be quite material. Failure to make
satisfactory progress toward Year 2000 readiness or to take other agency-
mandated steps could also result in action by state or federal regulators that
could adversely affect Northern Trust's business.
22
<PAGE>
BALANCE SHEET
Total assets at March 31, 1999 were $27.6 billion and averaged $29.4 billion for
the first quarter, up 13% from last year's average of $26.0 billion. Due to
strong demand for credit, loans and leases grew to $14.0 billion at March 31,
1999, and averaged $14.1 billion for the quarter. This compares with $13.0
billion in total loans and leases at March 31, 1998 and $12.7 billion on average
for the first quarter of last year.
Driven by continued strong earnings growth, offset in part by stock repurchases
under Northern Trust's ongoing stock buyback program, common stockholders'
equity increased to $1.91 billion at March 31, 1999 and averaged $1.85 billion
for the quarter, up 13% from the $1.64 billion average in last year's first
quarter. Total stockholders' equity averaged $1.97 billion for the first quarter
compared with $1.76 billion in 1998.
During the quarter, Northern Trust acquired a total of 289,294 of its common
shares at a cost of $25.5 million pursuant to the stock buyback program
authorized by the Board of Directors. An additional 1.3 million shares may be
purchased after March 31, 1999 under the buyback program.
Northern Trust Corporation's risk-based capital ratios remained strong at 9.9%
for tier 1 capital and 13.1% for total capital at March 31, 1999. These capital
ratios are well above the minimum regulatory requirements of 4% for tier 1 and
8% for total risk-based capital ratios. The leverage ratio (tier 1 capital to
first quarter average assets) of 7.0% at March 31, 1999, also exceeded the
minimum regulatory requirement of 3%. In addition, each of Northern Trust's
subsidiary banks had a ratio above 8.5% for tier 1 capital, 11.4% for total
risk-based capital, and 5.9% for the leverage ratio.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans, restructured loans and other
real estate owned (OREO). Nonperforming assets at March 31, 1999 totaled $32.3
million, compared with $35.2 million at December 31, 1998 and $39.2 million at
March 31, 1998. Domestic nonaccrual loans and leases, consisting primarily of
commercial loans, totaled $30.2 million, or .22% of total domestic loans and
leases at March 31, 1999. At December 31, 1998 and March 31, 1998, domestic
nonaccrual loans and leases totaled $30.5 million and $33.7 million,
respectively.
The table on the following page presents the outstanding amounts of nonaccrual
loans and leases, restructured loans and OREO. Also shown are loans that have
interest or principal payments that are delinquent 90 days or more and are still
accruing interest. The balance in this category at any quarter end can fluctuate
widely based on the timing of cash collections, renegotiations and renewals.
23
<PAGE>
ASSET QUALITY (continued)
<TABLE>
<CAPTION>
March 31 December 31 March 31
--------------------------------------------
(In Millions) 1999 1998 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual Loans
Domestic
Residential Real Estate $ 5.3 $ 5.2 $ 4.1
Commercial 21.7 21.8 22.4
Commercial Real Estate 2.8 2.9 6.8
Personal .4 .6 .4
- --------------------------------------------------------------------------------------------
Total Domestic 30.2 30.5 33.7
International - - -
- --------------------------------------------------------------------------------------------
Total Nonaccrual Loans 30.2 30.5 33.7
Restructured Loans - 2.4 2.5
Other Real Estate Owned 2.1 2.3 3.0
- --------------------------------------------------------------------------------------------
Total Nonperforming Assets $32.3 $35.2 $39.2
- --------------------------------------------------------------------------------------------
Total 90 Day Past Due Loans (still accruing) $14.3 $30.0 $16.1
- --------------------------------------------------------------------------------------------
</TABLE>
Provision and Reserve for Credit Losses
The provision for credit losses is the charge against current earnings that is
determined by management, through a disciplined credit review process, as the
amount needed to maintain a reserve that is sufficient to absorb credit losses
inherent in Northern Trust's loan and lease portfolios and other credit
undertakings. The reserve provides for probable losses that have been identified
with specific borrower relationships (specific loss component) and for probable
losses that are believed to be inherent in the loan and lease portfolios and
other credit undertakings but that have not yet been specifically identified
(inherent loss component).
Footnote 6 to the Consolidated Financial Statements includes a table that
analyzes the reserve for credit losses at March 31, 1999 and identifies the
charge-offs and recoveries by loan category and the provisions for credit losses
during the three-month period ended March 31, 1999. The table on the following
page shows (i) the specific portion of the reserve, (ii) the allocated portion
of the inherent reserve and its components by loan category and (iii) the
unallocated portion of the reserve at March 31, 1999, December 31, 1998, and
March 31, 1998.
24
<PAGE>
Provision and Reserve for Credit Losses (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE RESERVE FOR CREDIT LOSSES
- -------------------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 March 31, 1998
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Reserve Loans to Reserve Loans to Reserve Loans to
($ in millions) Amount Total Loans Amount Total Loans Amount Total Loans
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Specific Reserves $ 11.7 -% $ 5.9 -% $ 6.4 -%
- -------------------------------------------------------------------------------------------------------------
Inherent Reserves
Residential Real Estate 11.1 43 11.0 43 8.6 42
Commercial 73.0 32 77.4 29 76.3 30
Commercial Real Estate 12.4 5 11.8 5 11.9 5
Personal 3.1 9 3.2 11 3.7 9
Other - 4 - 5 - 6
Lease Financing 2.9 4 2.9 4 2.9 3
International 3.4 3 3.6 3 4.5 5
Unallocated 29.6 - 31.0 - 33.4 -
- -------------------------------------------------------------------------------------------------------------
Total Inherent Reserve $135.5 100% $140.9 100% $141.3 100%
- -------------------------------------------------------------------------------------------------------------
Total Reserve $147.2 100% $146.8 100% $147.7 100%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Specific Component of the Reserve. At March 31, 1999, the specific component of
the reserve amounted to $11.7 million compared to $5.9 million at the end of
1998. The increase in the specific loss component of the reserve primarily
relates to one commercial credit where reported settlement negotiations among
other parties during the quarter indicated that losses on the loan are likely to
be in excess of amounts previously allocated to this loan.
Allocated Inherent Component of the Reserve. The $4.0 million decrease in the
allocated portion of the inherent reserve during the first three months of 1999
to $105.9 million at March 31, 1999, principally reflects a reduction in
exposure to higher risk credits as measured by Northern Trust's internal credit
ratings.
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 all
appropriate considerations, including management's view that the reserve should
have a margin that recognizes the imprecision inherent in the process of
estimating expected credit losses. On a net basis, the unallocated inherent
portion of the reserve decreased by $1.4 million, reflecting management's
judgment that credit quality continued to be strong as evidenced by the trend in
the level of nonperforming assets and level of net charge-offs.
Other Factors. During the three months ended March 31, 1999, there were no
significant changes in concentration of credits that impacted asset quality. The
total amount of the highest risk loans, those rated "6" to "8" (based on
Northern's internal rating scale which closely parallels that of the banking
regulators), was $97 million at March 31, 1999 and $99 million at December 31,
1998, reflecting minor charge-offs and repayments received on these credits.
25
<PAGE>
Provision and Reserve for Credit Losses (continued)
Overall Reserve. Management's evaluation of the factors above resulted in a
reserve for credit losses of $147.2 million at March 31, 1999 compared to $146.8
million at the end of 1998. This is reflective of further deterioration in one
commercial loan, which required an increase in the specific component of the
reserve, offset by quality improvements. The reserve as a percentage of total
loans declined to 1.05% at March 31, 1999 from 1.08% at year-end 1998. 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.
Provision. The resulting provision for credit losses was $500 thousand during
the first three months of 1999. Net charge-offs were $74 thousand for the
period.
MARKET RISK MANAGEMENT
As described in the 1998 Annual Report to Shareholders, Northern Trust manages
its interest rate risk through measurement techniques which include simulation
of earnings, simulation of the economic value of equity, and gap analysis. Also,
as part of its risk management activities, it regularly measures the risk of
loss associated with foreign currency positions using a value at risk model.
Based on this continuing evaluation process, the Northern Trust's interest rate
risk position and the value at risk associated with the foreign exchange trading
portfolio have not changed significantly since December 31, 1998.
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking, such as
the discussion of Northern Trust's financial goals, expansion and business
development plans, business prospects and positioning with respect to market and
pricing trends, new business results, credit quality, outlook and reserves,
planned capital expenditures and technology spending, planned schedules or
expected completion dates for Year 2000 work, and the effect of various matters
(including Year 2000 issues) on Northern Trust's business. These statements
speak of Northern Trust's plans, goals, beliefs or expectations, refer to
estimates or use similar terms. Those relating to Year 2000 matters also
constitute Year 2000 readiness disclosures. Actual results could differ
materially from the results indicated by these statements because the
realization of those results is subject to many uncertainties including:
. The future health of the U.S. and international economies and other
economic factors that affect wealth creation, investment and savings
patterns, and Northern Trust's interest rate risk exposure and credit risk.
. Changes in U.S. and worldwide securities markets, with respect to the
market values of financial assets and the level of volatility in certain
markets such as foreign exchange.
26
<PAGE>
FORWARD-LOOKING INFORMATION (continued)
. Regulatory developments and changes in accounting requirements or
interpretations in the U.S. and other countries where Northern Trust has
significant business.
. Changes in the nature of Northern Trust's competition resulting from
industry consolidation, regulatory change and other factors, as well as
actions taken by particular competitors.
. Northern Trust's success in continuing to generate new business in its
existing markets, as well as its success in identifying and penetrating
targeted markets, through acquisition or otherwise, and generating a profit
in those markets in a reasonable time.
. Northern Trust's ability to continue to fund and accomplish technological
innovation, improve processes and controls and attract and retain capable
staff, in order to deal with increasing volume and complexity in many of
its businesses and technology challenges such as the Year 2000 system
renovation.
. The ability of various vendors, clients, counterparties and governmental or
private entities on which Northern Trust's business depends, or in which
Northern Trust invests for itself or its clients, to complete Year 2000
systems renovation efforts on a timely basis and in a manner that allows
them to continue normal business operations or furnish products, services
or data to Northern Trust without disruption, as well as Northern Trust's
ability to accurately evaluate their readiness in this regard and, where
necessary, develop and implement effective contingency plans.
. The accuracy and effectiveness of Northern Trust's assessment of and work
on issues such as those described under the caption "Year 2000 Project".
. The impact of the euro on Northern Trust's global custody business and
foreign exchange trading results.
. The ability of each of Northern Trust's principal businesses to maintain a
product mix that achieves satisfactory margins.
. Changes in tax laws or other legislation that could affect Northern Trust's
personal and institutional asset administration businesses.
Some of these uncertainties that may affect future results are discussed in more
detail in the section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" captioned "Risk Management" in the 1998
Annual Report to Stockholders (pp. 35-44) and in the sections of "Item 1 -
Business" of the 1998 Annual Report on Form 10-K captioned "Government
Policies", "Competition" and "Regulation and Supervision" (pp. 6-10). All
forward-looking statements included in this document are based upon information
presently available, and Northern Trust assumes no obligation to update any
forward-looking statement.
27
<PAGE>
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
First Quarter
--------------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 1999 1998
----------------------------- -----------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- ---------------------------------------------------- -------- --------- ---- -------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 14.1 $ 1,175.1 4.87% $ 12.5 $ 897.9 5.66%
Time Deposits with Banks 40.5 3,479.1 4.72 34.1 2,562.9 5.40
Other Interest-Bearing 1.0 83.6 4.85 .8 45.6 6.81
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Money Market Assets 55.6 4,737.8 4.76 47.4 3,506.4 5.49
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Securities
U.S. Government 4.5 312.2 5.79 7.0 465.3 6.06
Obligations of States and Political Subdivisions 10.1 511.2 7.98 9.0 398.2 9.04
Federal Agency 80.3 6,367.4 5.11 86.5 6,081.7 5.77
Other 4.7 281.6 6.81 3.2 223.4 5.87
Trading Account .2 12.4 6.97 .2 8.9 7.17
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Securities 99.8 7,484.8 5.40 105.9 7,177.5 5.98
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Loans and Leases 223.7 14,079.2 6.44 212.4 12,735.0 6.76
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Earning Assets $379.1 $26,301.8 5.84% $365.7 $23,418.9 6.33%
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Average Source of Funds
Deposits
Savings and Money Market $ 35.3 $ 4,624.7 3.09% $ 33.7 $ 4,155.7 3.29%
Savings Certificates 29.2 2,188.8 5.41 30.3 2,124.4 5.79
Other Time 6.8 560.4 4.90 7.1 525.6 5.47
Foreign Offices Time 63.1 5,973.6 4.28 68.7 5,553.1 5.02
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Deposits 134.4 13,347.5 4.08 139.8 12,358.8 4.59
Federal Funds Purchased 41.6 3,535.2 4.78 36.3 2,673.6 5.50
Repurchase Agreements 25.6 2,198.9 4.73 20.9 1,538.9 5.51
Commercial Paper 1.7 138.3 4.96 2.0 144.9 5.64
Other Borrowings 20.4 1,893.3 4.36 21.8 1,685.0 5.25
Senior Notes 9.2 746.6 4.93 10.6 750.0 5.68
Long-Term Debt 7.9 458.3 6.93 8.1 434.5 7.44
Debt - Floating Rate Capital Securities 3.8 267.5 5.72 4.2 267.4 6.26
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Interest-Related Funds 244.6 22,585.6 4.39 243.7 19,853.1 4.97
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Interest Rate Spread - - 1.45% - - 1.36%
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Noninterest-Related Funds - 3,716.2 - - 3,565.8 -
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Source of Funds $244.6 $26,301.8 3.77% $243.7 $23,418.9 4.22%
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
Net Interest Income/Margin $134.5 - 2.07% $122.0 - 2.11%
- ---------------------------------------------------- ------ --------- ---- ------ --------- ----
</TABLE>
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
<TABLE>
<CAPTION>
First Quarter 1999/98
-------------------------
Change Due To
----------------
(In Millions) Volume Rate Total
- ---------------------------------------------------------------------------------------------- ------ ------ -----
<S> <C> <C> <C>
Earning Assets $41.1 $(27.7) $13.4
Interest-Related Funds 29.7 (28.8) .9
- ---------------------------------------------------------------------------------------------- ----- ------ -----
Net Interest Income $11.4 $ 1.1 $12.5
- ---------------------------------------------------------------------------------------------- ----- ------ -----
</TABLE>
28
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information called for by this item is incorporated herein by
reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Market Risk Management" on page 26
of this document.
29
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of Northern Trust Corporation
was held on April 20, 1999 for the purpose of electing fourteen
Directors to hold office until the next annual meeting of stockholders,
and voting on one other proposal described below. Proxies for the
meeting were solicited pursuant to Section 14(a) of the Securities
Exchange Act of 1934 and there was no solicitation in opposition to
management's nominees. All of the management's nominees for Director
as listed in the proxy statement were elected by the votes set forth
below. As contemplated by the description of cumulative voting
procedures in the Corporation's Proxy Statement, votes withheld from
some (but less than all) of the candidates were distributed by the
proxies among candidates with respect to whom authority was not
withheld. There were no broker non-votes with respect to any
candidates.
<TABLE>
<CAPTION>
Candidates "FOR" "WITHHELD"
---------- ----- ----------
<S> <C> <C>
Duane L. Burnham 98,942,982 356,463
Dolores E. Cross 98,902,134 356,463
Susan Crown 98,907,747 356,463
Robert S. Hamada 98,962,682 356,463
Barry G. Hastings 98,932,188 356,463
Robert A. Helman 98,523,991 356,463
Arthur L. Kelly 98,911,156 356,463
Frederick A. Krehbiel 98,951,977 356,463
William G. Mitchell 98,772,656 356,463
Edward J. Mooney 98,942,950 356,463
William A. Osborn 98,915,629 356,463
Harold B. Smith 98,870,528 356,463
William D. Smithburg 98,605,451 356,463
Bide L. Thomas 98,835,244 356,463
</TABLE>
Stockholders also approved the Northern Trust Corporation Management
Performance Plan described in the Corporation's Proxy Statement dated
March 15, 1999. The principal purpose of the Plan is to promote the
achievement of superior financial and operating performance of the
Corporation and its subsidiaries through the awarding of annual cash
incentive payments to certain key senior officers of the Corporation.
It is expected that compensation paid under the Plan will qualify as
"performance-based" compensation under Section 162(m) of the Code and
thus be fully deductible by the Corporation for federal income tax
purposes. 96,618,624 shares were voted in favor of the Plan; 1,868,561
shares were voted against the Plan; the holders of 724,950 shares
specifically abstained from voting on the Plan; and there were no
broker non-votes.
30
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
--------
Exhibit (10) Material Contracts:
(i) Northern Trust Corporation (1999)
Annual Performance Plan.
(ii) Northern Trust Corporation (1999)
Management Performance Plan
Exhibit (27) Financial Data Schedule.
Exhibit (99) Edited version of remarks delivered by Mr. William
A. Osborn at the Annual Meeting of Stockholders of
Northern Trust Corporation held on April 20, 1999.
(b.) Reports on Form 8-K
-------------------
In a report on Form 8-K, Northern Trust incorporated in Item 5
its January 19, 1999 press release, reporting on its earnings for
the fourth quarter of 1998 and for its 1998 fiscal year. The
press release, with summary financial information, was filed
pursuant to Item 7.
In a report on Form 8-K dated February 19, 1999 Northern Trust
Corporation reported in Item 5 an amendment of its 1989
Stockholder Rights Plan and an amendment of its 1998 Stockholder
Rights Plan and filed the amendments pursuant to Item 7.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
Date: May 14, 1999 By: /s/ Perry R. Pero
-----------------------------------
Perry R. Pero
Senior Executive Vice President
and Chief Financial Officer
Date: May 14, 1999 By: /s/ Harry W. Short
-----------------------------------
Harry W. Short
Senior Vice President and Controller
(Chief Accounting Officer)
32
<PAGE>
EXHIBIT INDEX
The following exhibits have been filed herewith.
Exhibit
Number Description
- ------ -----------
(10) Material Contracts:
(i) Northern Trust Corporation (1999) Annual Performance Plan.
(ii) Northern Trust Corporation (1999) Management Performance Plan.
(27) Financial Data Schedule.
(99) Edited version of remarks delivered by Mr. William A. Osborn at the
Annual Meeting of Stockholders of Northern Trust Corporation held
on April 20, 1999.
33
<PAGE>
Exhibit 10(i)
NORTHERN TRUST CORPORATION
ANNUAL PERFORMANCE PLAN
1999
I. Purpose of Plan
---------------
The purpose of the Annual Performance Plan (the "Plan") is to promote the
achievement of superior financial and operating performance of the
Northern Trust Corporation and its subsidiaries (hereinafter referred to
as the "Corporation"), and further the objective of delivering unrivaled
service quality to its clients and partners through the awarding of cash
incentive payments to selected officers.
II. Plan Year
---------
The Plan is effective from January 1, 1999 to December 31, 1999.
III. Eligibility and Participation
-----------------------------
Eligibility to participate in the Plan is restricted to officers with the
title of Vice President and above and who are not eligible for
participation in a Specialized Incentive Plan. Plan participation is
reviewed each year, and participation in one year does not automatically
indicate participation in subsequent Plan years. Participation in the Plan
is based upon recommendation from the respective Business Unit Head.
IV. Award Funding and Determination
-------------------------------
At the beginning of the Plan year, the Compensation and Benefits Committee
of the Board of Directors of the Corporation will determine a Corporate
Earnings Target and profit plan funding for awards under the Annual
Performance Plan. The allocation of the plan award funding to each
respective Business Unit will be based on the salaries of the eligible
officers within the Business Unit. Within each Business Unit, one-half of
the available funding for awards under the Plan will be based on the
Corporation's financial achievement versus the Corporate Earnings Target.
The other half of the award funding is based on the financial achievement
of the Business Unit versus the Business Unit's earnings target. For staff
support personnel, the available funding for awards will be based entirely
on the financial achievement of the Corporation versus the Corporate
Earnings Target. The formula determining the pool level funding based on
Corporate and Business Unit performance is described in Attachment I.
V. Individual Award Determination
------------------------------
Individual participant awards will be discretionary. They will be
determined by Business Unit Management based on an assessment of
individual performance, relative to performance expectations,
contribution, competitive level of total compensation, and available award
pool funding.
<PAGE>
VI. Payment of Awards
-----------------
Awards will be paid in cash as soon as practicable following the
completion of the Plan year. Awards payable because of a Change in Control
of the Corporation pursuant to Paragraph VIII (h) shall be paid in cash as
soon as practicable following such Change in Control.
VII. Administration
--------------
The Plan shall be administered by the Management Committee of the
Corporation (the "Committee"). Subject to the provisions of the Plan, the
Committee shall be authorized to interpret the Plan, to establish, amend,
and rescind any rules and regulations relating to the Plan, and to make
all other determinations necessary or advisable for the administration of
the Plan. The determinations of the Committee in the effective
administration of the Plan, as described herein, shall be final and
conclusive.
The Board of Directors of the Corporation, by written resolution, may
amend, suspend, or terminate any or all provisions of the Plan at any
time.
VIII. Other Provisions
----------------
The following miscellaneous provisions are applicable to the Plan:
(a) Awards paid under the provisions of the Plan are considered
pensionable earnings when paid.
(b) Termination of employment by a participant during the Plan year,
either voluntary or involuntary with cause, and for reasons other than
death, disability, or retirement shall result in immediate exclusion
from the Plan.
(c) Except in the event of the death of a participant, the rights and
interests of a participant under the Plan shall not be assigned,
encumbered, or transferred.
(d) No employee or other person shall have any claim or right to be
granted an award under the Plan. Neither the Plan, nor any action
taken thereunder, shall be construed as giving any employee or other
person any right to be retained in the employ of the Corporation.
(e) The Corporation shall have the right to deduct from all payments made
under the Plan any taxes required by law to be withheld with respect
to such payment.
(f) All questions pertaining to the validity, construction and
administration of the Plan and any award hereunder shall be determined
in conformity with the laws of the State of Illinois.
2
<PAGE>
(g) Each participant shall designate a beneficiary (the "Designated
Beneficiary") to receive the award, if any, allocated to a
participant, in the event of such participant's death. If no
Designated Beneficiary survives the participant, it shall be the
surviving spouse of the participant or, if there is no surviving
spouse, it shall be the participant's estate.
(h) Notwithstanding any other terms contained herein, in the event of a
Change in Control of the Corporation, funding for awards under the
Plan shall be determined as if the Corporation and Business Units had
achieved the respective earnings targets, as described in Section IV.
Discretionary awards shall be paid to participants as soon as
practicable. For purposes of this paragraph, a "Change in Control" of
the Corporation shall be deemed to occur on the earliest of:
(i) The receipt by the Corporation of a Schedule 13D or other
statement filed under Section 13(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), indicating that
any entity, person, or group has acquired beneficial ownership,
as that term is defined in Rule 13d-3 under the Exchange Act, or
more than 30% of the outstanding capital stock of the
Corporation entitled to vote for the election of directors
("voting stock");
(ii) The commencement by an entity, person or group (other than the
Corporation or a subsidiary of the Corporation) of a tender
offer or an exchange offer for more than 20% of the outstanding
voting stock of the Corporation;
(iii) The effective time of (A) a merger or consolidation of the
Corporation with one or more other corporations as a result of
which the holders of the outstanding voting stock of the
Corporation immediately prior to such merger or consolidation
hold less than 60% of the voting stock of the surviving or
resulting corporation, or (B) a transfer of substantially all of
the property of the Corporation other than to an entity of which
the Corporation owns at least 80% of the voting stock; or
(iv) The election of the Board of Directors of the Corporation,
without the recommendation or approval of the incumbent Board of
Directors of the Corporation, or the lesser of (A) three
directors or (B) directors constituting a majority of the number
of directors of the Corporation then in office.
3
<PAGE>
Exhibit 10(ii)
NORTHERN TRUST CORPORATION
MANAGEMENT PERFORMANCE PLAN
I. Purposes of Plan
The purposes of the Northern Trust Corporation Management Performance
Plan (the "Plan") are to (i) promote the achievement of superior
financial and operating performance of Northern Trust Corporation and its
subsidiaries (the "Corporation"), and to further the objective of
delivering unrivaled service quality to clients through the awarding of
annual cash incentives to participants in the Plan ("Participants"), (ii)
reward Participants who make significant contributions to the
Corporation's success, enabling them to share in this success, (iii)
provide the Corporation a means to attract, motivate and retain certain
key senior officers and (iv) qualify any compensation paid under the Plan
for tax deductibility under Section 162(m) of the Internal Revenue Code
of 1986, as amended, to the extent deemed appropriate by the Compensation
and Benefits Committee (the "Committee") of the Board of Directors (the
"Board") of the Corporation.
II. Administration
The Plan shall be administered by the Committee. The Committee shall have
authority for selecting Participants and determining final award amounts
to be paid to Participants. Subject to the express provisions of the
Plan, the Committee shall be authorized to interpret the Plan and to
establish, amend and rescind any rules and regulations relating to the
Plan and to make all other determinations deemed necessary or advisable
for the proper administration of the Plan. The determinations of the
Committee in the proper administration of the Plan shall be conclusive
and binding.
III. Term
The Plan shall be effective as of January 1, 1999 (the "Effective Date"),
subject to approval by the Corporation's shareholders at the 1999 annual
meeting of Stockholders. The Plan shall remain in effect until terminated
by the Board.
IV. Eligibility and Participation
Eligibility to participate in the Plan shall be limited to any key
officer of the Corporation at or above the level of an executive vice
president. Participants in the Plan shall be selected annually by the
Committee from those key senior officers eligible to participate in the
Plan.
V. Performance Objective
The Plan's performance objective (the "Performance Objective") shall be
established with reference to the Corporation's consolidated net income
as determined in accordance with generally accepted accounting
principles.
1
<PAGE>
VI. Maximum Award Funding Opportunity
The maximum award funding opportunity in any fiscal year (the "Funding
Opportunity") for the Chairman and Chief Executive Officer, if a
Participant for such fiscal year, shall be 0.6% of the Corporation's
consolidated net income for that fiscal year. The Funding Opportunity for
the President and Chief Operating Officer, if a Participant for such
fiscal year, shall be 0.4% of the Corporation's consolidated net income
for that fiscal year. The Funding Opportunity for any other Participant
shall be 0.3% of the Corporation's consolidated net income for that
fiscal year.
VII. Award Determination
As soon as practicable (but in no event later than 90 days) following
completion of a fiscal year, the Committee shall (i) determine each
Participant's Funding Opportunity for that fiscal year solely on the
basis of the Performance Objective and (ii) approve each Participant's
actual award for that fiscal year on a discretionary basis as provided
below. The Committee shall have the right to limit or reduce a
Participant's actual award in any fiscal year below the Funding
Opportunity in its sole discretion based on an assessment of individual
contribution, performance relative to performance expectations,
competitive levels of compensation and corporate performance, but it
shall not increase a Participant's award in any fiscal year above the
Funding Opportunity.
VIII. Payment of Awards
Awards for a fiscal year will be paid in cash (or deferred at the
election of a Participant as provided in Section IX (b) below) as soon as
practicable following the Committee's determination of awards for that
fiscal year.
IX. Other Provisions
The following miscellaneous provisions are applicable to the Plan:
(a) Awards paid under the provisions of the Plan are considered
pensionable earnings when paid.
(b) Awards under the Plan may be deferred into the Northern Trust
Corporation Deferred Compensation Plan. Deferred amounts will be
considered pensionable earnings under the provisions of the
Supplemental Pension Plan.
(c) Termination of employment of a Participant during the Plan year,
either voluntarily, or involuntarily with cause for reasons other
than death, disability, or retirement, shall result in immediate
exclusion from the Plan.
(d) Except in the event of the death of a Participant, the rights and
interests of a Participant under the Plan shall not be assigned,
encumbered, or transferred.
(e) Each Participant shall designate a beneficiary (the "Designated
Beneficiary") to receive the award, if any, allocated to a
Participant, in the event of such Participant's death. If no
Designated Beneficiary survives the Participant, it shall be the
surviving spouse of the Participant or, if there is no surviving
spouse, it shall be the Participant's estate.
2
<PAGE>
(f) No employee or other person shall have any claim or right to be
granted an award under the Plan. Neither the Plan, nor any action
taken thereunder, shall be construed as giving the Participant or
other person any right to be retained in the employ of the
Corporation.
(g) The Corporation shall have the right to deduct from all payments
made under the Plan any taxes required by law to be withheld with
respect to such payment.
(h) All questions pertaining to the validity, construction and
administration of the Plan and any award hereunder shall be
determined in conformity with the laws of the State of Illinois.
(i) The Board, in its sole discretion, may modify or amend any or all of
the Plan at any time and, without notice, may suspend or terminate
the Plan entirely. However, no such modification or amendment may,
without the consent of the Participant, reduce the right of a
Participant to a payment or distribution to which the Participant is
entitled by reason of an outstanding award.
(j) All obligations of the Corporation under the Plan with respect to
awards granted hereunder shall be binding on any successor to the
Corporation, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation, or
otherwise, of all or substantially all of the business or assets of
the Corporation.
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
(Identify Specific Financial Statements) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,195,083
<INT-BEARING-DEPOSITS> 2,650,588
<FED-FUNDS-SOLD> 772,675
<TRADING-ASSETS> 14,467
<INVESTMENTS-HELD-FOR-SALE> 6,731,248
<INVESTMENTS-CARRYING> 477,458
<INVESTMENTS-MARKET> 488,244
<LOANS> 14,046,482
<ALLOWANCE> 147,265
<TOTAL-ASSETS> 27,554,634
<DEPOSITS> 16,592,248
<SHORT-TERM> 6,972,999
<LIABILITIES-OTHER> 779,783
<LONG-TERM> 1,178,540
<COMMON> 189,935
0
120,000
<OTHER-SE> 1,721,129
<TOTAL-LIABILITIES-AND-EQUITY> 27,554,634
<INTEREST-LOAN> 223,396
<INTEREST-INVEST> 91,018
<INTEREST-OTHER> 55,795
<INTEREST-TOTAL> 370,209
<INTEREST-DEPOSIT> 134,288
<INTEREST-EXPENSE> 244,555
<INTEREST-INCOME-NET> 125,654
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 266,433
<INCOME-PRETAX> 144,790
<INCOME-PRE-EXTRAORDINARY> 95,123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,123
<EPS-PRIMARY> .85
<EPS-DILUTED> .82
<YIELD-ACTUAL> 2.07
<LOANS-NON> 32,331
<LOANS-PAST> 14,252
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<LOANS-PROBLEM> 0
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<CHARGE-OFFS> 438
<RECOVERIES> 365
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<ALLOWANCE-UNALLOCATED> 29,650
</TABLE>
<PAGE>
Exhibit 99
William A Osborn
Annual Shareholders Meeting
April 20, 1999
1998 was the eleventh consecutive year of record earnings for Northern
Trust. Net Income of $353.9 million was 14% ahead of 1997. Since 1994, the
compound annual growth rate of net income is an exceptionally strong 18%. This
strong performance has been fueled by revenue growth which has averaged 12% a
year and controlled expenses which have grown at an average annual growth rate
of 9%.
A key driver of our revenue growth has been trust fees, which have grown at
a compound annual rate of 16% since 1994. In addition to the excellent
performance of our trust business, traditional banking services remain an
important component of the products that we offer to our clients. Total deposits
have grown at an average annual rate of 11% for the last five years and our
loans have grown at an average annual rate of 12%.
Our return on equity has increased significantly over the past couple of
years. In both 1997 and 1998, we exceeded our target range of 18-20% and
achieved a record ROE for this decade of 20.5% in 1998.
Trust assets continue to grow dramatically. At the end of the first quarter
of 1999, trust assets under administration totaled $1.3 trillion. That is an
increase of 12% from a year ago. In this decade, trust assets have grown an
average of 21% per year. This is a key driver for the growth of our business.
New and existing clients are placing more assets with us and we are expanding
the services that we offer them.
Assets under management have also grown significantly and now total $243
billion, an increase of 12% over the first quarter of 1998. In this decade, the
average annual growth rate of managed assets has been 19%. In our Corporate and
Institutional Services business, we have $167 billion under management and in
our Personal Financial Services unit, we have $76 billion under management.
Personal Financial Services
- ---------------------------
I'd like to spend a few moments talking about our two client-focused
businesses. In our personal business, Northern is unique in the depth and
breadth of offices we have in attractive, high growth markets. Through our
network of 69 offices in 7 states, we currently reach 22% of the millionaire
population that we define as households with $1 million or more of investable
assets. In the U.S., this market is projected to grow at 8.3% per annum over the
next five years versus the overall population growth of 1% for the same period.
Northern's success in this relationship-oriented business is evidenced by the
results of recent client surveys. The overall ratings from our client base were
outstanding across the board with over 93% of our clients highly satisfied or
satisfied with our service. Over 80% of our clients have referred prospects to
us.
Within PFS we also have our Wealth Management business whose target market
is primarily families with $100 million or more in investable assets and who use
multiple
<PAGE>
investment managers. With 195 families and over $39 billion in trust assets,
Northern has the largest market share in this segment.
As another method for distribution of our products and interaction with
clients, our Private Passport product offers internet access for home banking.
In May, a new release will provide clients access to the Trust/Investment
Management, Banking, Northern Funds, and Northern Trust Securities, Inc.
accounts. We believe that these new capabilities will put us ahead of much of
the competition in the industry. The use of technology and the internet is a
key growth initiative for us in both PFS and C&IS.
Our PFS franchise continues to grow. Our expansion strategy is twofold - to
fill in opportunities in existing states and to expand our network to new
states. Last year we added two states to our ever increasing PFS network of
offices: Colorado and Michigan. We also added two new offices in Illinois, Logan
Square and Glenview, and an office in Beverly Hills, CA. So far in 1999, we have
opened a new office in Grand Rapids, MI and converted our representative office
in Indian Wells, CA to a full-service office. Within the next few months, we
will be opening new offices in Hinsdale, IL, Lakewood Ranch, FL, Marin County,
CA, and the new Northwestern Medical Center here in Chicago. We are also
planning to move into Seattle, WA and Milwaukee, WI which will give us our
eighth and ninth states. A new office in Sun Lakes, AZ, southeast of Phoenix, is
planned for later in the year or early 2000, bringing our total to 76 offices by
early next year. PFS expansion is a key strategic initiative for us.
Corporate and Institutional Services
- ------------------------------------
Our Corporate and Institutional Services unit serves large corporations,
financial institutions, international entities and foundations and endowments.
We currently have clients in 34 different countries and nearly $1.2 trillion of
assets under administration which includes $206 billion of global custody
assets. We are one of only six major global custodians in the world and the
growth characteristics due to the globalization of investing are very strong.
Expansion of our global custody capabilities around the world is another key
initiative for us.
One of the keys to our success in this business is technological
capabilities. Our Northern Trust Passport product continues to be leading edge
with an emphasis on risk and performance services and we are increasingly using
the internet to deliver services to our clients. Our focus on technology was
also evident when in January, after many months of planning and preparation,
Northern completed a smooth and successful conversion to the new Euro currency.
On January 2nd, we were one of the first global custodians to release on-line
reporting data to clients and investment managers. We received very high marks
from clients on this transition.
Our Year 2000 project is also progressing on plan. As of March 31, we have
spent $25 million of the $35 million total cost that we have estimated for this
project. Northern has completed 100% of the renovation and testing of mission
critical systems. During 1999, we are focusing on additional internal testing,
testing with outside parties, and contingency planning.
<PAGE>
Northern Trust Global Investments
- ---------------------------------
Now, I'd like to review our Northern Trust Global Investments. Our world
class investment organization supports both our personal and corporate clients,
and is an important element in the success of our business strategy. With $243
billion under management, Northern is the 15th largest U.S. investment manager
and the 6th largest manager of tax-exempt assets. NTGI also ranked 5th in
overall new business for 1998. We are very focused on growing our managed
assets. We added a high yield capability to our fixed income products in late
1998 and we are taking steps to further broaden our product line, perhaps with
the acquisition of a value style investment manager. Expansion of our product
line in investments is another key initiative for us.
Our overall investment performance has been terrific. Our two mutual fund
families, Northern Funds and Northern Institutional Funds, which have grown to
$25 billion, achieved outstanding performance in 1998. 24 of our funds received
an "A" or "B" ranking in the Wall Street Journal Quarterly Fund review and 11
funds received ratings of "4 stars" or "5 stars" from Morningstar. In addition
to our new website for the Northern Funds at www.northernfunds.com, we have
increased the marketing exposure of our investment products both through direct
mail and print advertising and we now have five of our funds distributed through
the Schwab One program.
Strong earnings performance has carried forward into 1999. Our first
quarter results were released yesterday. Trust fees grew 16%, driven by strong
new business and a favorable U.S. stock market. Trust fees represented 53% of
total revenues in the first quarter and are a very consistent, high-quality
component of our revenue stream. Net income of $95.1 million was up 12% from the
first quarter of 1998 and resulted in earnings of $0.82 per share. New trust fee
business was up 47% in PFS and 17% in C&IS - a terrific start to the year. We
are optimistic that 1999 will be another record year.
Now let me review how we are doing compared to our strategic financial
targets. ROE for 1998 was 20.5% which exceeds our target range of 18-20%. In the
first quarter, our ROE was 20.6%, representing the 8th consecutive quarter over
20%. Earnings per share grew 14% in 1998 and 12% in the first quarter of this
year, both of which are over our minimum target level of 10%. We are also making
excellent progress toward our productivity goal of 160%. In 1998, we made $1.59
in revenue for every $1.00 in expenses. Our productivity ratio for the first
quarter was 158% and we anticipate achieving the 160% target for the full year
1999.
Our strong financial performance coupled with the robust stock market has
resulted in extraordinary performance of our stock price, which rose 25% in 1998
and was the sixth highest performing institution of the 30 largest banks in the
United States. The stock price has increased 5.5 times since 1994 - just over 4
years ago. This is well ahead of the performance of the S&P500 and the KBW index
of 50 banks. If you had invested $100 in Northern Trust stock on January 1,
1995, your investment would have grown to over $550 today.
<PAGE>
Finally, I want to thank our employees worldwide for their hard work and
dedication which has led to our record performance; our clients for their
confidence and trust in placing their business with Northern; and our Board of
Directors for their advice, counsel and support. We continue to be very
optimistic about the future of your company.
********************************************************************************
Forward-Looking Statements
This edited version of Mr. Osborn's remarks may be deemed to include
forward-looking statements, such as statements that relate to financial goals,
business outlook, expansion plans and credit quality. Actual results could
differ materially from those indicated by these statements. Northern Trust's
1998 Annual Report to Shareholders and the section of this Quarterly Report on
Form 10-Q for March 31, 1999 captioned "Forward-Looking Information", contain
additional information about factors that could affect actual results.
