<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2723087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 SOUTH LA SALLE STREET
CHICAGO, ILLINOIS 60675
(Address of principal executive offices) (Zip Code)
Rigistrant'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 [ ]
111,045,729 Shares - $1.66 2/3 Par Value
(Shares of Common Stock Outstanding on September 30, 1998)
================================================================================
<PAGE>
The registrant is filing this Form 10-Q/A (Amendment No. 1) for the purpose of
expanding its discussion of Reserve for Credit Losses methodology and the
determination of the Reserve during the periods reported upon in its Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998. These
additions amend Footnote No. 6 - Reserve for Credit Losses (page 10) found in
Part I, Item 1 (Financial Statements); and, Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset Quality (pages 25 and
26) found in Part I, Item 2 of that report.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTHERN TRUST CORPORATION
--------------------------
(Registrant)
By: /s/ Perry R. Pero
--------------------------
PERRY R. PERO
Senior Executive Vice President
and Chief Financial Officer
Date: March 2, 1999
3
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET NORTHERN TRUST CORPORATION
September 30 December 31 September 30
------------ ----------- ------------
($ In Millions) 1998 1997 1997
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
Assets
Cash and Due from Banks $ 1,105.2 $ 1,738.9 $ 2,293.6
Federal Funds Sold and Securities Purchased under Agreements to Resell 2,878.1 2,991.7 2,762.4
Time Deposits with Banks 2,448.4 2,283.2 2,256.8
Other Interest-Bearing 15.4 34.5 45.5
Securities
Available for Sale 5,994.0 3,733.3 5,438.0
Held to Maturity (Fair value - $479.7 at September 1998, $473.4 at December 1997,
$493.1 at September 1997) 465.2 456.1 475.8
Trading Account 13.4 8.8 10.9
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Securities 6,472.6 4,198.2 5,924.7
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Loans and Leases
Commercial and Other 7,926.5 7,401.5 7,235.9
Residential Mortgages 5,674.3 5,186.7 4,987.8
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Loans and Leases (Net of unearned income - $219.2 at September 1998, $151.9 at
December 1997, $146.0 at September 1997) 13,600.8 12,588.2 12,223.7
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Reserve for Credit Losses (146.6) (147.6) (148.0)
Buildings and Equipment 334.4 316.4 312.4
Customers' Acceptance Liability 27.7 31.4 47.0
Trust Security Settlement Receivables 338.7 291.4 302.4
Other Assets 1,004.1 989.1 898.7
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Assets $28,078.8 $25,315.4 $26,919.2
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Liabilities
Deposits
Demand and Other Noninterest-Bearing $ 3,383.5 $ 3,510.1 $ 3,189.7
Savings and Money Market Deposits 4,391.0 4,278.9 3,712.3
Savings Certificates 2,189.3 2,092.6 2,039.7
Other Time 668.6 572.0 743.9
Foreign Offices - Demand 433.5 451.0 526.2
- Time 5,975.7 5,455.4 5,631.6
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Deposits 17,041.6 16,360.0 15,843.4
Federal Funds Purchased 1,300.8 821.2 817.9
Securities Sold Under Agreements to Repurchase 1,011.3 1,139.7 834.6
Commercial Paper 119.5 146.8 137.9
Other Borrowings 4,513.6 2,876.6 5,299.4
Senior Notes 700.0 785.0 885.0
Long-Term Debt 462.7 439.5 443.7
Debt - Floating Rate Capital Securities 267.5 267.4 267.4
Liability on Acceptances 27.7 31.4 47.0
Other Liabilities 755.4 708.8 645.4
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Liabilities 26,200.1 23,576.4 25,221.7
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Stockholders' Equity
Preferred Stock 120.0 120.0 120.0
Common Stock, $1.66 2/3 Par Value; Authorized 280,000,000 shares at September 1998,
December 1997 and September 1997; Outstanding 111,045,729 at September 1998,
111,367,436 at December 1997 and 111,550,097 at September 1997 189.9 189.9 189.9
Capital Surplus 217.8 225.5 225.3
Retained Earnings 1,519.4 1,330.8 1,274.3
Net Unrealized Gain on Securities Available for Sale (.7) 2.1 2.1
Common Stock Issuable - Performance Plan 30.4 11.7 11.7
Deferred Compensation - ESOP and Other (44.5) (37.5) (37.5)
Treasury Stock - (at cost, 2,915,033 shares at September 1998, 2,593,326 shares at
December 1997, and 2,410,665 shares at September 1997) (153.6) (103.5) (88.3)
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Stockholders' Equity 1,878.7 1,739.0 1,697.5
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
Total Liabilities and Stockholders' Equity $28,078.8 $25,315.4 $26,919.2
- ------------------------------------------------------------------------------------------- ------------ ----------- ------------
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENT OF INCOME NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended September 30 Ended September 30
---------------------------- ---------------------------
($ In Millions Except Per Share Information) 1998 1997 1998 1997
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest Income
Loans and Leases $225.9 $203.3 $ 656.7 $ 582.8
Securities
Available For Sale 109.6 80.4 298.3 236.1
Held to Maturity 6.9 7.6 21.0 23.3
Trading Account .2 .1 .5 .4
- ---------------------------------------------------------------------- ------------- ------------- ------------- ------------
Total Securities 116.7 88.1 319.8 259.8
- ---------------------------------------------------------------------- ------------- ------------- ------------- ------------
Time Deposits with Banks 36.0 34.0 101.2 92.7
Federal Funds Sold and Securities Purchased under Agreements
to Resell and Other Interest-Bearing 14.3 13.8 42.8 35.7
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Total Interest Income 392.9 339.2 1,120.5 971.0
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Interest Expense
Deposits 154.0 136.4 431.1 375.0
Federal Funds Purchased 35.3 19.5 101.8 58.1
Securities Sold under Agreements to Repurchase 26.5 21.5 60.5 60.8
Commercial Paper 2.1 2.0 6.2 5.8
Other Borrowings 39.4 25.4 106.6 92.6
Senior Notes 5.2 12.2 27.0 19.4
Long-Term Debt 8.0 8.2 23.7 24.2
Debt - Floating Rate Capital Securities 4.4 4.4 12.8 10.2
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Total Interest Expense 274.9 229.6 769.7 646.1
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Net Interest Income 118.0 109.6 350.8 324.9
Provision for Credit Losses 1.0 5.0 8.0 6.0
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Net Interest Income after Provision for Credit Losses 117.0 104.6 342.8 318.9
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Noninterest Income
Trust Fees 203.6 177.4 599.6 504.0
Treasury Management Fees 17.6 14.8 50.9 44.4
Foreign Exchange Trading Profits 23.6 33.5 74.8 77.8
Security Commissions and Trading Income 6.9 6.9 21.3 19.4
Other Operating Income 12.9 22.0 39.1 40.9
Investment Security Gains .1 .1 1.3 .7
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Total Noninterest Income 264.7 254.7 787.0 687.2
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Income before Noninterest Expenses 381.7 359.3 1,129.8 1,006.1
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Noninterest Expenses
Salaries 126.3 116.4 373.2 325.4
Pension and Other Employee Benefits 23.0 20.1 69.3 61.7
Occupancy Expense 17.4 17.7 51.6 50.2
Equipment Expense 15.9 17.6 47.3 47.4
Other Operating Expenses 61.2 62.9 186.3 173.5
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Total Noninterest Expenses 243.8 234.7 727.7 658.2
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Income before Income Taxes 137.9 124.6 402.1 347.9
Provision for Income Taxes 47.7 43.6 139.8 119.8
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Net Income $ 90.2 $ 81.0 $ 262.3 $ 228.1
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Net Income Applicable to Common Stock $ 89.0 $ 79.7 $ 258.6 $ 224.4
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Net Income Per Common Share - Basic $ .81 $ .72 $ 2.34 $ 2.02
- Diluted .78 .70 2.25 1.96
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
Average Number of Common Shares Outstanding - Basic 110,518,171 111,065,939 110,741,579 111,008,921
- Diluted 114,714,190 114,719,797 114,924,110 114,618,221
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended September 30 Ended September 30
------------------- --------------------
($ In Millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------- ------ ------- -------
<S> <C> <C> <C> <C>
Net Income $90.2 $81.0 $262.3 $228.1
Other Comprehensive Income (net of tax)
Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Holding Gains (Losses) Arising During Period
(Net of tax (provision) benefit - $.2 million in Third
Quarter 1998 and $0.07 million in 1997; and $.8 million
during first nine months of 1998 and $(.5) million in 1997 (0.3) (0.1) (1.4) 0.8
Less: Reclassification Adjustments for Gains Included in Net Income
(Net of tax (provision) benefit - zero in Third
Quarter of 1998 and zero in 1997; and $(.4) million during
first nine months of 1998 and $(.2) million in 1997).
-- -- (0.7) (0.3)
- -------------------------------------------------------------------------------- ------ ------- -------
Other Comprehensive Income (0.3) (0.1) (2.1) 0.5
- -------------------------------------------------------------------------------- ------ ------- -------
Comprehensive Income $89.9 $80.9 $260.2 $228.6
- -------------------------------------------------------------------------------- ------ ------- -------
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Nine Months
Ended September 30
----------------------------
(In Millions) 1998 1997
- ------------------------------------------------------------------------ ----------------------------
<S> <C> <C>
Preferred Stock
Balance at January 1 and September 30 $ 120.0 $ 120.0
- ------------------------------------------------------------------------ ----------------------------
Common Stock
Balance at January 1 and September 30 189.9 189.9
- ------------------------------------------------------------------------ ----------------------------
Capital Surplus
Balance at January 1 225.5 231.7
Stock Issued - Incentive Plan and Awards (7.7) (6.4)
- ------------------------------------------------------------------------ ----------------------------
Balance at September 30 217.8 225.3
- ------------------------------------------------------------------------ ----------------------------
Retained Earnings
Balance at January 1 1,330.8 1,110.2
Net Income 262.3 228.1
Dividends Declared - Common Stock (70.1) (60.3)
Dividends Declared - Preferred Stock (3.6) (3.7)
- ------------------------------------------------------------------------ ----------------------------
Balance at September 30 1,519.4 1,274.3
- ------------------------------------------------------------------------ ----------------------------
Net Unrealized Gain (Loss) on Securities Available for Sale
Balance at January 1 2.1 1.6
Unrealized Gain (Loss), net (2.8) .5
- ------------------------------------------------------------------------ ----------------------------
Balance at September 30 (.7) 2.1
- ------------------------------------------------------------------------ ----------------------------
Common Stock Issuable - Performance Plan
Balance at January 1 11.7 10.4
Stock Issuable, net of Stock Issued 18.7 1.3
- ------------------------------------------------------------------------ ----------------------------
Balance at September 30 30.4 11.7
- ------------------------------------------------------------------------ ----------------------------
Deferred Compensation - ESOP and Other
Balance at January 1 (37.5) (35.5)
Compensation Deferred (16.7) (7.8)
Compensation Amortized 9.7 5.8
- ------------------------------------------------------------------------ ----------------------------
Balance at September 30 (44.5) (37.5)
- ------------------------------------------------------------------------ ----------------------------
Treasury Stock
Balance at January 1 (103.5) (84.2)
Stock Options and Awards 47.2 44.5
Stock Purchased (97.3) (48.6)
- ------------------------------------------------------------------------ ----------------------------
Balance at September 30 (153.6) (88.3)
- ------------------------------------------------------------------------ ----------------------------
Total Stockholders' Equity at September 30 $1,878.7 $1,697.5
- ------------------------------------------------------------------------ ----------------------------
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS NORTHERN TRUST CORPORATION
<TABLE>
<CAPTION>
Nine Months
Ended September 30
----------------------------------------
(In Millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 262.3 $ 228.1
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 8.0 6.0
Depreciation on Buildings and Equipment 39.7 37.5
(Increase) Decrease in Interest Receivable 1.2 (13.0)
Increase (Decrease) in Interest Payable (9.8) 25.0
Amortization and Accretion of Securities and Unearned Income (175.4) (129.7)
Amortization of Software, Goodwill and Other Intangibles 40.4 39.3
Net Increase in Trading Account Securities (4.6) (6.1)
Other Noncash, net 38.1 (46.6)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 199.1 140.5
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net (Increase) Decrease in Federal Funds Sold and Securities Purchased under
Agreements to Resell 113.6 (1,739.8)
Net Increase in Time Deposits with Banks (165.2) (196.8)
Net Decrease in Other Interest-Bearing Assets 19.1 68.8
Purchases of Securities-Held to Maturity (2,480.9) (120.2)
Proceeds from Maturity and Redemption of Securities-Held to Maturity 2,473.8 145.3
Purchases of Securities-Available for Sale (81,697.8) (52,648.3)
Proceeds from Sale, Maturity and Redemption of Securities-Available for Sale 79,685.2 51,688.5
Net Increase in Loans and Leases (1,090.7) (1,332.2)
Purchases of Buildings and Equipment (57.7) (38.4)
Net (Increase) Decrease in Trust Security Settlement Receivables (47.3) 59.9
Decrease in Cash Due to Acquisitions (15.0) -
Other, net (.9) (1.2)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,263.8) (4,114.4)
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net Increase in Deposits 681.6 2,047.2
Net Increase in Federal Funds Purchased 479.6 164.9
Net Decrease in Securities Sold under Agreements to Repurchase (128.4) (131.5)
Net Decrease in Commercial Paper (27.3) (11.1)
Net Increase in Short-Term Other Borrowings 1,155.0 2,259.6
Proceeds from Term Federal Funds Purchased 1,387.9 1,156.8
Repayments of Term Federal Funds Purchased (905.9) (1,259.1)
Proceeds from Senior Notes & Long-Term Debt 801.0 803.1
Repayments on Senior Notes & Long-Term Debt (862.8) (227.2)
Proceeds from Debt-Floating Rate Capital Securities - 267.3
Treasury Stock Purchased (96.6) (44.8)
Net Proceeds from Stock Options 12.1 10.5
Cash Dividends Paid on Common and Preferred Stock (73.9) (63.9)
Other, net 7.9 3.2
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 2,430.2 4,975.0
- --------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Due from Banks (633.7) 1,001.1
Cash and Due from Banks at Beginning of Year 1,738.9 1,292.5
- --------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at September 30 $ 1,105.2 $ 2,293.6
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 779.6 $ 621.2
Income Taxes Paid 79.1 65.4
- --------------------------------------------------------------------------------------------------------------------
Schedule of Noncash Investing and Financing Activities:
Building Purchase Obligation - 20.0
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements
1. Basis of Presentation - The consolidated financial statements include the
accounts of Northern Trust Corporation and its subsidiaries (Northern Trust),
all of which are wholly-owned. Significant intercompany balances and
transactions have been eliminated. The consolidated financial statements as
of September 30, 1998 and 1997 have not been audited by independent public
accountants. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position and the results of operations for
the interim periods have been made. All such adjustments are of a normal
recurring nature. Certain reclassifications have been made to prior periods'
consolidated financial statements to place them on a basis comparable with
the current period's consolidated financial statements. For a description of
Northern Trust's significant accounting policies, refer to Note 1 of the
Notes to Consolidated Financial Statements in the 1997 Annual Report to
Stockholders.
2. Securities - The following table summarizes the book and fair values of
securities.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
--------------------------------------------------------------------------------------
Book Fair Book Fair Book Fair
(In Millions) Value Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Government $ 55.2 $ 55.4 $ 72.0 $ 72.0 $ 81.0 $ 81.0
Obligations of States and
Political Subdivisions 265.6 282.3 276.7 295.1 285.7 304.0
Federal Agency 5.0 5.1 14.3 14.3 14.2 14.3
Other 139.4 136.9 93.1 92.0 94.9 93.8
- ------------------------------------------------------------------------------------------------------------------
Subtotal 465.2 479.7 456.1 473.4 475.8 493.1
- ------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government 271.8 271.8 470.0 470.0 698.7 698.7
Obligations of States and
Political Subdivisions 194.6 194.6 130.2 130.2 119.7 119.7
Federal Agency 5,389.9 5,389.9 2,969.8 2,969.8 4,496.3 4,496.3
Preferred Stock 118.6 118.6 128.8 128.8 91.5 91.5
Other 19.1 19.1 34.5 34.5 31.8 31.8
- ------------------------------------------------------------------------------------------------------------------
Subtotal 5,994.0 5,994.0 3,733.3 3,733.3 5,438.0 5,438.0
- ------------------------------------------------------------------------------------------------------------------
Trading Account 13.4 13.4 8.8 8.8 10.9 10.9
- ------------------------------------------------------------------------------------------------------------------
Total Securities $6,472.6 $6,487.1 $4,198.2 $4,215.5 $5,924.7 $5,942.0
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Reconciliation of Book Values to Fair Values of
Securities Held to Maturity September 30, 1998
- ------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Book -------------------------- Fair
(In Millions) Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 55.2 $ .2 $ -- $ 55.4
Obligations of States and Political Subdivisions 265.6 16.7 -- 282.3
Federal Agency 5.0 .1 -- 5.1
Other 139.4 -- 2.5 136.9
- ------------------------------------------------------------------------------------------------------------------
Total $ 465.2 $ 17.0 $2.5 $479.7
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Amortized Cost to Fair Values of
Securities Available for Sale September 30, 1998
- ----------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized --------------------------- Fair
(In Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 270.1 $ 1.7 $ -- $ 271.8
Obligations of States and Political Subdivisions 183.6 11.0 -- 194.6
Federal Agency 5,388.3 2.0 .4 5,389.9
Preferred Stock 118.0 .7 .1 118.6
Other 20.1 -- 1.0 19.1
- ----------------------------------------------------------------------------------------------------------------
Total $ 5,980.1 $15.4 $1.5 $5,994.0
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Unrealized gains and losses on off-balance sheet financial instruments used to
hedge securities available for sale totaled zero and $15.0 million,
respectively, as of September 30, 1998. At September 30, 1998, stockholders'
equity included a charge of $.7 million, net of tax, to recognize the
depreciation 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 $6.4 billion on September 30, 1998, $6.2 billion on December 31,
1997 and $8.5 billion on September 30, 1997.
4. Contingent Liabilities - Standby letters of credit outstanding were $1.6
billion on September 30, 1998, $1.5 billion on December 31, 1997 and $1.5
billion on September 30, 1997.
8
<PAGE>
5. Loans and Leases - Amounts outstanding in selected loan categories are shown
below.
<TABLE>
<CAPTION>
(In Millions) September 30, 1998 December 31, 1997 September 30, 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Residential Real Estate $ 5,674.3 $ 5,186.7 $ 4,987.8
Commercial 3,987.9 3,734.8 3,848.2
Broker 100.1 170.1 171.5
Commercial Real Estate 624.2 582.1 617.1
Personal 1,366.7 1,207.2 1,141.9
Other 697.3 890.1 615.5
Lease Financing 452.7 347.0 311.8
- --------------------------------------------------------------------------------------
Total Domestic 12,903.2 12,118.0 11,693.8
International 697.6 470.2 529.9
- --------------------------------------------------------------------------------------
Total Loans and Leases $13,600.8 $12,588.2 $12,223.7
- --------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, other domestic and international loans included $879.1
million of overnight trust-related advances primarily in connection with next
day security settlements, compared with $924.5 million at December 31, 1997 and
$752.5 million at September 30, 1997.
At September 30, 1998, nonperforming loans totaled $29.6 million. Included in
this amount were loans with a recorded investment of $25.6 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 $7.8 million had no portion of the reserve for credit
losses allocated to them, while impaired loans totaling $17.8 million had an
allocated reserve of $1.6 million. For the third quarter of 1998, the total
recorded investment in impaired loans averaged $24.4 million. Total interest
income recorded on impaired loans for the quarter ended September 30, 1998 was
$25 thousand.
At September 30, 1997, nonperforming loans totaled $46.3 million and included
$43.3 million of impaired loans. Of these impaired loans, $10.0 million had no
reserve allocation while $33.3 million had an allocated reserve of $5.8 million.
Impaired loans for the third quarter of 1997 averaged $49.3 million with $43
thousand of interest income recognized.
9
<PAGE>
6. Reserve for Credit Losses - Changes in the reserve for credit losses were as
follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
(In Millions) 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $147.6 $148.3
Charge-Offs
Commercial Real Estate (.2) (.6)
Other (10.6) (8.4)
International -- --
- ------------------------------------------------------------
Total Charge-Offs (10.8) (9.0)
- ------------------------------------------------------------
Recoveries 1.6 2.7
- ------------------------------------------------------------
Net Charge-Offs (9.2) (6.3)
Provision for Credit Losses 8.0 6.0
Reserve Related to Acquisitions .2 --
- ------------------------------------------------------------
Balance at End of Period $146.6 $148.0
- ------------------------------------------------------------
</TABLE>
The reserve for credit losses represents management's estimate of probable
losses which have occurred as of the date of the financial statements. The loan
and lease portfolio and other credit exposures are regularly reviewed to
evaluate the adequacy of the reserve for credit losses. In determining the
level of the reserve, Northern Trust evaluates the reserve necessary for
specific nonperforming loans and estimates losses inherent in other credit
exposures.
The result is a reserve with these components:
. Specific Reserves. The amount of specific reserves is determined through a
loan-by-loan analysis of non-performing loans that considers expected future
cash flows, the value of collateral and other factors that may impact the
borrower's ability to pay.
. Allocated Inherent Reserve. The amount of the allocated portion of the
inherent loss reserve is based on loss factors assigned to Northern Trust's
credit exposures based on internal credit ratings. These loss factors are
determined on the basis of historical charge-off experience. In addition,
management applies judgment in determining particular components of the inherent
reserve, as when management began in 1997 to use an "industry base" reserve for
the commercial and commercial real estate segments of the portfolio, set the
base reserve level at 1% in 1997 and 1.25% in the first nine months of 1998, and
extended the methodology to international exposure in 1998.
. Unallocated Inherent Reserves. Management determines the unallocated portion
of the inherent loss reserve based on factors that cannot be associated with a
specific credit or loan categories. These factors include management's
subjective evaluation of local and national economic and business conditions,
portfolio concentration and changes in the character and size of the loan
portfolio. The unallocated portion of the inherent loss reserve reflects
management's attempt to ensure that the overall reserve appropriately reflects a
margin for the imprecision necessarily inherent in estimates of expected credit
losses.
The continuous control process maintained by the Credit Policy Group and the
lending staff and the quarterly analysis of specific and inherent loss
components is the principal method relied upon by management to ensure that
changes in estimated credit loss levels are adjusted on a timely basis.
Management also considers the experience of peer institutions and regulatory
guidance in addition to Northern Trust's own experience.
Loans, leases and other extensions of credit deemed uncollectable are charged to
the reserve. Subsequent recoveries, if any, are credited to the reserve.
Actual losses may vary from current estimates and the amount of the provision
may be either greater than or less than actual net charge-offs. The related
provision for credit losses, which is charged to income, is the amount necessary
to adjust the reserve to the level determined through the above process.
10
<PAGE>
7. Net Income Per Common Share Computations - The computation of net income per
common share is presented in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------------------------------
($ In Millions Except Per Share Information) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Net Income Per Common Share:
Net Income $ 90.2 $ 81.0 $ 262.3 $ 228.1
Less Dividends on Preferred Stock (1.2) (1.3) (3.7) (3.7)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 89.0 $ 79.7 $ 258.6 $ 224.4
Average Number of Common Shares Outstanding 110,518,171 111,065,939 110,741,579 111,008,921
Basic Net Income Per Common Share $ 0.81 $ 0.72 $ 2.34 $ 2.02
Diluted Net Income Per Common Share:
Net Income Applicable to Common Stock $ 89.0 $ 79.7 $ 258.6 $ 224.4
Average Number of Common Shares Outstanding 110,518,171 111,065,939 110,741,579 111,008,921
Plus Dilutive Potential Common Shares:
Stock Options 3,177,807 2,827,563 3,251,476 2,783,251
Performance Shares 666,301 567,377 597,784 576,961
Other 351,911 258,918 333,271 249,088
- ------------------------------------------------------------------------------------------------------------------------------
Average Common and Potential Common Shares 114,714,190 114,719,797 114,924,110 114,618,221
Diluted Net Income Per Common Share $ 0.78 $ 0.70 $ 2.25 $ 1.96
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8. Accounting Standards Pronouncements - In March, 1998, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
requires the capitalization of certain external and internal costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998, with
early adoption permitted.
Northern Trust's current accounting policy is to expense internal costs of
computer software developed for internal use as incurred. It is estimated that
salary and related costs of approximately $10 million, relating to currently
planned software development projects, will be capitalized in 1999 following
Northern Trust's adoption of SOP 98-1.
In April, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
all nongovernmental entities to expense costs of start-up activities as those
costs are incurred. The term "start-up activities" is broadly defined and
includes pre-operating, pre-opening and organization activities. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998, with early adoption permitted.
11
<PAGE>
Northern Trust will adopt SOP 98-5 effective January 1, 1999. Northern Trust has
typically expensed such costs as incurred and, therefore, adoption of this SOP
will not have a material effect on Northern Trust's results of operations.
In June 9, 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.
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 has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements and has not determined the timing or method of its
adoption.
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 15 years.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER EARNINGS HIGHLIGHTS
Net income increased 11% to a record $90.2 million from the $81.0 million earned
in the third quarter of last year. Net income per common share on a diluted
basis also increased 11% to a record $.78 for the third quarter, up from $.70
earned a year ago. This earnings performance produced an annualized return on
average common equity (ROE) of 20.55% versus 20.68% reported last year, and an
annualized return on average assets (ROA) of 1.30% versus 1.33% in 1997. Trust
fees grew by 15% and continue to represent the key driver of revenue growth. The
11% earnings per share growth, 161% productivity ratio, and 20.55% ROE exceeded
Northern Trust's strategic financial targets.
Noninterest Income
Noninterest income, after adjusting for a $10.0 million nonrecurring gain in
1997, increased 8% and totaled $264.7 million for the quarter, accounting for
67% of total taxable equivalent revenue. Trust fees of $203.6 million increased
15% or $26.2 million over the like period of 1997, and represented 77% of
noninterest income and 52% of total taxable equivalent revenue. This fee growth
was driven by new business, increased transaction volumes and higher market
values of trust assets administered. Trust assets under administration increased
12% from a year ago and totaled $1.13 trillion at September 30, 1998 but,
reflecting the decline in the equity markets during the quarter, decreased 6%
from June 30, 1998. Trust assets under the management of Northern Trust grew 34%
to $220.7 billion from September 30, 1997. At December 31, 1997, trust assets
under administration totaled $1.08 trillion with $196.6 billion under
management.
Trust fees are based on the market value of assets managed and administered, the
volume of transactions, securities lending volume and spreads, and fees for
other services rendered. Asset-based fees are typically determined on a sliding
scale so that as the value of a client portfolio grows in size, Northern Trust
receives a smaller percentage of the increasing value as fee income. Therefore,
market value or other changes in a portfolio's size do not typically have a
proportionate impact on the level of trust fees. In addition, Corporate and
Institutional Services (C&IS) trust relationships are increasingly priced to
reflect earnings from activities such as custody-related deposits and foreign
exchange trading which are not included in trust fees.
Effective January 1, 1998, the trust activities for Middle Market clients were
transferred to C&IS from the Personal Financial Services business unit (PFS).
Trust assets and fees for all periods presented have been restated.
13
<PAGE>
Noninterest Income (continued)
Trust fees from PFS increased 18% from the prior year level of $83.7 million and
totaled $98.8 million for the third quarter, reflecting strong growth in new
business throughout Northern Trust's PFS office network. In addition, trust fees
benefited from favorable equity markets that prevailed at June 30 since most of
Northern Trust's market-based trust fees for a quarter are determined at the
prior quarter-end. Trust fees in each state increased more than 15% from last
year's third quarter with growth especially strong in Florida, Arizona and
Texas. The PFS Wealth Management Group, which administers significant family-
asset pools nationwide, continued to achieve excellent performance, with trust
fees increasing 15% to $9.4 million. The Group now administers $31.8 billion of
trust assets. Total personal trust assets under administration increased $13.1
billion from the prior year and $8.9 billion since December 31, 1997, and
totaled $104.8 billion at September 30, 1998 but, reflecting the decline in the
equity markets during the quarter, decreased 5% from June 30, 1998. Of the
personal trust assets under administration, $65.0 billion is managed by Northern
Trust compared to $55.7 billion one year ago and $58.5 billion at December 31,
1997. Net recurring new business sold through September 30, 1998 and expected to
transition by year-end, was $29.0 million in annualized trust fees, up 33% from
the same period of 1997.
During the quarter, Northern Trust Bank, FSB commenced operations in Bloomfield
Hills, Michigan and Northern Trust's California bank established a new branch in
Beverly Hills. With the opening of these offices, Northern Trust's network of
Personal Financial Services offices now includes 66 locations in seven states.
Three additional offices will open in the fourth quarter of 1998 or early 1999.
Trust fees from C&IS increased 12% to $104.8 million from $93.7 million in the
year-ago quarter, reflecting excellent new business. These fees are derived from
a full range of custody, investment and advisory services rendered to retirement
and other asset pools of corporate and institutional clients worldwide, and all
of these services contributed to the third quarter fee growth. Strong custody
fees contributed approximately one-fourth of the growth in C&IS trust fees. New
business drove a 30% increase in retirement services recordkeeping and
consulting fees. Securities lending fees increased 11%, or $1.9 million, from
the prior year quarter to $20.1 million. Corporate trust fees also benefited
from $3.5 million in fees generated by Northern Trust Quantitative Advisors,
Inc. (NTQA), a December 31, 1997 acquisition. On a sequential quarter basis,
C&IS trust fees were down slightly because international securities lending fees
benefited from increased borrowing in the second quarter due to the seasonal
nature of dividends on certain international securities. C&IS trust assets under
administration increased 11% or $104.1 billion from the prior year to $1.02
trillion but, reflecting the decline in equity markets during the quarter,
decreased 6% from June 30, 1998. Of the C&IS trust assets under administration,
$155.7 billion is managed by Northern Trust. Trust assets under administration
included approximately $176 billion of global custody assets.
14
<PAGE>
Noninterest Income (continued)
Net new business sold, through September 30, 1998 and expected to transition by
year-end, was $45.3 million in annualized trust fees, about even with the
comparable period in 1997. Approximately 40% of the new business sold came from
existing clients and 60% from new relationships.
Foreign exchange trading profits were $23.6 million compared to the record $33.5
million in the third quarter of last year. The prior year's results benefited
from high levels of volatility in the Asian currencies and higher trading
volumes as clients repositioned their securities portfolios with respect to
these markets. Also, the current year's results were impacted by decreased
volatility in the EMU currencies and lower client portfolio holdings in emerging
markets.
Total treasury management revenues from both fees and the computed value of
compensating deposit balances increased 8% from the third quarter of 1997 to
$24.4 million. Increased volumes from existing clients as well as new business
contributed to the growth in revenues which was fairly evenly distributed
between electronic- and paper-based products. The fee portion of these revenues
accrued in the quarter was $17.6 million, up from $14.8 million in the
comparable quarter last year.
Security commissions and trading income at $6.9 million was unchanged from a
year ago. Other operating income was $12.9 million for the third quarter
compared with $22.0 million in the same period of last year. The prior year's
quarter included $10.0 million of nonrecurring income resulting from a
settlement reached with Illinois banking regulators concerning the disposition
of certain unclaimed balances accumulated over a number of years. Exclusive of
this nonrecurring item, the increase over last year is primarily attributable to
higher fees from trust deposit activities and banking services.
Net Interest Income
Net interest income for the quarter totaled $118.0 million, 8% higher than the
$109.6 million reported in the third quarter of 1997. Net interest income is
defined as the total of interest income and amortized fees on earning assets,
less interest expense on deposits and borrowed funds, adjusted for the impact of
off-balance sheet hedging activity. When net interest income is adjusted to a
fully taxable equivalent (FTE) basis, yields on taxable, nontaxable and
partially taxable assets are comparable, although the adjustment to a FTE basis
has no impact on net income. Net interest income on a FTE basis for the quarter
was $127.7 million, up 9% from the $117.6 million reported in 1997. The increase
in net interest income reflects higher levels of noninterest-related funds,
driven by increases in both demand and noninterest-bearing deposits and common
equity, and 16% growth in average earning assets. The net interest margin
declined to 2.01% from 2.14% reported in the year-ago quarter. The decline in
the net interest margin is attributable to the flattening yield curve which has
compressed interest rate spreads and to a higher proportion of assets held in
lower spread short-term securities and money market assets.
15
<PAGE>
Net Interest Income (continued)
Earning assets for the third quarter averaged $25.2 billion, up 16% from the
$21.8 billion average for the same quarter of 1997. The $3.4 billion growth in
average earning assets was concentrated in the loan portfolio which increased
12% to average $13.4 billion and in securities which increased 35% to $8.4
billion. Money market assets averaged $3.4 billion in the quarter, down slightly
from last year.
The loan growth was concentrated predominantly in the domestic portfolio which
increased $1.3 billion to average $12.7 billion. Residential mortgage loans
accounted for one-half of the domestic growth, increasing 13% to average $5.6
billion for the quarter, comprising 41% of the total average loan portfolio.
Commercial and industrial loans averaged $4.1 billion during the third quarter
compared to $3.6 billion in the prior year quarter. The securities portfolio
increased $2.2 billion or 35% reflecting a higher level of investments in short-
term U.S. agency securities.
Funding for the growth in earning assets came from several sources. Total
interest-bearing deposits averaged $13.0 billion, up 9% or $1.1 billion from the
third quarter of 1997. This growth came principally from foreign office time
deposits (up $667 million), and savings and money market deposits (up $423
million). The increase in foreign office time deposits resulted primarily from
growth in global custody activity. Other interest-related funds grew 31% or $2.0
billion resulting from higher levels of federal funds purchased, securities sold
under agreements to repurchase and treasury tax and loan balances. Noninterest-
related funds increased 9% to average $3.7 billion, due to demand and
noninterest-bearing deposit growth and a $188 million increase in common
stockholders' equity resulting from retained earnings.
Provision for Credit Losses
The provision for credit losses of $1.0 million in the third quarter was $4.0
million below the comparable quarter in 1997. For a discussion of the provision
and reserve for credit losses, refer to the Asset Quality section.
Noninterest Expenses
Noninterest expenses totaled $243.8 million for the quarter, an increase of 4%
or $9.1 million from the $234.7 million in the year-ago quarter. The prior year
quarter included $8.9 million of technology-related special charges. Of these
charges, $5.4 million were for Year 2000 related costs and $3.5 million were
related to the now-completed relocation of the computer data facility. Exclusive
of these special charges, noninterest expenses increased 8% from the year-ago
level. Approximately 70% of the increase in recurring expenses related to
salaries and employee benefits resulting from staff growth and merit increases,
partially offset by lower performance-based compensation. In addition, the
noninterest expense increase in the third quarter reflects $3.9 million of
incremental expenses resulting from the NTQA and Trust Bank of Colorado
acquisitions, the opening of additional PFS offices and costs associated with
technology investments and business promotion.
16
<PAGE>
Noninterest Expenses (continued)
Salaries and benefits, which represent 61% of total noninterest expenses,
increased to $149.3 million from $136.5 million in the year-ago quarter. The
increase was primarily attributable to staff growth and merit increases,
partially offset by lower performance-based compensation. 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 September 30, 1998
totaled 7,950, up 8% from 7,337 at September 30, 1997. Lower performance-based
compensation principally reflects lower accruals for stock-based compensation
plans.
Net occupancy expense totaled $17.4 million, down 1% from $17.7 million in the
third quarter of 1997. Excluding the nonrecurring items in the prior year
quarter, occupancy expenses increased a modest 2%, due primarily to the opening
of additional PFS offices over the past twelve months and additional space
leased to support business growth.
Equipment expense, comprised of depreciation, rental and maintenance costs,
totaled $15.9 million, down 10% from the $17.6 million reported in the third
quarter of 1997. Exclusive of $2.6 million in technology-related special charges
in last year's third quarter, equipment expense increased 6% over the prior
year. Higher levels of lease expense for data lines and depreciation for
computer hardware were partially offset by a reduction in equipment rental costs
resulting from the termination of certain leases associated with the relocation
of the computer data facility.
Other operating expenses in the quarter totaled $61.2 million compared to $62.9
million last year. Excluding technology-related special charges of $4.8 million
in last year's third quarter, other expenses increased 5% from the prior year.
The increase in the 1998 expense level was primarily the result of continued
investment in technology, expansion of the personal trust and banking office
network, and higher operating expenses necessary to support business growth. The
expense categories most affected were business promotion, telecommunications,
and amortization of goodwill and other intangible assets. Partially offsetting
these increases were lower levels of subcustodian expense, and costs associated
with legal claims.
The components of other operating expenses were as follows:
<TABLE>
<CAPTION>
Third Quarter
Ended September 30
------------------
(In Millions) 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Business Development $ 8.1 $ 6.6
Purchased Professional Services 20.6 20.9
Telecommunications 4.1 3.6
Postage and Supplies 5.3 5.5
Software Amortization 10.0 13.4
Goodwill and Other Intangibles Amortization 3.6 2.5
Other Expense 9.5 10.4
- ---------------------------------------------------------------
Total Other Operating Expenses $61.2 $62.9
- ---------------------------------------------------------------
</TABLE>
17
<PAGE>
Noninterest Expenses (continued)
On October 21, 1998, the Northern Trust Company announced an agreement in which
Fiserv, Inc. will manage the bank's check processing operations. The agreement
calls for Northern Trust's approximately 300 check processing operations
employees to move to parallel positions with Fiserv effective January 1, 1999.
In the near term this agreement is not expected to have a significant effect on
operating costs for item processing. Longer term, this partnership reinforces
the bank's commitment to increasing the cost efficiencies needed for maintaining
Northern's leadership position in treasury management. Fiserv, Inc.,
headquartered in Brookfield, Wisconsin, is an independent, full-service provider
of integrated data processing and information management systems to the
financial industry.
Provision for Income Taxes
The provision for income taxes was $47.7 million for the third quarter compared
with $43.6 million in the year-ago quarter. The higher tax provision in 1998
resulted primarily from the growth in taxable earnings for both federal and
state income tax purposes. The effective tax rate was 35% for both periods.
Year 2000 Project
"Year 2000" issues stem from the fact that computer programmers and other
designers of equipment that use microprocessors have long abbreviated dates by
eliminating the first two digits of the year. As the Year 2000 approaches, many
systems may be unable to distinguish years beginning with 20 from years
beginning with 19, and so may not accurately process certain date-based
information, which could cause a variety of operational problems for businesses.
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 on a timely basis could have a
materially adverse affect 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. Failure to make satisfactory
progress toward Year 2000 readiness or take other agency-mandated steps could
also result in action by state or federal regulators that could adversely affect
Northern Trust's business.
Northern Trust has a dedicated Year 2000 Project Team whose members have
significant experience with Northern Trust's banking and trust applications. The
scope of the Project Team's work has been reduced by the fact that Northern
Trust has been developing systems using four digit years since the mid 1980s,
and the work has proceeded more efficiently because Northern Trust has licensed
a number of software tools that help automate the process of identifying and
making needed changes.
18
<PAGE>
Year 2000 Project (continued)
The information technology portion of Northern Trust's Year 2000 Project is
proceeding in phases, although the phases overlap in some cases. In the now-
completed awareness and assessment phases, the project was defined and
application software, systems software and hardware were systematically
inventoried and assessed for importance to Northern Trust's business. Northern
Trust has used an inclusive definition of "mission critical" items, with
approximately 90% of Northern Trust's core applications included in this
category.
Northern Trust is nearing completion of the remaining phases of the Year 2000
Project:
. Renovation involves reviewing programming code and altering it where necessary
to deal appropriately with years after 1999.
. Validation tests systems and software. Both renovated systems and systems that
do not require renovation both undergo Year 2000 testing, to verify that
accurate results are produced using key dates (including leap year) in the new
century. Renovated systems are also tested to make sure that other functions
have not been affected. Any needed follow-up renovation is then performed.
Hardware is similarly tested and either upgraded or replaced.
. Implementation, in which test results are reviewed by user groups and
documented and systems or applications returned to production, follows
validation.
Northern Trust has also commenced integration testing, which will continue into
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.
The project's progress can be measured by completion percentages for the
remaining phases or by completion percentages for categories of items. Northern
Trust also tracks the progress of its centrally-supported information
technology, which makes up the vast majority of the work, as well as the
progress of all of its information technology, wherever supported. For mission
critical information technology supported centrally (including purchased and
internally developed software), Northern Trust had completed approximately 97%
of the renovation, 91% of the validation and 80% of the implementation as of
September 30, 1998. For all mission critical applications, systems and hardware,
wherever supported and including purchased and internally developed software, as
of September 30, 1998 Northern Trust had completed the following approximate
percentages of all work through the implementation phase:
Application Software 76%
Systems Software 86%
Hardware 79%
19
<PAGE>
Year 2000 Project (continued)
Northern Trust expects that renovation, validation and implementation for
substantially all internally-developed mission critical items will be completed
by December 31, 1998. Testing and implementation for a few tax functions is
expected to be completed in early 1999. Validation testing and implementation of
systems provided by third parties will also be largely completed by year-end,
although testing of a few such systems will likely carry over into the first
quarter of 1999. With respect to non-mission critical applications, including
non-critical desktop software, Northern Trust's target for completion of Year
2000 work is June 1999.
Northern Trust has also established a Year 2000 Business Issues Task Force,
consisting of senior managers from across the Corporation's businesses and
support functions, in order to systematically address issues that are not
directly related to information technology. The Task Force and the Year 2000
Project Team provide regular reports to the Corporation's Management Committee
and Board of Directors.
The Business Issues Task Force is coordinating 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 they will function in the Year 2000. The assessment phase of this task has
been completed. Renovation, validation and implementation have been completed
for most of the equipment needing renovation. Some building alarm and employee
access systems will be renovated and tested in 1999. Contingency plans are also
being developed for Northern Trust's important locations, to allow critical
functions to continue in the event of infrastructure problems.
The Task Force is also monitoring programs to contact important vendors and
suppliers to verify their Year 2000 readiness. For example, during 1998,
Northern Trust is again reviewing the Year 2000 preparedness of its
subcustodians, and recently completed on-site due diligence visits with
subcustodians, who account for most of Northern Trust's global securities
processing -- approximately 95% measured by market value of holdings and 84%
measured by number of transactions. The great majority of these subcustodians
appear to be making adequate progress. Northern Trust will continue to monitor
subcustodians Year 2000 work and develop contingency plans 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 of data
exchanges with these organizations is underway and is expected to be completed
by March 31, 1999.
Northern Trust also plans to test for all key dates in the new century with
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.
20
<PAGE>
Year 2000 Project (continued)
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.
Although Northern Trust is attempting to monitor and validate the efforts of
other parties, it cannot control the success of these efforts. 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 experiences significant Year 2000 difficulties that will affect
Northern Trust or internal problems develop. For example, the Task Force is
coordinating a review of the Year 2000 status of power and telecommunications
providers at each important location, as these services are critical to Northern
Trust's business. The contingency plan for Northern Trust's critical Chicago
data and operations complex calls for back-up generators to be used in the event
of extended power outages to run the data center and support the most critical
operations functions. Northern Trust is also updating its existing business
continuity plans for Year 2000. This process is well underway and will continue
through the third quarter of 1999, as plans are reviewed and refined.
As part of its credit analysis process, Northern Trust has developed a project
plan for assessing the Year 2000 readiness of its significant credit customers.
An initial assessment of Year 2000 readiness has been completed for the
customers who have responded to Northern Trust's inquiries about their progress,
which make up the majority of its credit customers and represent most of its
credit exposure. Northern Trust will continue to monitor the progress of these
customers, taking action (which may include additional loan loss provisions)
where appropriate. 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 is also contacting clients and customers to explain its
Year 2000 Program.
The estimated 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 and the cost of consultants. The estimate does not include the time
that internal staff and user departments are devoting to testing programming
changes, although this testing is not expected to add significant incremental
costs.
All Year 2000 costs are expensed as incurred. As of September 30, 1998, $18.7
million of the estimated $35 million of project costs have been incurred. The
remaining costs are expected to be incurred roughly evenly through the first
quarter of 2000.
21
<PAGE>
Year 2000 Project (continued)
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 remediation 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.
Euro Conversion
On January 1, 1999, the existing or "legacy" currencies of eleven of the fifteen
members of the European Union are scheduled to become convertible at fixed rates
into the euro, which will become the common legal currency of the participating
members on that date. The legacy currencies are scheduled to remain legal tender
for public and private transactions, as denominations of the euro, until June
30, 2002. During the three year transition period, transactions may be settled
in either the legacy currency or the euro.
Because of its substantial global custody and investment management businesses,
Northern Trust has engaged in extensive preparations for the introduction of the
euro. Euro-complaint software has been installed in Northern Trust's global
securities processing system. Testing is well underway and will continue through
the balance of the year. Changes in other systems have been made and are also
well into testing. Northern Trust is also conducting tests with key industry
participants, counterparties and others with whom euro-denominated data must be
exchanged beginning in 1999. Transition to the euro will necessarily involve a
significant amount of work at year-end using new system functions, and the best
preparations cannot guarantee that all important participants will successfully
complete the transition. Detailed plans for accomplishing the necessary data
conversion at year end have been made, including contingency plans for work-
around solutions in the event that others are unable to transmit, receive or
process data as expected.
The effects of the euro on various aspects of Northern Trust's business are
difficult to predict. In the foreign exchange market, volatility in pricing for
transactions between legacy currencies has already decreased considerably, as
have volumes; after January 1, 1999 these transactions will not be conducted.
Northern Trust currently estimates that foreign exchange profits have been or
will be reduced by approximately 10% in the aggregate as a result of these
developments. Although a new market will develop for transactions involving the
euro and the US dollar, it is impossible to predict the extent to which foreign
exchange profits arising from this new market will replace profits from
transactions involving legacy currencies and the US dollar or the extent to
which reductions in foreign exchange profits will be offset by other foreign
exchange initiatives.
It is generally expected that the advent of the euro will increase liquidity in
European equity and debt markets, but its impact on trading strategies, which
have an effect on Northern Trust's global securities lending business, remains
unclear. Northern Trust will
22
<PAGE>
Euro Conversion (continued)
lend for clients securities denominated in euro, and is also creating vehicles
that allow delivery and investment of collateral denominated in euro. Northern
Trust has also developed euro-denominated deposit and money market fund products
for introduction early in 1999 and is reviewing other investment management
strategies in light of the euro.
NINE MONTH EARNINGS HIGHLIGHTS
Net income per common share increased 15% to $2.25 for the nine month period
ended September 30, up from $1.96 last year. Net income also increased 15% to
$262.3 million from $228.1 million in the year-ago period. The ROE rose to
20.58% from 20.21% last year, while the ROA improved to 1.31% from 1.30% in the
same period last year.
Total revenues stated on a FTE basis increased 12% from 1997 levels. Trust fees
totaled $599.6 million, up 19% from $504.0 million last year. Excluding the
$10.6 million of incremental fees resulting from the NTQA acquisition, trust
fees increased 17%.
Foreign exchange trading profits totaled $74.8 million, down 4% from last year's
record performance. Treasury management revenues from both fees and the computed
value of compensating deposit balances increased 6% to $72.0 million. The fee
portion of these revenues accrued in the period totaled $50.9 million, up from
$44.4 million in 1997.
Security commissions and trading income totaled $21.3 million, up 10% from $19.4
million reported last year. Other operating income totaled $39.1 million in the
period compared with $40.9 million in 1997. Excluding the $10.0 million of
nonrecurring income included in the prior year, other operating income increased
26% over 1997. The improvement from the prior year was due primarily to higher
banking and trust deposit-related fees, and the second quarter gains on a
mortgage loan sale and the sale of Northern Futures Corporation exchange
memberships.
Net interest income stated on a FTE basis totaled $377.9 million, up 8% from the
$349.4 million reported last year. The $8.0 million provision for credit losses
was $2.0 million higher than the provision required in the first nine months of
1997. Net loan charge-offs increased to $9.2 million from $6.3 million in the
prior year. Noninterest expenses were up 11% and totaled $727.7 million compared
to $658.2 million a year ago. Exclusive of the $8.9 million of technology-
related special charges, total noninterest expenses increased 12% from last
year.
BALANCE SHEET
Total assets at September 30, 1998 were $28.1 billion and averaged $27.6 billion
for the third quarter, up 14% from last year's average of $24.2 billion. Due to
strong demand for credit, loans and leases grew to $13.6 billion at September
30, 1998, and averaged $13.4 billion for the quarter. This compares with $12.2
billion in total loans and leases at September 30, 1997 and $12.0 billion on
average for the third quarter of last year.
23
<PAGE>
BALANCE SHEET (continued)
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 $1.76 billion at September 30, 1998 and averaged $1.72
billion for the quarter, up 12% from the $1.53 billion average in last year's
third quarter. Total stockholders' equity averaged $1.84 billion for the third
quarter compared with $1.65 billion in 1997.
During the quarter, Northern Trust acquired a total of 508,414 of its common
shares at a cost of $36.1 million pursuant to the stock buyback program
authorized by the Board of Directors. An additional 1.9 million shares may be
purchased after September 30, 1998 under the buyback program.
Northern Trust Corporation risk-based capital ratios remained strong at 9.4% for
tier 1 capital and 12.7% for total capital at September 30, 1998. These capital
ratios are well above the minimum regulatory requirements of 4% for tier 1 and
8% for total risk-based capital ratios. The leverage ratio (tier 1 capital to
third quarter average assets) of 6.9% at September 30, 1998, also exceeded the
minimum regulatory requirement of 3%. In addition, each of Northern Trust's
subsidiary banks had a ratio above 8.2% for tier 1 capital, 11.1% 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 September 30, 1998 totaled
$31.2 million, compared with $43.3 million at December 31, 1997 and $50.4
million at September 30, 1997. Domestic nonaccrual loans and leases, consisting
primarily of commercial loans, totaled $27.2 million, or .21% of total domestic
loans and leases at September 30, 1998. At December 31, 1997 and September 30,
1997, domestic nonaccrual loans and leases totaled $38.9 million and $43.8
million, respectively.
The Nonperforming Asset 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.
24
<PAGE>
ASSET QUALITY (continued)
<TABLE>
<CAPTION>
September 30 June 30 December 31 September 30
----------------------------------------------------------------
(In Millions) 1998 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans
Domestic
Residential Real Estate $ 4.6 $ 3.7 $ 5.3 $ 4.1
Commercial 18.4 18.0 26.3 32.9
Commercial Real Estate 3.4 2.6 7.1 6.2
Personal .8 .2 .2 .6
- -------------------------------------------------------------------------------------------------------------
Total Domestic 27.2 24.5 38.9 43.8
International - - - -
- -------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 27.2 24.5 38.9 43.8
Restructured Loans 2.4 2.5 2.5 2.5
Other Real Estate Owned 1.6 2.0 1.9 4.1
- -------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $31.2 $29.0 $43.3 $50.4
- -------------------------------------------------------------------------------------------------------------
Total 90 Day Past Due Loans (still accruing) $35.4 $24.4 $13.9 $20.7
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Provision and Reserve for Credit Losses
The provision for credit losses is the charge against current earnings that is
determined by management, through a disciplined credit review process, as the
amount needed to maintain a reserve that is sufficient to absorb credit losses
inherent in Northern Trust's loan and lease portfolios and other credit
undertakings. The reserve provides for probable losses that have been
identified with specific borrower relationships (specific loss component) and
for probable losses that are believed to be inherent in the loan and lease
portfolios and other credit undertakings but that have not yet been specifically
identified (inherent loss component).
Footnote 6 to the Consolidated Financial Statements includes a table that
analyzes the reserve for credit losses at September 30, 1998 and identifies the
charge-offs and recoveries by loan category and the provisions for credit losses
during the nine-month period ended September 30, 1998. The following table shows
the specific portion of the reserve, the allocated portion of the inherent
reserve and its components by loan category and the unallocated portion of the
reserve at September 30, 1997, December 31, 1997, and September 30, 1998.
<TABLE>
<CAPTION>
ALLOCATION OF THE RESERVE FOR CREDIT LOSSES
- --------------------------------------------------------------------------------------------------------------------------
September 30, 1998 December 31, 1997 September 30, 1997
-------------------------- --------------------------- ---------------------------
Percent of Percent of Percent of
Reserve Loans to Reserve Loans to Reserve Loans to
($ in millions) Amount Total Loans Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C> <C> <C>
Specific Reserves $ 3.0 ---% $ 10.7 ---% $ 6.6 ---%
- --------------------------------------------------------------------------------------------------------------------------
Inherent Reserves
Residential Real Estate 12.3 42 3.7 41 7.3 41
Commercial 77.8 30 87.1 30 71.7 33
Commercial Real Estate 12.0 5 6.4 5 3.3 5
Personal 3.4 10 .6 10 7.5 9
Other --- 5 --- 7 --- 5
Lease Financing 2.9 3 2.9 3 2.9 3
International 4.6 5 --- 4 2.8 4
Unallocated 30.6 --- 36.2 --- 45.9 ---
- --------------------------------------------------------------------------------------------------------------------------
Total Inherent Reserve $143.6 --- $136.9 --- $141.4 ---
- --------------------------------------------------------------------------------------------------------------------------
Total Reserve $146.6 100% $147.6 100% $148.0 100%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Specific Component of the Reserve. The specific component of the reserve is
determined on a loan-by-loan basis as part of the regular review of classified
and non-performing loans and potential charge-offs. The specific reserve is
based on a loan's current book value compared to the present value of its
projected future cash flows, collateral value or market value, as is relevant
for the particular loan.
At September 30, 1998, the specific reserve component amounted to $3.0 million
compared to $10.7 million at the end of 1997. During 1998, and as part of the
regular review of classified and non-performing loans and potential charge-offs,
management determined that certain loans with specific reserves allocated to
them in 1997 had deteriorated and needed to be charged-off. Although most of
the $10.8 million in charge-offs during the period were taken against and
reduced the specific loss component of the reserve, that reduction was partially
offset by higher allocations needed on some of the credits with specific
reserves and other newly-identified commercial credits, resulting in a net $7.7
million decrease in the specific loss component of the reserve.
25
<PAGE>
Allocated Inherent Component of the Reserve. The allocated portion of the
inherent reserve is based on management's review of historical charge-off
experience as well as management's judgment for loans in each credit rating
category over a period of time which management determines is adequate to
reflect longer term economic trends. One building block in reaching the
appropriate allocated inherent reserve is an analysis of loans by credit rating
categories. Credit ratings are determined by members of the Credit Policy Group
at the time each loan is approved. These credit ratings are subject to periodic
reviews of the loan portfolio in which the Credit Policy Group, which is
independent of line management, makes the final determination of ratings for
each loan in the portfolio. Credit ratings range from "1" for the strongest
credits to "9" for the weakest credit rating; a "9" rated loan would normally
represent a complete loss.
At September 30, 1998, for loans with credit ratings "1" through "4", the loss
ratio for each past year was calculated by expressing the loan charge-offs in
each rating category as a percentage of previous year-end outstanding loans in
that rating category. These yearly loss ratios for each credit rating category
were then averaged over the prior five years to develop the historical loss
ratio. Prior to 1998, this historical loss ratio methodology was also followed
for higher risk loans rated "5" through "8". In 1998, the loss factors on these
higher-risk loans were refined by considering both historical loss ratios and
regulatory guidelines to provide a more consistent and reliable method for
taking account of credit trends in measuring loss exposure. In addition,
management broadened the analysis of credit risk by using a range of estimated
loss when facts and circumstances so dictate.
Beginning in 1997, management had decided to use for the commercial and
commercial real estate segments of the portfolio an "industry base" reserve in
order to measure the loss estimated to be inherent in these riskier segments. At
the beginning of 1998, management noted the rising uncertainty in international
markets and the possibility that this would have affected many of Northern
Trust's domestic borrowers with significant international business and revenues.
Accordingly, management used an industry base level reserve of 1.25%, higher
than the 1% base used in 1997, for the first three quarters of 1998 to better
reflect estimated probable loss during this period of uncertainty. For similar
reasons, management also applied this base reserve methodology, using the 1.25%
base reserve, to international exposure, resulting in an increase in this
component of the inherent unallocated reserve. Management also increased the
portion of the inherent reserve allocated to residential loans, in light of the
increasing size of the mortgage portfolio as a percentage of all lending.
In 1998, management also refined its methodology by reducing the loss
factor assigned to undrawn loan commitments and standby letters of credit from
the 1% used in 1997 for this exposure to .25%, in order to reflect the nature
and extent of the credit exposure on these instruments as perceived at that
time.
The $12.3 million increase in the allocated portion of the inherent reserve
during the first nine months of 1998, to $113 million at September 30, was
principally a function of the increase in the amount of loans and other credit
exposure and the decision to apply the base reserve methodology to international
exposure. Other changes in methodology essentially offset each other.
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.
In the first nine months of 1998, the loan portfolio, and in particular
commercial loans, continued to grow at a significant rate, as they had done
throughout the period 1995 - 97. In 1998, through the application of an industry
base reserve to international exposure as described above, a portion of the
unallocated inherent reserve was reassigned to the allocated inherent reserve in
light of the rising uncertainty about the effect of developments in
international markets on borrowers. Management viewed this as a more clear
identification of some of the risk previously dealt with by the unallocated
inherent reserve. The change resulted in an increase in the allocated inherent
reserve as compared to December 31, 1997. The unallocated inherent portion of
the reserve decreased, reflecting management's judgment that credit quality in
other respects continued to be strong.
Other Factors. During the nine months ended September 30, 1998, there were no
significant changes in concentration of credits that impacted asset quality.
The total amount of highest risk loans, those rated "6" to "8", was $118 million
at December 31, 1997 and $104 million at September 30, 1998, reflecting
principally charge-offs on one commercial loan and repayments received on other
of these lower-rated credits. These changes were not deemed significant in
determining loan loss reserves, although changes in the amounts in each category
would have affected the allocated inherent loss reserve analysis. There were no
"9" rated loans reported at any time during these periods because loans are
charged-off when they are so rated.
Non-performing loans fell from $41.4 million at December 31, 1997 to $29.6
million at September 30, 1998, reflecting principally charge-offs on one
commercial loan. These changes were deemed relatively minor in a loan portfolio
that exceeded $13.0 billion on average throughout the period.
Overall Reserve. Management's evaluation of the factors above resulted in a
reserve for credit losses of $146.6 million at September 30, 1998 compared to
$147.6 million at the end of 1997, reflecting the conclusion that losses
inherent in the portfolio were larger than would otherwise be suggested by the
favorable charge-off experience in recent years and the view that the reserve
should not decline appreciably given the continuing growth in loans. The
components of the reserve changed as described above. The reserve as a
percentage of total loans declined to 1.08% at September 30, 1998 from 1.17% at
year-end 1997. This decline is consistent with the trend Northern Trust has
experienced during the recent economic expansion whereby conservative
underwriting standards, improved credit quality and favorable charge-off
experience have offset the steady growth in the portfolio.
Provision. The resulting provision for credit losses was $8.0 million during
the first nine months of 1998 and $1.0 million for the quarter ended September
30, 1998. Net charge-offs were $9.2 million for the nine months and $1.1
million for the quarter.
MARKET RISK MANAGEMENT
As described in the 1997 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, 1997.
FORWARD-LOOKING INFORMATION
This report contains statements that may be considered forward-looking, such as
the discussion of Northern Trust's pricing and fee trends, credit quality,
outlook and reserves, new business results, expansion plans, anticipated
expenses, planned schedules or expected completion dates for the Year 2000 and
Euro related work, and the effect of various matters (including Year 2000 issues
and the Euro conversion) on Northern
26
<PAGE>
FORWARD-LOOKING INFORMATION (Continued)
Trust's business. These statements speak of Northern Trust's plans, goals or
expectations, refer to estimates, or use similar terms. Those relating to Year
2000 matters also constitute Year 2000 readiness disclosures. Actual results or
effects could differ materially from the results or effects 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 financial markets, with respect to the market
values of financial assets and the level of volatility in certain markets such
as foreign exchange.
. 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 identifying and penetrating targeted markets,
through acquisitions or otherwise, and generating a profit in those markets in
a reasonable time.
. Northern Trust's ability to continue to fund and accomplish technological
innovation, improve processes and controls and attract and retain capable
staff, in order to deal with increasing volume and complexity in many of its
businesses and technology challenges such as the Year 2000 and the
introduction of the Euro.
. 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 captions "Year 2000 Project" and
"Euro Conversion".
. The ability of each of Northern Trust's principal businesses to maintain a
product mix that achieves satisfactory margins.
27
<PAGE>
FORWARD-LOOKING INFORMATION (continued)
. Changes in tax laws or other legislation that could affect Northern Trust's
personal and institutional asset administration businesses.
Some of these uncertainties that may affect future results are discussed in more
detail in the section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" captioned "Risk Management" in the 1997
Annual Report to Stockholders (pp. 32-39) and in the sections of "Item 1 -
Business" of the 1997 Annual Report on Form 10-K captioned "Government
Policies", "Competition" and "Regulation and Supervision" (pp. 6-9). All
forward-looking statements included in this document are based upon information
presently available, and Northern Trust assumes no obligation to update any
forward-looking statement.
28
<PAGE>
The following schedule should be read in conjunction with the Net Interest
Income section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
CONSOLIDATED ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Third Quarter
--------------------------------------------------------
(Interest and rate on a taxable equivalent basis) 1998 1997
--------------------------- ---------------------------
($ in Millions) Interest Volume Rate Interest Volume Rate
- --------------------------------------------------------- -------- ---------- ----- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Average Earning Assets
Money Market Assets
Federal Funds Sold and Resell Agreements $ 14.1 $ 979.9 5.68% $ 12.8 $ 887.4 5.68%
Time Deposits with Banks 36.0 2,392.8 5.97 34.0 2,593.3 5.20
Other Interest-Bearing .2 15.3 5.26 1.0 72.4 5.71
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Money Market Assets 50.3 3,388.0 5.89 47.8 3,553.1 5.33
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Securities
U.S. Government 5.2 339.3 5.97 11.8 787.4 5.96
Obligations of States and Political Subdivisions 9.9 443.0 8.92 9.1 401.3 9.05
Federal Agency 106.3 7,328.9 5.76 69.8 4,797.0 5.77
Other 4.2 269.6 6.37 3.6 238.0 6.01
Trading Account .3 12.5 6.42 .2 8.4 7.19
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Securities 125.9 8,393.3 5.95 94.5 6,232.1 6.02
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Loans and Leases 226.4 13,428.4 6.69 204.9 12,001.2 6.77
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Earning Assets $402.6 $25,209.7 6.34% $347.2 $21,786.4 6.32%
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Average Source of Funds
Deposits
Savings and Money Market $ 36.3 $ 4,232.7 3.41% $ 31.6 $ 3,810.5 3.29%
Savings Certificates 30.9 2,149.2 5.70 29.5 2,030.1 5.77
Other Time 9.3 678.1 5.41 10.8 771.0 5.54
Foreign Offices Time 77.5 5,927.9 5.19 64.5 5,261.0 4.86
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Deposits 154.0 12,987.9 4.71 136.4 11,872.6 4.56
Federal Funds Purchased 35.3 2,524.0 5.55 19.5 1,391.9 5.56
Repurchase Agreements 26.5 1,907.4 5.50 21.5 1,559.8 5.45
Commercial Paper 2.1 148.9 5.60 2.0 143.3 5.59
Other Borrowings 39.4 2,854.5 5.48 25.4 1,866.0 5.41
Senior Notes 5.2 366.0 5.62 12.2 844.0 5.77
Long-Term Debt 8.0 462.5 6.95 8.2 443.6 7.46
Debt-Floating Rate Capital Securities 4.4 267.4 6.33 4.4 267.3 6.41
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Interest-Related Funds 274.9 21,518.6 5.07 229.6 18,388.5 4.96
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Interest Rate Spread - - 1.27% - - 1.36%
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Noninterest-Related Funds - 3,691.1 - - 3,397.9 -
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Total Source of Funds $274.9 $25,209.7 4.33% $229.6 $21,786.4 4.18%
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
Net Interest Income/Margin $127.7 - 2.01% $117.6 - 2.14%
- ---------------------------------------------------------- ------ --------- ---- ------ --------- ----
</TABLE>
ANALYSIS OF NET INTEREST INCOME CHANGES
DUE TO VOLUME AND RATE
<TABLE>
<CAPTION>
Third Quarter 1998/97 Nine Months 1998/97
-------------------------- --------------------------
Change Due To Change Due To
--------------- ---------------
(In Millions) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets $49.1 $6.3 $55.4 $142.1 $10.0 $152.1
Interest-Related Funds 40.5 4.8 45.3 108.3 15.3 123.6
- ---------------------------------------------------------- ----- ---- ----- ------ ----- ------
Net Interest Income $ 8.6 $1.5 $10.1 $ 33.8 $(5.3) $ 28.5
- ---------------------------------------------------------- ----- ---- ----- ------ ----- ------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
NORTHERN TRUST CORPORATION
Nine Months
-------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------
Interest Volume Rate Interest Volume Rate
------------ -------------- ------ ------------ ------------- ------
<S> <C> <C> <C> <C> <C>
$ 40.9 $ 968.0 5.65% $ 33.3 $ 794.4 5.60%
101.2 2,419.3 5.59 92.7 2,424.5 5.11
1.9 37.4 6.74 2.4 56.5 5.75
------------ -------------- ------ ------------ ------------- ------
144.0 3,424.7 5.62 128.4 3,275.4 5.24
------------ -------------- ------ ------------ ------------- ------
17.6 390.7 6.01 38.4 870.2 5.91
28.4 424.6 8.93 29.0 412.5 9.37
285.7 6,636.5 5.76 200.9 4,670.3 5.75
13.1 255.2 6.89 11.1 242.7 6.14
.6 11.2 6.70 .5 8.3 7.47
------------ -------------- ------ ----------- -------------- ------
345.4 7,718.2 5.98 279.9 6,204.0 6.03
------------ -------------- ------ ----------- -------------- ------
658.2 13,090.6 6.72 587.2 11,580.6 6.78
------------ -------------- ------ ----------- -------------- ------
$1,147.6 $24,233.5 6.33% $995.5 $21,060.0 6.32%
------------ -------------- ------ ----------- -------------- ------
$ 105.9 $ 4,230.7 3.35% $ 93.7 $ 3,887.4 3.22%
91.6 2,133.5 5.74 86.8 2,022.9 5.74
23.3 574.3 5.42 29.6 720.0 5.49
210.3 5,556.3 5.06 164.9 4,619.7 4.77
------------ -------------- ------ ----------- -------------- ------
431.1 12,494.8 4.61 375.0 11,250.0 4.46
101.8 2,466.1 5.52 58.1 1,431.5 5.43
60.5 1,472.5 5.49 60.8 1,521.1 5.34
6.2 147.4 5.61 5.8 142.1 5.51
106.6 2,657.9 5.36 92.6 2,320.0 5.34
27.0 637.5 5.64 19.4 453.5 5.72
23.7 440.1 7.19 24.2 433.1 7.49
12.8 267.4 6.29 10.2 209.6 6.38
------------ -------------- ------ ----------- -------------- ------
769.7 20,583.7 5.00 646.1 17,760.9 4.86
------------ -------------- ------ ----------- -------------- ------
- - 1.33% - - 1.46%
------------ -------------- ------ ----------- -------------- ------
- 3,649.8 - - 3,299.1 -
------------ -------------- ------ ----------- -------------- ------
$ 769.7 $24,233.5 4.25% $646.1 $21,060.0 4.10%
------------ -------------- ------ ----------- -------------- ------
$ 377.9 - 2.08% $349.4 - 2.22%
------------ -------------- ------ ----------- -------------- ------
</TABLE>
30
